United States: Risk Retention Rule Overturned For Open-Market CLO Managers: Implications For Managers And Investors

On February 9, 2018, a three-judge panel of the United States Court of Appeals for the District of Columbia Circuit (the "D.C. Circuit Court") invalidated the credit risk retention rule, 79 Fed. Reg. 77,601 (Dec. 24, 2014) (the "Risk Retention Rule"), as it applies to the collateral managers of open-market collateralized loan obligation transactions, or CLOs. Under the Risk Retention Rule, CLO collateral managers are currently required to purchase notes representing at least 5% of the credit risk associated with each CLO that they structure.

The Risk Retention Rule was adopted in 2014 pursuant to Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which requires any "securitizer" of asset-backed securities to retain at least 5% of the credit risk associated with the assets collateralizing such securities. In 2016, in response to a lawsuit filed by the Loan Syndications and Trading Association, a District of Columbia district court held that the Risk Retention Rule was a valid exercise of federal agency authority and that collateral managers of open-market CLOs – the most typical CLO arrangement, in which assets are purchased at arm's length transactions on the open market rather than being acquired from an entity involved in the structuring of the CLO – could appropriately be considered "securitizers" under Section 941. Loan Syndications & Trading Ass'n v. SEC, 223 F. Supp. 3d 37 (D.D.C. Dec. 22, 2016).

Last Friday, the D.C. Circuit Court disagreed, ruling that collateral managers of open-market CLOs are not "securitizers" under the Dodd-Frank Act and are accordingly not subject to the requirements of the Risk Retention Rule. See -- F.3d --, 2018 WL 798290 (D.C. Cir. Feb. 9, 2018). The D.C. Circuit Court emphasized that, whereas the Dodd-Frank Act defines a "securitizer" as, among other things, an entity that transfers assets to an issuer of asset-backed securities, managers of open-market CLOs typically never own the assets that collateralize a CLO, and thus cannot transfer them to the issuer. Instead, the manager acts as an agent of the issuer in selecting the assets to be purchased by the issuer from third parties. The D.C. Circuit Court thus invalidated the Risk Retention Rule insofar as it applies to managers of open-market CLOs, and remanded the case to the D.C. District Court with instructions to "vacate the Risk Retention Rule insofar as it applies to open-market CLO managers." Id. at *7.

The D.C. Circuit Court's decision is subject to possible rehearing en banc by the entire D.C. Circuit Court, or even a petition for certiorari to the U.S. Supreme Court. The federal agencies defending the lawsuit have until March 26, 2018 to seek rehearing, absent any extension. And, although it is impossible to say at this point whether those agencies will seek rehearing, any effort to overturn the D.C. Circuit Court's decision faces significant headwinds. For one, the Trump Administration has publicly stated that it is in favor of exempting CLO managers from the Risk Retention Rule. See U.S. Dep't of Treasury, Report to President Donald J. Trump: Executive Order 13772 on Core Principles for Regulating the U.S. Financial System, available at https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf, at 102-04. En banc review by the D.C. Circuit Court is also extraordinarily rare. And given that challenges to agency action are typically (though not always) addressed by the D.C. Circuit Court, it is relatively unlikely that a different Circuit Court will issue a conflicting opinion.

Absent a grant of further review by the D.C. Circuit Court or U.S. Supreme Court in the coming months, market participants can expect the D.C. District Court to issue an order vacating the Risk Retention Rule as it applies to open-market CLO managers. Over the long term, the vacating of the Risk Retention Rule as it applies to open-market CLO managers should give a boost to new CLO issuance and to refinancing activity, as managers in general will no longer need to source capital to invest in each CLO that they set up or refinance. Investment managers involved in other types of securitizations may also benefit. Although the decision was limited to open-market CLOs, the court's interpretation of the term "securitizer" suggests that the Risk Retention Rule may not apply to investment managers whose role is limited to negotiating the terms of the relevant securitization and selecting the assets to be acquired by the issuing entity.

The near-term implications of the D.C. Circuit's decision are less clear, since uncertainty over the rule's validity and application may lead some managers to hold off on CLO issuances pending the issuance of an order vacating the rule as it applies to such CLOs. In addition, absent further litigation or clarification by the relevant federal agencies, open-market CLO managers that originate or hold assets in an effort to comply with EU risk retention requirements may continue to be subject to the Risk Retention Rule in the U.S. as well.

For existing CLO risk retention investments, and the debt and equity financing arrangements that have been put in place to finance them, the impact of the decision will depend on the terms of relevant transaction documents. For example, many collateral managers that have established private investment funds to finance their risk retention investments, and investors in such funds, should consult the relevant fund documents to determine whether the investors will continue to be required to fund their commitments to such funds if the Risk Retention Rule no longer applies or whether, conversely, the manager or the investors have the right to cancel such arrangements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Kramer Levin Naftalis & Frankel LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Kramer Levin Naftalis & Frankel LLP
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions