March 27, 2018 - As the clock struck midnight on March 26th, the last opportunity for the government to file an appeal to the United States Circuit Court in its risk retention litigation with the LSTA expired, with the agencies choosing not to pursue further action in this venue.

As readers recall, on February 9, 2018, the United States Court of Appeals for the District of Columbia Circuit (the Circuit Court) ruled in favor of the LSTA in its lawsuit against the SEC and Federal Reserve Board.  The ruling reversed a December 2016 decision by the DC District Court and held that the risk retention rules promulgated under section 941 of the Dodd-Frank Act cannot be applied to open market CLO managers.  The court’s ruling constituted an important victory for the CLO market.  (The LSTA’s in- depth analysis of the opinion and what it meant can be found here).

So, what happens now?

That was the topic of a webinar presented by the LSTA on Tuesday morning featuring the LSTA’s Meredith Coffey and Elliot Ganz, joined by Sidley partner (and litigation team member) Jennifer Clark.

In a nutshell, we should be very close to the end of this saga and open market CLOs should soon be out of the woods. It is very likely that sometime in the near future the Circuit Court will issue a “mandate” to the District Court instructing it to issue an order vacating the risk retention rule as applied to managers of open market CLOs.  The issuance of that order will mean that CLO managers are free to issue new non- risk retention compliant open market CLOs, reset non-risk retention compliant legacy CLOs and – if they want to – sell their risk retention positions in existing compliant CLOs.  And, while the agencies can still ask the United States Supreme Court to review the Circuit Court’s decision, we believe that they are unlikely to do so and, even if they do, the Supreme Court is unlikely to grant such a request.  Let’s take a deeper dive.

When will the Circuit Court issue its mandate?

Under the Court’s own rules, it has seven days to issue the mandate.  Typically, it issues a mandate on the seventh day after the end of the appeals period but it has discretion to issue it earlier.  April 2nd (serendipitously corresponding to the LSTA general counsel’s birthday?) would be the seventh day.

When will the District Court issue the order vacating the rule?

While there is no set rule for the District Court to issue its order once it receives the mandate, the court is likely to act reasonably quickly, subject to the judge’s case load.

What is the timing for an appeal by the government to the Supreme Court?

The agencies can file a petition for certiorari to the Supreme Court until midnight of May 10th (unless they request an extension).

Are the agencies likely to appeal to the Supreme Court?

It is unusual for government agencies to appeal to the Supreme Court when they have chosen not to first request en banc review from the Circuit Court.  Moreover, as described below, this case is not the type that would typically interest the Supreme Court.  Finally, an appeal to the Supreme Court would likely require the approval of both the SEC Commissioners and the Federal Reserve Board as well as the acquiescence of the Solicitor General who is a member of the Executive Branch.

What are the odds that the Supreme Court would take this case if the agencies appeal?

The Supreme Court only grants a tiny fraction of the petitions for certiorari that are submitted.  Typically, it focuses on cases where (a) a “circuit split” exists (i.e., where two or more federal circuit courts reach opposite decisions on the same issue) or (b) an issue of major policy or social importance is before them.  Neither of these circumstances obtains in this case; it is a very basic statutory construction case.

If the agencies do file a petition for certiorari, does the LSTA have the opportunity to oppose it?  Would the effect of the District Court’s order be impacted? When would the Court decide whether to take the case?

The LSTA would get the opportunity to file a brief in opposition to the petition for certiorari.  Unless the agencies requested a stay of the order, which would be very unusual, the District Court’s order would remain in place.  The Supreme Court would probably decide whether to grant the petition in the fall of 2018.

In the unlikely event that the agencies file a petition for certiorari and succeed in getting Supreme Court review, when would the case be argued and decided?

The Court would hear the case sometime during its next term, which begins in October 2018.  It would be briefed and argued sometime in late 2018 or early in 2019 and decided by June 2019.

What would happen if the Supreme Court reverses the Circuit Court?

The vacatur of the risk retention rule would be nullified and the risk retention rules would once again apply to managers of open market CLOs.  In the unlikely event of this happening, the LSTA might still have the opportunity to reopen with the Circuit Court the issue of whether the agencies calculated the appropriate measure of risk retention when they tied it to fair value rather than credit risk.

Would CLOs issued or restructured between the date of issuance of the District Court’s order vacating the rule and its reinstatement by the Supreme Court that do not comply with the risk retention rule be subject to risk retention?

Unclear.  But it’s important to remember that, while it might be prudent to structure CLOs to address such a contingency, this result is extraordinarily unlikely.

What’s the bottom line?

The deadline for filing an appeal to the Circuit Court passed and the government agencies chose not to exercise their right to appeal.  Moreover, they are unlikely to appeal to the Supreme Court.  In the coming weeks, the District Court will issue an order vacating the risk retention rule as it applies to open market CLO managers.  CLO managers will be permitted to issue new CLOs and restructure old CLOs without having to retain risk.

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