LSTA's 2012 CLO conflict letter awaits an SEC answer

The Loan Syndications and Trading Association sent the SEC a comment letter on February 10, 2012. The letter responds to the agency's proposed rule on conflicts of interest in securitizations; the LSTA offers it as a member-only download, and the file name marks it as a comment on the conflict-of-interest rule. CLOs are securitizations. That puts CLO managers and sponsors of private credit structured products directly in the rule's reach.

The rule targets a conflict that is native to CLO management. The firm runs the vehicle, holds warehouse loans before pricing, hedges exposure, and may trade the same credits across other accounts. The proposal would set boundaries around those positions. The LSTA's letter argues about where those boundaries belong.

The letter is dated February 10, 2012. That date sits more than a decade before the current CLO issuance cycle. Private Credit Daily recently counted three managers pricing CLO deals on a single Friday. Creditflux logged the prints, which showed $400 million in deals. Creditflux has also reported that Palmer Square is exploring a sale of its CLO and private credit platform. Structured credit has scaled up since the letter was written. The SEC's proposed rule has not moved, as far as the available record shows. The LSTA notice does not say whether the SEC has taken further action, and no final rule appears in the material.

For private credit funds that rely on CLOs as funding tools, the rule is economic as much as legal. A constraint on how a manager trades the loans inside its own securitization changes the running cost of the vehicle. No final rule has settled that constraint. Until one does, the cost of that unknown is a line item in every CLO's running cost.