德勤：2023年资本市场监管展望 2023 capital markets regulatory outlook

2023capitalmarkets

regulatoryoutlook

CENTERfor

REGULATORY

STRATEGY

AMERICAS

2023capitalmarketsregulatoryoutlook

Introduction1

Regulatorychurn3

T+1

Amendmentstothedefinitionofbroker-dealer

Bestexecution

Marketstructureproposals

Reinvigoratedenforcement7

ElectronicCommunications

RegS-PandRegS-IDactions

Digitalassets

Theregulatoryhorizon10

Electronicrecordkeeping

Branchofficeinspections

Complexproducts

Lookingforward11

Endnotes12

Contacts13

Contents

2

2023capitalmarketsregulatoryoutlook

Introduction

Thecurrentvolumeofproposedregulatorychange

comparestothatofthepost–Dodd-Frankperiod.In

2023,weexpecttheimpactstorippleacrossfirms

andmarketsintransformationalandhard-to-predict

ways.Weidentifythreethemesthatfirmsmaywantto

considerastheyassessthesweepingimpactsofthis

agendaontheirbusiness:

.Regulatorychurn:In2022,capitalmarketsregulators

developedapproachestoemergingtechnology,

outdatedrules,andprogressivetopics.Mostof

theactivitywasledbytheSecuritiesandExchange

Commission(SECorCommission),whichapproved39

proposalstoamendexistingorcreatenewregulations.

Manyoftheseproposalscreatenewreporting

requirementsforfirms;otherswillexpandthescopeof

entitiesrequiredtoregisterwiththeSEC.Additionally,

thisambitiousagendahascreatedatremendous

amountofuncertaintyandriskforcertainfirms.

Overlappingimplementationtimelinesandanticipated

legalchallengesmakeitdifficulttoeffectivelyallocate

competingresources.

.Reinvigoratedenforcement:In2022,thenumberof

Whileregulatorychangeshouldbeatop

theC-suiteandboard agendain2023,what couldbeviewedasatumultuousperiodfromaregulatoryperspective couldalsobeanopportunitytoevaluatestrategymorebroadly.

enforcementactionsbroughtagainstcapitalmarkets

firmsincreasedby9%.1Regulatorsalsoleanedheavily

onexistingrulestoenforceinareaswherenew

regulationsarepending.

.Ontheregulatoryhorizon:Despitethevolumeofnew

initiativesundertakenbyregulatorsin2022,weexpect

severalmoretopicstobeontheregulatoryhorizonin

2023,includingoverhaulsoffirms’digitalengagement

andcybersecuritypractices.

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2023capitalmarketsregulatoryoutlook

2023capitalmarketsregulatoryoutlook

2

2

2023capitalmarketsregulatoryoutlook

3

Regulatorychurn

Thelargenumberofruleproposalsin2022castsashadowofuncertaintyovertheregulatoryagendain2023(seeFigures1and2).Howmuchoftheproposedagendaultimatelywilltranslateintorulesthattheindustrymustimplement?Twobigfactorsthatwilllikelydeterminethisare(1)SECleadershipandoversightand(2)legalchallengestotheagenda.SincetheSEChasledthefinancialregulatoryagenciesinnewrulemakingactivity,theapproachofitsleadership(andspecificallythechair)isparamount.ChairGenslerhasidentifiedasweepingagendaofregulatorychangeandlikelyintendstofollowthroughonthatagenda.However,externalpressuresontheCommissionandtherealitiesofeffectuating,ratherthanproposing,changecouldforceprioritization.2

Oversightoftheagencywillbeimpactfulandlikelypoliticallymotivated.WithaRepublicanmajorityintheHouse,weexpectmorescrutinyofthechair’sagenda,particularlyfromtheHouseFinancialServicesCommittee(HFSC).Legalchallengestoforthcomingrules,whichareinevitable,especiallyforthemostcontroversialproposals,3arepotentiallystrengthenedbyrecentSupremeCourtrulings.4Nevertheless,firmsshouldplanasthoughtheproposedagendawillbeenactedbecause,evenifonlyafractionisfinalized,thechangeswillbeimpactful,andsignificant

implementationeffortswillberequired.Additionally,theuncertaintybroughtonbylegalchallengestofinalrulescouldlingerforyears—placingfirmsinanuntenablepositioniftheydonotprepareforanoutcomethatfavorstheregulators.Someproposals,suchasreducingthesettlementcyclefromT+2toT+1,arenotcontroversialattheCommissionandlikelywillpressforwardunimpeded.TheproposalswediscussindetailhereareamongthemosttransformativeintroducedbytheSECin2022.

