Saturday, April 19, 2014

Do the securities laws matter?

Today I'm plugging my colleague Elisabeth de Fontenay's new article, despite the existential threat it poses to my specialty. 

InDo the Securities Laws Matter?, de Fontenay compares the market for syndicated loans, which are not treated as securities, to the market for bonds, which are.  She finds that the market for syndicated loans is as deep and as liquid as the market for bonds, suggesting that the mandatory disclosure regime that governs bonds, but not loans, is unnecessary.

As she puts it in her abstract:

One of the enduring principles of federal securities regulation is the
mantra that bonds are securities, while commercial loans are not. Yet the
corporate bond and loan markets in the U.S. are rapidly converging,
putting significant pressure on the disparity in their regulatory treatment.
As securities, corporate bonds are subject to onerous public disclosure
obligations and liability regimes, which corporate loans avoid entirely. This
longstanding regulatory distinction between loans and bonds is based on
the traditional conception of a commercial loan as a long-term relationship
between the borrowing company and a single bank, in contrast to bonds,
which may be issued to widely dispersed retail investors and are traded in a
liquid market. Today, however, not only are loans funded by dispersed, nonbank
creditors, but the pricing, terms, participants, and liquidity in the two
markets are rapidly converging. Logically, securities regulators should
respond to this functional convergence by treating loans and bonds as one
and the same. While the regulatory disparity persists, however, it provides a
rare natural experiment testing the effectiveness of the securities laws. That
the loan market has achieved comparable depth and liquidity to the bond
market, even in the absence of mandatory disclosure and robust antifraud
provisions, suggests that the securities laws are not doing the work for
which they were intended.

It's a really fascinating paper.

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