The United States Second Circuit Court of Appeals ruled on August 24 in Kirschner v. JP Morgan that the origination and distribution of $1.8 billion in syndicated bank loans cannot be categorized as securities transactions, even when resold to institutional buyers on the secondary market. The court upheld the District Court’s decision, reinforcing a significant boundary within securities law.
Given the increasing prevalence of syndicated bank loans, particularly within institutional investment portfolios, this ruling has attracted much interest in the legal community. This is particularly the case as the court’s decision is in line with current Securities and Exchange Commission (SEC) guidelines, which do not classify bank loans as securities. It is important to note, however, that the demarcation clarified by the Second Circuit is not necessarily universal, and may be interpreted differently by other courts in the future.
The court considered the definitions in the Securities Act of 1933 and the Securities Exchange Act of 1934, ultimately siding with JP Morgan and affirming the lower court’s ruling. The court wrote, “[The] origination and distribution of the loan participations in this case involved neither the sort of public offering that would implicate the ‘context and purpose’ of the Securities Act and Exchange Act nor the risks traditionally associated with securities.
The decision in Kirschner v. JP Morgan reiterates that syndicated loans – even large, sophisticated ones resold on a secondary market – may not be considered securities under the law. While this interpretation may serve to protect banks from certain kinds of investor litigation, it’s crucial to watch this space as other courts might vary in their interpretation of the law.