Court Opinion

ID: 4243794
Source: CourtListenerOpinion
Date Created: 2018-02-09 16:00:44.09038+00
Date Added: 2024-06-11T14:17:12.091177
License: Public Domain

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, 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.
                                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 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
                               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. § 78o-
11(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 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
                                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 re-
securitized 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.