Appeals Court Exempts Loan Funds from Dodd-Frank Risk-Retention Rule -- Update
By Dave Michaels
WASHINGTON -- Managers of Wall Street funds that lend money to heavily indebted firms won't have to retain an interest in the debt they sell to investors after a federal appeals court invalidated part of a major postcrisis rule.
The U.S. Court of Appeals for the District of Columbia Circuit on Friday overturned regulators' decision to apply a 2014 rule to funds known as collateralized loan obligations. The rule sought to impose discipline on banks and other mortgage lenders that had spun dodgy home loans into securities, fomenting the 2008 financial crisis.
A three-judge panel of the D.C. Circuit said the Federal Reserve and Securities and Exchange Commission lacked the authority to apply the risk-retention rule to CLOs. The regulation required creators of complex securities such as CLOs to keep 5% of the value of the asset they sell to others.
The judges said the SEC and Fed went too far in applying the rule -- required by the 2010 Dodd-Frank Act -- to the business model of CLOs.
"It's a very big deal for the market," said Elliot Ganz, general counsel of the Loan Syndications and Trading Association, which sued the government over the rule in 2014. "No matter what the policy argument was, the statutory language just does not give the agencies the ability to do what they did."
An SEC spokesman declined to comment. A spokesman for the Fed said the central bank is reviewing the court's decision.
CLOs are a big source of credit for indebted companies with limited alternatives. Some CLO managers had moved to create vehicles that allowed them to retain less than 5% of the risk by setting up affiliated companies that would buy the stakes. The fund manager would own roughly 51% of the new firms, and outside investors would own the rest, according to market participants.
CLO managers include firms such as Blackstone Group LP and HPS Investment Partners LLC, a spinoff from JPMorgan Chase & Co. Managers sell portions of the fund to clients such as banks, insurers and others.
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(END) Dow Jones Newswires
February 09, 2018 12:27 ET (17:27 GMT)Copyright (c) 2018 Dow Jones & Company, Inc.