April 5, 2018 - It was a big week on the risk retention front. As readers know, the opportunity for the government to file an appeal to the United States Circuit Court for the DC Circuit (DC Circuit) in its risk retention litigation with the LSTA expired at midnight on March 26th with the agencies choosing not to pursue further action in this venue. On Tuesday, April 3rd, the next step happened: The DC Circuit issued a “mandate” to the DC District Court. Then, on Thursday afternoon, the final critical step happened: The DC District Court ordered that i) summary judgement is granted in favor of the LSTA regarding the application of risk retention to open-market CLO managers, ii) summary judgement is vacated on the issue of how to calculate the five percent risk retention under the Credit Risk Retention Rule, and iii) the Credit Risk Retention Rule is vacated insofar as it applies to investment managers of open-market collateralized loan obligations.
So, what everyone wants to know – are we done? For all practical purposes, the answer is yes: CLO managers are no longer subject to the U.S. risk retention rule. Of course, there is a caveat: As we noted last week, until May 10th, the government agencies can still ask the United States Supreme Court to review the DC Circuit’s decision. However, there are many steps that the agencies would have taken if they were planning to appeal to the Supreme Court. In turn, we believe it is unlikely that the agencies will seek Supreme Court review and that, if they did, it is unlikely that the Court would grant their petition. We believe we can exhale.