The OCIE issued this risk alert to provide registrants with information about the scope and content of their registrant preparedness analysis examinations.
The Commission’s Office of Compliance Inspections and Examinations identified registrant preparedness for the transition away from LIBOR as an examination program priority. The OCIE has now issued this Examination Initiative: LIBOR Transition Preparedness to provide registrants with additional information about the scope and content of these examinations.
LIBOR transition. LIBOR, formerly the London Interbank Offered Rate, is used extensively in the United States as a "benchmark" or "reference rate" for various commercial and financial contracts. It is scheduled to be discontinued in 2021. According to the alert, this could have a significant impact on the financial markets and may present a material risk for certain market participants, including SEC-registered investment advisers, broker-dealers, investment companies, municipal advisors, transfer agents, and clearing agencies (registrants).
As a result, the OCIE has identified registrant preparedness for the transition away from LIBOR as a priority for 2020. To this end, OCIE said it intends to engage with registrants through examinations to assess their preparations for the expected discontinuation of LIBOR and the transition to a different reference rate.
Examinations. The OCIE plans to review whether and how a registrant has 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 (collectively, investors). For example, OCIE will review the plans that registrants have developed and steps they have taken to prepare for the LIBOR discontinuation, including, as applicable, the following:
- the firm’s and investors’ exposure to LIBOR-linked contracts that extend past the current expected discontinuation date, including any fallback language incorporated into these contracts;
- the firm’s operational readiness;
- the firm’s disclosures, representations, and/or reporting to investors regarding its efforts to address LIBOR discontinuation and the adoption of alternative reference rates;
- identifying and addressing any potential conflicts of interest associated with the LIBOR discontinuation and the adoption of alternative reference rates; and
- clients’ efforts to replace LIBOR with an appropriate alternative reference rate.
An appendix to the alert provides sample list of requests for information that the OCIE may use in conducting the examinations.
Resources for Registrants. The OCIE alert encourages registrants and investment professionals to visit the AARC website, https://www.newyorkfed.org/arrc, to receive updates about the latest transition-related developments and best practices. The OCIE also welcomes a discussion of the transition and encourages the public to share information about the potential impact of the expected discontinuation of LIBOR via e-mail to LIBOR@sec.gov.
Guidance. The examinations are intended to help promote and facilitate an orderly discontinuation of LIBOR and transition to an alternative reference rate. The risk alert is intended to highlight for firms the risks and issues that the OCIE staff has identified. The alert notes, however, that other factors besides those described may be appropriate to consider and some of the factors may not be applicable to a particular firm’s business. Additionally, the factors identified are neither exhaustive nor do they constitute a safe harbor.
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