The Mid-Year Regulatory Update: Crisis, Volatility and More Regulation

At the half-way point in its fiscal year, the U.S. Securities and Exchange Commission (SEC) is accelerating and intensifying its aggressive examination, enforcement and rule-making initiatives for 2023. This poses significant regulatory and compliance risk, as well as costs for both persons and entities that fall within the agency crosshairs. Undaunted by the current crisis in the banking sector, the meltdown in the digital asset market, the looming threat of recession, rising interest rates, inflation concerns and market volatility, the SEC continues to flex its regulatory powers. The agency has recently enacted or proposed a host of new rules related to: trading by corporate insiders, cybersecurity, custody of client assets, private funds, marketing, privacy, supervision of outsourced vendors, climate risk, valuation and derivatives, among others. Further, the Division of Examinations (EXAMS) is well under way in the implementation of its priorities when conducting compliance reviews of a variety of registrants that are subject to the SEC’s examination powers, including registered investment advisers, broker-dealers, exchanges and municipal advisers.

Kroll’s multi-disciplinary team of subject-matter experts have formulated the following eight compliance enhancements and related actionable strategies that we recommend to effectively address potential exposure to material examination deficiencies or public enforcement actions:

• Off-Channel Communications
• Alternative Data
• Marketing Rule
• Fund Valuation and Derivatives
• Environmental Social and Governance (ESG) Investing
• Regulation Best Interest, Fiduciary Duty and Form CRS
• Information Security and Operational Resiliency
• Crypto-Assets and Emerging Financial Technologies

The SEC and other U.S. regulators expect registrants to have a robust compliance culture and to tailor compliance systems, processes and procedures in a manner that is risk-based and relevant to the registrant’s business. Our readers are encouraged to confer with their experts regarding local-area priorities, emerging risks, enforcement activity and agency risk alerts that may cause registrants to adjust their risk identification and compliance mitigation strategies.

The 8 Rules

Conclusion

While many industry pundits predicted an increase in regulatory activity under the current administration, the SEC’s rulemaking, enforcement and examination activities have far outpaced even the most optimistic projections. The SEC, using all available tools in its regulatory quiver, has been public about its expectations, levied hefty monetary penalties, imposed monitors, extracted admissions and held individuals accountable for violations. In addition, the SEC has signaled that it expects firms that become aware of violations to self-report  misconduct to examiners during the course of examinations without being prompted to do so—clearly exposing another potential issue for registrants to navigate. 

Kroll’s experts have highlighted and provide practical guidance on these eight compliance risk areas and steps to mitigate such risks. However, these risk areas are not exclusive and registrants are urged not to ignore the building blocks of a well-designed compliance program, including a knowledgeable and empowered CCO; effective supervision and governance; robust risk identification; a tailored set of compliance policies and procedures that is designed and implemented to detect and prevent violations of applicable laws; a compliance culture and value system that is baked into the firm’s DNA; and effective testing, training and documentation—all wrapped in a healthy dose of adherence to fiduciary duty (or best interest, as applicable) and disclosure and mitigation of conflicts. 

For firms considering adding external resources to their exam preparation arsenal, Kroll is here to help, offering subject-matter expertise and industry insights into these and many other compliance and operational matters.