Loan Syndications & Trading Ass'n v. SEC. & Exch. Comm'n

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 10, 2017 Decided February 9, 2018

No. 17-5004

THE LOAN SYNDICATIONS AND TRADING ASSOCIATION,

APPELLANT

v.

SECURITIES AND EXCHANGE COMMISSION AND BOARD OF

GOVERNORS OF THE FEDERAL RESERVE SYSTEM,

APPELLEES

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.

2

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.

Opinion for the Court filed by Senior Circuit Judge

WILLIAMS.

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

agencies1) 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

1

Section 941(b)(1) authorizes the promulgation of regulations

by the Securities and Exchange Commission and the “Federal

banking agencies,” defined in § 941(a)(1) as the Federal Reserve

Board of Governors, the Comptroller of the Currency, and the

Federal Deposit Insurance Corporation. Because only the

Commission and the Board codified the open-market CLO risk

retention rules in their respective titles of the Code of Federal

Regulations, see Credit Risk Retention Rule, 79 Fed. Reg. 77,601,

77,603/3–77,604/1 & n.10 (Dec. 24, 2014), they are the only

defendant agencies here.

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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–

2

CLOs can take two forms. As explained further below, open-

market CLOs acquire their assets from, as the name implies, arms-

length negotiations and trading on an open market. Balance sheet

CLOs (sometimes called middle-market CLOs) are usually created,

directly or indirectly, by the originators or original holders of the

underlying loans to transfer the loans off their balance sheets and into

a securitization vehicle. Only the former are governed by the rule at

issue in this case, so our general use of “CLO” refers only to open-

market CLOs.

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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

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Hosp. Partners, L.P. v. Burwell, 786 F.3d 46, 54 (D.C. Cir.

2015).

The statute directs the agencies to issue regulations

to require any securitizer to retain an economic

interest in a portion of the credit risk for any asset

that the securitizer, through the issuance of an

asset-backed security, transfers, sells, or conveys

to a third party.

15 U.S.C. § 78o-11(b)(1) (emphasis added). And Congress

defined a “securitizer” as:

(A) an issuer of an asset-backed security; or

(B) a person who organizes and initiates an asset-

backed securities transaction by selling or

transferring assets, either directly or indirectly,

including through an affiliate, to the issuer . . . .

Id. § 78o-11(a)(3) (emphasis added).

The two key words in determining whether § 941 can be

reasonably read to encompass CLO managers are “transfer”

and “retain.” The two subsections quoted above have the effect

of authorizing requirements that an entity which transfers

assets to an issuer retain a portion of the credit risk from the

underlying assets that it transfers. In their ordinary meaning,

words directing that one who “transfers” an asset must “retain”

some interest in the associated risk refer to an entity that at

some point possesses or owns the assets it is securitizing and

can therefore continue to hold some portion of those assets or

the credit risk those assets represent—that is, the entity is in a

position to limit the scope of a transaction so that it transfers

away less than all of the asset’s credit risk. See, e.g., FDIC v.

Meyer, 510 U.S. 471, 476 (1994) (“In the absence of [a

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statutory] definition, we construe a statutory term in accordance

with its ordinary or natural meaning.”); 2A Sutherland

Statutory Construction §§ 47:28–29 (7th ed. 2014) (similar).

But CLO managers do not hold the securitized loans at any

point. Instead of being a financial institution originating or

acquiring assets and then securitizing them, a CLO manager

meets with potential investors and agrees to the terms of its

performance as well as the risk profiles and tranche structures

the CLO will ultimately take. See Wells Fargo & Company,

Comment on Credit Risk Retention Proposed Rules 27 (July

28, 2011) (“Wells Fargo Comment”). The manager then directs

a Special Purpose Vehicle (“SPV”) (a corporation operating as

the manager’s agent—although the documents often define the

manager as the SPV’s agent, Argument Tr. 32–33) to issue

notes in exchange for capital from the investors, the various

notes reflecting the terms of the agreement and the kind and

size of the investments. Board of Governors of the Federal

Reserve System, Report to the Congress on Risk Retention 22–

23 (Oct. 2010) (“Board Report”). Only then does the SPV—

using the investors’ money and operating at the

recommendation of the manager—purchase the assets to

securitize them. Wells Fargo Comment 27.

