CLO Managers Exempt From Risk Retention Rules, Court Says
Collateralized loan obligation managers are not subject to post-crisis rules that require issuers of securitized products to retain some of the instruments they sell, a U.S. appeals court ruled on Friday.
The U.S. Court of Appeals for the District of Columbia ruled that so-called "risk retention" rules don’t apply to securitizers of loans, because they don’t make loans or hold them as assets.
The ruling may add momentum to sales in one of Wall Street’s hottest markets, which packages risky corporate loans into bonds. Those loans are often used to fund private equity buyouts and other highly leveraged acquisitions, which could benefit from the decision. Managers and lenders had created new vehicles that allowed them to meet the requirements, but smaller CLO managers still struggled.
The Loan Syndications and Trading Association sued the Securities and Exchange Commision and the Federal Reserve in 2014 to exempt CLOs from the rules. It lost its first round in federal district court, and then appealed.
"The LSTA is delighted with this result, which vindicates our analysis of the clear statutory language and reflects the reality that CLOs have performed very well for more than 20 years, including through the financial crisis," Elliot Ganz, the trade group’s general counsel, said in a statement.
Judith Burns, an SEC spokeswoman, declined to comment.
Risk-retention rules, which went into effect on Dec. 24, 2016 for commercial-mortgage bonds, asset-backed securities and similar products, were designed to prevent lenders from making risky loans, packaging them into bonds, and sticking investors with the losses when the securities sour. The regulations, based on the Dodd-Frank financial overhaul law, required issuers to hold onto 5 percent of their securitized deals, giving them exposure if the securities deteriorate.
Several of the larger CLO managers had established ways to deal with the regulations: they set up separate new vehicles that would retain risk and issue CLOs. The risk-retention rules posed more of a threat to smaller CLO managers who didn’t have the ability to easily raise money the large sums needed to comply with the regulations.
The ruling should be effective immediately, unless the agencies involved ask for a stay, said J. Paul Forrester, a partner at law firm Mayer Brown in Chicago.
— With assistance by Sridhar Natarajan, and Benjamin Bain
February 9, 2018 at 12:07PM