2018 sees the entry into force of a wave of new regulation which firms need to both comply with and, where relevant, position themselves to benefit from. Here’s what to expect in the United States.

Risk Retention

On February 9, 2018, the United States Court of Appeals for the District of Columbia Circuit ruled in favor of the Loan Syndications and Trading Association (LSTA) in its lawsuit against the SEC and Federal Reserve Board. The decision reversed a December 2016 holding by a lower court and held that the risk retention rules under section 941 of the Dodd-Frank Act cannot be applied to open market CLO managers.

Section 941 requires any “securitizer” of a securitization to retain and hold 5% of the credit risk associated with such securitization. The SEC and the US federal banking regulators determined that CLO managers were the “securitizers” in respect of CLOs and required each manager to purchase and retain 5% of the fair value of each securitization it originates.  The DC Circuit determined that, because managers of open market CLOs do not take ownership of the securitized assets, they do not fall within the requirement that they must “retain” a percentage of such assets after transferring them to the securitization.

While this decision is good news for the liquidity of the loan markets, we note that it applies only to managers of open market CLOs, and not to CLOs generally. It also remains to be seen whether the SEC and the banking agencies will appeal the decision to the US Supreme Court.

Leveraged Lending Guidelines

Recently, Joseph Otting, the Comptroller of Currency, and Jerome Powell, the chair of the Board of Governors of the Federal Reserve, have issued public remarks confirming that the 2013 leveraged lending guidance is in fact guidance, and not a binding rule. Mr. Otting stated that banks were free to do the leveraged lending they wanted so long as doing so did not affect their safety and soundness.  It is likely that this topic will be the subject of continued regulatory focus during the remainder of 2018.

Wells Fargo

In February 2018, Wells Fargo entered into a consent order with the Board of Governors of the Federal Reserve System that included severe penalties for Wells Fargo for failures in risk management that led to, in the words of the Board, “widespread consumer abuses and other compliance breakdowns.” These penalties include replacing four board members at Wells Fargo, and restricting Wells Fargo from taking action that would cause the size of its asset base to increase from that in place on December 31, 2017.  In addition, the consent order requires Wells Fargo to take affirmative steps to enhance its risk management capabilities.

These penalties have been widely noticed by other US banking institutions, as was intended by the Fed.

Around the corner: Financial Services Regulation in 2018’, looks at what more to expect from this year.


John Lawlor is an experienced finance attorney resident in Baker McKenzie’s Chicago office. He represents borrower and lenders in a wide variety of financings.