Within the last week, both the US Securities and Exchange Commission's (SEC) Office of Compliance Inspections and Examinations (OCIE) and the Financial Industry Regulatory Authority (FINRA) have issued their 2020 annual report or letter1 for their respective examination priorities and each included London Interbank Offered Rate (LIBOR) preparedness as a priority for examination.
The OCIE report includes the following (at p. 5):
OCIE will . . . closely track and evaluate the impact of several major risk themes affecting its registrant population, including . . . the industry's transition away from LIBOR.
The OCIE report also includes the following (at pp.8-9; emphasis added):
OCIE's analytic efforts and examinations remain firmly grounded in its four pillars: promoting compliance, preventing fraud, identifying and monitoring risk, and informing policy. The risk-based approach, both in selecting registrants as examination candidates and in scoping risk areas to examine, provides OCIE with greater flexibility to cover emerging and exigent risks to investors and the marketplace as they arise. For example, as 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.
OCIE's commentary about the LIBOR transition echoes, in part, the guidance and concerns voiced by SEC staff in a June 2019 Public Statement: https://www.sec.gov/news/public-statement/libor-transition.
The FINRA letter states:
FINRA will engage with firms—outside the examination program—to understand how the industry is preparing for LIBOR's retirement at the end of 2021, focusing on firms' exposure to LIBOR-linked financial products; steps firms are taking to plan for the transition away from LIBOR to alternative rates, such as the Secured Overnight Financing Rate (SOFR); and the impact of the LIBOR phase-out on customers.
Given the continued and increased focus by regulators on LIBOR transition preparation, SEC registrants and other market participants should carefully review the regulators' statements on this topic and take timely and appropriate actions in response.
Footnotes
1 The OCIE report is available at: https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2020.pdf and the FINRA letter is available at: https://www.finra.org/rules-guidance/communications-firms/2020-risk-onitoring-and-examination-priorities-letter.
Visit us at mayerbrown.com
Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.
© Copyright 2019. The Mayer Brown Practices. All rights reserved.
This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.
