If your broker or financial advisor recommended Collateralized Loan Obligations—commonly called CLOs—and you have suffered significant investment losses, you are not alone. CLOs have become one of the fastest-growing and most aggressively marketed products in the retail investment landscape, with the U.S. CLO market now exceeding $1.13 trillion in outstanding issuance. Unfortunately, the explosive growth of CLO-focused exchange-traded funds (ETFs) and closed-end funds has pulled everyday investors into a corner of finance historically reserved for sophisticated institutions, often with devastating results.
At the Law Offices of Robert Wayne Pearce, P.A., we have recovered over $185 million for investors harmed by unsuitable recommendations, broker misconduct, and failure to disclose material risks. Attorney Robert Wayne Pearce has more than 45 years of experience representing investors in FINRA arbitration and securities litigation involving complex structured products, and he is prepared to evaluate your CLO-related losses at no cost.
If you have lost money in CLO investments—whether through direct tranche purchases, CLO ETFs like JBBB or CLOB, or closed-end funds like Eagle Point Credit Company (ECC) or Oxford Lane Capital (OXLC)—contact our office today for a free consultation. Call us at (561) 338-0037, toll-free at (800) 732-2889, or fill out our free case evaluation form.
What Is a Collateralized Loan Obligation (CLO)?
A Collateralized Loan Obligation is a type of securitized investment product. A CLO manager assembles a diversified portfolio of 150 to 350 senior secured leveraged loans—loans made to companies with below-investment-grade credit ratings—and packages them into a special purpose vehicle. That vehicle then issues multiple layers, or “tranches,” of debt and equity to fund the loan purchases.
The CLO’s capital structure typically comprises approximately 90% debt and 10% equity. Cash flows from the underlying loan portfolio are distributed through a strict payment hierarchy known as a “waterfall.” Senior tranches rated AAA receive payment first, followed by successively junior tranches rated AA, A, BBB, and BB, with the unrated equity tranche receiving only whatever residual cash flow remains after all debt obligations are satisfied.
The underlying loans are floating-rate instruments, typically benchmarked to the Secured Overnight Financing Rate (SOFR) plus a credit spread. Most are made to companies rated single-B, and over 92% of leveraged loans today are “covenant-lite,” meaning they lack the financial maintenance covenants that historically protected lenders. CLOs now purchase approximately 69% to 75% of all leveraged loans issued in the United States, making them the dominant buyer in the $1.55 trillion leveraged loan market.
How Retail Investors Access CLOs
Although CLO tranches were historically available only to institutional investors with minimums of $250,000 to $500,000, three pathways now expose retail investors to CLO risk.
CLO Exchange-Traded Funds (ETFs)
CLO ETFs have experienced extraordinary growth, with total assets expanding from approximately $120 million in 2020 to over $38 billion by mid-2025. The largest, the Janus Henderson AAA CLO ETF (JAAA), holds roughly $27.2 billion in assets and invests predominantly in AAA-rated tranches. While AAA CLO ETFs have relatively stable returns and low expense ratios, lower-rated CLO ETFs expose investors to substantially greater risk. The Janus Henderson B-BBB CLO ETF (JBBB), with approximately $1.16 billion in assets and a yield around 7.3%, and the VanEck AA-BB CLO ETF (CLOB) carry meaningful mezzanine credit risk that many investors do not fully understand.
CLO Closed-End Funds
Closed-end funds represent the most dangerous access point for retail investors. These funds invest primarily in CLO equity tranches—the riskiest slice of the CLO capital structure—and market themselves to retail investors with eye-catching distribution yields of 20% or more. Eagle Point Credit Company (ECC) invests approximately 86% of its portfolio in CLO equity and has marketed distribution yields exceeding 16% to 21%. Oxford Lane Capital (OXLC) concentrates even more heavily in CLO equity and has marketed forward yields approaching 28% to 29%.
As discussed in detail below, these headline yields are profoundly misleading. Both ECC and OXLC have experienced devastating net asset value (NAV) declines while continuing to pay distributions that, in many cases, represent a return of the investor’s own capital rather than investment income.
Direct Tranche Purchases
Some brokers recommend direct purchases of individual CLO mezzanine or equity tranches to high-net-worth or institutional clients. These instruments are extremely illiquid, trade over-the-counter by appointment only, and lack transparent pricing. Direct tranche holders face the most severe exit risk during periods of market stress.
The Risks of CLO Mezzanine and Equity Tranches That Brokers Fail to Disclose
The risks facing retail investors in CLO mezzanine and equity tranches are severe, asymmetric, and frequently misunderstood or inadequately disclosed by the brokers who recommend them. If your financial advisor failed to explain any of the following risks before recommending CLO investments, you may have a claim for unsuitable investment recommendations or investment fraud.