T+1

Inthecurrentagenda,T+1isatypicalinthescaleofoperationalimplementationeffortrequiredandsimultaneousunanimoussupportfromtheCommission.5Weexpectafinalruletoadvancein2023andtheindustryhasalreadybegunpreparations.Likepreviouseffortstoreducethesettlementcycle,transitioningtoT+1willrequiresignificantoperationalchange,andbecauseoftheheavyvolumeofregulatoryactivity,theteamsthatwillberesponsibleforimplementingT+1arelikelytobespreadthinbyimplementingotherregulatorymandatesaswell.

Nevertheless,firmswillneedtopressforwardwithoperationalchanges,includingthecreationofaprojectmanagementoffice(PMO),developmentofimplementationplans,continuousoversightoftheimplementationeffort,portfoliomanager,traderandclienteducation,internalandindustrywidetesting,andestablishmentofamigrationcommandcenter.

FirmsmayalsowanttosetupoverarchingPMOteamsforthefullspectrumofregulatoryimplementationsthatwillberequiredin2023andconductassessmentstoidentifysynergies,conflicts,andresourceconstraintstomanageriskspresentedbyanarrayofoverlappingimplementationefforts.Otherstepsfirmsshouldconsidertakinginclude:

.Establishingagovernancestructure

forimplementation

.Obtainingcommitmentfrommanagementfor

resourcesdedicatedtoimplementation

.Conductinganalysestodeterminetheimpacts,gaps,andchangesrequiredforimplementation

.Developingaroadmapforimplementation,inclusiveofgapsidentifiedthroughfirms’analyses

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2023capitalmarketsregulatoryoutlook

Amendmentstothedefinitionofbroker-dealer

Two“definitional”proposalsexpandthescopeofentitiesrequiredtoregisterwiththeSEC.6Ineffect,theseproposalswouldstretchtheregulatoryperimetertonewentities.Thesecondofthetwoproposalsextendsthebroker-dealerregulatoryregimetomarketmakersnottypicallyunderitsumbrellabycreatingtwonewrulesthatdefinequalitativeandquantitativestandardsfordeterminingwhatconstitutesliquidityprovision“aspartofregularbusiness”undertheExchangeAct.7Theproposalfurtherdefines“aspartofregularbusiness”intheExchangeAct.Ineffect,theproposalwouldrequirecertainprincipaltradingfirms,privatefunds,andothermarketparticipantstoregisterasdealers.ThiswouldentailregisteringwithboththeSECandaself-regulatoryorganizationandcomplyingwithfederalsecuritieslaws,includingsignificantreportingandcapitalrequirements.

Someinitialactionsfirmspotentiallyaffectedbytheproposalcanconsidertakingincludethefollowing:

•Workwiththefirm’scounseltointerpretandunderstandtheproposal

•Conductastrategicassessmentofopportunitiesandtrade-offspresentedbyregulation

•Identifythecurrentorfutureentitythatwouldregisterandperformaproformacapitalcomputation

•Conductagapassessmentofthetechnologyandsystemsdesignandimplementationcapabilitiesrequired

•Conductagapassessmentofthecomplianceprogramagainstleadingpracticesandregulatoryexpectations

Iffinalized,firmswouldhaveoneyeartocomeintocompliancefollowingtherule’seffectivedate.Thisplacessignificanturgencyonfirmstoassesstheiralternativesanddevelopaplanbeforetheruleisfinalized.

Bestexecution

InDecember2022,theSECapprovedaproposalthatwouldcreateanSECstandardofbestexecutionforbroker-dealers(asopposedtotheexistingFinancialIndustryRegulatoryAuthority(FINRA)standard).8TheSECproposalsetssimilarstandardsasexistingFINRARule5310,includingrobustpoliciesandproceduresregardingbestexecutionandquarterlyreviewsofcustomerexecutionquality.9TheSECrulewouldestablishmoreprescriptivestandardsforbroker-dealersreceivingpaymentfororderflowandother“conflictedtransactions.”

