I. OVERVIEW
A three-judge panel of the U.S. Court of Appeals for the D.C. Circuit (“D.C. Circuit”) issued a unanimous decision1 on Friday, February 9, 2018 holding that the final rules implementing the requirements of Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Risk Retention Rules” or the “Rule”) do not apply to “open-market CLO” managers. Before the issuance of the D.C. Circuit’s decision, the market was adjusting to the Rule’s requirement that a CLO manager, as “sponsor” of a CLO, retain or cause to be retained by a “majority-owned affiliate” at least five percent of the securities issued in the CLO transaction.2 The D.C. Circuit ruled that the federal agencies implementing the Rule (collectively, the “agencies”)3 incorrectly characterized open-market CLO managers as “securitizers” required to retain the requisite credit risk because such managers have no “relationship to the assets such that one can reasonably say that they ‘transfer’ the assets and could be required to ‘retain’ a portion of the assets’ risk.”4 While the D.C. Circuit’s decision is expected to be, over the long term, a shot in the arm to an already robust CLO market, there may be some pause in the market for pricings of some new CLOs and CLO resets and refinancings, in particular in such transactions that had contemplated retention financings, pending possible appeal (or passage of the time period for appeal) of the decision.
