A Drop of Clarity in the Regulatory Sea of Change

Author

Andrew Poole

Publish Date

Type

Article

Topics

  • Compliance
  • ESG
  • SEC Marketing Rule

A focus on sanctions, refreshing established practices, marketing & financial promotions, and ESG

2022 was never expected to be a straightforward year, with the pace of tectonic regulatory plates shifting again within a rapidly evolving operating environment. As both regulators and firms emerge from the Covid-19 pandemic, which has set the agenda for the past two years, there is a lot of catching up to do with a new list of priorities. 

The conflict in Ukraine and subsequent expansion of sanctions requires firms to review not only their investments but also their overall financial crime systems and controls. Ensuring the various lists of sanctions are screened against can be no small task so we recommend that firms liaise with third-party administrators and vendors to ensure the appropriate steps have been taken. The ever-looming risk of cyber-attacks also hangs over the financial industry and the FCA published a Dear CEO letter warning firms of the threat of Russian cyber-attacks.

Against this volatile backdrop, we continue to see international regulators push forward with their agendas. Though regional approaches may be somewhat different, clear global trends for regulatory change are evident, with a common focus on  refreshing established practices, marketing, and, of course, ESG (environmental, social, and governance). 

In the UK, the FCA continues to move ahead with its adjustment of European Union (EU) regulations post-Brexit, with the aim of ensuring the on-shored regulatory requirements are proportional to the perceived risks. The EU is dealing with its own regulatory agenda with the reworking of AIFMD moving through the European Parliament. 

Eyebrows have been raised on the potential increase in political influence with the inclusion of the EU High-Risk third Country list, rather than continuing with the Financial Action Task Force (FATF) list. The Cayman Islands currently resides on the EU high-risk list and raises questions of accessing funds domiciled in the Caymans. On the other side of the pond we have seen the SEC proposing sweeping changes to the private funds model detailing enhanced reporting requirements and prohibiting the charging of various different fees often associated with private markets investments (such as broken deal costs). For a more detailed description of these proposals, please see our insight here

New rules for marketing of funds have been introduced in most regions. In November of 2021 the Securities Exchange Commission (SEC) introduced new marketing rules requiring fund sponsors to make changes to hypothetical performance and, in certain cases, track-records before November of 2022. The European Securities and Markets Authority (ESMA) Guidelines on marketing communications are similar to the SEC Rules and require what could be considered a more “retail” style of communication around performance information even when engaging with professional or institutional investors. This is in addition to the EU Cross-Border Distribution of Funds Directive, which introduced a formal definition of pre-marketing while seemingly reducing the reliance on reverse solicitation when conducting capital raises across Europe. With each EU member state implementing this directive in their own way, including the expansion of requirements to non-European managers and funds, the marketing landscape may prove to be a little bumpy.

What’s clear, however, is that 2022 is the year of ESG. This has long been a staple of marketing documents, though with a fair amount flexibility in the definition. Now regulators have been busy working to establish the much needed consistency and transparency around ESG claims. The EU is considered furthest ahead in the ESG regulatory race, introducing phase one of the Sustainable Finance Disclosure Regulation (SFDR) in March 2021. Requiring certain disclosures, which in the past were far more voluntary and generic, SFDR may have caught some European firms off-guard to the level of information needed when deciding if funds would be classified as article 6, 8 or 9, indicating essentially the level of sustainability criteria involved in the investment decision process. Guidance from the regulators around the data that is required to compete the requisite disclosures has been perhaps less than illuminating but as we approach the January 2023 deadline for the implementation of stage 2 clarity should, hopefully, be on its way.

Following closely on the heels of the EU, the UK introduced the Task Force on Climate Disclosures (TCFD) with those rules coming into force in April of this year. Perhaps learning from some of the issues that firms have encountered with SFDR (phase 2 having been postponed twice already) and in somewhat typical UK regulatory fashion, TCFD is being rolled out in stages with the largest UK-registered companies and financial institutions being required to disclose climate-related financial information on a mandatory basis. Expansion of the disclosure requirements to other UK-authorised asset managers is expected in 2023.

So tentatively emerging into the post-pandemic world, the global financial industry has a myriad of regulatory hurdles to navigate which, though seemingly similar on the surface, may actually pose more issues that initially anticipated. Though refinement to certain EU/UK directives are welcomed (goodbye to MiFID RTS 27 and 28) and clarity around ESG needed, the governance, risk and compliance landscape may still have a few hidden surprises in store. Ensuring you have the right guide may just be key.

Want to hear more?

Andrew Poole is speaking on this topic at IMpower Fund Forum in Monaco, 10-13 May.  If you are attending, be sure to join Andrew's session and stop by our booth. 

Questions?

Our specialists are on hand to help you to navigate the these challenges while considering the complexity of your firm’s unique compliance, managed services, and ESG requirements.

In addition, our ESG advisory team are on hand to help you gain clarity on your ESG requirements and build a strong ESG program that meets incoming regulatory needs. This practice helps firms of all sizes develop and monitor ESG programs to mitigate risk, make informed choices, grow profitably and sustainably, and combat greenwashing in the process.