Marketstructureproposals

AlsoinDecember2022,theSECapprovedthreesignificantproposalsrelatedtoequitymarketstructure,whichreflectskepticismaboutthepracticeofpaymentfororderflowandareintendedtoimproveretailorderexecutionquality.Collectively,thepackagecomprisesthemostsignificantproposedchangestomarketstructureinmorethanadecade.ThethreeproposalsareamendmentstoRegulationNationalMarketSystem(RegNMS),10the“OrderCompetitionRule,”11andnewdisclosuresoforderexecutioninformation.12ThemostcontroversialoftheproposalsislikelytobetheOrderCompetitionRule,whichwouldrequireallmarketparticipants,includingmarketmakers,torouteorderstoauctionshostedonnationalexchanges.Therulecouldpotentiallyupendthebusinessmodelofsomebroker-dealersandmarketmakersifenactedinitscurrentform.

Theothertwoproposals,whichwouldamendRegNMSandcreatenewdisclosurearoundorderexecutionquality,seeminglyseektoachievethesamegoalofimprovingretailorderexecutionthroughlessdrasticmeans.Oneoftheproposalsalsoallowsforasub-pennyticksize,whichpotentiallycouldreducespreads,butmaybetechnologicallycomplextoimplement,particularlygiventhespecificationoftheproposal,whichsetaminimumpricingincrementrelativetoaweighted-averagespread.FirmshaveuntiltheendofMarchtorespondtothepackageofproposalsatwhichpointSECstaffwillevaluatethecommentsreceivedbeforemakinganyrecommendationstotheCommissionforfinalrules.

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2023capitalmarketsregulatoryoutlook

Figure1.TimelineofactiveSECcapitalmarketsrules

CapitalMarketRule

ApprovalDate

EfectiveDate

CommentDeadline

ProposalDate

Reg-lexActionDate

2020

2021

2022

2023

2024

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

M1M2M3

M4M5M6

M7M8M9

M10M11M12

M1M2M3

M4M5M6

M7M8M9

M10M11M12

Rule10b5-1InsiderTrading

Sharerepurchasedisclosuremodernization

Erroneouslyawardedcompensation

Shortinterestreporting

Exchangetradedproducts

TheEnhancementandStandardizationofClimate-RelatedDisclosuresforInvestors

ExpandingClearingofGovernmentSecurities

ExchangeAct&RegATSAmendments

ProhibitionagainstundueinluenceoverSBSDCCOs

ReportinglargeSBSpositions

SBSexecution/registration®ulationofSBSF's

ReducingRiskinClearanceandSettlement(T+1)

Holdingforeigncompaniesaccountableactdisclosure

DisclosureofPaymentsbyResourceExtractionIssuers

Rule144HoldingPeriodandForm144Filings

UnclearedSBSMarginPhase6+

Rule18f-4UseofDerivativesFunds

PositionlimitsforDerivatives

RegSBSRReporting

ClearingAgencyGovernanceandConlictsofInterest

ProhibitionAgainstConlictsofInterestRelatingtoCertainSecuritizations

RegNMSUpdates

OrderCompetition

BestExecution

Rule605reporting

ProposedFinalImplementationLikelyimplementationperiod

Source:SEC,

SECUnifiedAgenda

,October2022

Figure2.RelativeimpactofSECcapitalmarketsagendaonbusinesslines

Board/corporateFinance/

governance

UnclearedSBSMarginPhase6+

regreporting

Risk

Operations

Technology

Compliance

Legal

ConsolidatedAuditTrail(CAT)

Rule18f-4UseofDerivativesFunds

RegSBSRReporting

Rule15c2-11NoActionLetter

ModernizationofBeneficialOwnershipReporting

DigitalEngagementPractices

Electronicrecordkeepingrequirements

T+1

ExchangeActandRegATSAmendments

TreasuryClearing

Crosstrading

Amendmentstothedefinitionofabroker-dealer

ShortInterestreporting

ProhibitionagainstfraudinconnectionwithSBS

Positionlimits

Security-basedSWAPmarginrules

Rule4210Coveredagencytransactions

Shortreporting

OTCOptionsTransactionsReporting

RegNotice22-16

RegNotice22-13:TradeReportingExemption

TraceIdentificationofPortfolioTrades

AmendmentstotheCodeofArbitration

RegNotice22-08

UnclearedSwaps/SBSmarginphase6

RegNMSUpdates

OrderCompetition

BestExecution

Rule605reporting

Lowestimpact

Highestimpact

Source:Deloitte,

TheActiveRegulatoryAgenda

,2022

2023capitalmarketsregulatoryoutlook

2023capitalmarketsregulatoryoutlook

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2023capitalmarketsregulatoryoutlook

Reinvigoratedenforcement

Afteryearsoflightpolicing,capitalmarketsregulatorshavedrasticallyintensifiedtheirenforcementefforts.Recordfineshavebeenimposed,rigidcompliancewithexistingstandardshasbeenrequiredinareaswherenewrulemakingisforthcoming,anddeeplystrategicactionshavebeentakeninareaswherethelawishotlycontested(e.g.,digitalassets).13Whenpairedwiththeonslaughtofnewrulemakingactivity,firms’governmentaffairsandcompliancefunctionshavenotbeenundercomparableregulatorypressureforyears.