The loans underlying CLOs are very large loans made to

already highly leveraged companies, often in the retail or

manufacturing sectors of the economy. Usually no single bank

originates the entirety of a loan. Rather, multiple banks

“syndicate” under a lead arranger, each holding only a portion

of the loan. Syndicated loans are “actively traded amongst

financial institutions in a secondary market place,” and

purchased on these markets by a range of investors, including

institutional investors, hedge fund managers, and, of course,

CLO vehicles. Wells Fargo Comment 27. The number of

syndicated loans in a CLO pool is typically small relative to

other asset-backed securitizations. Ordinarily, a pool is made

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up of 100 to 250 loans, usually all made to moderate or large

companies that generate a wealth of risk profile data for review

by CLO managers and investors. See Securities Industry and

Financial Markets Association, Comment to Joint Regulators

on Credit Risk Retention Proposed Rules 67–68 (June 10,

2011); JPMorgan Chase & Co., Comment to Joint Regulators

on Credit Risk Retention Proposed Rules 58–59 (July 14,

2011). But CLO managers neither originate the loans nor hold

them as assets at any point. Rather, like mutual fund or other

asset managers, CLO managers only give directions to an SPV

and receive compensation and management fees contingent on

the performance of the asset pool over time. See American

Securitization Forum, Comment to Joint Regulators on Credit

Risk Retention Proposed Rules 133–34 (June 10, 2011); U.S.

Treasury Department, Report: A Financial System that Creates

Economic Opportunities 102 (Oct. 2017) (“Treasury Report”);

Board Report 22. The agencies do not question these

characterizations of the CLO securitization model. See

Appellees Br. 4–7; Board Report 22–23.

The agencies’ interpretation seems to stretch the statute

beyond the natural meaning of what Congress wrote; it turns

“retain” a credit risk into “obtain” a credit risk. Even under

Chevron, after all, agencies only “possess whatever degree of

discretion [an] ambiguity allows.” City of Arlington v. FCC,

569 U.S. 290, 296 (2013) (quoting Smiley, 517 U.S. at 740–41).

But the agencies assert some defenses, which we’ll now

explore, taking the key words in order.

“Transfer” ordinarily implies that a person with control

over an asset via possession or ownership gives it or conveys it

by sale to a transferee. E.g., Black’s Law Dictionary 1727 (10th

ed. 2014) (“to pass or hand over from one to another, esp. to

change over the possession or control of”); 18 The Oxford

English Dictionary 395 (2d ed. 1989) (“To convey or take from

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one place, person, etc. to another”; “Law. To convey or make

over (title, right, or property) by deed or legal process”).

The agencies point to dictionaries they claim support the

idea that a third party can be said to “transfer” something if it

is somehow the cause of a transfer between two other parties.

E.g., The American Heritage Dictionary 1832 (4th ed. 2000)

(“To convey or cause to pass from one place, person, or thing

to another”). We think the natural reading of “cause” in these

definitions means nothing more than that the verb “transfer”

means to engage in the act of making a “transfer” (as a noun).

Merriam-Webster’s Dictionary of Law 495 (2d ed. 2011)

(defining the verb as “to cause a transfer” and the noun as “a

conveyance of a right, title, or interest in real or personal

property from one person or entity to another” or a “passing of

something from one to another”). But such a meaning doesn’t

necessarily encompass a person’s playing any causal role in any

transfer. Moreover, the possible ambiguity and meaning of

statutory language depend on “the specific context in which

[the term] is used, and the broader context of the statute as a

whole.” Robinson v. Shell Oil Co., 519 U.S. 337, 341 (1997).

