(Article from Registered Funds Regulatory Update, January 2024)
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In an October 11, 2023 speech to the Center for American Progress, SEC Commissioner Caroline Crenshaw called for a review to determine whether additional regulatory action is needed with respect to broadly syndicated loans, the most common form of leveraged loans, which have grown to over $1.0 trillion in assets globally. Crenshaw noted that the syndicated loan market has significantly grown and evolved far beyond traditional borrowing but is not subject to meaningful regulation.
Crenshaw stated that while syndications, loan participations, and assignments are not new investment products, these products are now “supersized and systemized.” Moreover, she noted that while investors in syndicated loans have typically been sophisticated investors, such as hedge funds, pension funds, or insurance companies, retail investors have significantly increased their exposure to syndicated loans because they have increasingly been marketed to the broader public to hedge against rising interest rates. She warned that if these products are not more closely monitored, the risks to the wider financial system will only grow and urged regulators to be vigilant with not just past risks but emerging ones too.
In March, the Second Circuit asked the SEC to weigh in as to whether syndicated term loans are securities, but the SEC ultimately declined to do so. In August, the Second Circuit ruled that leveraged loans do not qualify as securities.
Caroline A. Crenshaw, SEC Commissioner, Speech, In-securities: What Happens When Investors in an Important Market are not Protected? Remarks to the Center for American Progress (Oct. 11, 2023), available at: https://www.sec.gov/news/speech/crenshaw-remarks-center-american-progress-101123.