Credit Card ABS: Securitization and State Usury Laws

Consumer lending as we know it today – and credit card lending in particular – depend on securitization for significant access to capital. However, the ability of banks to bundle and sell credit card debt-backed securities may be thrown into disarray depending on the outcomes of a pair of pending cases: Cohen v. Capital One Funding, LLC[1] and Cohen v. Chase Card Funding, LLC.[2]

The outcomes of these matters will likely turn on the application of a 2015 decision by the 2nd Circuit Court of Appeals regarding a statute that is more than 150 years old: the National Bank Act of 1864 (“NBA”).

The Supreme Court has stated that the NBA preempts state laws that “significantly interfere” with a “national bank’s exercise of its powers,”[3] a ruling that has been applied to cover state usury laws that set maximum rates of interest. As a result, a bank must comply with the usury law of the state “in which the bank [is] located”[4] – if the borrower moves to a state with a lower rate cap, the interest rate remains valid.

In 2015, the 2nd Circuit decided Madden v. Midland Funding, LLC.[5] In Madden, a Delaware-based bank had issued a loan to a New York borrower with an interest rate that complied with Delaware law.[6] The bank, however, then sold the loan to a debt purchaser. But because the purchaser was neither a national bank itself nor acting “on behalf of” a national bank, the 2nd Circuit found that New York’s usury law[7] did not “significantly interfere” with the bank and held that New York’s maximum interest rate cap applied.

Now, plaintiffs in Capital One and Chase Card seek to extend this reasoning to ABS that hold credit card debts. Because the debts are now owned by an independent trust, plaintiffs allege the credit card ABS entity has no right to assert that state usury laws preempt the interest rates being charged on the underlying debts.


Should plaintiffs prevail, banks’ ability to free up capital and spread risk across nonbank institutional investors would be severely hampered – and would likely face a period of upheaval as the effects on the billions of dollars of outstanding CCABS are sorted out.

The 2nd Circuit’s decision in Madden has sparked criticism from regulators[8] and at least two efforts in Congress to legislate a change to the ruling.[9] However, until such a change is enacted, market participants will have to watch the courses of Capital One and Chase Card.


[1] No. 19-cv-03479 (E.D.N.Y.).

[2] No. 19-cv-00741 (W.D.N.Y.).

[3] Marquette Nat. Bank v. First of Omaha Svc. Corp., 439 U.S. 299, 313 (1978).

[4] Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25, 33 (1996).

[5] 786 F.3d 246 (2d Cir. 2015).

[6] 6 Del. C. § 2301 et seq.

[7] NY CLS Gen Oblig § 5-501 et seq.

[8] See, e.g., amicus brief of the F.D.I.C. and Office of Comptroller of the Currency, In re: Rent-Rite Super Kegs West Ltd., No. 19-cv-01552 (D. Colo.), dkt. no. 11.

[9] See, e.g., Sykes, J., Banking Law: An Overview of Federal Preemption in the Dual Banking System (Jan. 23, 2018), available at

Capital Markets Litigation Team Achieves Key Victory in Pro Bono Transgender Rights Case

We are proud to announce that our team achieved a key victory as plaintiffs’ pro bono counsel in Doe v. Esper, a constitutional challenge to the Pentagon’s transgender service policy. The government’s policy is to discharge or deny enlistment to anyone who will not serve in the gender to which they were assigned at birth, or who is undergoing hormone therapy or other gender-confirmation procedures.

The Hon. Colleen Kollar-Kotelly of the U.S. District Court for the District of Columbia granted our team’s motion to compel production of documents withheld by the Department of Defense (DOD) and other government defendants.  The court rejected the government’s argument that it should automatically be accorded a high level of deference because the policy resulted from military-decision-making, and ruled that “[a]dditional discovery is needed to determine if the [challenged Mattis] Plan is the product of considered military decision-making that reasonably and evenhandedly regulates the matter at issue.”

The judge further agreed that DOD could not invoke the deliberate process privilege, which protects documents revealing the process behind government decisions, because “[t]hose documents go to the heart of Defendants’ intent and decision-making process … — both key issues in establishing the legitimacy of the disputed transgender policy.” The opinion made clear that “Plaintiffs’ need for the information overcomes Defendants’ privilege.”

As noted in Lowenstein’s press release about the victory, we are pleased to contribute our trial skills to protect the rights of individuals fighting on behalf of our country.

