Risk Retention: The Journey Thus Far

Abstract

In late March 2011, the Department of the Treasury, Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (“FDIC”), the Securities and Exchange Commission (“SEC”), the Federal Housing Finance Agency (“FHFA”) and the Department of Housing and Urban Development (collectively, the “U.S.Regulatory Agencies”) issued a notice of proposed rulemaking (“NPR”) with respect to the risk retention rules required to be promulgated under Section 941 of the Dodd-FrankWall Street Reform and Consumer Protection Act. To appreciate the significance of the NPR, it is important to understand the risk retention regulatory landscape into which the NPR has been cast. This article explains the background of proposals for rules on risk retention, or so-called “skin in the game,” and recent efforts at risk retention legislation and regulations, including SEC Regulation AB II and European Union Article 122A. The authors conclude although the U.S.Regulatory Agencies have come a long way since their initial Regulation AB II risk retention proposal, they and securitization sponsors still have a difficult journey ahead of them in order to achieve the balance between a risk retention regime that aligns incentives and one that encourages the formation of capital.