Here the specific context is § 941’s imposition of a risk

retention rule on entities that “sell or transfer” assets to the

issuer, indicating that Congress had in mind the ordinary sense

of a conveyance between two parties, whether the conveyor

was acting for financial remuneration (“sell”) or was merely

shifting economic value between or among an entity and its

subsidiaries or affiliates (“transfer”). See also Freeman v.

Quicken Loans, Inc., 566 U.S. 624, 634–35 (2012) (invoking

the “commonsense canon . . . that a word is given more precise

content by the neighboring words with which it is associated”

(quoting United States v. Williams, 553 U.S. 285, 294 (2008)).

More broadly, § 941 is designed to reach those entities that

“organize[] and initiate[]” securitizations “by transferring”

assets to issuers. 15 U.S.C. § 78o-11(a)(3)(B) (emphasis

added). The language does not seem to apply to a person or

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firm that causes an SPV, whose value belongs to the investors,

to make an open-market purchase from wholly independent

third parties.

Besides seeming to reverse the apparent flow of the

“transfer,” the agencies’ disregard of context leads them to

embrace a reading of “transfer” that would include any third

party who exerts some causal influence over a transaction. It

would thus sweep in brokers, lawyers, and non-CLO

investment managers who, though they play a part in

organizing securities and “causing” the transfer of securitized

assets, are clearly not the initiators of securitizations that

Congress intended to regulate. That the agencies’

interpretation sweeps so far beyond any reasonable estimate of

the congressional purpose confirms our view that the

interpretation is beyond the statutory language.

The agencies argue that § 941’s qualification of “transfer”

with the phrase “directly or indirectly” sufficiently broadens

the term to cover CLO managers’ activities. See 15 U.S.C.

§ 78o-11(a)(3)(B). But it would be odd for those adverbs to

eradicate the ordinary boundaries around the word “transfer.”

As the Supreme Court recently said in rejecting a government

claim that a provision holding defendants liable for property

“obtained, directly or indirectly” from certain crimes could

make a defendant liable for property he never obtained at all,

“The adverbs ‘directly’ and ‘indirectly’ modify—but do not

erase—the verb ‘obtain.’” Honeycutt v. United States, 137

S.Ct. 1626, 1633 (2017). Further, the immediate context of

“directly or indirectly” suggests a meaning far narrower than

the agencies’ reading. Section 941(a)(3)(B) refers to one who

organizes an asset-backed securities transaction “by selling or

transferring assets, either directly or indirectly, including

through an affiliate, to the issuer.” 15 U.S.C. § 78o-

11(a)(3)(B). Congress’s use of “through an affiliate” as an

example of “directly or indirectly” (indeed, perhaps the only

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example contemplated by Congress at all) suggests that the

adverbs were meant to assure that, despite the often

complicated array of affiliates, depositors and SPVs that

financial institutions use to create and sell asset-backed

securities, the credit retention rule would reach a transferor no

matter how many intermediaries it used. But to be covered by

clause B of § 941(a)(3), the party must actually be a transferor,

relinquishing ownership or control of assets to an issuer.

The meaning of “retain” in this context makes this point

clear, as it lacks even the theoretical ambiguity that a person

with no possessory interest could effect a “transfer.” One

occasionally uses “retain” colloquially to mean “acquiring

something for the first time,” as when one first gains legal

counsel by “retaining” a lawyer. But the agencies

conspicuously fail to offer a single real-world example of

anyone ever using “retain” to encompass a process like the

activity that the rule would require of CLO managers: going out

into the marketplace and buying an asset they never before

held.

The agencies argue that “retain” doesn’t presuppose any

voluntary anterior possession. It is of course true that one can

keep something that one acquires under duress. Thus, say the

agencies, so long as the rule’s “requirement is continuing, and

it requires ‘retention’ of risk on an ongoing basis,” the rule fits

a reasonable reading of Congress’s text. Appellee’s Br. 31

(citing Black’s Law Dictionary 1509 (“To hold in possession or

under control; to keep and not lose, part with, or dismiss.”)).

But it is an astonishing stretch of language to read a mandate to

“retain” to apply to one who would never hold the item at all

apart from the mandate, with no congressional text mandating

the prior acquisition.

