SEC Issues Statement on LIBOR Transition – Key Considerations

The SEC workers issued a statement “in light of the now-certain transition away from LIBOR” reminding funding professionals of their obligations when recommending LIBOR-linked securities and associated funding merchandise and methods, together with rate of interest swaps, municipal securities and securitizations.

The assertion highlights points regarding the truth that many transaction paperwork that ponder solely a short lived cessation of LIBOR, or comprise no fallback language, will seemingly expertise materials modifications of their funding returns when the LIBOR is discontinued. Even newer issuances that comprise fallback language could expertise a change in potential returns on the funding as a result of no alternative charge would offer a “perfect match” for LIBOR.

The assertion additionally highlighted the potential influence on valuation measurements that use LIBOR as an enter, together with: (1) in contrast to LIBOR, SOFR doesn’t mirror perceived financial institution credit score danger; (2) potential modifications in market liquidity and buying and selling volumes throughout the transition each within the LIBOR market and with investments tied to different reference charges; and (3) that for some alternative charges (that aren’t time period charges), the general rate of interest on an funding utilizing the speed won’t be identified till close to the tip of the funding interval.

Dealer-Sellers: Suggestions to Retail Prospects

The SEC workers urged dealer-sellers must be “especially mindful” when recommending LIBOR-linked securities, together with securities with underlying investments in LIBOR-linked monetary devices, to retail clients. The workers defined that below Regulation Best Interest, a dealer-supplier ought to perceive the fallback language in any LIBOR-linked safety which it recommends and have an inexpensive foundation to consider that the influence of that alternative is in the very best curiosity of the actual retail buyer.

The workers acknowledged that it believes it “would be difficult for a broker-dealer to satisfy the Care Obligation [under Reg. BI] where it recommends a LIBOR-linked security with no fallback language absent the recommendation being premised on a specific, identified, short-term trading objective.” The assertion additional notes {that a} dealer-supplier ought to take into account the alternative charge for a LIBOR-linked safety which, in sure circumstances, could contain contemplating whether or not New York state LIBOR laws offering for a fallback will probably be relevant.

Municipal Securities Underwriting and Gross sales to Prospects

Constructing on previous guidance from the Workplace of Municipal Securities and the MSRB, the workers supplied the next steerage with regard to municipal securities actions and LIBOR:

  • below Alternate Act Rule 15c2-12 (“Municipal securities disclosure”), underwriters of major choices of municipal securities ought to take into account the municipal obligor’s publicity to dangers as a consequence of LIBOR transition;

  • dealer-sellers ought to take into account their obligations to retail clients below Regulation Greatest Curiosity mentioned above and to non-retail clients below the suitability requirements of MSRB G-19 (“Suitability of Recommendations and Transactions”); and

  • info identified or out there from established trade sources concerning the municipal obligor’s publicity to dangers related to the LIBOR transition could also be materials info below MSRB Rule G-47.

Registered Funding Advisers and Funds

The assertion highlights LIBOR-related issues as a part of the fiduciary responsibility of funding advisers and disclosure obligations relevant to funding corporations. Funding advisers ought to take into account whether or not any recommendation concerning LIBOR-linked investments and relevant dangers are according to their purchasers’ targets, which can embrace constantly monitoring whether or not a consumer ought to maintain a LIBOR-linked funding. Funding advisors must also take into account whether or not the contracts have sturdy fallback language and implications of any financial variations which will end result from an alternate charge. The assertion additional urges advisers to think about whether or not disclosures are crucial in relation to benchmark-linked efficiency charges.

Disclosure Considerations for Public Corporations and Asset-Backed Securities

Current federal securities legal guidelines require disclosure about dangers and occasions {that a} affordable investor would take into account vital to their funding determination. Guidelines concerning danger elements, administration’s dialogue and evaluation, board danger oversight, and monetary statements could all require disclosure based mostly on LIBOR’s discontinuation.

Issuers of registered asset-backed securities ought to take into account the related disclosure necessities below Regulation AB, which necessitates an issuer should disclose how the rate of interest of an asset-backed safety is decided, how regularly will probably be decided and supply asset stage info not simply on the time of the providing, however on an ongoing foundation, which can dictate change based mostly on the LIBOR transition.

The SEC encourages corporations to offer qualitative and quantitative disclosures, comparable to how a lot debt with insufficient fallbacks are excellent and what steps the corporate goes to take to handle the scenario. The SEC anticipates disclosures to evolve over time as corporations transition away from LIBOR.

Commentary

The assertion is a should‐learn for SEC registrants engaged in LIBOR‐associated actions.

Major Sources

  1. SEC Staff Statement on LIBOR Transition – Key Considerations for Market Participants

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