Beginning on December 24, 2016, compliance with Dodd-Frank risk retention rules for all types of asset-backed securities (ABS), including collateralized loan obligations (CLOs), will be required. Compliance with the rules for RMBS began on December 24, 2015.

Any ABS transaction – whether registered or unregistered – issued on or after this date must comply with the final risk retention rules. CLO managers have been working to create retention-compliant structures (see Legal Update, C-MOA Structure Facilitates CLO Risk Retention Compliance), and several compliant transactions are said to have already been issued. The rule is, however, expected to chill the 2017 CLO market.

Risk retention, or so-called "skin in the game," is the cornerstone of the US regulatory reform efforts in the securitization area. Risk retention, mandated under Section 941 of the Dodd-Frank Act, which added new Section 15G to the Securities and Exchange Act of 1934 (15 U.S.C. § 78o-11), is designed to align the interests of securitizers with those of investors in ABS.

Section 941 of the Dodd-Frank Act mandates that securitizers retain at least 5% of the credit risk of any asset pool that is securitized, but leaves for federal regulators to determine:

On October 22, 2014, federal regulators adopted the final risk retention rules.

For details on the final risk retention rules, see Practice Note, ABS Risk Retention under Dodd-Frank.