Survey Shows Hedge Funds Are Using More Alternative Data, but Data Cost and Quality Issues Remain

According to survey results published in September, 2019, by Lowenstein Sandler, over 80 percent of hedge funds of all sizes are using alternative data in some capacity, with 75 percent of respondents saying they use it to make better investment predictions.

Completed by C-level executives, data scientists, equity analysts, portfolio managers, and legal/compliance officers in the private funds industry, the survey assessed how funds of all sizes use alternative data. Funds were grouped by size–less than $500 million, $500 million to $5 billion, and greater than $5 billion–to determine how data use, and concerns about it, differ at varying levels of asset value.

The report, entitled Alternative Data = Better Investment Strategies, But Not Without Concerns, is the first survey of its kind from the firm’s Investment Management Group; it was authored by Peter D. Greene, partner and Vice Chair of the group, with contributions from partner Benjamin Kozinn.

“It is not surprising to me that an overwhelming majority of funds are using alternative data,” said Greene. “What is interesting is how funds of various sizes are using it and how they plan to expand their use in the future. In a changing industry, it is more important than ever to learn what alternative data can do, while also acknowledging the limitations and concerns that come with using such data.”

81 percent of respondents’ organizations plan to increase their budgets for alternative data. Of those, the majority plan to increase budgets by 11-25 percent.

The survey results also show an increasing interest in using newer data sources such as web scraping and biometrics to stay competitive. 57 percent of respondents expect to use web scraping as a data source within a year, a jump from the 49 percent who currently use it; and 32 percent said they currently use biometric data now, with 45 percent expecting to use it in the future.

However, concerns do remain over new regulations and privacy laws, cost and time investment, and the ability to distinguish relevant information from large volumes of data.

Most respondents (98%) said they used alternative data in combination with fundamental analysis to make investment decisions.

The release of the report was noted by HedgeweekBusiness WireOpalesque, the Managed Funds Association newsletter, Institutional InvestorAssociated PressYahoo! Finance,, and Chief Investment Officer.

Syndicated Loans: Have They Been Securities All Along?

In a case pending in federal court in New York, Kirschner v. JPMorgan Chase Bank, N.A., No. 17-cv-06334-PGG (S.D.N.Y.), a bankruptcy trustee may upend what has long been accepted wisdom on Wall Street: securities laws apply to stocks, bonds, equity options, and the like – but not to syndicated loans.

Kirschner is brought by the bankruptcy trustee on behalf of a group of “approximately 400 mutual funds, pension funds, universities, [CLO]s and other institutional investors,” and alleges that the banks that led Millennium Labs’ 2014 loan syndication violated state securities laws of California, Massachusetts, and Colorado, among other claims.

Syndicated loans, often referred to as “leveraged loans,” are term loans extended to companies by a group of lenders. Like corporate bonds, syndicated loans are debt instruments that entitle the holder to interest and principal.  However, unlike traditional securities, interests in a syndicated loan are not sold like a bond, but assigned to the new holder.  As a result, only current investors have standing to bring claims against the borrower.  Another difference is that syndicated loans are not offered through a risk-warning-laden prospectus, but rather a confidential information memorandum, or “CIM.”  The CIM is not a public document, and is generally only made available to lenders upon approval of the borrower.[1]

Enter privately-held Millennium Laboratories LLC, a San Diego-based company that performed urinalysis drug testing for Medicare, Medicaid programs, and commercial insurance companies.  In 2014, Millennium Labs teamed up with a group of banks to organize a $1.765 billion term loan to refinance older debt and pay out a substantial cash dividend to insiders.

Less than a year later, however, lenders found Millennium Labs besieged under a barrage of legal threats from federal regulators and civil litigants that would ultimately lead to the company’s bankruptcy – risks that the trustee in Kirschner asserts were well known to Millennium Labs and its bankers but fraudulently concealed from investors in the 2014 CIM.

As the true depth of these risks was revealed in late 2015 and early 2016, the market value of Millennium Labs’ loan fell sharply:

The secondary market price of Millennium Labs’ syndicated loan during 2016 highlights one of the hazards of this type of investment – as the extent and gravity of the company’s litigation risks were becoming known, Millennium reportedly refused to provide prospective lenders access to the CIM, leading to nearly three months in mid-2016 of no secondary market activity with lenders locked into their stale-priced positions:

As defendants point out in their motion to dismiss, federal courts have for some time agreed that bank loans such as these do not qualify as “securities” for purposes of federal securities laws, citing Banco Espanol de Credito v. Pacific National Bank, 973 F.2d 51 (2d Cir. 1992). Although the Second Circuit did affirm this lower-court determination in Banco Espanol de Credito, the panel cautioned: “We recognize that even if an underlying instrument is not a security, the manner in which participations in that instrument are used, pooled, or marketed might establish that such participations are securities.” Id. at 56.