Subordination and First-Loss Risk
The CLO equity tranche absorbs all losses from the underlying loan portfolio before any debt tranche is affected. Because equity typically represents only 8% to 12% of the CLO’s capital structure, even modest default rates can rapidly destroy equity value. A portfolio experiencing a 5% default rate with 75% recovery can consume approximately 12.5% of equity value. Under more severe default scenarios, equity can be wiped out entirely, and mezzanine tranches begin absorbing losses.
Overcollateralization (OC) and Interest Coverage (IC) Test Failures
CLOs contain built-in protective mechanisms called overcollateralization tests and interest coverage tests. When the quality of the underlying loan portfolio deteriorates below specified thresholds, these tests “fail,” and the CLO’s payment waterfall diverts cash flows away from equity and junior mezzanine tranches and redirects them to pay down senior debt. For equity holders, this means distributions stop entirely until the tests are restored. During the initial COVID-19 market disruption, approximately 35% of U.S. CLOs within their reinvestment periods were failing or nearly failing junior OC tests. Older vintage CLOs fared far worse, with over half of CLOs outside their reinvestment period failing junior OC tests.
Spread Compression
Spread compression has emerged as the most damaging current risk for CLO equity investors. As leveraged loans refinance at tighter credit spreads—average institutional loan margins fell to 3.13% in the third quarter of 2025, the lowest quarterly average on record—the CLO’s excess spread narrows, directly reducing equity returns even without any increase in loan defaults. Eagle Point Credit’s management identified spread compression as the primary factor driving the fund’s performance deterioration in 2025, with weighted average loan spreads declining approximately 50 basis points over the prior year.
Leverage Amplification
CLO equity is inherently leveraged, typically at ratios of 8 to 10 times. This means that a 10% decline in the value of the underlying loan portfolio can translate into a roughly 19% or greater decline in equity value. Closed-end funds like ECC and OXLC add a second layer of leverage by borrowing at the fund level to increase their CLO equity holdings. ECC’s leverage ratio reached 47.6% against a target range of 27.5% to 37.5%, meaning NAV contraction has pushed leverage well above the fund’s own intended levels.
Illiquidity
CLO tranches trade over-the-counter with no exchange listing, and equity tranches have the thinnest secondary markets of any CLO security. During periods of market stress, there may be no willing buyers at any price. CLO ETFs offer daily liquidity, but they hold underlying securities that may be impossible to sell during market dislocations, creating a dangerous liquidity mismatch. During the tariff-driven volatility of April 2025, CLO ETF correlations spiked dramatically and volatility more than doubled compared to normal periods.
Complexity
CLOs involve unique documentation, waterfall structures, OC and IC test mechanics, CCC bucket concentration limits, weighted average rating factor requirements, reinvestment period constraints, and manager-specific strategies. Even professional analysts acknowledge that CLOs are complex and challenging for retail investors to understand. This complexity makes it virtually impossible for an ordinary investor to evaluate the true risk of these products without expert guidance—and it places the burden squarely on the recommending broker to ensure the investor understands what they are buying.
Real-World Losses: The Track Record of CLO Closed-End Funds
The performance of the two dominant CLO closed-end funds illustrates why headline distribution yields can be profoundly misleading and why investors who relied on their brokers’ recommendations have suffered catastrophic losses.
Eagle Point Credit Company (ECC)
ECC’s NAV declined from $9.16 per share in March 2024 to $5.70 per share by December 2025, a decline of approximately 38%. By early 2026, ECC shares traded at approximately $3.92, representing a 29% discount to an already-depressed NAV. The fund’s full-year 2025 GAAP return on common equity was negative 14.6%, and its distribution was cut by approximately 57%. Throughout this period of severe capital destruction, brokers continued recommending ECC to retail investors based on its headline distribution yield.
Oxford Lane Capital (OXLC)
OXLC’s results have been even worse. The fund’s NAV declined approximately 36% year-over-year through December 2025, and its distribution was slashed 50% in late 2025. OXLC executed a 1-for-5 reverse stock split in September 2025, a step widely viewed as a negative signal. Most revealingly, OXLC’s 10-year annualized total return through October 2025 was negative 1.51%, catastrophically underperforming the S&P 500’s 12.57% over the same period. The fund’s maximum historical drawdown was negative 74.58%. Despite this track record of value destruction, OXLC continues to market forward distribution yields of 28% to 29%.
