We have heard much from the participants in the managed collateralized loan obligation fund market about how the US risk retention requirements do not fit CLOs and will injure or eliminate the CLO market. We agree with the numerous law firm memoranda and trade group statements arguing that the law does not fit, or work with, a managed CLO. The debate, however, has skipped over a threshold issue: does the law (as written under the Dodd-Frank Wall Street Reform and Consumer Protection Act and as proposed in the recent credit risk retention rules) provide the means to achieve the regulatory end asserted by the regulators? Returning to the text yields a fairly clear result: the law's plain language does not expressly provide the statutory authority that the Agencies assert. While the definition of asset-backed security is expansive and would include managed CLOs, the risk retention requirement language under the law and the proposed rules is explicitly tailored and, as written, does not cover managed CLOs.
We recognize that, in the current political environment and under the common law, regulators have many arguments and options available to them when interpreting the scope of the risk retention obligation. However, a proper discussion of the law's scope must begin with the first rule of statutory construction: a review of the plain language of the law. Notwithstanding the assertion of the regulators, the plain language of the statute and the resulting proposed risk retention rules simply do not provide for risk retention by an investment adviser to a managed CLO. With a plain meaning in clear conflict with the regulators' roposed interpretation, regulators may face a credible legal challenge to their regulatory authority, requiring them to demonstrate their legal authority for the inclusion of managed CLOs in the risk retention regime.
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