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SEC Is Probing Dealings by Banks and Companies in Loan Securities

On March 24, 2014, an article in The Wall Street Journal (“SEC is Probing Dealings by Banks and Companies in Loan Securities”), disclosed that the Securities and Exchange Commission is investigating whether a Wall Street boom in complicated bond deals is creating new avenues for fraud.

According to the article, the SEC investigators are reportedly looking at whether banks and companies are using the bond deals to hide certain risks illegally and a parallel probe is focusing on how Wall Street banks sell the deals.

Both of these SEC investigations are homing in on a post-crisis resurgence in a type of deal called a collateralized loan obligation, or CLO, which is an investment based on pools of loans that financial firms make to companies with lower credit ratings that are sliced up, packaged and sold to deep-pocketed (and often unsuspecting) investors on the premise that they offer higher yields than other fixed-income investments tied to highly rated companies.

Sales of CLOs, which screeched to a halt in 2009, bounced back to $83 billion in the U.S. last year, according to S&P Capital IQ Leveraged Commentary & Data. So far this year, CLO issuance has reached $20.5 billion.

The probe is reportedly being led the “complex financial instruments” unit of the SEC which is the same SEC enforcement unit that spearheaded the agency’s financial-crisis CDO cases.

The SEC is also reportedly expanding its investigation into whether a number of Wall Street banks are cheating clients by mispricing certain bond deals, including bonds backed by residential mortgages, which often do not trade on a transparent market. The investment banks under scrutiny in that portion of the SEC’s investigation have been identified by The Wall Street Journal to include Barclays PLC, Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc., Morgan Stanley, Royal Bank of Scotland Group PLC and UBS AG.


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