SEC Staff Statement on LIBOR Transition

As the cessation of LIBOR nears, the SEC staff issued a statement addressing disclosure obligations, operational complexities, and other reminders for investment professionals. The statement complements previous statements, reinforcing the requirement for registrants to disclose material qualitative and quantitative information the transition from LIBOR has, or may have, on operations.  

 

Background

The discontinuation of the London Interbank Offered Rate (LIBOR) is now only a matter of time. Banks were previously encouraged to cease the use of LIBOR in any new contracts entered into after December 31, 2021. The USD LIBOR one-week and two-month maturities, and all non-USD LIBOR maturities, were discontinued December 31, 2021, with the remaining USD LIBOR maturities to cease June 30, 2023. The SEC staff previously issued statements focused on transition issues associated with the discontinuation of LIBOR, specifically noting that the change could have a significant impact on the financial markets and may present a material risk for certain market participants, including public companies, investment advisers, investment companies, and broker dealers. The most recent statement, issued December 7, 2021, continues to focus on disclosure, emphasizing the need to provide quantitative and qualitative information specific to the registrant.

 

Disclosure Considerations

The SEC staff continues to encourage registrants to provide meaningful disclosure on risk identification and mitigation related to their transition from LIBOR. Disclosure is required when the information is material to a reasonable investor, and is most often included within risk factors, management’s discussion and analysis, and, depending on facts and circumstances, within the financial statements.  Disclosure should focus on the registrant’s progress in identifying, assessing, and mitigating LIBOR exposure, and the staff expects the disclosures to evolve over time, especially as the cessation of LIBOR nears. When material, the disclosures should include quantitative information, which may include the notional value of the registrant’s contracts that reference LIBOR past the cessation dates, or LIBOR-based debt that will be outstanding after the cessation dates with non-existent or inadequate fallback^[1] provisions. The rules may require disclosure in multiple sections of the filing and, as such, the staff encourages registrants to cross reference the disclosures  or provide a summary to ensure investors can easily understand the risks, status, and potential impact of LIBOR transition on the registrant.

 

Other Considerations

The staff’s statement also provides reminders of rules and regulations applicable to investment professionals when recommending LIBOR-linked securities or investments, as well as considerations for underwriters and broker-dealers.
 

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[1] Fallback provisions include language contemplating the cessation of LIBOR and are intended to provide an alternative reference rate.