The head of advocacy for the Loan Syndications and Trading Association has sent a letter to US Treasury Secretary Janet Yellen, the Federal Reserve Chair, Jerome Powell and two other agency heads to urge them about the importance of keeping a sharp distinction between loans and securities, Bloomberg News reported late last week.
The immediate issue concerns bank-led syndicated loans, but in this matter alternative lenders are also beneficiaries of the loans/securities distinction, and they may well have an interest in preserving a narrow definition of “securities”. Observers expect the Securities and Exchange Commission to weigh in at the end of this month.
A nearly decade-old court battle may reach a new phase in coming weeks, and a dangerous one for the syndicated term loan market as the SEC considers how it will weigh in on the question of whether syndicated corporate loans are securities, subject to SEC regulation and to its state-level analogs.
The LSTA’s letter, written by Elliot Ganz, its head of advocacy, reportedly warned that redefining loans as securities could dry up valuable market liquidity and raise the cost of corporate borrowing. “These increased costs and heightened regulatory uncertainty would come at precisely the wrong time for the domestic economy and the borrowers that depend on access to the syndicated term loan market,” it cautioned.
A representative of LSTA, Rich Myers, reached Friday, declined to comment. Ganz could not be reached for comment.
In addition to Yellen and Powell, the letter went to Michael Hsu, acting Comptroller of the Currency, and Martin Gruenberg, chairman of the FDIC, said the Bloomberg report.
The letter was likely instigated by a court battle that has been under way for some time, Kirschner v. Morgan.
In 2014, 70 institutions bought $1.78 billion in the debt obligations of Millennium Laboratories, syndicated by defendant JPMorgan. Millennium filed for bankruptcy in 2015, and the investors’ claims were assigned to a trust. The bankruptcy trustee alleged that these obligations represented securities and accordingly were subject to the stringent disclosure rules of “blue sky” securities laws.
JPMorgan moved for a dismissal on the grounds that a syndicated bank loan is not a security, so such laws do not apply.
In May 2020 Judge Paul Gardephe of the US District Court for the Southern District of New York granted that motion, dismissing all claims. At that time, the LSTA praised Gardephe’s ruling in a statement. It expressed relief that he had recognised that “the relatively narrow plan of distribution (which excludes natural persons), the settled expectations of market participants that term loans are lending transactions, not securities, and the existence of another regulatory scheme (i.e. the supervision of the federal banking agencies) weigh in favor of finding that the term loans are not securities”.
The plaintiffs appealed to the Second Circuit. In March of this year, that court asked the SEC for its opinion: can be considered securities? The SEC is set to respond at the end of this month.
Further, the SEC is clearly seen in some quarters as more sympathetic to legal arguments that would enhance its investor-protection authority than to concerns about the strength of banks and the efficiency of syndication. It is reasonable to infer, then, that since the LSTA sent such a letter to the above-mentioned banking regulators, including the Fed and the Comptroller, the goal was to “look past” the SEC and toward authorities accustomed to taking into account the soundness of banks.