LSTA files suit against Fed, SEC over CLO risk retention

The Loan Syndications and Trading Association (LSTA) has filed a lawsuit against the Federal Reserve and the Securities Exchange Commission over the final risk-retention-rule release last month.

The petition for review, filed Nov. 10, alleges the final rule is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”

The petition for review represents the first step in legal proceedings that the LSTA has taken against regulators in an effort to provide the CLO market with relief from the final risk-retention rule, which will require CLO managers to retain 5% of the deal. It is expected to take effect in about two years.

The LSTA said it filed the suit “reluctantly” and as a last resort. “The LSTA believes the regulatory agencies’ one-size-fits-all solution to risk retention with respect to collateralized loan obligations (CLOs) disproportionately punishes an industry that was not involved in the financial crisis, suffered practically no losses and currently provides critical financing to over 1,000 non-investment-grade companies,” LSTA executive director Bram Smith said in a statement.

“We have sought a reasonable solution for years and worked tirelessly to provide the agencies with workable and practical options because we believe the negative impact of the risk-retention rule on the CLO market and broader economy will be significant,” Smith added. “None of our material proposals were implemented into the rule.” – Kerry Kantin

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