Further, that ruling was delivered contrary to an amicus brief submitted by the Securities and Exchange Commission, eliciting a vociferous dissent by then-Chief Judge Oakes, who noted:“I fear that the majority opinion misreads the facts, makes bad banking law and bad securities law, and stands on its head the law of this circuit and of the Supreme Court….” Id.

Whether the analysis in Banco Espanol de Credito proves equally availing for purposes of the various state laws that the Trustee in Kirschner relies on remains to be seen.

Defendants’ motions to dismiss the claims in Kirschner have been fully briefed and both sides have requested oral argument.


[1] A publicly filed exhibit in Kirschner offers a rare look at a CIM.  See Decl. in Sup. of Mot. to Dismiss, Ex. B, Parts 1 & 2, Kirschner, No. 17-cv-06334-PGG, Dkt. Nos. 79-2 & 79-3 (S.D.N.Y. June 28, 2019).


Student Loan Debt Called a “Trillion-Dollar Blackhole”

Do student loans bear any similarities to mortgage loans, which lay at the heart of the 2008 economic crisis? The short answer is yes. Student loan asset-backed securities (SLABS), much like residential mortgage-backed securities (RMBS), are loans bundled and packaged into securities available for purchase by investors. Bearing ominous resemblance to the precursors to the 2008 financial crisis, the number of student loan borrowers, as well as the average balance per borrower, continues to rise every year, while most recent college graduates are unable to find jobs allowing them to pay back their loans.

According to members of Congress, the U.S. is already in crisis over growing student loan debt. The House Committee on Financial Services held a hearing on Tuesday, September 10th entitled “A $1.5 Trillion Crisis: Protecting Student Borrowers and Holding Student Loan Servicers Accountable.” A five-person panel warned the Committee that there is currently $1.5 trillion in outstanding student loans, from about 44 million borrowers, with approximately 11% of those loans more than 90 days delinquent.

At the hearing, Ashley Harringston, Senior Policy Counsel for the Center for Responsible Lending, testified that 70 percent of 2016 graduates had student loan debt. The crisis is impacting not only low and middle-class families: even students from high-income families are borrowing to attend college, perhaps choosing to attend higher-ranked and more expensive schools. The executive director of the Student Borrower Protection Center, Seth Frotman, called the student loan crisis a “trillion-dollar blackhole in our financial markets.” But with nine pending pieces of legislation aimed at tackling rising student debt, members of Congress disagree on how to handle this crisis. Time will tell whether Congress – and the American people – have learned from the 2008 financial crisis, or whether history is doomed to repeat itself.

New York Legislature Extends Statute of Limitations for Martin Act Claims

Last week, Governor Cuomo signed into law a bill to amend the New York Civil Practice Law and Rules (“CPLR”) to extend the statute of limitations to six years for financial fraud claims brought under the Martin Act.  One of the strongest blue sky laws in the country, New York’s Martin Act gives wide latitude to the state’s Attorney General to investigate and prosecute financial fraud, both criminally and civilly.  The statute is a particularly useful weapon in the state’s arsenal, as it does not require the Attorney General to prove scienter, or fraudulent intent, in order to prevail.

This legislation effectively overturns a 2018 decision of the Court of Appeals in the state’s prosecution of Credit Suisse affiliates for fraud related to Credit Suisse’s sale of residential mortgage backed securities.  The Court was called on to determine the appropriate statute of limitations for Martin Act claims, an issue that had not been addressed since the law’s enactment in 1921.  Because the scope of the Martin Act exceeds the scope of common law fraud, the Court ruled that the CPLR’s three-year statute of limitations applicable to statutory causes of action, rather than its six-year statute of limitations applicable to common law fraud, should apply.   Accordingly, the state’s claims against Credit Suisse were dismissed as time-barred.

The legislation also extended to six years the statute of limitations for claims brought under Executive Law § 63(12), a law allowing for prosecution of repeated or persistent fraud also at issue in the Credit Suisse case.

Flattening Yield Curve Signals Looming Recession, Some Say

Recently, investors and economists have focused increased attention on bond market yield curves, which have proven to be a compelling predictor of an upcoming economic recession.