Excessive and Hidden Fees
Fee layering compounds these losses. ECC charges a base management fee of 1.75% of total equity base plus a 20% incentive fee above an 8% hurdle rate. OXLC charges 2.00% of gross assets plus a 20% incentive fee above a 7% hurdle, calculated quarterly with no clawback for losing quarters. When including indirect CLO manager expenses at the underlying deal level, OXLC’s total cost burden has been estimated to reach as high as 30.69% of assets annually. By contrast, AAA CLO ETFs like JAAA charge just 0.20%. These fee structures create a powerful incentive for fund managers to maintain high headline yields—even when doing so requires distributing investor capital back to investors in the form of a return of principal—because the managers’ compensation is driven by asset levels and distribution rates, not by actual investment returns.
How Brokers Misuse CLO Products: Common Forms of Misconduct
Our firm has identified several recurring patterns of broker misconduct in the sale of CLO products to retail investors.
Unsuitable Recommendations. Brokers sell CLO equity tranches or CLO equity closed-end funds to conservative investors, retirees, or those nearing retirement who need capital preservation and stable income. These investors cannot afford the risk of total principal loss inherent in CLO equity.
Misrepresentation and Omission of Material Risks. Brokers present CLO products by emphasizing headline distribution yields of 16% to 29% without explaining that distributions may include return of capital, that principal can be lost entirely, that historical total returns after fees are dramatically lower than current yields suggest, or that the underlying loans are made to sub-investment-grade, covenant-lite borrowers.
Overconcentration. Brokers recommend multiple CLO positions or a disproportionate allocation to CLO products, creating excessive concentration risk in a single asset class that is highly correlated to credit cycle risk.
Compensation-Driven Conflicts of Interest. Broker compensation on structured products can reach 3.625% to 4% of the transaction amount, compared to typical equity commissions capped at approximately 1.5%. This compensation differential creates a powerful incentive to recommend higher-risk CLO products over simpler, lower-cost alternatives that may better serve the investor’s needs.
Failure to Supervise. Brokerage firms have a duty to establish and enforce supervisory systems to prevent unsuitable CLO recommendations. When firms fail to train their representatives on CLO risks, fail to review CLO recommendations for suitability, or fail to detect patterns of unsuitable CLO sales, the firm may be liable for failure to supervise.
The Regulatory Framework: FINRA Suitability Rules and Regulation Best Interest
The legal framework for evaluating CLO recommendations to retail investors is well established and provides strong protections for harmed investors.
FINRA Rule 2111 (Suitability)
FINRA Rule 2111 imposes three suitability obligations that directly apply to CLO recommendations. Reasonable-basis suitability requires the broker to understand the CLO’s waterfall structure, default correlations, OC and IC triggers, and credit cycle sensitivity before recommending the product. FINRA has stated that a broker’s lack of understanding of a complex product when making a recommendation could itself violate the suitability rule. Customer-specific suitability requires the broker to evaluate whether the particular customer can bear total loss of principal, has a sufficient time horizon, possesses adequate liquidity, and has the sophistication to understand the product. Quantitative suitability prohibits excessive trading or accumulation of positions that create overconcentration.
SEC Regulation Best Interest (Reg BI)
For recommendations made after June 30, 2020, Regulation Best Interest imposes four component obligations: a Disclosure Obligation requiring full and fair disclosure of all material conflicts of interest; a Care Obligation requiring the broker to exercise reasonable diligence and consider whether a simpler, less costly product could achieve the same objectives; a Conflict of Interest Obligation requiring written policies to mitigate conflicts arising from higher CLO commissions; and a Compliance Obligation requiring written procedures for training, supervision, and documentation of all recommendations.
FINRA Regulatory Notices on Complex Products
FINRA Regulatory Notice 12-03 explicitly identifies asset-backed securities, including CLOs, as complex products requiring heightened supervision. The notice mandates enhanced training for registered representatives who sell complex products, requires post-approval review of recommendations, and emphasizes that firms must ensure their supervisory frameworks keep pace with product complexity. FINRA Regulatory Notice 22-08 further reinforced scrutiny of complex products, and the SEC’s 2026 Examination Priorities explicitly list structured products as a focus area under Reg BI examinations, with specific emphasis on closed-end funds with leverage and significant illiquid holdings.
Recent Regulatory Actions and Industry Investigations
Regulators have intensified their focus on the CLO market through several significant enforcement actions and investigations.
In August 2024, the SEC charged Sound Point Capital Management, a major CLO manager, with compliance failures related to its handling of material nonpublic information (MNPI) in CLO trading operations. While participating in a lender group for a media services company, a Sound Point employee received confidential information about a failed asset sale, then obtained internal compliance approval to sell CLO equity tranches containing that company’s loans one day before the nonpublic information became public and loan values dropped more than 50%. Sound Point paid a $1.8 million civil penalty.
