On 7 November 2023, the FRC announced a significant and wide-ranging policy update which included a material change of direction in relation to how it will approach its work in the future and a significant recalibration of how it will take forward its consultation on proposed changes to the UK Corporate Governance Code. That consultation, which ran from 24 May 2023 to 13 September 2023, sought to implement certain proposals in the UK government’s paper, “Restoring trust in audit and corporate governance”. The vast majority of those proposals will no longer be taken forward.
The priorities highlight emerging and core risk areas for investment advisers, broker-dealers, and other entities, including cybersecurity and crypto assets.
On October 16, 2023, the Securities and Exchange Commission’s (SEC) Division of Examinations (the Division) published its annual examination priorities for 2024 (2024 Priorities), which focus on “certain practices, products, and services that [the Division] believes present potentially heightened risks to investors or the integrity of the U.S. capital markets.” The Division will prioritize areas that pose emerging risks to investors or the markets, as well as examinations of core and perennial risk areas. The 2024 Priorities include certain of these focus areas, but are not an exhaustive list.
The 2024 Priorities are primarily organized by entity, with just four thematic topics broken out separately as applicable to a wide range of market participants: (1) information security and operational resiliency; (2) crypto assets and emerging financial technology; (3) regulation systems compliance and integrity; and (4) anti-money laundering. Notably, ESG was not specifically identified as a priority in adviser reviews for the first time in years.
The Division will continue to prioritize examinations of advisers and investment companies that have never been examined, including new registrants, as well as those that have not been examined for a number of years.
On 31 October 2023, the FCA published Market Watch 75 reminding firms of the importance of robust market soundings procedures. In particular, the publication sets out the FCA’s recent observations around the practices of market soundings recipients (MSRs) and their conduct in the period between being asked to consent to being sounded by disclosing market participants (DMPs), and the sounding itself taking place.
Market soundings can involve the communication of confidential and/or inside information under UK MAR and act as a safe harbour to an unlawful disclosure offence on the basis that a compliant market sounding is performed in the normal exercise of a DMP’s employment, profession, or duties. The market soundings process includes standardised arrangements and information requirements to ensure that no potentially sensitive information is unnecessarily disclosed.
As financial services firms digest FS2/23, the joint Feedback Statement on Artificial Intelligence and Machine Learning issued by the FCA, Bank of England, and PRA (the regulators), and the UK government hosts the AI Safety Summit, we take stock of the government and the regulators’ thinking on AI to date, discuss what compliance considerations firms should be taking into account now, and look at what is coming next.
The FCA recently highlighted that we are reaching a tipping point whereby the UK government and sectoral regulators need to decide how to regulate and oversee the use of AI. Financial services firms will need to track developments closely to understand the impact they may have. However, the regulators have already set out how numerous areas of existing regulation are relevant to firms’ use of AI, so firms also need to ensure that any current use of AI is compliant with the existing regulatory framework.
The amendments aim to modernize the Names Rule and promote investor protection objectives by ensuring that a fund’s portfolio of holdings aligns with its name.
The US Securities and Exchange Commission has adopted amendments to Rule 35d-1 under the Investment Company Act governing naming conventions for registered funds (the Names Rule). The Names Rule prohibits registered funds from using “materially deceptive or misleading” names. Specifically, the Names Rule requires a registered investment company or business development company with a name that suggests it focuses on a particular type of investment or investments in a particular industry, country, or geographic region, or that it suggests certain tax treatment, to invest at least 80% of its assets consistent with its name. The expanded requirements include registered fund names that indicate the registered fund’s investment decisions incorporate one or more ESG factors.
This Client Alert discusses the amendments adopted in the final rule and key differences from the original proposal. It also explores implications for the use of ESG-related terminology in US fund names, and compares the final rule with EU and UK approaches.
On 17 October 2023, the European Commission published a legislative proposal that would significantly alter the benchmarks in scope of the EU Benchmarks Regulation (BMR). The proposal aims to address long-standing criticisms of the BMR’s wide-reaching scope and practical impact, and would enable EU regulators to focus only on the most economically and socially important benchmarks.
On 11 October 2023, the Securities and Futures Commission (SFC) issued a consultation paper (Consultation Paper) proposing new “Guidelines for Market Soundings” (Guidelines) for Hong Kong intermediaries conducting market soundings for securities and capital market transactions (such as private placements and block trades). Market participants will welcome this development, as the absence of specific guidance on market soundings has caused some inconsistencies in market practice, as the SFC noted following its thematic review of market soundings in 2022.
SFC-licensed intermediaries should review the Guidelines and consider whether and to what extent their existing market sounding procedures should be adjusted to comply with the Guidelines.
The regulations, which formed part of the wider proposals to reform the UK audit and corporate governance regulatory landscape, were laid in Parliament on 19 July 2023. They would have introduced the following additional reporting requirements for UK companies with at least 750 employees and an annual turnover of £750 million or more:
an annual resilience statement, setting out how a company is managing risk and building or maintaining resilience over the short, medium, and long term;
a triennial Audit and Assurance Policy Statement, explaining how the company proposes to assure non-financial reporting over the following three years as well as providing an annual update on the implementation of the policy;
an annual statement about distributable profits and the company’s policy on distributions; and
an annual statement on steps taken to prevent and detect material fraud.
In its press release, the UK government announced that the regulations would be withdrawn after consultation with companies raised serious concerns about the negative impact of additional reporting requirements on both existing and potential users of the UK capital markets. Instead, the Business Secretary will provide options to reform the wider framework to reduce the burden of red tape on businesses. Latham & Watkins will continue to monitor developments in this area.
On 25 September 2023, the FCA and the PRA published separate but related consultation papers on D&I in financial services (FCA CP23/20 and PRA CP18/23). The regulators published a joint Discussion Paper in July 2021 on how they might accelerate the pace of meaningful change in relation to D&I and misconduct in financial services, by establishing minimum standards and providing firms with a better understanding of regulatory expectations (see Latham’s related blog post).
While some of the regulators’ proposed measures overlap, others are separate, and so dual-regulated firms will need to read both papers carefully. Equally, some of the measures would apply to all firms, but the more granular requirements would apply only to larger firms. Firms will therefore need to ensure they understand which requirements would be relevant to them.
On 28 September 2023, HM Treasury published further papers in relation to the planned reform of the UK bank ring-fencing regime, which was announced as part of the Edinburgh Reforms (see this Latham article). The ring-fencing regime requires banks over a certain size threshold to separate out their retail deposit-taking operations into a ring-fenced entity.
HM Treasury has published a consultation on short-term reforms to the regime, aiming to implement (and, in some cases, go beyond) recommendations made in 2022 by the independent review of ring-fencing. The proposed reforms include raising the ring-fencing threshold from £25 billion to £35 billion of core deposits, and expanding the activities that a ring-fenced bank may carry on. HM Treasury has also published a response to its Call for Evidence on aligning the ring-fencing and resolution regimes in the longer term.