The yield curve is the measure of the difference between short-term and long-term interest rates on government bonds.  In a healthy economy, interest rates on long-term (typically, ten-year) bonds are generally higher than rates on short-term (often, two-year) bonds.  This rate increase from short-term to long-term bonds creates a positively sloping yield curve (see Figure 1) which reflects investors’ expectations that economic growth will, among other things, ultimately inflate prices.

Currently, however, the yield curve is flattening, meaning that the disparity between short-term and long-term interest rates is diminishing (see Figure 2).  As a recent New York Times article explained it, the yield curve has been flattening lately because “long-term bond yields have been stubbornly slow to rise – which suggests traders are concerned about long-term growth – even as the economy shows plenty of vitality.”  Additionally, the Federal Reserve has been raising short-term interest rates, and as a result, the short-term and long-term rates threaten to collide.

The growing concern is that if this trend continues, and the short-term rates meet with, and eventually rise above, long-term rates, then the yield curve becomes inverted, meaning that it reflects a downward slope (see Figure 3).  Such a yield curve inversion has occurred in the two years preceding each of the nine officially designated recessions since January 1955, according to research by the San Francisco Federal Reserve Bank.  It is worth noting that the current gap between two-year and 10-year United States Treasury notes fluctuates between thirty and forty basis points.  The last time the yield curve came this close to inverting was in 2007, just before that financial crisis erupted.  For reference, a yield curve in a healthy economy can exceed 280 basis points.

Yet, the yield curve’s prophetic function might be overstated.  The fear that the yield curve indicates a recession may create a self-fulfilling prophecy.  Investors’ pessimism about market growth rates is what causes the yield curve to flatten in the first place.  Therefore, under some views, mounting concerns about yield curve trends, alone, may be sufficient to drive investors to make additional purchases in long-term government bonds, which only further flattens the curve.

Moreover, there has been at least one false positive, in 1966, in which the yield curve inverted but was not followed by an official recession.  At least one study, published by an economic think tank, has concluded that inverted yield curves are actually “not rare,” and that “inverted yield curves per se have not been a serious problem for savings and loans . . . except when they were clustered in a few consecutive years with large negative spreads.”

Publications from 2007 discussing yield curves reveal some skepticism as to whether the inverted yield curve is indeed guaranteed to signal a recession.  The above study, which was published in March 2007, ironically concluded: “[D]epository institutions are in overall good financial condition and . . . regulation has been significantly improved.  Despite concerns over yield curve inversions and weaknesses in the real estate market, the problems emerging today are not of sufficient magnitude or sufficiently widespread to be comparable to those that arose two decades ago and we are unlikely to face a recurrence of the savings and loan crisis of the 1980s.  The developing real estate problems . . . are unlikely at the moment to lead to any significant and costly failures.”  Though not an oracle, a flattening yield curve still deserves to be considered seriously today, particularly if it becomes inverted.

Figure 1:  A “normal” yield curve for U.S. Treasuries from February 29, 1996, reflecting a yield spread between two- and ten-year bonds that was approximately 68 basis points (bps), and rates that were substantially higher than today, with the two-year yielding more than 5.42 percent.

Figure 2:  The current yield curve (June 30, 2018) is in blue and is compared against the yield curve from January 1, 2018, which is in red.  Although yields have risen for every maturity, short-term yields have risen faster, with the two-year adding nearly 65 bps while the 10-year has increased by only 46 bps.  The longest-dated U.S. Treasuries, the 30-year bonds, have seen their yields rise by even less – barely 25 bps.

Figure 3:  The U.S. Treasuries yield curve was inverted on November 30, 2006, after the Federal Reserve had undertaken a two-year effort to “normalize” short-term rates.  The yield spread between the two- and ten-year bonds was negative by more than 15 bps, a factor that contributed to the downfall of Bear Stearns and Lehman Brothers in 2008.

