July 7, 2020 - On June 18^th, the SEC announced an “Examination Initiative: LIBOR Transition Preparedness”. The Agency will begin asking investment managers a series of questions on how – specifically – they are preparing for LIBOR cessation. This is no idle navel gazing. The LSTA already has been asked for help in responding to some of the 20 questions the SEC published.  Below, we discuss the SEC’s view, their key issues, and begin to provide resources for answers (with more to come).

The SEC begins by reiterating that LIBOR discontinuation is expected after 2021 and notes that it may present a material risk for certain market participants, including registered investment advisors. So what should said managers do? The SEC states i) that preparation is essential to minimize any potential adverse effects of LIBOR discontinuation and ii) that transition risks will be magnified if work is not completed in a timely manner. (LSTA interpretation: Get cracking.)

And the SEC will be checking. The Office of Compliance, Inspections and Examinations (“OCIE”) will conduct examinations to assess managers’ efforts to prepare for transition. Below we flag the key items for review (and note LSTA efforts and resources in italics):

• Measure exposure to LIBOR-linked contracts, including any fallback language incorporated into contracts. Through its role on the ARRC, the LSTA has been pivotal in developing Hardwired Fallback Language.
• Plans for operational readiness, including any enhancements or modifications to systems, controls, processes, and risk or valuation models associated with the transition. LSTA has led efforts for much of the ARRC’s Business Loans Operations Sub-Group. This will be discussed in the LIBOR Operations Webcast on Tuesday, July 14^th.
• Disclosure, representations, and/or reporting to investors regarding 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.
• Efforts to replace LIBOR with an appropriate alternative reference rate. The LSTA has published extensively on the different SOFRs, their strengths, weaknesses and basis.

While these are the general themes flagged by the SEC, they go one step further by providing cheat sheet of 20(!) questions they may use in conducting examinations. Members are encouraged to use this resource.

The LSTA has been deeply involved in LIBOR transition efforts; we are on the Alternative Reference Rates Committee (“ARRC”) itself, and co-chair the ARRC’s Business Loans Working Group. For more information, contact mcoffey@lsta.org for general market and policy issues, tvirmani@lsta.org for fallback and documentation issues, and ehefferan@lsta.org for operations issues. The LSTA also hosts a weekly LIBOR Q&A call on Mondays at 3PM (ET).