SEC Staff Announces Examination Initiative on LIBOR Transition Preparedness

In Short

The Situation: The SEC's Office of Compliance Inspections and Examinations ("OCIE") intends to examine registrants to assess preparation for the expected discontinuation of LIBOR and the transition to alternative reference rates.

The Result: SEC-registered firms subject to examination should expect to receive extensive requests for documents and information concerning (i) the steps they have taken to identify the areas of their business and their customers, clients, and investors that will be impacted by the LIBOR transition; and (ii) the strategy the registrant intends to implement to avoid negative impacts from the transition and to disclose the related risks and conflicts to clients. 

Looking Ahead: As December 31, 2021 nears, the SEC and other regulators have indicated their intention to step up efforts to ensure that registered firms have adequately prepared for the transition to alternative reference rates in order to minimize, to the extent possible, any adverse impacts the transition may have on the financial markets and their participants.

On June 18, 2020, OCIE published a Risk Alert informing SEC registrants, including broker-dealers, investment advisers, investment companies, and municipal advisors, of its intention to assess, through examinations, those entities' preparations for the expected discontinuation of LIBOR and the resulting transition to an alternative reference rate (an "ARR"), with a view to minimizing adverse effects on financial markets, firms and investors. 


LIBOR, or the London Interbank Offered Rate, is an interest rate that is used in financial contracts that has grown to be one of the world's most often used reference rates. It is calculated and published daily across five currencies, including U.S. Dollars, and seven tenors or maturities. LIBOR is used extensively in the U.S. and globally as a reference rate or benchmark for various commercial and financial contracts, including corporate and municipal bonds and loans, floating rate mortgages, asset-backed securities, consumer loans, insurance contracts, and interest rate swaps and other derivatives. 

Because LIBOR is expected to be permanently discontinued after 2021, many firms, industry organizations, and regulators, including the SEC, have been working to help ensure a successful transition from LIBOR. One such organization is the U.S.-based Alternative Reference Rates Committee ("ARRC"), of which the SEC is an ex-officio member. The ARRC, which was convened by the Federal Reserve Board and the Federal Reserve Bank of New York and is comprised of a diverse set of private-sector entities, including banks, asset managers, insurers and industry trade organizations, has identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative rate for USD LIBOR.  

The Risk Alert, which informs registrants of the types of documents and information OCIE expects to request during examinations, is another effort to encourage market participants to actively address and mitigate the impacts of the LIBOR transition. For instance, OCIE identified LIBOR transition preparedness as an examination priority for 2020. (Read more about the 2020 examination priorities here.) The SEC Staff also published a Statement last year noting that the discontinuation of LIBOR could have a significant impact on the financial markets and could present material market risks that would be exacerbated if market participants do not timely complete the work necessary to effect an orderly transition to an ARR. See SEC Staff Statement from the Divisions of Corporation Finance, Investment Management and Trading and Markets, and the Office of the Chief Accountant, (July 12, 2019). For more information about that Statement, see our Jones Day Commentary: "Mandatory Summer Reading: SEC Staff Issues Rare Joint Statement on LIBOR Transition." 

OCIE's Examination Request Content

OCIE intends to review whether and how registrants have evaluated the impact of the LIBOR transition on their business activities, operations, services, and clients, customers, and investors (collectively, "investors") and how they have or intend to implement their transition plans. The Risk Alert sets out a 20-item list (see Appendix A to the Risk Alert) of the types of information and documents OCIE may request in conducting its examinations. They include:

  • Documentation or descriptions of: (i) analyses performed to identify contracts or obligations held or issued by the registrant or its investors that may be affected by the transition; (ii) performance composites or advertising that use a benchmark that could be affected by the transition; (iii) risk management matrices or risk inventories referencing the LIBOR transition; and (iv) analyses performed to identify LIBOR-based risk or valuation models used and changes that may be required to use an ARR;
  • Information regarding the impact of the transition on fee structures (e.g., performance-based fees) and performance reporting (e.g., use of a LIBOR-linked benchmark);
  • Information regarding any LIBOR-linked contracts/obligations that extend past 2021 that are held and/or issued by the registrant or its investors, including the implications and impact of any incorporated fallback language; 
  • Information regarding any contracts/obligations held and/or issued by the registrant or its investors that reference an ARR;
  • Information regarding changes made or proposed to registrant's information technology systems to accommodate the transition;
  • Disclosures provided in SEC filings and/or to investors about the LIBOR transition from January 2019 to the present;
  • Guidance provided to employees or supervised persons regarding recommendations to investors to transact in LIBOR-linked instruments that extend past 2021, reviews of portfolios containing such instruments, or the underwriting of new instruments referencing LIBOR; and
  • Any implemented or planned changes to compliance procedures, controls, or surveillance systems designed to monitor for LIBOR-linked instruments or contracts recommended or sold to clients.

It would appear safe to assume the examination requests are designed to evaluate, among other things, whether the registrant (i) is making adequate LIBOR-related disclosures to investors, when appropriate, or has supplemented or modified disclosure materials, when necessary, to reflect the expected cessation of LIBOR; (ii) has a plan to address performance benchmarks tied to LIBOR; (iii) is properly considering any fiduciary obligations it may have in connection with the LIBOR transition; (iv) understands the impact that the cessation of LIBOR will have on investments it manages or recommends; (v) has evaluated the impact of LIBOR's expected cessation on its policies and procedures, as well as asset valuation practices; and (vi) has evaluated its operations and systems that will be impacted by the LIBOR transition, and implemented sufficient remediation plans.

Four Key Takeaways

  1. During examinations, SEC-registered firms should expect to be asked for detailed documents and information about their efforts to prepare for the discontinuation of LIBOR and its replacement by an ARR. Registrants may want to consider beginning now to assemble (and periodically update) information responsive to the sample list that is attached to the Risk Alert and work with outside counsel to evaluate the full range of legal, operational, economic, and regulatory risks that the LIBOR transition will have on their businesses. 
  2. Assembling the relevant information now will likely have two beneficial impacts: (i) registrants will be better prepared in advance of examinations so they can spend time preparing to answer the questions OCIE is likely to have instead of collecting responsive documents at the eleventh-hour; and (ii) registrants can identify and address any potential shortcomings in their current LIBOR transition strategies in advance of an examination.
  3. Although OCIE Risk Alerts are not rules and do not create, alter, or amend applicable law, the SEC's enforcement Staff has often referenced such Alerts in bringing subsequent enforcement actions. Thus, to the extent they have not yet done so, registrants should assess the impact of the LIBOR transition on their businesses and investors and take steps to address and mitigate the attendant risks based on the types of information and documents described in the Risk Alert.
  4. While it is possible that OCIE will use the results of these examinations as a basis for enforcement referrals, it is also possible that OCIE will compile the results of these examinations into a Best Practices-type report to provide guidance to registrants that may be lagging their peers in addressing the LIBOR transition's effect on their business. Firms, however, should not wait to address LIBOR-related issues for such a future Best Practices publication. They should take action now.
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