What does the new the “risk alert” published by OCIE mean, especially as it relates to contract remediation and conduct risk?
On June 18th, 2020, the Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations (OCIE) published a new “Risk Alert” providing details on regulatory examinations to assess firms’ preparation for the cessation of LIBOR at the end of 2021.1 Earlier this year, the OCIE identified registrant preparedness for the transition away from LIBOR as an examination program priority for Fiscal Year 2020.2 The OCIE has published this new Risk Alert to provide SEC registered firms with additional information on the scope and content of the regulatory examinations.3 The SEC has stated that “The discontinuation of LIBOR, … could have a significant impact on the financial markets and may present a material risk for certain market participants …”4
What this means
The OCIE has stated that they will conduct examinations on various SEC registered investment advisers, broker-dealers, investment companies, municipal advisors, transfer agents and clearing agencies, to assess their efforts to prepare for the discontinuation of LIBOR and the transition to alternative benchmark rates.5 The Risk Alert noted that OCIE will review the impact on each organization’s business activities, operations, services, customers, clients and investors.6 This includes a review of the plans that firms have developed across businesses to prepare for the transition from LIBOR, including:7
- Exposure to LIBOR linked contracts that extend past the expected 2021 discontinuation date, and whether fallback language has been incorporated
- Operational readiness, including enhancements to systems, controls, processes and risk/valuation models
- Investor disclosures and reporting with regard to LIBOR cessation and adoption of alternative reference rates
- Identification of any potential conflicts of interest associated with the adoption of new reference rates
- Clients’ efforts to move to an alternative reference rate to replace LIBOR
In addition, OCIE provided a sample list of documents that may be used for requesting information from regulated firms and encouraged them to visit the Alternative Reference Rates Committee (ARRC) website to remain informed on the latest transition related developments and best practices.8 The ARRC has provided a number of LIBOR transition resources from Preparedness checklists to Best Practices for LIBOR transition.
We have observed that many firms have conducted preliminary impact assessments for exposure to LIBOR-based instruments and have established LIBOR transition governance programs. Firms should consider whether any of the work conducted during the impact assessment phase could meet the SEC’s criteria checklist set forth in the SEC Risk Alert on LIBOR Transition Preparedness. As firms move from strategy and planning detailed business changes for LIBOR transition, many are finding that the impact assessments initially conducted left numerous unanswered questions requiring some re-work of the initial LIBOR transition planning. Gaps should be well documented, and plans implemented to address these with haste. Firms are strongly encouraged to now pivot their focus and efforts to executing their transition, including completing infrastructure changes to technology systems and operations in order to meet the expected 2021 discontinuation date for LIBOR-linked transactions.
The visual that follows provides a high-level perspective on the key steps firms should take in their transition away from LIBOR.
The OCIE also noted in its Risk Alert that it plans to include as part of the exam review a firm’s operational readiness, including enhancements or modifications to systems, controls, processes, and risk or valuation models pertaining to the transition to a new benchmark or reference rate.9 Our work in the space indicates that operational readiness has been a key area of focus for SEC registered firms including determining and executing enhancements to systems, controls, process and risk valuation models as well as testing of systems upgrades and enhancements for the LIBOR transition program. It is critical for SEC registered firms to develop an effective model updating and testing factory in order to maintain operational readiness for LIBOR decommissioning.
LIBOR contract remediation
The OCIE has also indicated it plans to review firms’ exposure to LIBOR-linked contracts that extend beyond the expected 2021 discontinuation date, and whether adequate fallback language has been incorporated so that parties can continue to perform their obligations under the contract as LIBOR is decommissioned.10 To respond, firms should have the necessary capability to identify all LIBOR impacted contracts and to search key terms to facilitate contract remediation. To manage these regulatory and risk management-driven transition changes, financial firms should consider examining their contract management process with the goal of standardizing a scalable and repeatable process of managing contracts through the contract remediation for LIBOR. To find out more, please consult our published blog posts on LIBOR contract remediation.
Conduct risk in LIBOR transition
Mitigating conduct risk is also an area of concern for many firms we work with. Firms operate within regulatory frameworks, including sales and suitability, and the Financial Industry Regulatory Authority’s FINRA Conduct Rules and other SEC and federal regulations relating to conflicts of interests should now be assessed in the context of LIBOR conduct mitigation related activities that are not covered by existing frameworks.
Firms should expect to be able to analyze the risk of misconduct occurrences and appropriately plan and manage mitigation, and qualify, quantify and report on conduct risk and underlying exposure. The visual that follows identifies types of conduct risks associated with a typical LIBOR transition.
As well, the SEC will be reviewing investor disclosures and reporting regarding LIBOR cessation and adoption of alternative reference rates so that clients and shareholders are appropriately informed about the impact of LIBOR decommissioning.11 For more thoughts on the topic please consult this presentation on LIBOR and conduct risk.
LIBOR transition exam toolkit
Analytics and reporting using artificial intelligence (AI) and other visualization tools and dashboards can be used not only to demonstrate to clients and regulators LIBOR transition progress but also to mitigate conduct risk. Many firms are building an end-to-end contract remediation capability not only to handle LIBOR contract remediation but for other regulatory, market and business driven events. This contract remediation capability can incorporate workflow automation and tracking as well as tie into a dashboard to provide LIBOR contract remediation progress. AI search and extraction solutions can be used to identify LIBOR impacted contracts, search and extract key LIBOR related terms from contracts and when combined with other data can provide insights to support contract remediation planning.
The OCIE has stated that these examinations are intended to help promote and facilitate an orderly transition from LIBOR to alternative reference rates.12 We strongly encourage all SEC registered firms to evaluate their SEC exam preparedness regarding their LIBOR transition programs.
How Accenture can help
Accenture can assist clients with exam preparedness and their LIBOR transition program, offering support and leading capabilities in the following areas:
- Transition Exam Preparedness and Planning
- Transition Analytics and Reporting
- Operational Readiness
- Contract Remediation
- Conduct Risk Assessment and Framework
To find out more, please contact Lisa Bloomberg.
- “Examination Initiative: LIBOR Transition Preparedness,” Securities and Exchange Commission Office of Compliance Inspections and Examinations, June 18, 2020. Access at: https://www.sec.gov/files/Risk%20Alert%20-%20OCIE%20LIBOR%20Initiative.pdf.
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