CLO deal volumes in 2012 and the first quarter of 2013 clearly indicate that investor appetite for CLO investments has returned. At the same time, establishing and managing CLOs can present attractive revenue-generating opportunities for fund managers. Nonetheless, these opportunities are accompanied by new challenges for managers, which are outlined in this two-part series of articles. This second article in the series presents a brief overview of various legal developments that have altered or may alter the CLO management landscape, including (1) risk retention rules, the Volcker Rule and various Commodity Futures Trading Commission requirements under the Dodd-Frank Act, (2) enhanced registration requirements under the Investment Advisers Act of 1940, (3) the implementation of the Foreign Account Tax Compliance Act provisions of the Internal Revenue Code (Code), and (4) Sections 409A and 457A of the Code. The first installment of the series touched upon several of the practical challenges CLO managers can expect to encounter in establishing a CLO in the current market environment. Specifically, the first article addressed a number of common documentation requests by anchor investors in the most senior and subordinated (or equity) classes of the CLO capital structure and explored certain inherent difficulties in obtaining warehouse financing in connection with the ramp up of the CLO portfolio prior to the initial issuance of CLO notes. See “CLO 2.0: How Can Hedge Fund Managers Navigate the Practical and Legal Challenges of Establishing and Managing Collateralized Loan Obligations (Part One of Two)
,” Hedge Fund Law Report, Vol. 6, No. 25 (Jun. 20, 2013). The authors of this series are Greg B. Cioffi and Jeff Berman, both partners in Seward & Kissel’s Structured Finance and Asset Securitization Group, and David Sagalyn, an associate in the group. See also “Key Legal and Business Considerations for Hedge Fund Managers When Purchasing Collateralized Loan Obligation Management Contracts
,” Hedge Fund Law Report, Vol. 3, No. 13 (Apr. 2, 2010).