In September 2024, the SEC charged Marathon Asset Management with similar MNPI policy failures and imposed a $1.5 million penalty. The SEC found that Marathon’s financial adviser began sharing confidential information from a distressed issuer before Marathon had executed its own nondisclosure agreement, while the firm continued building its position in the issuer’s debt.
Most significantly, the U.S. Department of Justice’s Criminal Antitrust Division in New York opened a criminal investigation in 2025 into whether CLO equity investors colluded during the LIBOR-to-SOFR transition in early 2023. The investigation is examining whether CLO equity investors coordinated to artificially inflate credit spread adjustments applied to borrowers’ loan amendments, effectively raising borrowing costs across the leveraged loan market. In January 2026, corporate borrowers filed the first-ever antitrust class action lawsuit against approximately 70 CLO equity investors, alleging that they conspired during a conference call to form a working group that pressured CLO managers into rejecting SOFR transition amendments with credit spread adjustments below certain thresholds.
These enforcement actions and investigations underscore that the CLO market is not only risky for retail investors but is also experiencing serious structural problems at the institutional level that may further harm the value of CLO positions held by retail investors.
Legal Claims Available to CLO Investors
Investors who have suffered losses in CLO investments due to broker misconduct may pursue several legal theories through FINRA arbitration or court proceedings.
Unsuitability. The most common claim involves a broker recommending CLO equity or mezzanine products to an investor whose risk tolerance, investment objectives, time horizon, liquidity needs, or financial sophistication made these products inappropriate. CLO equity tranches, with their leveraged exposure, first-loss position, illiquidity, and complexity, are almost certainly unsuitable for elderly investors, retirees dependent on stable income, investors with conservative risk tolerance, or those without sophisticated knowledge of structured credit.
Breach of Fiduciary Duty and Negligence. Financial advisors who hold themselves out as providing personalized investment advice owe their clients a duty of care. Recommending CLO products without conducting adequate due diligence, without understanding the product’s risk profile, or without tailoring the recommendation to the client’s specific circumstances constitutes a breach of fiduciary duty.
Misrepresentation and Omission of Material Facts. Presenting headline distribution yields of 20% or more without disclosing that these yields may be unsustainable, that distributions may include return of principal, that NAV has been declining, or that total returns after fees have been negative constitutes a material misrepresentation or omission.
Failure to Supervise. Brokerage firms are required to maintain supervisory systems reasonably designed to prevent and detect unsuitable recommendations. When a firm’s systems fail to flag CLO recommendations to unsuitable investors, the firm bears responsibility for the resulting losses.
Overconcentration. Recommending that an investor allocate a disproportionate percentage of their portfolio to CLO products—particularly CLO equity—without adequate diversification violates diversification requirements and exposes the client to excessive risk in a single, correlated asset class.
Elder Financial Abuse. When brokers recommend complex, high-risk CLO products to senior investors who lack the sophistication or financial resilience to bear the associated risks, the conduct may constitute elder financial abuse under applicable state laws.
Why Investors Trust the Law Offices of Robert Wayne Pearce, P.A.
Attorney Robert Wayne Pearce has more than 45 years of experience representing investors in disputes involving complex structured products, and his track record speaks for itself. The firm has recovered over $185 million for investors, including more than $13.4 million in cases involving complex leveraged structured products with the same characteristics as CLOs—securitized structures, subordination risk, opaque pricing, high fees, and misleading yield representations.
Our case results include a $3.27 million FINRA arbitration award for misrepresentation and unsuitable recommendations involving stripped coupon mortgage-backed securities and pass-through certificates, an $8.2 million settlement for a leveraged credit spread strategy, and a $6.1 million FINRA award involving complex options strategies with leverage. These recoveries demonstrate proven capability in pursuing exactly the types of claims that arise from CLO-related investor harm: misrepresentation of complex products, overconcentration, unsuitable recommendations to conservative investors, and failure to disclose leverage risks.
Mr. Pearce handles cases nationwide and offers free initial consultations to investors who believe they have been harmed by unsuitable CLO recommendations.
Contact an Experienced CLO Investment Loss Attorney Today
If you have suffered losses in CLO investments, you may be entitled to recover your losses through FINRA arbitration or other legal proceedings. Time limits apply to these claims, so it is important to act promptly.
Contact the Law Offices of Robert Wayne Pearce, P.A. today for a free, no-obligation consultation. We will review your account records, evaluate the suitability of the CLO recommendations made to you, and advise you on your legal options.
Call us at (561) 338-0037 or toll-free at (800) 732-2889.
You can also complete our online case evaluation form to get started. There is no cost to you unless we recover money on your behalf.
