November 30, 2021

Volume XI, Number 334

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November 29, 2021

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Lawmakers Introduce Legislation to Resolve CDO-TruPS (Collateralized Debt Obligation-Trust Preferred Securities) Controversy

In the latest installment of the Volcker Rule’s collateralized debt obligation-trust preferred securities (CDO-TruPS) controversy, on January 8, two House Financial Service Committee members introduced a bill to exempt existing CDOs backed by so-called TruPS from the Volcker Rule. The Volcker Rule provision reportedly would cause banks holding CDO-TruPS to divest them by July 15, 2015, and would additionally cause such institutions to have to mark them to market for the quarter ended December 31, 2013 and thereafter, causing unanticipated losses for many community banks.

The bill, H.R. 3819, entitled the Fairness for Community Job Creators Act, specifically states: “Nothing in this section [of the Dodd-Frank Act] shall be construed to require the divestiture of any 8 collateralized debt obligations issued before December 10, 2013 that as of December 10, 2013 are predominantly backed by trust preferred securities.’’ In statements accompanying the bill, the bill’s sponsors—Financial Services Committee Chairman Jeb Hensarling (R-Texas) and Financial Institutions and Consumer Credit Subcommittee Chairperson Shelley Moore Capito (R-West Virginia)—made the following statements, respectively: 

For more than three years, those who support the Dodd-Frank Act assured community banks they would not be harmed by the Volcker regulations. Then, in the dark of night, suddenly Washington regulators at the last minute changed the rules and included these products in the Volcker regulations with no time for public comment or review. That’s unfair and it will do nothing but undermine the ability of small businesses that create jobs and other bank customers to receive loans from their financial institutions. 

This targeted legislation prevents community banks from being forced to take considerable losses on investments they intend to hold to maturity. Avoiding these arbitrary losses will allow local financial institutions to continue to recover and help nurture the small businesses in their communities.  

The agencies that issued the rule—the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Securities and Exchange Commission (the Agencies)—are expected to revisit the CDO-TruPS issue on or before January 15 in response to a lawsuit filed by the American Bankers Association and several small banks.   

Depending on what the Agencies do, the bill that was introduced may become moot. 

The bill is available here.

©2021 Katten Muchin Rosenman LLPNational Law Review, Volume IV, Number 12
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