By Alan Zibel 

A trade group representing buyers and sellers of corporate loans is challenging new rules aimed at reducing the riskiness of such lending.

The Loan Syndications and Trading Association said on Monday it filed a legal challenge to the rules, which require firms managing or arranging collateralized loan obligations, or CLOs, to retain some of the loans' risk on their books. The New York-based association is made up of Wall Street firms that sell corporate debt, such as Barclays PLC and Goldman Sachs Group Inc. as well as mutual funds and hedge funds that buy such debt.

The rules, completed by six federal agencies in October, stem from the 2010 Dodd-Frank financial law. One of the law's provisions requires companies to retain some of the risk from asset-backed securities they package and sell to investors.

Regulators provided a wide exemption for mortgage-backed securities, but imposed stricter standards on collateralized loan obligations, which are pools of corporate loans packaged together into investments.

Speaking at the Fed's Oct. 22 meeting, a Fed official, April Snyder, cited "evidence of widespread deterioration" in standards for such loans in recent years. The new rules, she said, "would promote disciplined underwriting" and reduce risks to the financial system as a whole.

In a CLO, companies with lower credit ratings get a loan from a group of banks, known as a syndicated loan. Managers of CLOs buy pieces of these loans, pool them together and sell slices of debt to investors. CLOs typically offer higher returns than corporate bonds and other loans.

The trade group filed a lawsuit on Nov. 10 in the U.S. Court of Appeals for the D.C. Circuit alleging the Securities and Exchange Commission and Federal Reserve's rules were arbitrary and exceeded the agencies' authority to impose them.

Over the past year, the industry has been pressing regulators to avoid harming the nearly $350 billion CLO market with rules that would require the industry to have some "skin in the game" and retain some of the loans' risk. The final rules require managers who put together CLOs for investors to retain a 5% interest in the loans underlying the securities.

Bram Smith, the trade group's executive director, said in a statement that the rule completed by regulators "disproportionately punishes an industry that was not involved in the financial crisis, suffered practically no losses and currently provides critical financing to over 1,000 noninvestment grade companies."

The trade group "worked tirelessly to provide the agencies with workable and practical options because we believe the negative impact of the risk retention rule on the CLO market and broader economy will be significant, " he said. "None of our material proposals were implemented."

A Fed spokesman declined to comment, while an SEC spokeswoman had no immediate comment.

Write to Alan Zibel at alan.zibel@wsj.com

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