Indeed, the record indicates the potentially serious

consequences of shifting the statute’s meaning from “retain” to

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“obtain.” Recall that before the rule CLOs would cause SPVs

to issue notes to investors and then use investor capital to

purchase loans on the open market. Under the rule, CLO

managers must now acquire investments that may not be

suitable for them, necessitating significant amounts of capital

that they may neither have nor have access to. Treasury Report

102. The agencies themselves identified a subset of managers

operating between 2009 and 2013 with relatively poor access

to capital, and concluded that “it would be reasonable to

estimate that the exit of [those managers] could impact current

levels of capital formation by CLOs by 37 percent.” 79 Fed.

Reg. 77,730/2. Some commentators forecast much larger

reductions. See id. (discussing Oliver Wyman study). The

resulting recourse of borrowers and lenders to other devices

would presumably somewhat neutralize the net effect on

overall supply of capital to the leveraged loan market. Id. at

77,730/2–3. That the agencies’ reading of the statute would

require non-transferring parties to obtain large positions in the

relevant securities seems too large a surprise to have been

intended.

* * *

So far we cannot see how the language of § 941 sustains

the rule’s application to managers of open-market CLOs. But

the agencies make a special argument that requires a somewhat

detailed response. If CLO managers are not covered by § 941,

they contend, our interpretation “would do violence to the

statutory scheme” and “creat[e] a loophole that would allow

securitizers of other types of transactions to structure around

their risk retention obligation.” Appellee’s Br. 20. Policy

concerns cannot, to be sure, turn a textually unreasonable

interpretation into a reasonable one. See General Dynamics

Land Systems, Inc. v. Cline, 540 U.S. 581, 600 (2004); cf.

Spectrum Pharm., Inc. v. Burwell, 824 F.3d 1062, 1068 (D.C.

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Cir. 2016). Regardless of that, however, we think that the

agencies overstate the supposed loophole.

The argument pressed by the agencies in their final

rulemaking asserts that if CLO managers are not covered by

§ 941, then the statute is open to “easy evasion.” 79 Fed. Reg.

77,655/1. The theory runs that any securitizer could “evade

risk retention by hiring a third-party manager to ‘select’ assets

for purchase by the issuing entity that have been pre-approved

by the sponsor,” eviscerating the rule. Id. At the very least, the

agencies argue, CLOs would become a type of securitization

“without meaningful risk retention,” contrary to Congress’s

purposes. Appellee’s Br. 29. At worst, all other securitizations

might conform themselves to the CLO structure and thus defeat

Congress’s purposes entirely.

We understand the agencies’ plight, as they must give

force to a statute that links the organization and initiation of a

securitization to the transference of ownership interests in the

assets that are securitized. Occasionally cases may arise, such

as this one, in which those “organizing and initiating” the

securitization do not do so “by transferring” the securitized

assets to the issuer, while those that do transfer the assets are

not the entities who organize or initiate the securitization in any

meaningful way. However, if that is a “loophole,” it is one that

the statute itself creates, and not one that the agencies may close

with an unreasonable distortion of the text’s ordinary meaning.

In any event, we do not find the supposed loophole as

worrisome as the agencies do. First, the loophole is to a

considerable extent a problem of the agencies’ own making. To

see why requires us to trace several definitions through the

statutes and regulations.

Congress required the agencies to craft a risk retention rule

for “securitizers,” defined as: (A) “an issuer of an asset-backed

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security,” or (B) “a person who organizes and initiates an asset-

backed securities transaction by selling or transferring assets,

either directly or indirectly, including through an affiliate, to

the issuer.” 15 U.S.C. § 78o–11(a)(3). Although the agencies

commonly refer to the “issuing entity” of a security and define

“issuing entity” as “the trust or other entity created at the

direction of the sponsor that own or holds the pool of assets to

be securitized, and in whose name the [securities] are issued,”

