In a decision handed down today, a panel of the D.C. Circuit rejected the agencies’ construction of the statute and endorsed LSTA’s arguments. The Court held that the statute does not authorize the agencies to subject open market CLO managers to risk retention regulation, because those managers are not “securitizers.”
To be a securitizer for purposes of Section 941, the Court concluded, “a party must actually be a transferor, relinquishing ownership or control of assets to an issuer” of the securitization notes. Because managers of open market CLOs do not own or control assets that are transferred to a CLO issuer and do not otherwise transfer assets to the issuer, they are not “securitizers” for purposes of the statute. The statute thus does not authorize the agencies to regulate open market CLO managers as “securitizers” or to impose risk retention obligations upon them.
As a result, the Court reversed or vacated the portions of a district court decision that had initially upheld the agencies’ rule and remanded the case to the district court with instructions “to vacate the [risk retention] rule insofar as it applies to open-market CLO managers.” The Court also acknowledged that the reasoning of its decision may well apply to managers of other types of securitizations.
The Court’s decision is not immediately effective. The government has 45 days in which to decide whether to seek review before the full D.C. Circuit.
The Court’s decision does not address which parties may or must retain risk under EU risk retention rules when those rules are applicable.
For several years, Sidley has assisted LSTA’s efforts before the courts, Congress and the agencies to secure regulatory relief for managers of open market CLOs. Sidley partner Richard Klingler argued the case before the D.C. Circuit and was joined on the briefs by Sidley attorneys Peter Keisler, Jennifer Clark, and Daniel Feith. These members of Sidley’s appellate litigation group were supported by securitization lawyers in Sidley’s Global Finance practice group, which continues to consider the potential implications of the decision for other kinds of CLOs and a range of other securitization transactions.
