The Loan Syndications and Trading Association will appeal a Dec. 22 federal district court ruling that shot down the trade group’s 2016 lawsuit against U.S. financial regulators challenging new risk-retention standards for collateralized loan obligations.
The LSTA announced late Thursday it planned to file an appeal to the Federal Court of Appeals in the D.C. circuit. The group had been mulling its actions since the district court issued its ruling last month, which the LSTA stated “disappoints” an industry worried that the rules will curtail CLO issuance and hamper financing to speculative-grade companies that depend on syndications of their high-risk loans to securitization investors.
The LSTA and other structured-finance groups were suing the Securities and Exchange Commission and the Federal Reserve, which established the rules’ application to CLOs in December 2014 and set a Christmas Eve 2016 start date for enforcement.
The risk-retention rules, as directed by the Dodd-Frank Act for securitizations in mortgages, loans and other asset classes, are designed to align manager and investors’ interest by requiring “skin in the game” for sponsors and originators of loans.
Opponents of the rule have argued the standards were misapplied to the asset class since CLO managers, asserting that the managers serve only as money managers and arrangers – not originators – and do not fit the “securitizer” standard set forth in Dodd-Frank.
But in its 48-page decision, the district court cited the agencies’ contention that “special purpose vehicles and investors in the open market CLO structures to not choose or monitor assets in the CLO itself,” the Dec. 22 ruling stated. “[I]t makes less sense for them to retain risk instead of managers that do select and monitor the assets.”
The agencies had determined that CLOs and their managers were covered by the risk-retention standard since they are the agent in charge of investment and performance-monitoring decisions on the portfolios.
The appeals court is the same court that last spring under chief judge and Supreme Court nominee Merrick Garland had remanded the case to the D.C. district court for a hearing, following the LSTA’s long-shot ploy to first argue the case at the appeals court level in hopes of obtaining an immediate stoppage to the new rules.
Opponents were seeking changes to better accommodate CLOs, including limiting the stake to the equity tranche or providing a “qualified CLO” exemption similar to quality mortgages that home-loan lenders can exclude from the retention standard for securitizations.
“The LSTA strongly believes that the District Court’s December 22nd ruling was incorrect and that the agencies inappropriately applied the risk retention rules to managers of CLOs,” the association stated in a release. “CLOs performed extraordinarily well before, during and after the financial crisis; they are not the product that the Dodd-Frank Act intended to fix.”
In its statement, the LSTA expressed confidence it can have the case reinstated. “Critically, unlike appeals involving a judge’s or jury’s fact-finding in criminal or civil litigation, an appeal of a District Court’s administrative law decision involves no deference to the lower court or presumption that the court was correct. Therefore, we look forward to a thorough and direct analysis of the agencies’ rule.”