October 11, 2017 - (article updated October 12, 2017) – Almost three years from the day it initially filed its lawsuit against the SEC and Federal Reserve Board on risk retention for CLO managers, the LSTA got its “day in court”.  On Tuesday, a three judge panel of the United States Circuit Court for the District of Columbia heard oral arguments from LSTA’s counsel, Richard Klingler of Sidley Austin, and Joshua Chadwick representing the federal agencies.  The LSTA claimed that the federal agencies exceeded their statutory authority under Section 941 of the Dodd-Frank Act by tagging CLO managers as “securitizers” subject to risk retention.  The LSTA asserts that the statute labels as securitizers only those parties that initiate securitizations by selling or transferring assets to securitization vehicles and notes that CLO managers initiate CLOs by purchasing assets on behalf of managers.  The LSTA also claimed that the agencies acted arbitrarily in linking so-called “horizontal” first loss risk retention to 5% of the fair value of a securitization rather  than 5% of its credit risk (as required by the statute). This resulted in a horizontal risk retention requirement almost ten times what the statute mandates.  Although the court originally allocated 30 minutes for the argument, all three judges were very engaged, peppering counsel with questions on both the LSTA’s claims, and allowed the session to continue for just short of an hour.

The case is on appeal from the United States District Court for the District of Columbia which ruled last December in favor of the government.  A decision by the Court of Appeals is likely in the next few months. ThomsonReuters LPC and Law360 provided analysis of the oral argument. To hear a recording of the actual – and quite engaging – oral argument, click here.