February 21, 2018 - On February 9, 2018, the US Court of Appeals for the DC Circuit ruled in favor of the LSTA, issuing a decision that risk retention does not apply to open-market CLO managers. However, the story isn’t quite over. The Federal Reserve and the SEC have the opportunity to appeal the ruling in a number of ways. In turn, many members have reached out to the LSTA asking i) whether it is likely that the government will appeal and ii) what is the timeframe in which to do so. (In other words, how long before risk retention truly is gone for CLO managers.) Of course, we cannot answer whether the government will appeal. However, we have asked Sidley Austin, our counsel in this litigation, to explain and chart the scenarios by which the government could appeal and the timeframe in which this could occur.
The reality is fairly complicated. There are four immediate scenarios. The first is that agencies do not seek review. In that simplest case, the time to seek review expires on March 26, 2018. Absent an extension, the mandate will issue seven days later (April 2, 2018). At that point, the case returns to the District Court to implement the Court of Appeals’ instructions “to grant summary judgment to LSTA on whether application of the rule to CLO managers is valid under § 941, to vacate summary judgment on the issue of how to calculate the 5 percent risk retention, and to vacate the rule insofar as it applies to open-market CLO managers.” However, the rule is not formally invalidated until the District Court issues an order to that effect, which might take some time after the case is returned.
The other three scenarios are more complicated and more extended. The first is that the agencies can request a panel rehearing; in other words, that the same three judges rehear the case. The second is that the agencies can seek en banc review; in other words, that the full D.C. Circuit court hear the case. The third is that the agencies can petition the U.S. Supreme Court for writ of certiorari; in other words, appeal to the Supreme Court. In all of these cases, the process and day counts become more complicated. Because of the complexity, we direct readers to the scenario analysis in graphic form on page 2.