Loan Trade Group Asks Court to Overturn New CLO Risk Rule

The trade organization for the U.S. corporate loan market is asking a federal court to overturn new rules that would require investment firms that manage securities created from the debt to retain portions of those deals.

The Loan Syndications & Trading Association sued the Federal Reserve and the Securities and Exchange Commission in the U.S. Court of Appeals in Washington on Nov. 10, saying their regulations are “arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law.” Under the rules released Oct. 21, collateralized loan obligation managers would be forced to hold at least 5 percent of their deals.

“The LSTA and the industry believe that the agencies did not fulfill their legal responsibilities when finalizing the rule,” Bram Smith, executive director of the LSTA said in an e-mailed statement. “The LSTA believes the regulatory agencies’ one-size fits all solution to risk retention” that pertains to CLOS “disproportionately punishes an industry that was not involved in the financial crisis, suffered practically no losses and currently provides critical financing to over 1,000 non-investment grade companies,” he said.

CLOs typically pool high-yield corporate loans, which are often used to finance leveraged buyouts, and slice them into securities of varying risk and return. The funds bought 63 percent of loans in the second quarter, according to a July 23 report from the LSTA, which cited Standard & Poor’s Capital IQ Leveraged Commentary and Data. There has been a record $114 billion of CLOs raised in the U.S. this year, according to Wells Fargo & Co.

The risk-retention rule pertaining to CLOs will take effect two years after being published in the Federal Register.

The case is The Loan Syndications & Trading Association v. SEC, 14-1240, U.S. Court of Appeals, District of Columbia Circuit (Washington)

Before it's here, it's on the Bloomberg Terminal.