ElectronicCommunications

InSeptember2022,theSECandCommodityFuturesTradingCommission(CFTC)leviedfinesagainst11financialinstitutionsforrecordkeeping,monitoring,andsupervisoryfailuresassociatedwithbusinesscommunicationsconductedoutsideofpermissiblechannels.Thechargesprimarilystemmedfromemployeeuseofpersonaldevicestodiscussbusinessmatters,apracticethatinmanycasesviolatedtheSEC’sandCFTC’srecordkeepingandcompliancerequirements.Oftheentitiescharged,tenwerebroker-dealeraffiliatesandonewasaninvestmentadviseraffiliate.Thefinestotaledover$1.8B,rangingfrom$16Mto$225Mperinstitution,andontopof$200MinrelatedfinesannouncedbytheregulatorsinDecember2021.14

Whilesomeoftheallegedbehaviormayhave

beenegregiousorreflectiveofacultureofgeneraldisregardfortheserecordkeepingpolicies,regulators’expectationsplacefirmsinachallengingposition.Firmshave,ineffect,beendesignatedtosupervisetheiremployees’useofpersonaldevicesinpartsothattheircommunicationsareavailabletosupportfutureregulatoryinvestigations.Asthedustsettlesfromthismostrecentroundoffines,manyfirmsarelookingtoassesstheirelectroniccommunicationsandrecordkeepingprogramsconsideringregulatoryexpectations.Aspartoftheseefforts,firmsshould:

1.Assesselectroniccommunicationspolicies,procedures,andpracticesby(a)identifyinggapsandopportunitiesforenhancement;(b)assessingthefeasibilityoffirm-issueddevices(asopposedtobringyourowndevicepolicies);(c)pollingemployeesabouttheircommunicationpracticestoestablishasenseofthefirm’sriskprofile;(d)enhancingmonitoringandsurveillancecapabilities;and(e)evaluatingtheexistinggovernancemodel,includingescalationprotocolsanddisciplinaryprocesses.

2.Conductanalysesonhistoricalelectroniccommunicationsvialookbackdatacollectionsthatcapturehistoricalmobilemessagesandrunningenhancedanalyticsonavailabledata,suchasnaturallanguageprocessing(NLP)andartificialintelligence(AI)models.Ifthesetoolsalreadyexist,determinewhethernewalertsorsurveillancepatternsareneeded.

3.Evaluateandidentifyenhancementopportunitiesinthecurrenttechnologyinfrastructureforelectroniccommunicationsrecordkeepingandmonitoring,including1)enhancedsolutionstocapturecommunicationsfrommobileapplications;and2)automatedsurveillancemodulesthatleverageAI,machinelearning,andanalyticscapabilitiestodetectissuesandinstancesofnon-compliance.

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2023capitalmarketsregulatoryoutlook

RegS-PandRegS-IDactions

AstheSECintensifiesitsfocusoncybersecurityandlikelymovestofinalizemultiplecyberproposalsin2023,RegS-PandRegS-IDremainexistingenforcementtools,whichweexpectwillbestrictlyenforcedpriortothenewrulesgoingintoeffect.15TothisendtheSECpublishedaRiskAlertonRegS-IDinDecember2022.

RegS-Prequiresbroker-dealers,investmentcompanies,andinvestmentadvisersto“adoptwrittenpoliciesandproceduresthataddressadministrative,technical,andphysicalsafeguardsfortheprotectionofcustomerrecordsandinformation.”16RegS-ID,alsoknownastheIdentityTheftRedFlagsRule,requiresfirmstoestablish“IdentityTheftPreventionPrograms,”andrecentenforcementactionsemphasizethattheseprogramsshouldbetailoredtothefirm.Inresponsetothisnewenforcementfocus(theSEConlybroughtitsfirstRegS-ID–relatedenforcementactionin2018),thereareseveralstepsthatfirmscantaketorefreshtheirIdentityTheftRedFlagprograms:

1.Assesstheexistingprogramtoidentifyanygapsoroutdatedcomponents.

