News Release: Brief to Supreme Court Highlights Accounting Treatment of Syndicated Loans


Jan. 22, 2024

Carter Dougherty

Brief to Supreme Court Highlights Accounting Treatment of Syndicated Loans
New amicus brief argues for treating $3 trillion syndicated loan market

Washington, D.C. – Americans for Financial Reform Education Fund is urging the Supreme Court to take up a case, Kirschner v. JP Morgan, that could change the way regulators treat the syndicated loans, and potentially improve investor protections in this $3 trillion market.

In an amicus brief filed with the nation’s highest court, AFR-EF highlights how research from the financial services industry itself reveals that syndicated loan buyers engage in speculation rather than traditional lending, which jibes with the longstanding criteria (the “Reeves Test”) for classifying something as a security. But with these products classified as loans, investors lack vital information about the risks behind them.

“It is unacceptable that in this day and age, a $3 trillion market is not subject to basic investor protection under securities laws, allowing banks to withhold critical information to investors without consequences,” said Andrew Park, senior policy analyst at Americans for Financial Reform Education Fund. “Also, the lack of securities law protection means there are also no rules around self-dealing and insider trading, even though small investors – who are normally entitled to more robust disclosure – participate in this market through retail brokerages.” 

The regulation of syndicated loans has been outdated going back to the 1980s when a group of banks (“syndicate”) extended loans to highly indebted corporate borrowers and generally held those loans on bank balance sheets for their entire term. 

However, since then, the market has grown exponentially in size to support the private equity industry’s leveraged buyouts (LBOs). Syndicated loans are now predominantly sold to third parties such as hedge funds, mutual funds, and into securitizations known as Collateralized Loan Obligations (CLOs). The brief also cites academic literature challenging key legal precedents that have previously failed to classify syndicated loans as securities. 

“Syndicated loans are not, in fact, loans, given how banks sell them to external parties unrelated to the initial lending process,” Park added. “How this market is regulated warrants an urgent judicial review.”

The case stems from a transaction in which banks including JP Morgan Chase, Citigroup, Truist, and Bank of Montreal sold a $1.8 billion loan funding a dividend to the private equity owner of drug testing company Millennium Health, which was under investigation for Medicare fraud. Ultimately, 400 different investors lost significant money from the banks failing to disclose the pending investigation at Millennium Health which declared bankruptcy shortly thereafter, following a settlement with the Department of Justice.