February 20, 2024 - The US Supreme Court has this morning denied the petition for certiorari filed by Marc Kirschner, Trustee for the Millennium Labs Litigation Trust. This leaves in place the decision of the US Court of Appeals for the Second Circuit that syndicated term loans are NOT securities and ends, once and for all, this misguided litigation.
The LSTA team has been heavily involved in this case for five years, filing two critical amicus briefs, working closely with counsel to the principals, and engaging with the SEC, the Treasury Department and the banking agencies for many years to make it clear that the loan to Millennium Labs, and syndicated term loans more broadly, are not securities. This is a great – and critical – result for our market.
Why It Matters
As Bloomberg reported, whether syndicated loans are treated as securities has been at the forefront of the LSTA’s policy concerns for decades. Holding that loans are securities would have had a devastating effect on the $1.4 trillion market for leveraged syndicated term loans. Subjecting syndicated term loans to the securities laws would have introduced enormous practical complications and imposed very significant compliance costs on loan market participants. Loan market participants would have been obligated to comply with securities laws at the state and federal level as well as the rules of securities industry self-regulatory organizations, such as FINRA, subjecting them to a patchwork of rules that may have different requirements. In addition, if syndicated term loans had been deemed to be securities, loan syndication and trading activity would have to be conducted through registered broker-dealers, and any market participant that receives compensation tied to loan transactions would have to determine if it needs to register as a broker-dealer. Broker-dealers are subject to extensive SEC and FINRA regulations that could have caused significant disruptions to loan transactions. For example, unlike securities transactions, which generally are settled within two days, secondary trades in loans often take ten or more days to settle. If syndicated term loans were securities, their extended settlement cycle would implicate margin, net capital, and other rules that apply to the settlement of securities transactions; imposition of these rules would complicate loan transactions and burden market participants with additional costs. Treating syndicated term loans as securities would have also profoundly disrupted customary arrangements between borrowers and other loan market participants that have developed over many years and deprive both borrowers and lenders of the significant benefits that flow from the ability to choose between different instruments with different characteristics and regulatory regimes. Moreover, the syndicated term loan market currently allows borrowers to share with lenders important financial and corporate information that may be material non-public information (“MNPI”). Lenders can choose whether to receive such information (“private-side” lenders) or not to receive it, so that the lender can continue trading in the borrower’s securities (“public-side” lenders). When a private-side lender trades with a public-side lender, the public-side lender acknowledges that there may be an informational asymmetry due to the other party’s possession of MNPI, but that it is choosing to rely on its own due diligence and enter the transaction regardless. Such provisions are generally disfavored by securities regulators because they are seen as a way of contracting around the protections provided by the securities laws. As a result, if syndicated term loans were deemed to be securities, the loan market would likely have become a “public-only” market, where no lender receives access to confidential information, and borrowers who want to provide potential MNPI to lenders on a confidential basis would be unable to do so—eliminating one of the key features of syndicated term loans that make them desirable to borrowers and lenders.
Happily, with the Supreme Court’s denial of certiorari, the litigation that could have led to these concerns, is over and the status quo – loans not being subject to the securities laws – prevails.
