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Key points

  • The 2nd Circuit examines whether syndicated term loans – that is, loans to corporations provided by a group of lenders, rather than a single lender – are “securities” under a decision of the Supreme Court of the United States known as dreams.
  • The LSTA recently filed a friend curies brief arguing that syndicated term loans are not headlines and warning of the devastating effect on the $1.4 trillion market any other conclusion would have.
  • If the 2nd Circuit deems that the syndicated term loans are titles under dreams, the practical complications and resulting compliance costs for loan and CLO market participants could make it much more difficult for some companies to access debt financing and for these companies to engage in transactions. liability management. Such a move could even create an increased risk of insider trading under federal securities laws.


The trustee of the Millennium Lender Claim Trust filed suit against numerous financial institutions alleging that a $1.8 billion syndicated loan transaction violated state securities laws.

On May 22, 2020, Judge Paul G. Gardephe of the United States District Court for the Southern District of New York granted defendants’ motion to dismiss, finding that the syndicated loan notes at issue (the “Notes”) were not titles under the “family resemblance” test as set forth in Reves v. Ernst & Young494 US 56 (1990).1

In dreams, the Supreme Court has recognized that there is a presumption that the Notes are securities and that many types of Notes are, in fact, securities. However, dreams also listed several grade categories which are not securities under federal securities law, including, for example, notes secured by immovable mortgages, consumer finance notes, and notes evidencing loans from commercial banks for current transactions . Recognizing that many ticket types would not fall directly within these enumerated categories, the Supreme Court ruled that where a particular ticket bears a “family resemblance” to tickets commonly understood as non-titles, the presumption that a ticket is a title can be refuted.2

Judge Gardephe held that the notes were analogous to bank loans – not securities – because:

  • (1) The ticket distribution plan was relatively narrow so that it was not subject to common trading for speculative or investment purposes.
  • (2) The confidentiality language in the documents governing the loans would lead a reasonable investor to conclude that the Notes were loans and not securities.
  • (3) The sale of loan participations to “sophisticated buyers” is subject to certain policy guidelines from the Office of the Comptroller of the Currency, so the notes were subject to an existing regulatory regime.

Justice Gardephe concluded that the other dreams factor (i.e. whether the transactional motivations were akin to a securities transaction) did not weigh heavily in either direction.

On October 28, 2021, Plaintiff appealed to the United States Court of Appeals for the 2nd Circuit, arguing that the District Court improperly ignored the dreams presumption that the Notes are securities and that she misapplied the “family resemblance” test.

LSTA Amicus Brief

On May 23, 2022, the Loan Syndications and Trading Association (LSTA) submitted a amicus curiae brief to the 2nd Circuit arguing that syndicated term loans are not securities subject to federal and state securities laws. In support of the district court’s decision, the LSTA points out that treating syndicated term loans as securities would jeopardize a trillion-plus dollar market that is vital to the US economy.

The LSTA argues that the additional practical and compliance issues that would arise from treating syndicated loans as securities would impose enormous costs and burdens on borrowers. Market participants would be forced to comply with a patchwork of state and federal laws that would only increase borrowing costs. In addition, loan syndication and trading activities should likely be conducted through broker-dealers registered with the United States Securities and Exchange Commission (SEC), and any market participant who receives compensation related to a loan transaction should determine whether to register as a broker-dealer. Further, the LSTA points out that treating syndicated term loans as securities would profoundly disrupt normal agreements between borrowers and loan market participants.

Wide-ranging potential additional implications

A 2nd Circuit ruling that syndicated term loans are securities could have potentially significant implications, which go beyond the concerns set out in the LSTA amicus curiae Short.

