Early this year, the SEC’s Office of Compliance Inspections and Examinations announced its 2020 examination priorities. One item was “Risk, Technology, and Industry Trends.” One risk mentioned was LIBOR transition.
[A]s our registrants and other market participants transition away from LIBOR as a widely used reference rate in a number of financial instruments to an alternative reference rate, OCIE will be reviewing firms’ preparations and disclosures regarding their readiness, particularly in relation to the transition’s effects on investors. Some registrants have already begun this effort and OCIE encourages each registrant to evaluate its organization’s and clients’ exposure to LIBOR, not just in the context of fallback language in contracts, but its use in benchmarks and indices; accounting systems; risk models; and client reporting, among other areas. Insufficient preparation could cause harm to retail investors and significant legal and compliance, economic and operational risks for registrants
https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2020.pdf
OCIE has followed up with this initiative and released a Risk Alert on LIBOR transition. OCIE indicates that it is starting a sweep of examinations of to assess firms’ preparedness for the discontinuation of LIBOR.
- 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, including any enhancements or modifications to systems, controls, processes, and risk or valuation models associated with the transition to a new reference rate or benchmark;
- 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.
OCIE also included a sample document request list.
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