Private Cryptocurrency Firm Hit With Class Action Lawsuit Over Initial Offering

Investors in a private cryptocurrency firm brought a class action securities lawsuit against the firm itself, Latium Network, Inc. (Latium) and individually against Latium’s founder and CEO David Johnson and co-founder and chief commercial officer Matthew Carden. The lawsuit alleges that the defendants are subject to strict liability for violating Section 5 of the Securities Act of 1933 by offering and selling unregistered securities in the form of LatiumX tokens. According to the complaint, filed in federal court in Newark last week, the defendants attempted to represent the $17 million Latium initial coin offering (ICO) as a sale of “utility-based tokens,” while in fact the ICO was an offer and sale of securities subject to registration requirements of the federal securities laws because the defendants claimed that the value of the LatiumX tokens would increase after the launch of the new cryptocurrency platform.[1]

Lead plaintiff Joevannie Solis invested $25,000 to buy 208,333 LatiumX tokens during the ICO, relying on the defendants’ representations regarding the cryptocurrency’s platform. According to, the tokens were worth about 5 cents each last week, making Solis’ $25,000 investment now worth around $10,000. Solis, on behalf of himself and similarly situated investors in the class, seeks a judicial declaration that the LatiumX tokens are indeed securities subject to the federal registration requirements, as well as injunctive relief preventing the defendants from transferring or using any investment funds and providing rescission and repayment of all investments in the Latium ICO.

This lawsuit is another in a string of litigations concerning whether virtual currencies constitute securities subject to the federal securities laws and registration requirements. Chairman of the SEC Jay Clayton has said that certain types of cryptocurrencies could qualify as securities, while others do not.[2]  The Commodity Futures Trading Commission (“CFTC”) has classified Bitcoin as a “commodity,” while it’s former Chairman has stated that Ether and Ripple, two other cryptocurrencies, likely are securities subject to the federal registration requirements.[3] In contrast, the director of corporate finance for the SEC recently opined that Bitcoin and Ether are not securities.[4] As Clayton’s SEC statement warns, whether cryptocurrencies are ultimately determined by a court to be securities “will depend on the characteristics and use of that particular asset.” Potential investors in cryptocurrencies should proceed with caution in this legally uncertain territory, as their rights and remedies will vary greatly depending on the ultimate classification of the virtual currency.

[1] Paragraphs 2, 3, 18, and 19 of the complaint, available at

[2] December 11, 2017. “Statement on Cryptocurrencies and Initial Coin Offerings” by SEC Chairman Jay Clayton, available at

[3] Gary Gensler, former CFTC Chairman, April 23, 2018, remarks at the MIT Business of Blockchain conference.

[4] William Hinman, director of corporate finance for the SEC, June 14, 2018 remarks at the Yahoo! All Markets Summit: Crypto event.

DOJ Settles RMBS Action Under FIRREA with Barclays for $2 Billion

On Thursday, March 29, Barclays Capital Inc. and several of its affiliates (together, Barclays)–as well as two former Barclays executives–agreed to settle a three-year Department of Justice (DOJ) investigation concerning Barclays’ marketing and sale of residential mortgage-backed securities (RMBS) between 2005 and 2007.

The lawsuit was commenced by the United States Attorney’s Office for the Eastern District of New York in December 2016. The action, filed in the United States District Court for the Eastern District of New York in Brooklyn, alleged that Barclays caused billions of dollars in investor losses by engaging in a fraudulent scheme to sell $31 billion in subprime and Alt-A mortgage loans across 36 different RMBS securitizations, misleading investors about the quality of the mortgage loans backing those securitizations. More than half of the mortgage loans serving as collateral for those 36 RMBS securitizations had defaulted, and these deals helped fuel the 2008 financial crisis. The DOJ complaint alleged violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) based on mail fraud, wire fraud, bank fraud, and other predicate offenses.

In an unusual move by the government, the DOJ suit also targeted two former executives at the bank as individual defendants: Paul K. Menefee, of Austin, Texas, who served as Barclays’ head banker for subprime RMBS securitizations, and John T. Carroll, of Port Washington, New York, who served as Barclays’ head trader for subprime loan acquisitions. Menefee and Carroll were charged with violations of predicate offenses under FIRREA with respect to seven of the 36 RMBS securitizations at issue.

Under the terms of the settlement agreement, Barclays will pay $2 billion in civil penalties–with no admission of wrongdoing–to settle the action. Carroll and Menefee have agreed to pay a combined $2 million in civil penalties–also without admissions of wrongdoing–for dismissal of the claims against them. The settlement agreement has been called final by both sides and is currently pending execution.

Prior to the DOJ’s commencement of litigation, the two sides had attempted to reach settlement in 2016, but those negotiations stalled when Barclays refused to pay more than $2 billion in penalties to settle the dispute, while the DOJ sought higher penalties–a move that appears to have paid off for the London-based bank.

