Transparency and Reporting: 2023 Regulatory Challenges

Financial service companies should expect continued expansion of reporting and disclosures – not only to regulators but to investors, clients/customers, and the market at large. The focus will be on the effectiveness of risk management processes (including data and measurement controls) in order to ensure transparency and consistency of the data within and across various means of corporate reporting and communications (e.g., financial reporting, voluntary reporting, public statements) as well as reporting timeliness and quality, issues escalation, and remediation actions.

Areas to watch for new and evolving regulations that will expand reporting and disclosure requirements include:

• SEC
  • Climate Disclosures: climate-related information on business strategy, outlook, financial statements, governance, and risk management. (Final rule forthcoming.)
  • Cybersecurity Incident Disclosures: detailed information about material cybersecurity incidents such as date that the incident was discovered, whether it is ongoing, any data stolen, altered, or accessed, and the effects of the incident on operations. (Final rule forthcoming.)
  • Human Capital disclosures: workforce diversity, turnover, skills and development training, health and safety, and compensation. (Expected proposed enhancements to current disclosures.)
  • Form PF: enhanced transparency on “qualifying hedge funds,” investment strategies, counterparty exposures, private funds, and complex structures. (Final rules forthcoming.)
  • Form ADV: disclosure of cybersecurity risks and incidents to current and prospective clients
  • Form CRS: reporting of company services, fees, conflicts of interest, disciplinary history, and other information. (Examination priority.)
  • Names Rule: alignment between a fund name and the fund’s investments and risks, disclosure of the definition of the terms used in funds’ name and criteria used to select the investments that the term describes.  (Final rule forthcoming.)
  • ESG Investment Practices Disclosures: Information on how ESG factors are incorporated into investment strategies (processes, practices, and services.) (Final rule forthcoming.)

• CFTC
  • Trade Reporting: two-step implementation of rewrites, including technical message specifications (CDEs, UTIs, UPIs, validations, actions, collateral) plus updated reconciliation requirements, rules on processing corrections, upgraded historical live records. (Final rule compliance beginning December 2022.)
  • Climate-related financial risk reporting and disclosures: data collection and reporting of climate-related risks aligned to listed derivatives products, reported transactions, and/or open positions; TCFD-like disclosures. (Potential guidance, policies, and/or regulations based on RFI.)

• FINRA TRACE Reporting: append qualifying transaction reports with a portfolio trade modifier. (Final rule compliance beginning May 2023.)

• CFPB: 1071 small business: Data collection on small business lending across 21 data points such as applicants’ demographics, credit requested, amount approved or denied, and pricing information. (Final rule forthcoming.)

Market structure

Regulators are heightening their focus on market structure, encompassing the role of fintechs (non-banks), M&A transactions, fair competition, and consumer/investor protections.

Anticipated changes to the consumer and investor markets include:

• Shorter settlements, such as T+1 standard settlement cycle for broker-dealer transactions, and real time (T+0) payments transactions.

• Rule changes to improve “fairness/competition for retail investors,” in areas such as National Best Bid and Offer (NBBO) lot sizes, order execution quality, best execution, payment for order flow.

• Short selling disclosures and data collection.

• Increased standards associated with market impact-related trading controls.

• M&A policies and reviews of changes to market composition, considering competitive impacts, potential consolidation, new market participants (e.g., bank, nonbank), fair business practices.

• Recognition of “customer voice,” through consideration of shareholder proposals, proxy voting disclosure, and consumer control over financial data (future rulemaking).

• Increased regulatory oversight and scrutiny of certain products and services, including electronic funds transfers (e.g., P2P payments), BNPL credits, and AI applications (e.g., AVM models, DEP tools).

• FS companies seeking growth via on-premises tech builds and acquisitions of fintechs.

Protections and controls

Consumer and investor protection efforts will remain a high focus for regulatory agencies.  Clarity and consistency in all aspects of the customer journey will be key – with a focus on the data analytics and controls environment.

Examples of key regulatory areas of focus will include:

• Demonstrable clarity, consistency, and transparency in communications (e.g., marketing and advertisements must be accurate and consistent with product features; disclosures on the collection use of customer data must be clear and transparent).

• Established controls that surveil and analyze employee to consumer communications (e.g., complaints, claim disputes, mobile applications, and social media) to mitigate potential risks of appropriate data usage and “consumer harm”.

• Timely management of consumer complaints and responses that are accurate, substantive, complete, and consistent.

• Accuracy in furnished and reported data (e.g., consumer reporting).