SEC Staff Publishes Statement on LIBOR Transition | Practical Law

SEC Staff Publishes Statement on LIBOR Transition | Practical Law

The SEC Division of Corporation Finance, Division of Investment Management, Division of Trading and Markets, and Office of the Chief Accountant published a statement outlining key risks market participants should consider ahead of LIBOR's expected discontinuation after 2021.

SEC Staff Publishes Statement on LIBOR Transition

Practical Law Legal Update w-021-2818 (Approx. 5 pages)

SEC Staff Publishes Statement on LIBOR Transition

by Practical Law Corporate & Securities
Published on 16 Jul 2019 • USA (National/Federal)
The SEC Division of Corporation Finance, Division of Investment Management, Division of Trading and Markets, and Office of the Chief Accountant published a statement outlining key risks market participants should consider ahead of LIBOR's expected discontinuation after 2021.
On July 12, 2019, the SEC's Division of Corporation Finance, Division of Investment Management, Division of Trading and Markets, and Office of the Chief Accountant published a statement outlining key risks market participants should consider ahead of the expected discontinuation of LIBOR after 2021.
LIBOR is used extensively in the US and globally as an interest rate benchmark or reference rate in various commercial and financial contracts. However, it is expected that the LIBOR panel banks will stop reporting information used to set LIBOR after 2021, leading to its discontinuation (see Legal Update, FCA Chief Executive Speech on Future of LIBOR). Parties will therefore need to amend many existing contracts to replace LIBOR with another benchmark risk-free rate (RFR), such as the Secured Overnight Financing Rate (SOFR). The transition from LIBOR could significantly impact the financial markets and present material risks to market participants, including reporting companies, investment advisers, investment companies, and broker-dealers.
The SEC staff is actively monitoring the extent to which market participants are identifying and addressing risks associated with the expected discontinuation of LIBOR. In order to avoid business and market disruption, SEC staff is encouraging all market participants to:
  • Identify and implement alternative reference rates, such as the SOFR.
  • Identify, review, and take appropriate action with respect to existing contracts extending beyond 2021 that include interest rate provisions referencing LIBOR and that:
    • do not address its discontinuation; or
    • may result in uncertainty or disagreement over how the contract should be interpreted.
  • For future contracts, use an alternative reference rate to LIBOR or, if LIBOR is referenced, include effective fallback language (see Article, Current Trends in LIBOR Successor Rate Provisions: LIBOR Fallback Language).
  • Identify, evaluate, and mitigate other possible consequences the discontinuation of LIBOR could have on business operations, such as strategy, products, processes, and information systems.
The SEC's Division of Corporation Finance also provided guidance on adequate disclosure related to LIBOR's expected discontinuation, including in risk factors, management's discussion and analysis, board risk oversight, and financial statements. The Division noted that it is important to keep investors informed about the progress toward risk identification and mitigation, and the anticipated impact on the company, if material. In particular, in deciding what disclosures are relevant and appropriate, the Division encouraged companies to consider the following guidance:
  • Since the evaluation and mitigation of risks related to the expected discontinuation of LIBOR may span several reporting periods, consider disclosing the status of company efforts to date and significant matters still needing to be addressed.
  • When a company has identified a material exposure to LIBOR but does not yet know or cannot yet reasonably estimate the expected impact, consider disclosing that fact.
  • Consider sharing information used by management and the board in assessing and monitoring how transitioning from LIBOR to an alternative reference rate may affect the company, including both qualitative and quantitative disclosures (such as the notional value of contracts extending beyond 2021 that reference LIBOR).
The Division also noted that based on reviews to this point, larger companies (usually in the real estate, banking, and insurance industries) have been more likely to disclose risks related to LIBOR's expected discontinuation, but every company should begin planning for the transition.
For a sample risk factor relating to the discontinuation of LIBOR, see Standard Clause, Sample Risk Factor: LIBOR Phaseout.
For more information on the transition away from LIBOR, see Practice Note, Interest Rate Benchmark Reform: Loan Markets: Transition Away from LIBOR.