According to Ian Gordon, an analyst at Investec Plc, “[t]he settlement came at the bottom end of expectations and much sooner than expected,” and Gordon called the result a “clear positive” for Barclays. The $2 billion penalty is also notably less than settlements reached by Goldman Sachs, JPMorgan Chase, and other Wall Street banks over their pre-financial–crisis mortgage deals.

While analysts have clearly chalked up the deal as a win for Barclays, both sides publicly endorsed the settlement as a vindication of their efforts.

“The actions of Barclays and the two individual defendants resulted in enormous losses to the investors who purchased the Residential Mortgage-Backed Securities backed by defective loans,” Laura Wertheimer, the inspector general for the Federal Housing Finance Agency, said in a statement Thursday. “Today’s settlement holds accountable those who waste, steal or abuse funds in connection with FHFA or any of the entities it regulates.”

Barclays CEO Jes Stasley called the deal “a fair and proportionate settlement.” Menefee and Carroll appeared equally pleased. Menefee “has always maintained that the government’s FIRREA lawsuit against him was baseless. … Solely to put this matter behind him, Mr. Menefee has agreed to a settlement in which he has not admitted any wrongdoing,” his lawyers said in a statement. Carroll’s lawyers stated that Carroll was gratified the DOJ “relented in its efforts to prove wrongdoing where none exists.”


CLO Litigation Update

In December 2014, the credit risk retention rule, 79 Fed. Reg. 77,601 (the credit risk retention rule), was adopted pursuant to Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). The credit risk retention rule requires any “securitizer” of asset-backed securities (or other related parties) to acquire and retain either (i) 5 percent of the face amount of each class of notes issued by the collateralized loan obligation (CLO), (ii) notes of the most subordinated class issued by the CLO representing 5 percent of the fair value of all CLO notes, or (iii) a combination of (i) and (ii) representing 5 percent of the fair value of all CLO notes. The rule was designed to align the interests of the managers and investors in a CLO deal.

CLOs, the largest purchasers of leveraged loans, are generally classified into one of two types: open-market CLOs or middle-market CLOs. Open-market CLOs acquire their assets from third parties on the open market. Middle-market, or balance sheet, CLOs are created by a CLO manager or a related party transfering the loans off its balance sheet and into the securitization vehicle. Until a recent D.C. Circuit Court decision, the credit risk retention rule applied to managers of both open-market and middle-market CLOs.

In 2014, the Loan Syndications and Trading Association – the trade group representing the CLO and leveraged loan markets – filed a lawsuit against the Federal Reserve and the SEC, arguing that the credit risk retention rule was arbitrary, capricious, and an abuse of discretion. In December 2016, a D.C. District Court held that collateral managers of open-market CLOs were considered securitizers for purposes of the credit risk retention rule. Loan Syndications & Trading Ass’n v. SEC, 223 F. Supp. 3d 37 (D.D.C. Dec. 22, 2016).

On February 9, 2018, the D.C. Circuit Court reversed the district court’s 2016 ruling, and found that open-market CLO managers are no longer obligated to abide by Dodd-Frank’s risk retention requirements because CLO managers do not originate or hold assets and therefore do not qualify as “transferors” of assets or securitizers under Section 941 of Dodd-Frank. The case is Loan Syndications and Trading Association v. SEC, No. 17-5004, and the decision is available at$file/17-5004-1717230.pdf

The Circuit Court focused on Dodd-Frank’s definition of a securitizer as being an entity that transfers assets to an issuer of securities, and it noted that open-market CLO managers typically do not own the assets underlying the CLO and therefore do not transfer them to the issuer. Decision at 8-9. Rather, these managers select assets to be purchased by the issuer from third parties on the open market. Id. at 16. Therefore, because open-market CLO managers are not securitizers, they are not obligated to retain any credit risk in the CLOs they manage. Id. at 17.

The D.C. Circuit Court’s decision effectively groups open-market CLO managers with other asset managers rather than with securitizers of asset-backed securities. Wall Street’s reaction to this recent ruling has been positive, as this exemption is expected to grow the market, especially benefiting smaller managers who were most challenged by coming up with the capital to buy the required retention when issuing new deals.

However, the D.C. Circuit Court’s decision applies only to open-market CLOs. Middle-market CLOs will remain subject to the credit risk retention rule. The Federal Reserve and SEC have 45 days to seek en banc review of the decision before the D.C. Circuit Court and 90 days to seek certiorari from the U.S. Supreme Court. If regulators do not appeal the decision, open-market CLO managers can then begin structuring new deals without holding the credit risk.