  • Implications of insider trading: Market participants trading term loans often choose to access private data rooms, which may include confidential material that is arguably Material Non-Public Information (MNPI). Other participants may choose to trade Term Loans without access to this private information, fully aware that their counterparties may be in possession of this potential MNPI.3 These transactions are based on the assumption – and at this point, a well-established market convention – that term loans are not securities. If the 2nd Circuit overturns the decision below, market participants with access to private information could face increased risk of liability for insider trading, especially from regulators such as the SEC .
  • Offer issues: A decision that term loans are securities could subject certain transactions in the term loan market to federal take-over bid rules. Borrowers and third parties should consider whether a proposal to purchase Term Loans for cash or to exchange Term Loans for another counterparty constitutes a “take-over bid” under applicable case law. The tender offer rules could also be called into question (under the “new security” doctrine) by proposals to modify the basic financial conditions, such as a proposal to modify the rate of applicable interest or an extension of maturity. In the event that a transaction constitutes a take-over bid, the borrower or other bidder will be required to comply with Regulation 14E under the Securities Exchange Act of 1934, including requirements that the bid must stand open for 20 business days and that the offer remains open for at least 10 business days after any change in the consideration or the percentage of the tranche sought. The application of take-over bid rules would significantly reduce the flexibility of loan market participants to offer liability management transactions and effectively negotiate changes in terms.
  • Restrictions on Secured Loan Obligations (CLOs): As the largest group of investors in widely syndicated leveraged bank loans, CLOs would be particularly hard hit if those loans were considered securities. Most CLOs only allow a small amount of securities to be included in their pools as eligible assets. Defining certain types of syndicated loans as securities would narrow the universe of assets eligible for investment by CLOs. If banks are to hold more loans on their books instead of syndicating them to CLOs and other traditional loan buyers, in response to such reduced liquidity, banks can be expected to fund fewer loans to eligible borrowers. As a result, it will be much more difficult for companies to quickly access finance on flexible and tailored terms, and for lenders to pool funds quickly and easily to offer loans to borrowers who may not be eligible for other types of financing, which will have a far-reaching negative impact on the US economy.
  • Potential impact on other markets: A broad 2nd Circuit decision could impact the booming areas of decentralized finance (DeFi) and cryptocurrency. The SEC pointed out dreams in a recent established administrative order that found certain digital tokens to be securities.4 The SEC’s position on the application of dreams to DeFi has yet to be tested in court and a sweeping decision in Kirschner could impact this agency’s future decision-making in this completely distinct and rapidly developing market.

Participants in the syndicated loan market, including private fund managers who employ credit strategies, should pay particular attention to the Kirschner upcoming litigation. At this stage, no other friend briefs have been filed and the appeal briefing will conclude in mid-June with the filing of the plaintiff’s reply brief. Oral arguments will likely take place in the fall and the 2nd Circuit is expected to issue its opinion thereafter.

Securities law enforcement and litigation

Regulatory and Compliance – Investment Advisor

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1 Although Plaintiff alleged that Defendants violated state rather than federal securities laws, the Court accepted Plaintiff’s assertion that the dreams “family resemblance criterion” applied.

2 The four factors of the “family resemblance test” are: (1) “the motivations that would induce a reasonable seller and buyer to enter into an agreement [the transaction]”; (2) “the instrument distribution plan”; (3) “the reasonable expectations of the investing public” and (4) “the existence of another regulatory regime [to reduce] the risk of the instrument, thus rendering the application of the Securities Act unnecessary. ID. at 66-67.

3 Commerce confirms that those typically used to settle syndicated loan transactions contain standardized “big boy” provisions that require parties to acknowledge that they are willing to proceed with the transaction even if they have chosen not to access private secondary information that may have been reviewed. by the other party. While these types of representations provide parties with protections against private litigation in the syndicated loan market, the SEC has suggested that they would not constitute a defense to regulatory enforcement action for insider trading. See SEC Litigation Release No. 20132, Barclays Bank Payes $10.9 Million to Settle Charges of Insider Trading on Bankruptcy Creditor Committee Information (May 30, 2007),

4 See About Blockchain Credit Partners d/b/a DeFi Money Market, Gregory Keough and Derek Acree (SEC August 6, 2021), available at