In March , the Court of Appeals for the Second Circuit requested that the Securities and Exchange Commission (SEC) submit a brief on whether a syndicated term loan qualifies as a “security.” The brief was highly anticipated after the SEC requested multiple extensions to submit. However, on July 18, the SEC relayed to the court that they will not be filing a brief, stating that “Despite diligent efforts to respond to the Court’s order and provide the Commission’s views, the staff is unfortunately not in a position to file a brief on behalf of the Commission in this matter. We greatly appreciate the Court’s indulgence and regret any inconvenience this may have caused the Court or the parties.”
This update stems from a 2020 U.S. District Court for the Southern District of New York decision that the syndicated loans in question were not securities for purposes of the federal securities law registration requirements. On appeal, a three-judge panel on the Second Circuit heard arguments and then requested the SEC’s views shortly thereafter.
It is possible that the SEC declined to file a brief because they prefer syndicated loans to be treated as they are currently being treated. If the SEC wanted the characterization of syndicated loans to change and for syndicated loans to be brought into the SEC’s purview, then the SEC could have used this opportunity to advocate for a different approach.
The Second Circuit will likely issue its ruling later this year without the input of the SEC. As we previously wrote, a reversal of the lower court’s holding could dramatically alter the landscape for commercial lenders and borrowers participating in the $2.5 trillion syndicated loan market as any changes would upset the reasonable, settled expectation of market participants that loans as an asset class are not regulated securities. The practical effects of such an outcome would include increased compliance costs, which may hurt a market that is already slowing.