SEC Commissioner Wonders About Insurers' Broadly Syndicated Loans

Crenshaw noted that she sees the BSL issue as just part of the problem of world financial system dependence on instruments that are not regulated as ordinary bank loans or as securities.

Insurance companies power those instruments together with investment funds, pension plans and managers of collateralized loan obligations, she said.

Like private offerings, BSLs are presented to sophisticated individual investors and institutional investors with “big-boy” documents, with the expectation that the investors will do their own due diligence, she said.

“Frequently, investors have neither the means nor the time to conduct meaningful diligence,” Crenshaw said.

Moreover, she said, because investors trade BSLs privately, they could build up too much BSL exposure outside of the view of the SEC and other regulators.

She warned that the lack of visibility could lead to rapid changes in market conditions for BSLs and other assets that the SEC can’t regulate in a crisis.

“Greater disclosure and the greater integrity of disclosure that comes with antifraud rules, protections against insider trading, and gatekeepers would guard against the BSL market becoming a proverbial ‘market for lemons,’” she argued.

“I am aware that some may argue that BSLs have only exhibited isolated problems,” Crenshaw said. “But, as in the years leading up to 2008, a metamorphosis in the system may be occurring before our eyes. I worry that this market is becoming riskier in ways that regulators have not yet fully considered.”

SEC Commissioner Caroline Crenshaw. Credit: SEC