SEC Staff Issue Risk Alert on LIBOR-Transition Preparedness for Investment Advisers and Investment Companies

Who may be interested: Registered Investment Companies, Registered Investment Advisers

Quick Take: The staff of the SEC’s Division of Examinations (Staff) recently issued a risk alert (Alert) addressing the status of preparations by investment advisers and investment companies (firms) for transitioning from U.S. Dollar LIBOR (LIBOR), which is currently scheduled to be discontinued after June 30, 2023. The Alert highlights practices of firms to address the LIBOR transition. 

The Alert groups observations by the Staff on LIBOR transition practices, and accompanying challenges, into the following categories: (i) risk management, (ii) operations, (iii) portfolio management, (iv) fiduciary responsibilities and investor communications, and (iv) keeping informed about ongoing and new challenges. 

Risk Management 

With respect to risk management, the Staff noted the creation and implementation by certain firms of (a) cross-functional LIBOR transition working groups, overseen in some cases by a risk governance committee, (b) written LIBOR transition plans, and (c) impact assessments on investment and operational exposures. Further, the Staff noted a focus on internal training and guidance, as well as participation in LIBOR transition discussions with relevant industry groups and associations.


The Staff highlighted that firms have coordinated with service providers, sub-advisers, and third-party managers to assess readiness by these entities for the transition. The Staff also observed that firms have performed extensive systems testing to ensure that alternative reference rates (ARRs) can be accommodated by their current systems. Firms have also implemented reconciliation processes to ensure all terms and conditions of such ARRs are properly accounted for by counterparties and service providers.

Portfolio Management

The Staff noted that firms have made efforts to identify contract exposure to LIBOR across subsidiaries and affiliates and have conducted substantive reviews of fallback provisions in contracts, assessing and prioritizing contracts that may be more difficult to transition (“tough legacy” contracts). The Staff also observed that some firms have placed internal controls, such as pre-trade compliance checks, and trading restrictions on LIBOR-linked instruments.

Fiduciary Responsibilities and Investor Communications

The Staff noted that, in connection with their fiduciary obligations, firms have considered conflicts of interest relevant to the LIBOR transition in their remediation of contracts or due diligence on third-party fund managers (such as cross-trading, principal transactions, allocation of transition costs, and clients with conflicting priorities). The Staff also noted that firms with significant LIBOR exposure provided comprehensive risk disclosures to clients. The Staff highlighted that firms have implemented a wide range of client communication and engagement strategies related to the LIBOR transition.

Keeping Informed About Ongoing and New Challenges

The Staff summarized ongoing and new challenges to firms in managing the LIBOR transition. To avoid a flood of contracts requiring individually negotiated amendments in mid-2023, the Alert encouraged firms to move LIBOR-linked bank loans to alternative benchmarks before the June 30 deadline.

The Alert can be found here.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.