The Securities and Exchange Commission said it is “not in a position to file” a brief giving its view on whether leveraged loans are securities, sidestepping a request to weigh in on a long-running lawsuit that may have major implications for the $1.4 trillion market for risky debt.

A three-judge US Court of Appeals panel had sought the SEC’s view on the question as it weighs a decision in a case that could upend the leveraged buyout machine and a decades-old market riskier companies rely on for financing. The SEC’s filing had been hotly anticipated because the court was expected to lean heavily on its opinion, legal experts earlier told Bloomberg.

“Despite diligent efforts to respond to the Court’s order and provide the Commission’s views, the staff is unfortunately not in a position to file a brief on behalf of the Commission in this matter. We greatly appreciate the Court’s indulgence and regret any inconvenience this may have caused the Court or the parties,” according to the letter filed on Tuesday and signed by SEC General Counsel Megan Barbero.

The panel that’s deciding the case, Kirschner v. JPMorgan, now will likely need to decide the case without input from the agency. If the court rules that the loan at the heart of the case was a security, it could usher sweeping new regulations into the market.

Since taking the helm in 2021, Chair Gary Gensler has led the SEC in proposing dozens of new rules, often over the objections of Republicans and industry advocates. Most of those plans are yet to be finalized, but the agency is already facing challenges to key aspects of its regulatory approach. The legal wrangling will increase as the agency charges ahead on regulations for everything from hedge funds to corporate climate disclosures.

Security Question

The court first requested the SEC’s view in March to help it decide the case, which involves a 2014 loan sale where the debt quickly soured. A trustee for investors in the debt, Marc Kirschner, said the Wall Street firms that offered the debt, including JPMorgan Chase & Co., withheld key information that would have tipped off investors about trouble at the company.

Loans are essentially securities, and banks selling the debt had the same duty to disclose information as they would in a bond sale, the trustee said. Banks said that loans aren’t securities, and they didn’t have any obligation to disclose more than they did.

A representative for JPMorgan Chase & Co. declined to comment. Kirschner didn’t immediately respond to a request for comment.

Read more: Loans at Risk of More Regulation as Overlooked Lawsuit Heats Up

The LSTA, an industry lobbying group, had warned that reclassifying loans as securities would upend long-held market expectations.

“The LSTA engaged with many parties, including the SEC, the banking agencies and the U.S. Treasury, to discuss the adverse consequences of suddenly recharacterizing loans as securities. We appreciate that the SEC recognized the complexity of the matter and has decided not weigh in and instead allow a private litigation to proceed in its normal course,” Elliot Ganz, the group’s head of advocacy, said in a statement Tuesday.

Others, however, said that regulation would bring long overdue transparency to a notoriously opaque part of the financial system. Without securities laws, “disclosure requirements are diluted and anti-fraud rules are difficult to enforce,” according to a January report by the advocacy group Americans for Financial Reform.

Decades ago, when a company sought to borrow money in the form of a loan, it often obtained that loan from a single lender, typically a bank. Since the transaction involved just two parties and concerned routine funding questions, loans were not included in securities laws, which are designed to protect investors at large.

Over time, however, the market for loans evolved to allow dozens or hundreds of different investors to lend to just a single company, through a process known as syndication. Some argue that syndication and other changes make the loans market largely equivalent to the market for high-yields bonds, and that therefore the two markets should be regulated similarly.

--With assistance from Ben Bain.