Court Rules CLO Managers Exempt from Risk Retention Rules

On Friday, February 9th, a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit ruled in favor of the Loan Syndications and Trading Association (LSTA) in its litigation against the U.S. Securities and Exchange Commission and Federal Reserve Board (the agencies) regarding the application of risk retention rules to CLO managers of "open market CLOs". The ruling stated:

  • "Because we agree with the CLO managers that they are not "securitizers" under § 941, the managers need not retain any credit risk"
  • "The judgment of the district court is reversed and the case is remanded with instructions to grant summary judgment to the LSTA on whether application of the rule to CLO managers is valid under § 941, to vacate summary judgment on the issue of how to calculate the 5 percent risk retention, and to vacate the rule insofar as it applies to open-market CLO managers."

The LSTA, representing participants in the syndicated corporate loan market, brought action against the agencies, disputing the applicability of the risk retention rules to open market CLOs. On December 22, 2016, the United States District Court for D.C. concluded that "the agencies did not act arbitrarily, capriciously, or otherwise unlawfully in declining to provide an exemption or adjustment to the credit risk retention rules for open market CLOs." LSTA appealed this decision to the U.S. Court of Appeals for the D.C. Circuit and, on Friday, won its appeal in the panel's decision.

The U.S. Government has limited options to appeal the panel's decision. SFIG will continue to follow this issue closely and provide any additional updates. If you would like to join SFIG's CLO Committee, please contact Alyssa.Acevedo@sfindustry.org.

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