On July 12, 2019, the Division of Corporation Finance, Division of Investment Management, Division of Trading and Markets, and Office of the Chief Accountant of the Securities and Exchange Commission (the “Staff") issued a joint statement (the “Statement") (available here) regarding the expected discontinuation of LIBOR and transition to alternative reference rates. The Statement reminds readers that the discontinuation of LIBOR could have a significant impact on financial markets and may present a material risk for market participants, including public companies, investment advisers, investment companies, and broker-dealers. The Statement encourages market participants to proactively manage their transition away from LIBOR and outlines several areas that may warrant increased attention. As noted by the Staff, “[f]or many market participants, waiting until all open questions have been answered to begin this important work likely could prove to be too late to accomplish the challenging task required." We encourage anyone who may be impacted by the LIBOR transition to review the Statement, which outlines ways market participants can think through potential transition risks and provides helpful guidance on related disclosure obligations and risk management efforts.
The Statement provides general guidance to all market participants, as well as division-specific guidance focusing on the particular impacts to specific categories of registrants. Of particular importance to reporting companies is the Division of Corporation Finance's identification of four areas of disclosure that may be impacted by the transition: risk factors, management's discussion and analysis, board risk oversight, and financial statements. Among other things, the Statement encourages companies to consider the following guidance when deciding what disclosures are relevant and appropriate:
- “The evaluation and mitigation of risks related to the expected discontinuation of LIBOR may span several reporting periods. Consider disclosing the status of company efforts to date and the significant matters yet to be addressed."
- “When a company has identified a material exposure to LIBOR but does not yet know or cannot yet reasonably estimate the expected impact, consider disclosing that fact."
- “Disclosures that allow investors to see this issue through the eyes of management are likely to be the most useful for investors. This may entail sharing information used by management and the board in assessing and monitoring how transitioning from LIBOR to an alternative reference rate may affect the company. This could include qualitative disclosures and, when material, quantitative disclosures, such as the notional value of contracts referencing LIBOR and extending past 2021."
As calendar year filers prepare to file their second quarter 10-Qs in the coming weeks, they should carefully consider whether risks or uncertainties associated with the LIBOR transition (including any potential collateral impacts) should be discussed in the risk factors or management's discussion and analysis, and whether the transition will impact the financial statements. Companies whose fiscal years end in late spring or early summer are likely preparing their proxy statements now and should consider whether oversight of the risks associated with the LIBOR transition should be mentioned in the required risk oversight discussion.
Special appreciation for Orange County summer associate Meghan Roll's assistance with this post.