The Court of Appeals for the D.C. Circuit earlier today handed a victory to our client, the Loan Syndications and Trading Association (LSTA), in its longstanding effort to secure relief from U.S. risk retention requirements for managers of open market CLOs. CLOs—collateralized loan obligations—are an important type of securitization providing capital support for and investment opportunities related to syndicated loans.

In late 2014, the SEC and the three primary federal banking regulators (Federal Reserve, OCC and FDIC) issued regulations implementing Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 941 sought to require certain participants in a securitization to retain economic interests reflecting risk associated with the assets underlying the securitization. The statute directed the agencies to issue regulations “to require any securitizer to retain an economic interest in a portion of the credit risk for any asset that the securitizer, through the issuance of an asset-backed security, transfers, sells, or conveys to a third party.” Rejecting a range of arguments presented by LSTA and many other industry participants, the agencies concluded that managers of open market CLOs were “securitizers” for this purpose and thus subject to the risk retention regulations. As a result, since late 2016, managers of open market CLOs have had to retain interests in CLOs representing financial exposure to the performance of the loans supporting CLOs, beyond the exposure that investors would otherwise have required them to retain.