Middle-Market Public Policy Roundup

Another federal agency issued a warning this week concerning rising corporate debt levels, with one veteran lawmaker comparing current conditions to those prior to the 2008 subprime mortgage crisis. The Supreme Court also began hearing arguments in a case that could strengthen the powers of the Securities and Exchange Commission and empower private investors seeking to file deception-based lawsuits.

U.S. Bank Regulator Warns of Leveraged Loan Risks

The Office of the Comptroller of the Currency joined the Federal Reserve this week to warn of the current corporate lending environment.

In its semiannual risk report published Monday, the OCC said risks to financial stability include “growth in lower-quality originations, eased underwriting, higher leverage, and capital structures with limited subordinated debt cushions.”

The agency is focused on the leveraged lending market, noting that such loans have experienced near-record issuances in the first half of this year. Randal Quarles, vice chairman of supervision for the Federal Reserve, previously said such loans don’t pose a risk to banks specifically, as they are repackaging them into collateralized loan obligations and selling them as securities.

In 2013, the OCC, The Federal Deposit Insurance Corporation, and the Board of Governors of the Federal Reserve System issued guidance on leveraged lending, which said a company’s leverage should not exceed six times earnings before interest, taxes, depreciation and amortization.

However, after a request by Sen. Pat Toomey (R-Pa.) last year, the guidance was reviewed by the Government Accountability Office, who deemed it not to constitute a “rule” because it was not subject to public comment and submitted it to Congress for review. Federal regulators, including the Federal Reserve, FDIC, OCC and Securities and Exchange Commission clarified that they do not make enforcements based on supervisory guidance, nor does such guidance have the force and effect of law. As such, the Leveraged Lending Guidance was effectively invalidated.

Sen. Elizabeth Warren, D-Mass. subsequently wrote a letter to regulators with concerns that the “large leveraged lending market exhibits many of the characteristics of the pre-2008 subprime mortgage market,” and requested a response by Dec. 11.

Supreme Court Hears Case on SEC Enforcement Authority

The Supreme Court could deliver a ruling strengthening the Securities and Exchange Commission’s authority while giving a boost to private investors seeking to file deception-based lawsuits.

Hearing oral arguments Monday in Francis V. Lorenzo v. Securities and Exchange Commission, the Supreme Court seems likely to reaffirm the SEC’s powers, Bloomberg reports. If successful, the case would be a rare reversal in a trend of Supreme Court rulings limiting the agency’s authority.

The SEC accused Lorenzo, an investment banker, of allegedly taking part in a scheme to defraud investors by misrepresenting the financial condition of Waste2Energy Holdings, a client of Lorenzo’s. An in-house SEC judge ruled that two emails sent by Lorenzo were responsible for this misrepresentation. Lorenzo contends that the emails were drafted by his boss, and the SEC didn’t have enough proof to hold him responsible.

With conservative Justice Samuel Alito suggesting that the investment banker’s actions fell under the language of federal securities laws, and Justice Stephen Breyer, a possible swing-vote, suggesting that Lorenzo was a “big-deal participant” in the defrauding investors, the court seems poised to provide the SEC with an important win.

Interested in public policy issues that affect the middle market? Email Maria Wolvin, senior counsel and vice president of public policy, at mwolvin@acg.org to sign up for ACG’s Public Policy Interest Group and be the first to hear about relevant congressional, regulatory and policy-related developments.