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Vedder Thinking | Articles SEC Staff Issues Risk Alert on LIBOR-Transition Preparedness


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On May 11, 2023, the SEC’s Division of Examinations issued a risk alert to remind registered broker-dealers and investment advisers of the discontinuance of U.S. Dollar LIBOR (formerly the London Interbank Offered Rate) after June 30, 2023, as well as to summarize staff observations from recent examinations in relation to the transition. To assess industry preparedness for the impending cessation of LIBOR, the staff examined a variety of firms, including: (1) investment advisers associated with large banks; (2) advisers to various types of registered investment companies; (3) fund complexes of various sizes; (4) advisers to private funds that invest in private credit such as collateralized loan obligations; and (5) large retail-oriented advisers. The staff noted that efforts to prepare for the transition varied across firms based on the nature and extent of LIBOR exposure at a particular firm.

Stemming from these examinations, the risk alert summarized staff observations on how firms are managing the transition away from LIBOR in certain key areas:

Risk Management. The staff observed that firms with significant exposure to LIBOR issues are treating the transition as an enterprise risk governance matter and have formed working groups to create transition plans, timelines and impact assessments. The staff similarly found that firms have made concentrated efforts on internal training and guidance to ensure that employees most impacted by the LIBOR transition, such as traders, portfolio managers and client-facing representatives, are kept informed on current developments, both generally and in relation to their firm’s relevant internal policies. The staff observed that almost all examined firms are keeping informed and engaged either through membership in or reliance on guidance from the Alternative Reference Rates Committee, and that many firms are discussing the LIBOR transition with relevant industry groups.

Operations. The staff observed that many firms are actively engaged with service providers, sub-advisers and third-party managers to assess their readiness for the transition. The staff further noted that firms requiring internal system updates have performed end-to-end testing to confirm their systems can accommodate alternative reference rates. The staff observed that several firms incorporated a process to reconcile settlement and payment processes in an attempt to ensure that counterparties and service providers were properly accounting for the terms and conditions of alternative reference rates.

Portfolio Management. The staff observed that many firms have taken a global approach to contract identification, examining subsidiaries and affiliates for LIBOR exposure, and that many firms have engaged third-party service providers to perform substantive reviews of fallback provisions. The staff noted that firms have developed internal controls such as pre-trade checks or purchasing guidelines relative to LIBORlinked investments, and that firms have been converting existing bank loans and other instruments to alternative reference rates in advance of the transition date to the extent practicable.

Fiduciary Responsibilities and Investor Communications. The staff observed that firms were handling fiduciary obligations differently depending on the type of LIBOR exposure involved, with large direct client exposure being addressed through the remediation of contracts and indirect client exposure managed through third-party due diligence focused on transition readiness. The staff observed that firms have assessed, disclosed and mitigated conflicts of interest relative to LIBOR transition, including in particular those related to cross-trading, principal transactions, allocations of transition costs and clients with conflicting priorities. The staff observed that firms with significant exposure have provided comprehensive disclosures of relevant risks.

Keeping Informed About Ongoing and New Challenges. The staff reiterated guidance from the Alternative Reference Rates Committee that encouraged market participants to remediate as many LIBOR-linked bank loans as practicable before June 30, 2023 and noted that firms should continue to monitor industry resources for guidance and tools to assist in addressing operational challenges relative to LIBOR transition.

The SEC staff noted the significant efforts firms have made to prepare for the transition away from LIBOR, and encouraged firms to be aware of the issues the transition poses and to allocate adequate resources to address issues as they arise.

The risk alert is available here.


Nathaniel Segal


Jacob C. Tiedt


Nicholas A. Portillo