On June 18, 2020, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert (the “Alert”) outlining its plans to examine registrants’ readiness for the London Interbank Offered Rate (LIBOR) benchmark transition. The reference rate for loans, interest rate swaps, derivatives, and bonds is due to expire by 2022, and firms are expected to now be making transition plans for the change.
LIBOR has been used extensively by both US and global firms operating in the bond and lending markets. However, the rate has come under scrutiny in recent years resulting in several SEC enforcement actions against firms for rigging the rate. In order to prevent fraudulent activity, the alternative Secured Overnight Financing Rate (SOFR) is recommended by the Alternative Reference Rates Committee (ARRC).
In the Alert, OCIE states it plans to conduct examinations of investment advisers, broker-dealers, investment companies, municipal advisors, transfer agents, and clearing agencies. A sample document request is provided with the Alert; however, it appears to be written for investment advisers. It is rare to see the SEC release, in advance, a copy of its own document request prior to beginning targeted reviews. Firms should take notice and study the document request. SEC registered advisers that specialize in fixed-income products tied to LIBOR should expect an exam in 2020.
Interestingly, the Staff also referenced on-site visits as part of these new exams. However, at this time, all exams are still being conducted remotely in the COVID-19 environment.
View Risk Alert (with sample document request), “Examination Initiative: LIBOR Transition Preparedness,” June 18, 2020