LIBOR Transition Gets Real at SEC, OCIE

Remember when you were eight years old and your parents warned you to knock it off in the back of the car, and then warned you again, and then warned you a third time that no really, don’t test us, you better stop? Well, in related news, federal securities watchdogs are telling firms that this LIBOR transition is getting real.

LIBOR, of course, is the popular benchmark interest rate being sunsetted in 2022. Given the wealth of commercial instruments once tied to LIBOR, its looming discontinuation has inspired more scenarios of mayhem than anything since Y2K. Even long after the scandal associated with it faded, LIBOR has continued to attract attention (not gonna lie, it’s one of our favorite topics here on the blog). Certainly, a lot of warnings have been issued from the front seat, urging companies to prepare for the transition.

One of those voices belongs to the SEC’s Office of Compliance Inspections and Examinations (OCIE), which at the beginning of the year announced that preparedness for the LIBOR transition would be one of its biggest enforcement priorities for 2020. Now, like a stern but loving parent, it is following through on its warning. Last week, OCIE issued a risk alert that promised sweeping examinations on LIBOR transition preparedness, and told registrants what its areas of focus would be. Specifically, OCIE said it would be looking closely at:

• “LIBOR-linked contracts that extend past the expected discontinuation date”;
• “[O]perational readiness”;
• “[R]eporting to investors regarding . . . LIBOR discontinuation and the adoption of alternative reference rates”;
• “[P]otential conflicts of interest associated with the LIBOR discontinuation and the adoption of alternative reference rates”; and
• “[E]ffort to replace LIBOR with an appropriate alternative reference rate.”

The entire agency is getting into the act. A search of the Intelligize platform reveals that the SEC has sent numerous comment letters to ’40 Act filers about the coming transition. It has also gone after public companies. In February, it had the following exchange with Evoqua Water Technologies Corp.

SEC: “We note that the interest rates for your credit agreements are tied, in part, to LIBOR. Please include a risk factor discussing how the expected discontinuation of LIBOR could affect your liquidity and results [of] operations.”

Evoqua: “In the Company’s next quarterly report on Form 10-Q, the Company will include a risk factor substantially similar to the language set forth below in Item 1A, ‘Risk Factors’ – The phase-out, replacement or unavailability of the London Interbank Offered Rate (‘LIBOR’) could affect interest rates under our existing credit facility agreements, as well as our ability to seek future debt financing . . . .”

Earlier in the year, the SEC asked Bancolombia SA to “disclose in future filings, the contractual interest rates for borrowings from other financial institutions, including if you have any Libor exposure and the potential impact to your financial statements from the expected discontinuation of Libor.” The company agreed to do so.

Issuers would be wise to expect that the SEC will only be issuing more comment letters like this as the transition date approaches, just as they should expect OCIE examinations. They’ve been warned for the last time that LIBOR is ending. If they aren’t ready, we might just turn this car around and go home.