SEC Prosecutes CLO Sponsor as Fiduciary
The SEC has commenced enforcement proceedings against the sponsor of several Collateralized Loan Obligation vehicles, claiming that its failure to write down the value of portfolio holdings violated its fiduciary duty. The SEC asserts that the respondents failed to re-classify loan holdings as non-performing because it would have collected $200 Million less in fees and triggered investor control privileges. The SEC also charges that the respondents failed to disclose the conflict of interest that it controlled payments made by the borrowers on the debt held by the securitization vehicles. The SEC also faults the respondents for certifying that the financial statements complied with GAAP.
OUR TAKE: We cannot stress enough the importance of a rigorous fair valuation process that includes a degree of independent review. Perhaps most important about this case, however, is the SEC seeking to apply a fiduciary standard to CLO collateral managers. The securitization industry better take cover with some outside help from Compli-pros, lawyers, and auditors.