Introduction

On October 19, 2017, the United States Government Accountability Office (GAO) issued an opinion[1] determining that the 2013 Interagency Guidance on Leveraged Lending (the “2013 Guidance”),[2] issued jointly by the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (“Federal Reserve”) and the Federal Deposit Insurance Company (FDIC) (collectively the “Agencies”), constitutes a “rule” under the Congressional Review Act (CRA). The GAO’s determination was issued at the request of Senator Pat Toomey (R-PA), who inquired by letter whether the 2013 Guidance should be subjected to Congressional approval as a rule under the CRA.[3]

The GAO determined that the 2013 Guidance constitutes a rule because it is a general statement of policy designed to assist financial institutions subject to regulation by the Agencies in providing leveraged lending to creditworthy borrowers in a sound manner.

Before a rule can “take effect”, the Federal agency promulgating the rule is required to submit to each of the House of Representatives and the Comptroller General a report containing certain information required by the CRA, including a concise general statement relating to the rule.[4] No such report was submitted in the case of the 2013 Guidance, because the Agencies determined that it did not amount to the promulgation of a rule.[5]

In the absence of the required submissions accompanying a new rule, the 2013 Guidance would appear to have the status of an invalidly promulgated rule that has no effect. Additionally, even if the Agencies submitted the information required by the CRA, the 2013 Guidance would still be subject to a 60-day period (excluding days on which the House is adjourned) during which Congress may adopt a “resolution of disapproval,” which if signed by the President would again render the 2013 Guidance as having “no force or effect.”[6] A resolution of disapproval would also have the effect of prohibiting the Agencies from promulgating a new rule that is “substantially the same” as the 2013 Guidance unless specifically authorized by a law enacted after the date of the resolution of disapproval.[7]

2013 Guidance

The Guidance was originally proposed as draft guidance on March 26, 2012[8] to supersede lending standards that had been previously issued by the Agencies in 2001.[9] While the 2013 Guidance recited that it is not a set of mandatory rules, it advised that “all institutions that originate or sponsor leveraged transactions should consider all aspects and sections of the guidance.” The 2013 Guidance established criteria to be used by financial institutions in maintaining a definition of leveraged lending, set policy expectations of institutions engaged in leveraged lending, and set underwriting and valuation standards, among other things.

The Agencies took the position that the 2013 Guidance does not establish legally binding standards, is not final or certain, and does not substantially affect the rights of third parties, placing it outside the scope of the CRA. In its opinion, however, the GAO determined that general statements of policy may fall under the definition of a “rule” in the CRA. In addition, the GAO concluded that the 2013 Guidance is a general statement of policy intended to direct the leveraged lending behavior of financial institutions and does not meet any of the exceptions under the CRA, therefore deeming it a rule subject to the requirements of the CRA.

Observations

The GAO’s determination could have significant effects on the leveraged debt market globally. In addition, its impact could result in further disparate treatment of leveraged lending between the United States and Europe, given the impending effectiveness of the European Central Bank’s Guidance on Leveraged Transactions (“ECB Guidance”).[10]

In light of the Banking Report and the subsequent October 2017 US Department of the Treasury report on reforming the US regulatory system for the capital markets (Capital Markets Report),[11] we would expect that the White House will likely work with Congress to implement a joint disapproval resolution and that market participants should, on the balance of probabilities, expect: (1) that the 2013 Guidance will be nullified as a result of a joint disapproval resolution in the near term; (2) any replacement (if any) of the 2013 Guidance will be a deliberative process with an outcome that is indeterminable at this point in time; and therefore (3) for an unknown time period, the ECB Guidance will likely be in effect but no counterpart guidance will be in effect in the United States. The broader policy implications of nullification of the 2013 Guidance remain unclear, including with respect to the Federal Reserve’s outlook on interest rates.