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.
3

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, openmarket CLOs acquire their assets from, as the name implies, armslength 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 openmarket CLOs.
4

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 
5

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 assetbacked 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 
6

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 
7

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 
8

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 
9

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. § 78o11(a)(3)(B). Congress’s use of “through an affiliate” as an

example of “directly or indirectly” (indeed, perhaps the only 
10

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 
11

“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. 
12

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 
13

security,” or (B) “a person who organizes and initiates an assetbacked 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 
14

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).
15

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

collateralized debt obligations made up of other collateralized 
16

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 
17

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.