Loan Syndications & Trading Ass'n v. Sec. & Exch. Comm'n, 17-5004

• Decision Date: 09 February 2018
• Docket Number: No. 17-5004,17-5004
• Citation: 882 F.3d 220
• Parties: The LOAN SYNDICATIONS AND TRADING ASSOCIATION, Appellant v. SECURITIES AND EXCHANGE COMMISSION and Board of Governors of the Federal Reserve System, Appellees
• Court: U.S. Court of Appeals — District of Columbia Circuit

882 F.3d 220

The LOAN SYNDICATIONS AND TRADING ASSOCIATION, Appellant

v.SECURITIES AND EXCHANGE COMMISSION and Board of Governors of the Federal Reserve System, Appellees

No. 17-5004

United States Court of Appeals, District of Columbia Circuit.

Argued October 10, 2017

Decided February 9, 2018

Richard D. Klingler, Washington, DC, argued the cause for LSTA. With him on the briefs were Peter D. Keisler, Jennifer J. Clark, and Daniel J. Feith, Washington, DC.

Joshua P. Chadwick, Senior Counsel, Board of Governors of the Federal Reserve System, argued the cause for appellees. With him on the brief were Katherine H. Wheatley, Associate General Counsel, Michael A. Conley, Solicitor, Securities and Exchange Commission, and Sarah Ribstein Prins, Senior Counsel.

Carl J. Nichols, Kate Comerford Todd, and Steven P. Lehotsky, Washington, DC, were on the brief for amicus curiae The Chamber of Commerce of the United States of America in support of LSTA.

Before: Kavanaugh, Circuit Judge, and Williams and Ginsburg, Senior Circuit Judges.

Williams, Senior Circuit Judge:

In the wake of the 2007–2008 financial crisis, Congress enacted the Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010), including provisions aimed at redressing the "complexity and opacity" of securitizations that it saw as preventing investors from adequately assessing risks in a securitized portfolio. S. Rep. No. 111-176, at 128–29 (2010). In § 941 of the act, 15 U.S.C. § 78o -11, Congress directed the defendant agencies (plus two other banking agencies¹ ) to prescribe regulations to require "any securitizer" of an asset-backed security to retain a portion of the credit risk for any asset that the securitizer "transfers, sells, or conveys" to a third party, specifically "not less than 5 percent of the credit risk for any asset." 15 U.S.C. § 78o -11(c)(1)(B)(i). The reasoning was that "[w]hen securitizers retain a material amount of risk, they have ‘skin in the game,’ aligning their economic interests with those of investors in asset-backed securities." S. Rep. No. 111-176, at 129. The agencies responded with the Credit Risk Retention Rule, 79 Fed. Reg. 77,601 (Dec. 24, 2014).

The Loan Syndications and Trading Association (the "LSTA") represents firms that serve as investment managers of open-market collateralized loan obligations ("CLOs") (a type of security explained in some detail below).² It challenges the agencies' decision, embodied in the rule, to apply § 941's credit risk retention requirements to the managers of CLOs ("CLO managers"). See 12 C.F.R. § 244.9 ; 17 C.F.R. § 246.9. The LSTA's primary contention is that, given the nature of the transactions performed by CLO managers, the language of the statute invoked by the agencies does not encompass their activities. We agree.

We note by way of background that the LSTA initially petitioned for review of the rule in this court. We held that we lacked jurisdiction and transferred the case to the district court. Loan Syndications & Trading Ass'n v. SEC , 818 F.3d 716, 724 (D.C. Cir. 2016). The district court granted summary judgment in the agencies' favor, finding that they could reasonably read § 941 to treat CLO managers as "securitizers." Loan Syndications & Trading Ass'n v. SEC , 223 F.Supp.3d 37, 54–59 (D.D.C. 2016). The district court also rejected the LSTA's argument that the rule's methods for determining credit risk were arbitrary and capricious. Id. at 59–66. The case has now returned to us on appeal of both rulings. Because we agree with the CLO managers that they are not "securitizers" under § 941, the managers need not retain any credit risk; we therefore need not address the risk calculation issue.

* * *

We review the Credit Risk Retention Rule for reasonableness under the familiar standard of Chevron, USA, Inc. v. NRDC, Inc. , 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), "which ... means (within its domain) that a ‘reasonable agency interpretation prevails.’ " Northern Natural Gas Co. v. FERC , 700 F.3d 11, 14 (D.C. Cir. 2012) (quoting Entergy Corp. v. Riverkeeper, Inc. , 556 U.S. 208, 218 n.4, 129 S.Ct. 1498, 173 L.Ed.2d 369 (2009) ). Of course, "if Congress has directly spoken to an issue then any agency interpretation contradicting what Congress has said would be unreasonable." Entergy , 556 U.S. at 218 n.4, 129 S.Ct. 1498.

