882 F.3d 220
D.C. Cir.2018Background
- Congress enacted § 941 of Dodd-Frank (15 U.S.C. § 78o-11) to require securitizers to retain at least 5% of the credit risk in asset-backed securities to give them "skin in the game."
- The agencies adopted the Credit Risk Retention Rule (2014), applying retention requirements to various participants, including open-market CLO managers.
- LSTA, representing CLO managers, challenged the rule, arguing CLO managers are not "securitizers" under § 941 because they do not transfer or ever possess the securitized assets.
- Procedural history: case transferred from this Court to district court; district court upheld the agencies. On appeal, the D.C. Circuit reviews de novo and addresses whether CLO managers fall within § 941.
- Fact pattern: open-market CLO managers negotiate terms and direct an SPV to issue securities; the SPV (using investor funds) purchases loans on the open market. Managers do not originate or hold the loans; they act more like asset managers and are paid performance-based fees.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether CLO managers are "securitizers" under § 941 (i.e., whether they "transfer" assets and must "retain" credit risk) | LSTA: CLO managers do not transfer or hold assets and thus cannot "retain" risk; statutory "transfer"/"retain" require prior possession/ownership. | Agencies: "Transfer" and "retain" can be read broadly ("directly or indirectly") to include parties who cause transfers (including CLO managers); otherwise a loophole would undermine statutory scheme. | Court: Reversed—CLO managers are not securitizers under § 941; "transfer" and "retain" in ordinary meaning presuppose possession/ownership, which managers lack. |
Key Cases Cited
- Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837 (agency deference framework)
- Entergy Corp. v. Riverkeeper, 556 U.S. 208 (courts defer to reasonable agency interpretations absent clear congressional intent)
- City of Arlington v. FCC, 569 U.S. 290 (scope of agency deference principles)
- Smiley v. Citibank (S.D.), 517 U.S. 735 (agency interpretation entitled to deference where Congress expected it)
- Honeycutt v. United States, 137 S. Ct. 1626 (adverbs modify but do not erase a verb's ordinary meaning)
- FDIC v. Meyer, 510 U.S. 471 (construe statutory terms by ordinary meaning absent definition)
- K Mart Corp. v. Cartier, Inc., 486 U.S. 281 (statute construed by text and design)
- General Dynamics Land Systems, Inc. v. Cline, 540 U.S. 581 (policy concerns cannot override statutory text)
- Northern Natural Gas Co. v. FERC, 700 F.3d 11 (D.C. Cir. standard on reasonable agency interpretation)
- District Hosp. Partners, L.P. v. Burwell, 786 F.3d 46 (D.C. Cir. de novo review of district court summary judgment)