Report: SEC Zeros in on Booming CLO Market

The Securities and Exchange Commission is reportedly probing whether the surging market for collateralized loan obligations is paving the way for banks to illegally hide certain risks or commit fraud.

The apparent investigation into these complex securities, known as CLOs, comes as the U.S. winds down a flurry of crisis-era cases focusing on collateralized debt obligations, or CDOs.

According to The Wall Street Journal, the SEC has a number of CLO cases in the pipeline amid fears these complicated deals create new avenues for fraud.

The paper said the agency has also expanded an inquiry into how Wall Street banks sell CLO deals, which are negotiated privately between buyers and sellers.

The SEC declined to comment on the news.

CLOs are packages of corporate loans and debt cobbled together and sold by Wall Street to investors. While this market ground to a halt following the financial crisis of 2008-2009, it has raced back to life amid a search for yield in the low interest rate environment.

By comparison, CDOs are based on pools of mortgages and other debts that have varying levels of risk.

While the SEC has brought a slew of CDO-related cases in recent years, the regulator has no plans to bring more crisis-era CDO cases amid a looming statute of limitations, the Journal reported.

One area the SEC is focusing on is whether banks are hurting clients by mispricing bond deals, the paper said.

Specific banks under SEC scrutiny over CLOs reportedly include: Barclays (NYSE:BCS), Citigroup (NYSE:C), Deutsche Bank (NYSE:DB), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Royal Bank of Scotland (NYSE:RBS) and UBS (NYSE:UBS).