On June 18, 2020, the Office of Compliance Inspections and Examinations of the United States Securities and Exchange Commission (OCIE) announced an exam initiative and issued a subsequent Risk Alert about LIBOR transition preparedness. LIBOR, formerly known as the London Interbank Offered Rate, has been used globally as a reference rate for a variety of investment products and services since the 1970s. The transition away from LIBOR will likely occur after 2021 and may pose material risks for groups like SEC-registered investment advisers and broker-dealers.
OCIE issued a list of items to assist with the transition to an alternative reference rate in the coming years. Key takeaways for how to reduce compliance risks associated with the transition are below:
- During examinations, OCIE will evaluate a firm’s preparedness for how the transition will affect investors, business activities, operations, and services.
- Firms should draft a plan to address the transition away from LIBOR and include the following information, as applicable:
- A list of LIBOR dependent contacts existing among the firm or its investors, which may extend past 2021
- Details about operational readiness including any change to systems or controls related to the adoption of a new reference rate
- Communications or other disclosures given to investors regarding the transition
- Potential conflicts of interest involved in transitioning to an alternative reference rate and how the firm will address such conflicts
- Clients’ or investors’ action taken to transition to a different reference rate
- A sample request list published by OCIE includes items such as:
- A list of the firm’s departments, operations, or individuals impacted by the LIBOR transition
- Documentation of any LIBOR dependent performance composites or performance advertising which may be affected by a new reference rate
- Information about investors whose fee structure or performance reporting may be affected by the transition
- Any potential impacts on third-party vendors used by the firm who are affected by LIBOR
- Plans for changes to the firm’s compliance procedures or controls associated with any LIBOR-linked instruments or contracts
- The full sample request list can be found in Appendix A of the Risk Alert
WHAT DOES THIS MEAN FOR ME?
OCIE will continue to publish information about the transition away from LIBOR and is calling for market participants to share information about potential effects of the process at LIBOR@sec.gov.
LIBOR transition preparedness is included in OCIE’s 2020 Examination Priorities and will become an area of greater focus as the transition to an alternative reference rate approaches. Beginning preparations now will decrease risks during upcoming routine examinations.