LIBOR No More: SEC Focuses on LIBOR Transition Preparedness

LIBOR, formerly the London Interbank Offered Rate, has been used extensively in the United States and globally as a “benchmark” or “reference rate” for various commercial and financial contracts, including corporate and municipal bonds and loans, floating rate mortgages, asset-backed securities, consumer loans, and interest rate swaps and other derivatives. With the discontinuation of LIBOR expected in 2021, the SEC has identified that it will have a significant impact on the financial markets and may present a material risk for SEC-registered investment advisers and broker-dealers.

On June 18, 2020, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) released a Risk Alert highlighting the risks associated with the discontinuation and transition away from LIBOR. OCIE identified registrant preparedness for the transition away from LIBOR as an examination program priority for FY 2020. As such, OCIE intends to engage with registrants through examinations to assess their preparations for the expected discontinuation of LIBOR and the transition to an alternative reference rate. OCIE will review whether and how advisers have evaluated the potential impact of the LIBOR transition on the organization’s: (i) business activities; (ii) operations; (iii) services; and (iv) customers, clients, and/or investors.

OCIE will be looking at the plans advisers have developed and steps taken to prepare for the LIBOR discontinuation, including the firm’s operational readiness, any enhancements or modifications to systems, controls, processes, and risk or valuation models associated with the transition to a new reference rate or benchmark. Additionally, OCIE will review how registrants will identify and address any potential conflicts of interest associated with the LIBOR discontinuation and the adoption of alternative reference rates.

In an effort to help empower compliance professionals with the tools they may need to assess their organization’s preparedness for the LIBOR discontinuation, OCIE provided a sample document request letter. Information they intend to review include the following:

  • Documentation or descriptions of any performance composites or performance advertising that use a benchmark that could potentially be affected by the LIBOR Transition and any remediation plans.
  • Written assessments, strategic plans (including remediation plans, as applicable), roadmaps, or timelines prepared by or for registrant regarding preparation for the LIBOR Transition, including the consideration of alternative reference rates.
  • Documentation of any risk management matrices or risk inventories of registrant that reference the LIBOR Transition, including a description of any LIBOR Transition-related vulnerabilities or exposure covered by the matrix or inventory.

Key take-away: If your organization has not already done so, begin the process of identifying existing business contracts that extend past 2021 to determine their exposure to LIBOR. Perform an assessment of the discontinuation of LIBOR and how it will impact your organization. The SEC has previously encouraged market participants to identify, evaluate, and mitigate other consequences the discontinuation of LIBOR may have on their business, such as on strategy, products, processes, and information systems. To speak to our regulatory experts, please email info@cssregtech.com.


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