Outsourced CLO Services

Collateralized loan obligations, or CLOs, are complex financial instruments that are heavily regulated by the U.S. Securities and Exchange Commission (SEC). Many of those rules and regulations are extremely complex and some are even subject to multiple interpretations. Brokerage firms and CLO managers should strongly consider seeking out SEC compliance attorneys to ensure that they are not committing misconduct or even appearing to be in violation of U.S. securities law. Should the SEC investigate potential securities fraud related to CLOs, getting a strong and experienced securities fraud defense lawyer needs to be a priority.

In many cases, though, CLO fund managers are also interested in outsourcing some of the operational aspects of their role. However, the responsibilities that they would delegate can expose them to extensive legal liability if it is not done correctly.

Oberheiden P.C. is a national law firm with extensive experience in this extremely complex field. No matter where you are located, we likely have a law office nearby to represent you during an SEC investigation, bring your brokerage firm into compliance with SEC regulations, or provide knowledgeable outsourced CLO services that lighten your workload as a fund manager.

How Collateralized Loan Obligations Work

A collateralized loan obligation is a securitized and actively managed portfolio of secured loans. The CLO then issues a series of bonds, generally with a variety of priorities and risks, on the income provided by those loans. Each one of these tranches is rated by a credit rating agency, like Moody’s or S&P.

As the loans that make up the CLO are paid by their debtors, the cash from those payments flow into the different tranches of bonds in a “waterfall” effect – tranches with higher priorities and lower risks get paid out first. After costs are deducted, any residual cash gets paid out to equity holders. Losses sustained by the loans underlying the CLO are suffered in reverse order: Equity holders sustain them, first, and then the holders of the bonds in riskier tranches, and only lastly the holders of the safest bond series.

CLO managers can take the underlying loans that make up the CLO and that produce the cash flow that gets into the bonds that the CLO has issued, and sell them or buy new ones in order to maximize the returns that they generate. How the manager does that is regulated by the CLO’s governing documents.

Generally, the CLO managers are asset managers that focus on the credit market. The investors in CLOs are typically institutional investors, and are usually composed of a mix of:

• Banks
• Hedge funds
• Insurance companies

However, some exchange-traded funds (ETFs) have started investing in CLOs, opening the opportunity to non-institutional investors. This trend has made the SEC more wary of CLOs, as they now pose a threat to less savvy investors.

Put our highly experienced team on your side

Dr. Nick Oberheiden

Founder

Attorney-at-Law

Lynette S. Byrd

Former Department of Justice

Brian J. Kuester

Former U.S. Attorney
Former DA

John W. Sellers

Former Senior Trial Attorney
U.S. Department of Justice

Local Counsel

Joanne Fine DeLena

Former Assistant U.S. Attorney

Local Counsel

Joe Brown

Former U.S. Attorney & Former District Attorney

Local Trial & Defense Counsel

Amanda Marshall

Former U.S. Attorney

Local Counsel

Aaron L. Wiley

Former Federal Prosecutor

Local Counsel

Roger Bach

Former Special Agent (OIG)

Michael Koslow

Former Supervisory Special Agent (FBI)

Chris Quick

Former Special Agent (FBI & IRS-CI)

Ray Yuen

Former Supervisory Special Agent (FBI)

Outsourcing the Operational Duties of a CLO Manager

The role of the CLO manager in the success of this particular form of investment vehicle is massive. Because CLOs are actively managed, with the loans that make them up being bought and sold frequently, the decisions made by the manager can lead to a huge difference for the bond and equity holders that are participating in the CLO.

Those decisions, and the extensive research and due diligence that it takes to make them wisely, are only a small part of a CLO manager’s job. There are also numerous administrative and operational tasks that they have to perform, including:

• Internal reporting
• Monitoring accounts
• Communicating with ratings agencies
• Dealing with clients
• Interacting with regulators
• Managing the fund’s liquidity

All of these things must be done correctly, or else the CLO will suffer. Some of these requirements are legal obligations that can expose the fund and the manager to substantial legal liability. Others are essential for the CLO’s success. All of them, though, are routine and often repetitive tasks that distract CLO managers from their area of expertise: Making financial decisions that maximize the CLO’s returns.

Outsourcing these operational tasks to a firm that is experienced in handling them and that understands their role in the success of a CLO has become an increasingly popular choice for managers. However, there are relatively few firms out there that have the capability to provide outsourced CLO services that meet the needs of demanding CLO managers.

Given the SEC’s recent intrusions into the field of CLOs, the securities litigation and compliance professionals at Oberheiden P.C. may be your best option.

The SEC Has Shown an Increased Interest in CLOs

Because of the complex structure of CLOs, the SEC has taken an increased interest in regulating them. That interest means two things:

1. The odds of facing legal scrutiny for potential noncompliance are higher than they were before, and
2. The regulations that must be complied with are likely to change in the near future.

Both of these make it important to only outsource CLO tasks to firms that have extensive experience in SEC compliance and litigation defense, like Oberheiden P.C.

Already in 2023, the SEC has proposed a rule that would alter the compliance obligations that CLO managers would need to meet.

In that proposed rule, the SEC would redefine “custody” under Rule 206(4)-2 of the Advisers Act in a way that makes it much broader. If enacted, advisers would have “custody” of any assets over which they have discretionary trading authority. CLO managers would then likely become subjected to additional compliance obligations, including reporting requirements for financial statements and potentially even surprise examinations by the SEC.

Frequently Asked Questions About Oberheiden P.C. and Collateralized Loan Obligation Services

The Securities Litigation and SEC Compliance Lawyers at Oberheiden P.C. Provide Outsourced CLO Services

Brokerage firms and CLO managers can significantly reduce their costs by outsourcing many of the administrative tasks that can turn managing the fund into a slog. Fund managers, after all, are experts in nuanced and very specialized financial issues, like analyzing and managing risks, finding potential new deals, and maximizing returns. However, much of the day-to-day tasks that they have to complete have little to do with those areas of expertise.

Unfortunately, the complexity of CLOs and the close scrutiny that the SEC has put on them have made many CLO managers hesitate to outsource these tasks. The person or firm that handles them has to be capable and must understand the financial and legal risks associated with performing them incorrectly. There are not many firms out there that seem up to the task.

Oberheiden P.C. is a law firm and compliance agency that provides outsourced administrative services to CLO managers who are concerned that their needs will not be met. Our SEC defense lawyers and compliance professionals know and understand the risks that managers face and the concerns that they have when they look for another firm to handle the operational tasks of the fund. Call our national law offices at (888) 680-1745 or contact us online.