Navigating Financial Regulatory Compliance Changes: Strategies for Risk Management
Earlier this year, Axiom hosted a webinar on the future of U.S. financial regulation, discussing how new rules and proposals would impact the market and how in-house legal departments could proactively prepare. Now that we’re close to closing out 2024, many of these laws have taken effect, and the legal and financial sectors are feeling their impact. Mandy Moxley from Axiom led a rich discussion with Ashley Gillespie, General Counsel at Morgan Stanley, and Valerie Baxendale, Legal Compliance Counsel at Axiom, who shared their insights into how companies can navigate these changes. Here’s an updated look at the five key takeaways from that conversation and what’s changed since then.
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
Artificial intelligence (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. As predicted during the webinar, the U.S. Securities and Exchange Commission (SEC) has continued to push forward an aggressive rule-making agenda. By mid-2024, several landmark regulations, including updates on AI, cryptocurrency, and Environmental, Social, and Governance (ESG) disclosures, have gone into effect.
One of the most significant changes that took place was the adoption of the T+1 settlement cycle, which went live on May 22, 2024. This rule shortens the settlement cycle to one business day, greatly affecting trading operations and portfolio management. Many companies have had to rethink their tax-shielding strategies and realign their trading models to adapt to this new settlement timeline.
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
The SEC’s new disclosure requirements for ESG funds, which took effect in September 2024, now mandate that 80% of any fund labeled as ESG must align with these goals. This has already forced financial institutions to reevaluate their portfolios, and many are enhancing their transparency around green investments to meet these stringent requirements. Additionally, California passed the Climate Corporate Data Accountability Act, also in September, requiring corporations with over a billion dollars in revenue doing business in the state to report their greenhouse gas emissions. These requirements have placed an increased burden on corporations, many of which are scrambling to comply while facing reputational risks for non-compliance.
In the artificial intelligence space, the SEC expanded the definition of a dealer to include more entities, triggering compliance shifts for firms using AI-driven trading tools. By now, companies are working to understand and comply with new requirements to disclose how they use AI in their trading and advisory practices.
“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.” Ashley Gillespie agreed, noting the importance of monitoring these trends.
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.
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 compliance 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.
Now that several regulations are live, companies that have adopted proactive and well-supported compliance cultures are better positioned to respond to the changes. Firms without these cultures have faced operational challenges and, in some cases, penalties for non-compliance.
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, engagement of stakeholders, and right-sizing compliance are best practices.
RRushing the implementation of new regulations can significantly increase the risk of non-compliance and other negative consequences. Financial institutions that took steps to prepare for these regulations back in the spring are now reaping the benefits of smoother implementation processes. Companies that engaged stakeholders early, modeled compliant behavior at the executive level, and allowed time for training and education have been able to navigate these regulatory changes with fewer disruptions.
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 … 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 continuous monitoring, a strong culture of compliance set from the top, strong 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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