SEC Issues Interpretive Letter on Proposed Applicable Margin Reset Mechanism

September 07, 2016

The staff of the Division of Corporate Finance (the “Staff”) of the U.S. Securities and Exchange Commission issued an interpretive letter (the “Interpretive Letter”) to Sancus Capital Management LP and its affiliates (“Sancus Capital”) in response to a letter from Dechert LLP on behalf of Sancus Capital (the “Request Letter”) on September 1, 2016. In the Request Letter, Dechert and Sancus Capital proposed an applicable margin reset (“AMR”) procedure through which interest rates payable to the senior securities (the “CLO Securities”) in a collateralized loan obligation transaction (a “CLO”) are periodically reset at predetermined intervals pursuant to an auction mechanism. The AMR procedures were modeled after the mechanics used widely across the auction rate securities market, which under prior Staff no-action guidance were found to be in the nature of secondary market transactions between investors rather than an “offer and sale” by an issuing entity. The Request Letter requested confirmation from the Staff, and the Staff (in consultation with the staffs of the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation) confirmed in the Interpretive Letter, that the application of the AMR procedures would not constitute an “offer and sale of asset-backed securities by an issuing entity,” and therefore would not trigger application of the risk retention requirements of Section 15G of the Securities Exchange Act (the “Final Rule”).

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