November 28, 2023 - As anticipated, yesterday the SEC released its Final Conflicts of Interest in Securitizations Rule. As might not have been anticipated, the Final Rule is improved (if, like mankind, still imperfect). Perhaps reflecting both the improvement and imperfections, the SEC voted 4:1 to approve the Rule.  Republican Commissioner Uyeda joined his Democratic colleagues and described the improvements – and the SEC’s responsiveness (in this case) to commenters – in his statement. Republican Commissioner Peirce noted that the Final Rule had changed materially, remained overbroad and should have been re-proposed. She dissented.

The Final Rule does align with a number of recommendations supported by the LSTA in our third letter. We offer a high-level description of key differences below and a very digestible redline so readers can assess the differences for themselves.

At a high level, this is what we see:

• The definition of Conflicted Transactions (which is the linchpin of the rule) is significantly improved. In our third comment letter, we supported SIFMA and BPI’s recommendation that the SEC remove Prong iii of its original Conflicted Transactions definition and replace it with language that would not implicate purchases and sales (or amendments) of loans in the underlying CLO portfolio. The final language does reduce that fear.
• The definition of affiliates in the proposed rule was very broad (and dismissed information barriers), basically making it inapplicable to either a CLO arranger or a multi-strategy asset manager. The final (improved) language sweeps affiliates into the sponsor definition only if they act in coordination with a classic securitization participant or have access to/receive information about the CLO or the asset pool prior to the first closing of the sale of the CLO. That said, this exemption applies to affiliates, not persons in the same business entity.
• The market making exception now only requires licensing if that is required.
• The prohibition against Conflicted Transactions now doesn’t apply until a party has reached an agreement to become a securitization participant.
• The ongoing administration (but not management) of a CLO has been exempted alongside custodial/ministerial acts.
• The anti-circumvention language was replaced with anti-evasion language.
• A safe harbor for foreign transactions was added.
• There is an 18-month conformance period.

The LSTA would like to thank Sidley Austin for its work throughout the Conflicts of Interest in Securitizations comment letter process.