The LSTA, rightly, does not suggest that Chevron is inapplicable due to the multiplicity of agencies. As they were authorized only to act jointly, and have done so, there is no risk that Chevron deference would lead to conflicting mandates to regulated entities. See Collins v. NTSB , 351 F.3d 1246, 1252–53 (D.C. Cir. 2003). And there is nothing special to undermine Chevron 's premise that the grant of authority reflected a congressional expectation that courts would defer to the agencies' reasonable statutory interpretations. See Smiley v. Citibank (S.D.), N.A. , 517 U.S. 735, 740–41, 116 S.Ct. 1730, 135 L.Ed.2d 25 (1996).

As we are reviewing the district court's grant of summary judgment to the agencies and denial of summary judgment to the LSTA, our review of the district court is de novo. District Hosp. Partners, L.P. v. Burwell , 786 F.3d 46, 54 (D.C. Cir. 2015).

The statute directs the agencies to issue regulations

to require any securitizer to retain an economic interest in a portion of the credit risk for any asset that the securitizer, through the issuance of an asset-backed security, transfers , sells , or conveys to a third party.

15 U.S.C. § 78o -11(b)(1) (emphasis added). And Congress defined a "securitizer" as:

(A) an issuer of an asset-backed security; or

(B) a person who organizes and initiates an asset-backed securities transaction by selling or transferring assets, either directly or indirectly, including through an affiliate, to the issuer ....

Id. § 78o -11(a)(3) (emphasis added).

The two key words in determining whether § 941 can be reasonably read to encompass CLO managers are "transfer" and "retain." The two subsections quoted above have the effect of authorizing requirements that an entity which transfers assets to an issuer retain a portion of the credit risk from the underlying assets that it transfers. In their ordinary meaning, words directing that one who "transfers" an asset must "retain" some interest in the associated risk refer to an entity that at some point possesses or owns the assets it is securitizing and can therefore continue to hold some portion of those assets or the credit risk those assets represent—that is, the entity is in a position to limit the scope of a transaction so that it transfers away less than all of the asset's credit risk. See, e.g., FDIC v. Meyer , 510 U.S. 471, 476, 114 S.Ct. 996, 127 L.Ed.2d 308 (1994) ("In the absence of [a statutory] definition, we construe a statutory term in accordance with its ordinary or natural meaning."); 2A Sutherland Statutory Construction §§ 47:28 –29 (7th ed. 2014) (similar).

But CLO managers do not hold the securitized loans at any point. Instead of being a financial institution originating or acquiring assets and then securitizing them, a CLO manager meets with potential investors and agrees to the terms of its performance as well as the risk profiles and tranche structures the CLO will ultimately take. See Wells Fargo & Company, Comment on Credit Risk Retention Proposed Rules 27 (July 28, 2011) ("Wells Fargo Comment"). The manager then directs a Special Purpose Vehicle ("SPV") (a corporation operating as the manager's agent—although the documents often define the manager as the SPV's agent, Argument Tr. 32–33) to issue notes in exchange for capital from the investors, the various notes reflecting the terms of the agreement and the kind and size of the investments. Board of Governors of the Federal Reserve System, Report to the Congress on Risk Retention 22–23 (Oct. 2010) ("Board Report"). Only then does the SPV—using the investors' money and operating at the recommendation of the manager—purchase the assets to securitize them. Wells Fargo Comment 27.

The loans underlying CLOs are very large loans made to already highly leveraged companies, often in the retail or manufacturing sectors of the economy. Usually no single bank originates the entirety of a loan. Rather, multiple banks "syndicate" under a lead arranger, each holding only a portion of the loan. Syndicated loans are "actively traded amongst financial institutions in a secondary market place," and purchased on these markets by a range of investors, including institutional investors, hedge fund managers, and, of course, CLO vehicles. Wells Fargo Comment 27. The number of syndicated loans in a CLO pool is typically small relative to other asset-backed securitizations. Ordinarily, a pool is made up of 100 to 250 loans, usually all made to moderate or large companies that generate a wealth of risk profile data for review by CLO managers and investors. See Securities Industry and Financial Markets Association, Comment to Joint Regulators on Credit Risk Retention Proposed Rules 67–68 (June 10, 2011); JPMorgan Chase & Co., Comment to Joint Regulators on Credit Risk Retention Proposed Rules 58–59 (July 14, 2011). But CLO managers neither originate the loans nor hold them as assets at any point. Rather, like mutual fund or other asset managers, CLO managers only give directions to an SPV and receive compensation and management fees contingent on the performance of the asset pool over time. See American Securitization Forum, Comment to Joint Regulators on Credit Risk Retention Proposed Rules 133–34 (June 10, 2011); U.S. Treasury Department, Report: A Financial System that Creates Economic Opportunities 102 (Oct. 2017) ("Treasury Report"); Board Report 22. The agencies do not question these characterizations of the CLO securitization model. See Appellees Br. 4–7; Board Report 22–23.

The agencies' interpretation seems to stretch the statute beyond the natural meaning of what Congress wrote;...