Credit Risk Retention: Proposed Rule, 76 Fed. Reg. 24,098

n.37 (Apr. 29, 2011); 12 C.F.R. § 244.2; 17 C.F.R. § 246.2,

they did not use that commonsense definition here. In fact, the

agencies define the “issuer” of clause B as the issuing entity,

but in clause A they noted that in multiple other regulations “the

term ‘issuer’ when used with respect to an asset-backed

security (“ABS”) transaction is defined to mean the entity—the

depositor—that deposits the assets that collateralize the ABS

with the issuing entity.” 76 Fed. Reg. 24,099/1. Accordingly,

the agencies do not interpret “issuer” in clause A to mean

“issuing entity,” but rather to mean “depositor.” Id. The

agencies in turn define “depositor” as either: (1) “[t]he person

that receives or purchases and transfers or sells the securitized

assets to the issuing entity”; (2) “[t]he sponsor” if the sponsor

transfers assets directly to the issuing entity; or (3) the person

that receives or purchases and transfers or sells the securitized

assets to the issuing entity through a trust. 12 C.F.R. § 244.2;

17 C.F.R. § 246.2. That is, the clause A “issuer” under the rule

is not what an ordinary reader would think is an issuer but is

rather the “entity that transfers assets to the issuer.” Indeed, the

second definition of a “depositor”—“the sponsor”—makes this

clear. A “sponsor” is “a person who organizes and initiates a

securitization transaction by selling or transferring assets,

either directly or indirectly, including through an affiliate, to

the issuing entity”—almost exactly the language of clause B.

Id. In sum, the agencies have interpreted “issuer” in clause A

of Congress’s definition of a “securitizer” to be the exact same

thing as the substance of clause B—the entity transferring

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assets to an issuer. See 15 U.S.C. § 78o-11(a)(3). The agencies

have thus dropped the actual issuing entity out of the statutory

definition altogether.

The LSTA does not challenge the agencies’ definition of

an “issuer,” so we need not wrestle with the question whether

the agencies’ interpretation mistakenly turns a statutory clause

into mere surplusage.3 Cf. Duncan v. Walker, 533 U.S. 167,

174 (2001). The agencies contend that the disjunctive “or” in

Congress’s definition of a securitizer gives them discretion to

elect which entity will retain the credit risk and that they have

“elect[ed] to impose the risk retention requirements on the

sponsors of open market CLOs rather than on the issuing

entities.” Appellee’s Br. 35. That may be so, but that choice

does not justify the agencies’ stretching the definition of a

“sponsor” to cover those who do not, as required by clause B,

have a relationship to the assets such that one can reasonably

say that they “transfer” the assets and could be required to

“retain” a portion of the assets’ risk. The protest that no

securitizer can then be found to retain the risk arises because

the agencies have defined a whole class of securitizers—the

issuing entities—out of Congress’s statute. To be sure,

bringing them back in might make no useful difference here; it

may be that here the only serious candidate for “issuer” is the

SPV and that it holds the assets for the life of the securitization

for the benefit of the investors, who are the very parties

Congress sought to protect. See Argument Tr. 26–29. But

addressing the ramifications of this would take us into far

3

It would also be a rare case in which we could countenance

two instances of the same word within adjoining clauses having

entirely different meanings without a clear signal of congressional

intent to that effect. Cf. General Dynamics Land Systems, Inc. v.

Cline, 540 U.S. 581, 595–97 (2004) (collecting cases).

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deeper waters than the briefs or rulemaking record explore, or

than resolution of the case requires.

A second answer is that the agencies’ feared hypothetical

loophole is unlikely to materialize, even under their rather

circuitous definitions. The agencies’ concern is that banks or

other financial institutions who actually organize

securitizations will employ putatively third-party “managers”

to sponsor securitizations without themselves transferring

assets, thus creating “a situation in which no party to a

securitization can be found to be a ‘securitizer’ because the

party that organizes the transaction and has the most influence

over the quality of the securitized assets could avoid legally

owning or possessing the assets.” 79 Fed. Reg. 77,655/1. The

agencies raised two scenarios at argument: one where regulated

entities might try to get “bad assets” off their balance sheets by

appealing to third-party managers to offload them, and one

where ABSs might trade on a market and get re-securitized into

ever more risky yet opaque offerings. Argument Tr. 35–37.

