Navigating Financial Regulatory Compliance Changes: Strategies for Risk Management
The Securities and Exchange Commission (SEC) and state governments are rapidly changing the financial regulatory compliance landscape to increase transparency around artificial intelligence, cryptocurrency, and environmental, social, and governance (ESG) trading to combat climate change. In-house legal counsel should take a proactive approach to financial regulation to capitalize on these trends before they go into effect.
Axiom recently held a webinar on the future of U.S. financial regulation to discuss the new rules and proposals and how they will affect the market. Axiom's own Mandy Moxley moderated the engaging discussion and was joined by:
- Ashley Gillespie, General Counsel, Morgan Stanley
- Valerie Baxendale, Legal Compliance Counsel, Axiom
What did the webinar reveal? Five key takeaways:
- Aggressive rule changes are transforming corporate trading.
- New ESG, AI, and crypto rules to increase transparency.
- Adjusting to regulatory shifts starts at the top.
- Compliance can include external and internal knowledge.
- Stay proactive, engage early, and utilize right-size compliance.
Takeaway 1: Recent regulatory changes are shaping the financial services landscape in transformative ways
AI trading tools, the increased availability of cryptocurrency, and the rise of greenwashing have drastically changed the market over the last few years, challenging traditional trading strategies and norms. The current administration has set an aggressive rule-making agenda across various agencies, particularly the SEC, which plans to pass 25 major landmark regulations by June to clarify these issues and protect traders from fraud. Some regulations and best practices are changing so fast the press can’t keep up, forcing counsel to research the requirements.
Both panelists commented on the historic nature of the administration’s rule-making agenda. “It’s transformative, unprecedented,” Ashley Gillespie said of the significance of these regulatory shifts. “I don’t think we’ve seen that sort of rule-making since maybe Dodd-Frank.
The financial services industry is facing a period of substantial change, and general counsel must be prepared to adapt quickly to stay compliant and competitive.
Takeaway 2: Emerging trends to monitor include ESG, AI, and state-level regulations
Legal professionals in the financial industry should keep a close eye on the rapidly evolving regulatory landscape, particularly in the ESG space. Both federal and state regulators and legislators are working diligently to establish guidelines and requirements in this area, which is expected to see a significant volume of regulatory activity.
“I see the most significant and sheer volume of regulatory activity coming from the ESG area,” Valerie Baxendale commented. “They’re trying to figure everything out in the ESG space on the front end. Then, financial institutions, broker-dealers, and investment advisors will be responsible for figuring out how to be legally compliant as.” Ashley Gillespie agreed, noting the importance of monitoring these trends.
Key areas of focus for lawmakers include addressing a range of issues and practices around trading and dealer disclosure. The T+1 settlement, set to take effect on May 22, 2024, shortens the settlement cycle to one business day as digital trading speeds up the transaction process, which can affect your corporation’s portfolio, trading style, and tax-shielding strategy.
The SEC is also changing disclosure requirements so that 80% of any fund with the ESG label must be aligned with these goals. Meanwhile, California is set to pass the Climate Corporate Data Accountability Act, which requires any corporation with revenues over a billion dollars doing business in the state to report greenhouse gas emissions.
State-level laws and regulations, especially those originating in California, often have a ripple effect across the country, and financial institutions operating in multiple states must be prepared to adapt to new requirements as they spread.
The recent change around crypto EFTs has increased availability and interest among investors, leading to higher prices as many corporations start to enter this market.
New disclosure requirements will force dealers to say when and how they used AI. The SEC is also expanding the definition of a dealer to include anyone “engaged in the business of buying and selling securities . . . for such person’s own account through a broker or otherwise” while excluding anyone “who buys or sells securities . . . for such person’s own account, either individually or in a fiduciary capacity, but not as a part of a regular business,” which will restructure the entire market.
Takeaway 3: Modeling the tone at the top and a compliance culture is critical for adapting to changes
One of the most crucial factors in successfully navigating the evolving regulatory landscape is fostering a strong culture of compliance within the general counsel. This culture must be modeled and reinforced by executives and senior management, who set the tone for the entire department.
“That’s why the tone at the top is not really a cliché, “said Valerie Baxendale. “It is key to how an entire organization will do legal compliance. Senior management can’t just pay lip service to legal compliance. I mean, they need to model legally compliant behavior and attitudes.”
When executives fail to take compliance seriously and merely pay lip service, they enable a culture where non-compliance can be rationalized and excused throughout the department. This puts the company at significant risk of regulatory penalties and reputational damage.
Takeaway 4: Strategies for staying informed include leveraging external and internal knowledge
Financial institutions must employ various strategies to stay informed in an ever-changing regulatory environment. One approach is leveraging external knowledge by commissioning on-demand legal talent to track and report on evolving regulations and consultants specializing in these issues.
“One of the strategies I’ve seen firms use is commissioning,” Ashley Gillespie noted from her personal experience. “Have consultancies prepare and keep track of the evolving regulations, and you would get a report every month or two with the list of regulations.”
In addition to external resources, firms should also tap into internal knowledge by holding regular meetings with various subject matter experts with experience dealing with different compliance issues, including crypto, ESG, and AI. These meetings allow cross-functional collaboration and increase regulatory awareness with a deep understanding of the firm’s business operations.
Another strategy is to have dedicated staff members monitor industry associations, exchanges, and regulatory bodies for updates and announcements. This approach can be particularly effective for smaller corporate counsels or those with a more focused business model.
Takeaway 5: Proactivity, early engagement of stakeholders, and right-sizing compliance are best practices.
Rushing the implementation of new regulations can significantly increase the risk of non-compliance and other negative consequences. Instead, the general counsel should adopt a proactive approach that involves tracking regulations early, engaging affected stakeholders from the start, and allowing ample time for implementation.
Ashley Gillespie outlined the key components of a successful compliance strategy: “Preparation, organization, communication, education, training, and stakeholder identification, the early identification of the regulatory changes themselves, executive and senior management modeling and tone at the top. Having all these factors proactively in place will lead to a smoother process and a much less chaotic reactive response.”
Another crucial aspect of effective compliance is right-sizing the approach to the firm’s particular business model and operations. A one-size-fits-all approach rarely works, and firms must tailor their compliance efforts to their specific needs and risks.
Financial institutions can turn a potential burden into a competitive advantage by adopting these best practices and proactively investing in compliance. A strong compliance culture reduces the risk of regulatory penalties, enhances the firm’s reputation, and builds trust with clients and investors.
In conclusion, navigating the rapidly evolving U.S. financial regulatory landscape requires a multi-faceted approach that includes proactive monitoring, a strong culture of compliance set from the top, early stakeholder engagement, and a right-sized approach tailored to the firm’s unique business. Hiring external legal talent with compliance experience will help the general counsel position the company for success in an increasingly complex and dynamic regulatory environment.
To learn more about the latest regulatory changes, check out Axiom’s other webinars and blog posts for further insights and best practices.
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