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The Loan Syndications & Trading Association v. Securities & Exchange Commission & Board of Governors of Federal Reserve System

United States Court of Appeals, District of Columbia Circuit

February 9, 2018

The Loan Syndications and Trading Association, Appellant
Securities and Exchange Commission and Board of Governors of the Federal Reserve System, Appellees

          Argued October 10, 2017

         Appeal from the United States District Court for the District of Columbia (No. 1:16-cv-00652)

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

          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, 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 agencies[1]) 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 (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 (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.

         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 (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. ...

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