The Staff of the Securities and Exchange Commission (the Staff) issued a Public Statement regarding the probable transition away from the London Inter-bank Offered Rate (LIBOR) after December 31, 2021, as a result of the expectation that a number of private-sector banks currently reporting information used to establish LIBOR will cease to do so after 2021 when their reporting commitment ends.
As a result, the publication of LIBOR may cease immediately following the end of 2021 or may result in LIBOR’s regulator determining that the quality of the LIBOR metric has diminished such that it is no longer representative of its underlying market.
SOFR Could Be the Alternative to LIBOR
Many countries, including the United States, are currently working on replacing LIBOR with an alternative reference rate standard. This process is discussed in the Public Statement.
In the United States, the Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate (SOFR) for the U.S. dollar as its preferred alternative reference rate to USD LIBOR, which is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions.
Ending LIBOR Could Mean Big Changes – Review Agreements and Risks in Advance
Due to the pervasive usage of LIBOR in agreements, certain market participants, including public companies, investment advisors, investment companies and broker-dealers, may be materially impacted by the cessation of LIBOR. While many financial instruments contemplate the temporary unavailability of LIBOR, when applied permanently, such language may result in unintended and harsh consequences.
A general review of existing agreements well in advance of the anticipated cessation date to ensure such agreements will function appropriately following the cessation date should be undertaken, as the amendment process for agreements can be laborious and the failure to act may result in severe consequences. The Staff also encourages market participants to consider whether new contracts should reference SOFR or to include “fallback” language if such agreements reference LIBOR.
Additionally, the SEC’s Division of Corporation Finance encourages registrants to address LIBOR-related risks with investors. Public companies, particularly those in the banking, real estate and insurance sectors, should be aware that their periodic reports may require enhanced discussion regarding the expected discontinuation of LIBOR, such as disclosure relating to risk factors, MD&A, board risk oversight and financial statements.
The Staff’s Public Statement specifically suggests that companies take the following actions in advance of the anticipated end of LIBOR:
- Keep investors informed about progress toward risk identification and mitigation efforts.
- Consider addressing potential material exposures to LIBOR (or the fact that any expected impact is not yet known).
- Share material qualitative and quantitative information used by management and the board in assessing and monitoring the company’s transition from LIBOR to an alternative reference rate.
If you have any questions about this Staff’s Public Statement, please feel free to email the authors directly or, if applicable, contact your primary Bass, Berry & Sims relationship attorney.
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