In a pivotal ruling on August 24, 2023, the U.S. Court of Appeals for the Second Circuit delivered a unanimous decision in the Kirschner case, declaring that syndicated loans cannot plausibly be classified as “securities” under both state and federal securities laws, as specified under Reves v. Ernst & Young, 494 U.S. 56 (1990).
This ruling gives legal credence to the long-standing assumption by market players that commercial loans do not count as securities within the meaning of the securities laws. The categorization of financial instruments as securities has imperative implications for investors, financial institutions, businesses, as well as lawyers, given the elaborate regulatory framework that securities must adhere to.
The Second Circuit’s verdict follows a methodological evaluation of the “family resemblance” test established in the Reves case. The court appraised whether syndicated loans bear a strong familial similarity with other financial instruments commonly considered to be ‘notes’. The unanimous conclusion was that syndicated loans cannot pass the “family resemblance” test and hence, cannot be categorized as securities.
The ruling brings clarity to the legal ambiguity surrounding the nature of syndicated loans and provides assurance to financial institutions and borrowers alike. This decision has substantial implications for both the legal community and participants in the financial market.
For additional details on this case and the complete legal analysis, please refer to the full report on the judgment available here
Second Circuit Rules that Syndicated Loans Are Not “Securities” Under State and Federal Law.