Overview

• Firms should ensure they are meeting their financial sanctions / Anti-Money Laundering (AML) obligations in the light of the ongoing conflict in the Ukraine
• The UK’s Financial Conduct Authority (FCA) has a full agenda, which includes regulatory reform post-Brexit, ‘green’ finance, financial promotions, market abuse, and transaction reporting.
• The US SEC is developing new rules around environmental, social, and governance (ESG), cyber risk management, and crypto assets.

Ukraine Conflict

The past two years have been tumultuous for financial firms and their compliance teams; and the conflict in Ukraine has meant that compliance managers have had a busy start to 2022. Recognising that this is a rapidly evolving situation, we recommend that firms:

• Review their financial crime systems and controls, particularly in relation to financial sanctions. This should include the review of clients and investors against those ever-changing, ever-growing lists of sanctioned persons and institutions.
• Liaise with third party administrators and other vendors, to seek confirmation that they too have taken appropriate steps to implement their sanctions obligations.
• To the extent that assets within those strategies include Russian company-issued equity or debt, review those investments in the light of the sanction measures. Take a forward-looking approach to any potentially new prohibitions that may be imposed.
• Those in the private markets space should assess the exposure of their portfolio companies to Russia and Russian-recognised territories and the Ukraine, taking particular care with supply chains.
• Consider the firm’s cybersecurity in the light of these events. The FCA published a Dear CEO letter to banks only recently warning them of the threat of Russian cyberattacks. These warnings should be heeded by all firm types. Business continuity and operational resilience, as well as training for staff should be re-evaluated in the coming weeks.

Meanwhile, regulators in the UK and the US are pressing ahead with their respective agendas in 2022.

The US SEC’s focus for 2022

In the US, the Securities and Exchange Commission (SEC) has one of the fullest agendas that it has ever had. Its priorities include:

• ESG – The SEC published an ESG exam priority document on 30 March 2022, and stated that ESG will remain an examination priority in 2022, with the regulator getting down into the weeds of firms’ ESG programmes. Firms can expect to see, for the first time, ESG and climate risk related enforcement cases in 2022. New rule proposals are also expected soon for disclosure of ESG information and climate risks in public company filings and public statements. Asset management firms should also expect disclosure rules designed for their industry from the SEC in 2022.
• Private funds – The SEC has also come out with a new private funds proposed rule, which is a very significant sea change for what the regulator expects from that industry.  For insight into the regulator’s thinking behind these changes, firms should look at the two risk alerts published in the summer of 2021 and in January 2022. The proposals would require quarterly statement reporting around fees, expenses, and performance. They also prohibit certain activities, to eliminate certain conflicts of interest the regulator has been concerned about.
• SEC’s new marketing rule – The US SEC’s new Marketing Rule (Rule) is the long-awaited modernisation of the rules governing the advertising and cash solicitation practices of SEC-registered investment advisors. The Rule was approved in December 2020 and came into effect in May 2021.

The final compliance date is the 4 November 2022. Given the changes and potential work that many firms will need to do to comply with these new rules, it is important that registered investment advisors – wherever they are located in the world - are actively taking the relevant steps now to understand the new rule and how it will impact their current marketing materials. Implementation will require considerable planning and work by registered investment advisers. Steps firms need to take include:

• Review the firm’s policies and procedures against the new SEC requirements;
• Conduct a gap analysis and refresh those policies and procedures to bring them up-to-date;
• Evaluate all of the firm’s marketing materials, as these need to be compliant by the 4 November deadline;
• Provide training on the new Rule to all staff; and
• Update the firm’s books and records retention to include the new books and records requirements. Firms will also need to prepare to provide further Form ADV disclosures to comply with the new Rule. 

UK FCA priorities

In the UK, the Financial Conduct Authority’s (FCA’s) key themes are:

• UK Future Regulatory Review and international competitiveness – the regulatory review was initiated back in 2019 as a conscious attempt to reform the architecture of UK regulation in the aftermath of Brexit. The project has progressed to a recent consultation about the respective roles of the government, parliament, and the regulators. The Chancellor recently confirmed that a package of measures will be included in the Queen’s speech later in 2022. Over the medium term, potential outcomes of this new structure could include a much-rationalised FCA handbook. A second review, focusing on the UK funds industry, is promising measures that will make the UK a more competitive jurisdiction for fund structures and administrators. The third review, focusing on the wholesale markets, will result in a set of proposals put out to consultation in H2 2022.
• UK MiFID and AIFMD reforms – so far, the FCA has made a series of ‘quick fix’ changes to the way Markets in Financial Instruments Directive (MiFID II) is implemented in the UK, which are similar, but not identical, to changes that the European Union (EU) has recently made. Firms need to be quite agile to ensure they meet the MiFID II obligations in both regimes. UK firms are likely to face a similar situation with the EU’s coming Alternative Investment Fund Managers Directive (AIFMD II) reforms.
• New financial promotions regime – although the primary focus of the UK Treasury and FCA proposals is on protecting retail investors, there are elements that will have an impact on wholesale firms. For example, there is a proposal for a gateway for regulated firms wanting to approve financial marketing materials from non- regulated firms. There has also recently been a consultation on a review of the rules for the promotion of high-risk investments, including crypto assets. This will include a new category of restricted mass market investments, that will be subject to enhanced risk warnings and a prohibition on financial inducements.
• Compliance programme considerations – market abuse remains a high priority for the FCA, just as it has been for some time now. The FCA has warned about how market abuse risks have evolved as a result of the conflict in Ukraine. Transaction reporting is likely to remain another big priority for the FCA over the coming year, as it continues to be underwhelmed by the quality and timeliness of the data being submitted by financial firms. Work by ACA has shown that 97% of transaction reporting and European Markets Infrastructure Regime (EMIR) reporting by firms has errors. Firms may want to undertake an operational review of the processes used to meet these regulatory obligations. Lastly, firms – including private market firms – are engaging with the new climate-related disclosure obligations and will be facing many more over the coming 18 months as the FCA fleshes out its ESG Sourcebook.

Although the past two years have been disruptive for governance, risk, and compliance (GRC) teams because of the COVID-19 pandemic, the next twelve months are set to be no less challenging albeit in new ways. Preparing for the challenges of tomorrow becomes no less intense as we watch the human cost, horrors and uncertainty caused by conflict in Europe, seek to manage growing inflationary pressures and the navigate fluctuations of the post pandemic recovery. GRC professionals are having to manage these external pressures in the context of a hyper competitive job market, a growing regulatory and ESG agenda both sides of the Atlantic, and the expectations of getting more from less.

It’s clear that firms can no longer manage the GRC burden on a project-to-project basis, throwing bodies and spreadsheets at a deadline and then moving on. Rather, GRC teams need to think about these changes strategically, and encourage their organisations to do so as well. By taking a more holistic view of the demands that they are being placed under, and employing technology, not only can costs be reduced but the resultant enhanced efficiency provides opportunity to allow the expertise of real people to focus on the high value matters, staff development, retention, and risk mitigation.