A Securities and Exchange Commission staff statement issued Tuesday reiterates disclosure and fiduciary obligations of issuers and underwriters in light of the forthcoming transition away from Libor. And while those obligations are important, some municipal industry practitioners point to an already existing trend away from Libor-linked transactions.
Earlier this year, Libor’s regulator, the Financial Conduct Authority, announced that it will cease the publication of 1-week and 2-month U.S. dollar Libor after Dec. 31, 2021. Remaining U.S. dollar Libors will cease in 2023.
The SEC
Decker points out that the statement “really focuses on ensuring that both sides of the transaction understand the risks associated with being involved in a Libor transaction, given that it appears Libor is going away pretty soon.”
According to the staff statement, “understanding the potential risks, rewards, and costs is especially important when recommending Libor-linked securities.”
The statement also highlights specific considerations for underwriters of primary offerings of municipal securities and those for broker-dealers making recommendations of municipal securities.
For example, SEC staff believe that it would be difficult for a broker-dealer to satisfy its duty of care to customers in a situation where the broker-dealer recommends a Libor-linked security without fallback language.
Fallback language specifies a process for identifying a replacement rate in the event that a benchmark rate is not available.
Essentially, the SEC sees the replacement rate for a Libor-linked security as a factor that generally should be considered as part of a recommendation.
Decker said that while fallback provisions were originally conceived for temporary instances where the Libor wouldn't be published for a short period of time, the provisions have now become more robust.
“They account for the notion that Libor may go away entirely and specify a more practical and workable kind of long-term solution,” Decker said.
For example, Decker pointed out that instead of merely specifying the prime rate for some period of time, a Libor-transition fallback provision would specify the SIFMA index or some alternative index that the issuer and other parties to the transaction could use.
Regarding municipal securities underwriting, the SEC staff statement pointed to prior SEC staff guidance and guidance from the Municipal Securities Rulemaking Board concerning fair dealing requirements under MSRB Rule G-17.
The Office of Municipal Securities staff noted that “broker-dealers should consider the impact that the Libor transition may have in connection with other duties” including suitability standards in MSRB Rule G19 and disclosure rules under MSRB Rule G-47.
The SEC staff statement also reminds funds and advisors to monitor and manage conflicts of interest associated with the Libor transition.
Les Jacobowitz, a partner at Arent Fox, LLP who has extensive experience representing issuers, borrowers, underwriters, and financial institutions, has been writing about the Libor transition for a couple of years.
“As the UK FCA and U.S. regulators admonish, everyone should act now to slow USD LIBOR use for the next four weeks through the year-end Libor/SOFR [Secured Overnight Financing Rate] transition deadline,” Jacobowitz wrote
Jacobowitz also noted that slowing of Libor use was “a recommendation and not a requirement.”
However, with a nod to the classic movie, Casablanca, Jacobowitz says he is, “shocked, shocked” that Libor-linked instruments are still being recommended by underwriters and financial advisors.
“I can’t believe issuers and conduit borrowers are still entering into Libor-based instruments, especially those that terminate after USD LIBOR goes away [in June 2023],” Jacobowitz explained.
Meanwhile, with respect to both interest rate swaps and floating rate notes, Decker is seeing notable movement away from Libor. “There may be some new transactions that are still priced off of Libor, but it’s my understanding that those are becoming rarer and rarer,” Decker said.
Overall, Decker believes that underwriters, municipal advisors, and sales reps should be clear in their disclosure with customers and clients about Libor going away and about specifics of a transaction.
“In that sense, we agree with the SEC that disclosure and transparency are important,” Decker said.
