The Private Fund Adviser Rule and the Kirschner Decision: An August Doubleheader

The regulatory and judicial developments of the last few days relating to the loan markets and to loan funds have been significant.

On Tuesday, lenders and borrowers were concerned about a world in which syndicated and other loans would be treated as securities. And managers of collateralized loan obligation vehicles (“CLOs”) were concerned about being subject to extensive new Federal regulations. Both of these concerns were addressed this week.

On Wednesday afternoon, the SEC announced a final Private Fund Adviser Rule that has a broad exception for “securitized asset funds,” a category that includes CLOs. The SEC’s Release with the final Rule is here. An Update that we issued regarding the final Rule is here.

 Then, on Thursday morning, the Second Circuit issued a decision in the closely watched Kirschner v. JPMorgan case rejecting the plaintiff’s argument that the subject notes associated with syndicated term loans should be treated as securities.

What does all of this mean for the loan markets?

• Managers of, and investors in, CLOs are relieved after potentially facing demanding new Federal regulations.
• Sponsors of, and investors in, other loan funds also will benefit from the SEC’s significant paring back of its Private Fund Adviser Rule. Beyond the possibility of satisfying the securitized asset fund definition, many of these market participants will also be able to avail themselves of rule exceptions that should, among other things, limit new obstacles to certain agreed side-letter arrangements tailored for certain investors.
• The loan markets, and the loan fund universe, won’t have to deal with the substantial complications for origination and trading that would have accompanied a Second Circuit decision that certain syndicated loans are securities. These complications could have also impacted other markets that utilize loan-based funding, such as asset based lending and non-ABS structured finance markets.

No doubt there will be future twists and turns in regulation and in the courts that will pose challenges for the loan markets. But the developments of Wednesday and Thursday might be remembered for a while as the August 2023 Doubleheader.

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