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Loan Syndications & Trading Ass'n v. SEC

United States Court of Appeals for the District of Columbia Circuit

October 10, 2017, Argued; February 9, 2018, Decided

No. 17-5004


 [**266]   [*221]  WILLIAMS, Senior Circuit Judge: In the wake of the 2007-2008 financial crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010), including provisions aimed at redressing the "complexity and opacity" of securitizations that it saw as preventing investors from adequately assessing risks in a securitized portfolio. [***2]  S. Rep. No. 111-176, at 128-29 (2010). In § 941 of the act, 15 U.S.C. § 78o-11, Congress directed the defendant agencies (plus two other banking agencies1) to prescribe regulations to require "any securitizer" of an asset-backed security to retain a portion of the credit risk for any asset that the securitizer "transfers, sells, or conveys" to a third party, specifically "not less than 5 percent of the credit risk for any asset." 15 U.S.C. § 78o-11(c)(1)(B)(i). The reasoning was that "[w]hen securitizers retain a material amount of risk, they have 'skin in the game,' aligning their economic interests with those of investors in asset-backed securities." S. Rep. No. 111-176, at 129. The agencies responded with the Credit Risk Retention Rule, 79 Fed. Reg. 77,601 (Dec. 24, 2014).

The Loan Syndications and Trading Association (the "LSTA") represents firms that serve as investment managers of open-market collateralized loan obligations ("CLOs") (a type of security explained in some detail below).2 It challenges the agencies' decision, embodied in the rule, to apply § 941's credit risk retention requirements to the managers of CLOs ("CLO managers"). See 12 C.F.R. § 244.9; 17 C.F.R. § 246.9. The LSTA's primary contention is that, given the nature of the transactions performed by CLO managers, the language of the statute invoked [***3]  by the agencies does not encompass their activities. We agree.

 [*222]   [**267]  We note by way of background that the LSTA initially petitioned for review of the rule in this court. We held that we lacked jurisdiction and transferred the case to the district court. Loan Syndications & Trading Ass'n v. SEC, 818 F.3d 716, 724, 422 U.S. App. D.C. 48 (D.C. Cir. 2016). The district court granted summary judgment in the agencies' favor, finding that they could reasonably read § 941 to treat CLO managers as "securitizers." Loan Syndications & Trading Ass'n v. SEC, 223 F. Supp. 3d 37, 54-59 (D.D.C. 2016). The district court also rejected the LSTA's argument that the rule's methods for determining credit risk were arbitrary and capricious. Id. at 59-66. The case has now returned to us on appeal of both rulings. Because we agree with the CLO managers that they are not "securitizers" under § 941, the managers need not retain any credit risk; we therefore need not address the risk calculation issue.

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882 F.3d 220 *; 434 U.S. App. D.C. 265 **; 2018 U.S. App. LEXIS 3068 ***; Fed. Sec. L. Rep. (CCH) P100,015; 2018 WL 798290


Prior History:  [***1] Appeal from the United States District Court for the District of Columbia. (No. 1:16-cv-00652).

Loan Syndications & Trading Ass'n v. SEC, 223 F. Supp. 3d 37, 2016 U.S. Dist. LEXIS 177055 (D.D.C., Dec. 22, 2016)


securitization, agencies, entity, credit risk, retention, transfers, issuer, investors, regulations, asset-backed, organizes, loans, open-market, indirectly, sponsor, initiates, selling, affiliate, loophole, Trading, financial institution, third party, collateralized, Syndications, originating, Dictionary, convey, statutory language, summary judgment, district court

Administrative Law, Judicial Review, Standards of Review, Deference to Agency Statutory Interpretation, Securities Law, US Securities & Exchange Commission, Interpretation of Regulations, Civil Procedure, Appeals, De Novo Review, Summary Judgment Review, Standards of Review, Registration Requirements, Registration of Markets & Market Participants, Broker-Dealers