February 9, 2018 Alert - Court Rules CLO Managers Exempt From Risk Retention Rules

This morning 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 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."

SFIG will be following this issue closely and provide any additional updates, but the U.S. Government has very limited options to overturn the Court's decision and it seems unlikely, under this Administration, that they would attempt to do so.


When the risk retention rules were proposed, CLO market participants expressed concern with the application of the risk retention rules to a CLO manager who is unaffiliated with the origination of the loans and purchases loans in the open market.

The LSTA, representing participants in the syndicated corporate loan market, brought action against the SEC and FRB (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 in The Loan Syndications and Trading Association v. Securities and Exchange Commission and Board of Governors of the Federal Reserve System, No. 16-652 (D.D.C. Dec. 22, 2016) case 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, as stated, today, won its appeal.

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