Navigating Antitrust Risks and Compliance Challenges in the CLO Market: A New Era of Scrutiny

The Collateralized Loan Obligation (CLO) market, a cornerstone of the private credit universe, has long been celebrated for its robust yields and institutional-grade diversification. But as the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) turn their attention to antitrust risks and compliance failures, investors must recalibrate their strategies. The recent spotlight on collusion during the LIBOR transition and the misuse of material nonpublic information (MNPI) underscores a seismic shift in regulatory priorities—one that could redefine risk management and investor returns in the years ahead.

The DOJ's LIBOR Transition Probe: A Wake-Up Call for CLO Managers

The transition from LIBOR to the Secured Overnight Financing Rate (SOFR) was a monumental logistical feat, but it also exposed vulnerabilities in market integrity. The DOJ's investigation into potential collusion during this transition—highlighted by cases like Barclays and Rabobank—reveals a troubling pattern of rate manipulation that could ripple through CLO structures. For example, Rabobank's $325 million settlement for artificially inflating LIBOR rates to benefit traders shows how systemic misconduct can distort benchmarks critical to CLO liabilities.

CLOs, which rely heavily on floating-rate loans tied to reference rates, are particularly susceptible to operational and legal risks during transitions. As of 2025, 99% of floating-rate CLO liabilities reference SOFR, but many portfolios still grapple with legacy contracts and inconsistent credit spread adjustments (CSAs). This creates a patchwork of compliance challenges, especially for static CLOs in post-reinvestment periods, which lack the flexibility to adjust their collateral.

The DOJ's scrutiny isn't just about historical misconduct. Regulators are now demanding that CLO managers prove they've implemented “safe and sound” transition protocols. Firms that failed to update fallback language in loan agreements or amend CLO structures to align with ARRC recommendations risk litigation and regulatory penalties. For investors, this means due diligence on CLO managers' transition readiness is no longer optional—it's a non-negotiable part of risk assessment.

The SEC's MNPI Crackdown: A Lesson in Compliance Gaps

While the DOJ focuses on antitrust violations, the SEC has zeroed in on MNPI misuse in CLO trading. Two high-profile cases—Sound Point Capital and Marathon Asset Management—expose how even well-intentioned investment strategies can run afoul of antifraud rules.

Sound Point, for instance, faced a $1.8 million settlement for selling CLO equity tranches while in possession of MNPI about a borrower's financial distress. The SEC's argument? The firm's general MNPI policies failed to address the unique risks of trading in CLOs, which are complex, multi-tranche vehicles. Similarly, Marathon was fined $1.5 million for inadequate safeguards when participating in ad hoc creditor groups, where MNPI about distressed borrowers could influence trading decisions.

These cases signal a broader trend: the SEC is applying antifraud rules to private securities, not just public markets. For CLO managers, this means revising compliance frameworks to account for the structure of CLO tranches, the materiality of information about underlying loans, and the risks posed by third-party advisors. Investors should demand transparency about how managers handle MNPI, especially in distressed debt strategies where information asymmetry is highest.

Why Compliance Should Be a Core Investment Criterion

The combined weight of DOJ and SEC actions is reshaping the CLO landscape. Here's how investors can adapt:

1. Demand Tailored Compliance Programs: Firms with generic MNPI policies are red flags. Look for managers who've explicitly addressed CLO-specific risks, such as pre-trade reviews for materiality and barriers between investment teams.
2. Audit Transition Readiness: With synthetic LIBOR rates phasing out, investors must ensure CLOs have clear, ARRC-compliant fallback language. A manager's ability to navigate this transition smoothly is a proxy for its overall operational discipline.
3. Prioritize Transparency Over Yields: High-yield CLOs with opaque structures are now riskier. Favor managers that disclose how they handle MNPI and demonstrate a track record of regulatory cooperation.

The Bottom Line: Compliance Is No Longer a Cost—It's a Competitive Edge

The CLO market's appeal lies in its ability to generate alpha, but recent enforcement actions make one thing clear: regulatory missteps can erase returns overnight. For every Rabobank or Sound Point, there are managers who've proactively modernized their compliance programs—turning regulatory rigor into a differentiator.

As we head into 2025, investors must treat compliance as a core criterion, not an afterthought. The CLOs that thrive will be those managed by teams that see regulatory scrutiny not as a burden, but as a catalyst for innovation. In this new era, transparency isn't just ethical—it's the key to sustainable returns.