But in the first scenario, where the actual organizer is the

institution that holds the assets and “pre-approve[s]” the

selections of “a third-party” manager, then both the rule and the

statute logically apply. 79 Fed. Reg. 77,655/1. The bank or

financial institution that is actually calling the shots is

organizing the securitization “by transferring” its assets and

can be required to retain credit risks that it is already holding.

In fact, the agencies’ first hypothetical has provided a textbook

example of sponsoring a securitization by indirect transfer

through agents and intermediaries, the type of indirect transfer

that is absent in this case, where CLO managers act as

independent contractors with investors rather than as agents of

an originating financial institution.

In the agencies’ second scenario, they fear that re-

securitized ABSs (the so-called “CDO squared,” or

collateralized debt obligations made up of other collateralized

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debt obligations), which became one of the more toxic

defaulters of the financial crisis, would escape regulation

because they often take a structure similar to that of CLOs:

trading on an open market, purchased by third parties on behalf

of an SPV that re-securitizes the purchased securities.

Argument Tr. 35–36. But this concern ignores that many if not

most of the primary securitizations that produce ABSs traded

on these markets are now subject to the agencies’ risk retention

rule and the improved underwriting standards the agencies

expect to flow from it. Moreover, any CLO so constituted

must, by definition, have acquired the ABSs in open-market

purchases at the direction of the investors.

Finally, to the extent other asset-backed securitizations

were to truly take the form of open-market CLOs, it is highly

doubtful that their falling outside the reasonable coverage of

the statute need be a cause for concern. CLO managers are not

direct or indirect agents of the originators, but rather negotiate

their contracts with investors, usually with compensation based

on performance. Open-market CLOs thus mitigate the

problems Congress identified with the originate-to-distribute

model: (1) The organizers’ compensation dependency already

gives them “skin in the game.” Cf. S. Rep. No. 111-176, at

128–29. (2) Because they purchase relatively small numbers

of unsecuritized loans on the open market through arm’s-length

bargaining, the activities of CLO managers present a far weaker

version of the opacity that Congress identified in other ABS

markets. Cf. id. And (3) both the superior incentives and

relative transparency reduce the likelihood that such financing

will generate anything like the decline in underwriting

standards that the more famous ABS market is thought to have

brought about. Perhaps for these reasons, CLOs weathered the

financial crises relatively well. In contrast to 435 ABS

collateralized debt obligations that defaulted, no more than six

CLOs defaulted during the crisis, and all six included features

atypical for CLOs and were eventually cured. Joint Appendix

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527, 875, 1132 (citing Moody’s Report, “Recent Performance

of Market Value Collateralized Loan Obligations” (May 5,

2010); S&P, “Cash Flow and Hybrid CDO Event of Default

Notices Received as of Jan. 25, 2011”; Jeremy Gluck, “CLOs

versus CDOs” It’s the ‘L’ That Matters,” Moody’s CLO

Interest (July 2010)). Indeed, Congress in its statutory scheme

seems to be trying to achieve through regulation the incentives

and transparency that the CLO market achieved through its

business model. To the extent other securitizations seek to

conform to this model, so much the better for the investors

Congress seeks to protect.

In any event, the agencies’ policy concerns cannot compel

us to redraft the statutory boundaries set by Congress. Our

commentary on those concerns only reinforces the reasoning

that the ordinary meaning of § 941 does not extend to CLO

managers. See K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 291

(1988) (“In ascertaining the plain meaning of the statute, the

court must look to the particular statutory language at issue, as

well as the language and design of the statute as a whole.”).

The agencies have gone beyond the statute to require managers

to “retain” risk by acquiring it. Even if their concerns about a

policy loophole had merit, the statutory language does not

support this radical shift in meaning.

* * *

The judgment of the district court is reversed and the case

is remanded with instructions to grant summary judgment to

the 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.

So ordered.