Loans are still not securities, court says

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Leveraged loans are not considered securities, in a legal or regulatory sense. More broadly, that market’s structure is a fun anachronism keeping the fax machine alive in finance, as other markets trades trade in microseconds.

Given all of that, a recent court case where a bankruptcy trustee asked a judge to classify them as securities (under state law, oddly enough) posed a vague threat to the status quo.

The SEC declined to weigh in. And now a ruling from the US Court of Appeals’ Second Circuit has decided the answer is still no.

With apologies for the especially hairy use of the double negative below:

We hold that the District Court had jurisdiction under the Edge Act because defendant-appellee JPMorgan Chase Bank, N.A. engaged in international or foreign banking as part of the Transaction. We also hold that the District Court did not erroneously dismiss plaintiff’s state-law securities claims because plaintiff failed to plausibly suggest that the Notes are securities under Reves.

CreditSights says the decision should help the leveraged-loan industry stay out of the crosshairs of securities regulators for some time:

The decision also provides important and much-needed guidance for the syndicated loan market to help ensure that it stays outside the reach of the Securities Laws, as market participants can look to the Reves factors discussed in the opinion to help ensure that syndicated loans do not inadvertently become swept up by the securities laws in the future. Of course, the Trustee may seek to have the US Supreme Court review the case, but we think the Supreme Court would likely decline to do so, largely because there is no split among the federal circuits on the legal question.

Find the full court decision here. The leveraged-loan industry — and perhaps the few remaining fax salespeople on the planet — can sleep easy this weekend.