2.Evaluateallsourceswhereidentitytheftescalationcouldoriginate.Broadly,theseareasinclude(1)frontofficeandcustomersupportteams,(2)third-partyvendormanagementteams,(3)cybersecurityandtechnologyteams,and(4)anti-moneylaundering(AML)fraudteams.

3.EnsurethattheprogramisintegratedwithcurrentpoliciesandproceduresfortheteamssupportingthatsupporttheIdentityTheftPreventionProgram.

4.EnsurethatproceduresfordetectingandmitigatingidentitytheftredflagsareadequatelydocumentedintheIdentityTheftPreventionProgram.

5.Identifyanddocumentescalationchannels.

6.Createanddocumentaproceduretoupdatetheprogramatleastannually.

SincetheSECisdirectingseriousattentionto

cybersecurityissuesbutneitherofitsnewproposed

cybersecurityrulesspecificallytargetbroker-dealers,

weexpecttheseprogramslikelycouldbeunderan

enforcementmicroscopefortheforeseeablefuture.

Digitalassets

Thedigitalassetsindustryexperiencedsomethingofanenforcementblitzin2022asthefederalgovernmentsoughttokeeppacewith—andcodifyitsapproachto— innovation.TheSECgenerallyhasledtheseefforts,butothermarketregulators,notablytheCFTC,haverecentlyredoubledtheirefforts.PresidentBiden’sMarch2022“ExecutiveOrderonEnsuringResponsibleDevelopmentofDigitalAssets”mobilizeda“wholeofgovernment”policyresponse.Asharpcontractioninassetprices,broughtonbyareversalininterestrates,drewdeepscrutinyfromthegovernmentasretailinvestorssufferedsteeplossesandfirmscollapsed,takinginvestorassetswiththem.Theseeventswerereflectedinthetoneofaseriesofreportsconnectedtotheexecutiveorderthatwasissuedinthefall.

Fortheirpart,marketregulatorsmadeconcertedeffortsto“usethefullextentoftheirexistingauthorities”toregulatetheassetclass,asinstructedbytheexecutiveorder.AstheHillandfederalgovernmentgrewintheirthinking,theirattentionalsoturnedtodecentralizedfinance.Lastfall,theCFTCbroughtitsfirstchargesagainstadecentralizedautonomousorganization(DAO),andtheSECheldpublichearingsrelatedtoanenforcementcasethatitinitiatedagainstaDAO

lastJanuary.17

Althoughasignificantamountofuncertaintyremains,ourDigitalAssetsPolicyPrimeroutlinestheremainingtensionspointsinthepolicyframeworkandlikelydirectionoftravelonkeyissues,includingthelegalclassificationofassetsandregulatoryframeworkforstablecoinsandexchanges.18In2023,therewillbenarrowwindowsforlegislation,butabsentthat,firmslikelywillcontinuetofaceenforcementactionfromthemarketregulatorsuntiltheyfeelthattheindustryissufficientlycomplyingwithexistingregulatorystandards.

2023capitalmarketsregulatoryoutlook

2023capitalmarketsregulatoryoutlook

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10

2023capitalmarketsregulatoryoutlook

Theregulatoryhorizon

Manymoresignificantproposalsareforthcomingfromthefinancialregulators.WhiletheSECislikelytoleadthepackintermsofbreadthandvolumeofsignificantchanges,othercapitalmarketsregulatorsareconsideringimpactfulissuesfortheindustryaswell.Thesetopicsontheregulatoryhorizonincludedigitalengagement,complexproducts,andmarketdatafees.

Electronicrecordkeeping

InOctober2022,theSECadoptedamendmentstotherecordkeepingrulesforbroker-dealers,security-basedswap(SBS)dealers,andmajorSBSparticipants.TheamendmentstoSECrule17a-4allowforan“audit-trail”recordkeepingformatasanalternativetotheexistingrequirementforelectronicrecordkeepinginawriteonce,readmany(WORM)format.19Theamendmentstorule18a-6createarequirementforSBSentitiestomaintainelectronicrecordsusingeitheranaudit-trailorWORMformat.Theamendmentsalsocreateanewrequirementunderrules17a-4and18a-6forfirmstoproduceelectronicrecordstotheSEC“inareasonablyusableformat”ifrequested.

Otheraspectsoftheproposaladapttheexistingrulestomakethemeithermoretechnologyneutralortoreflectcurrentbusinesspractices(e.g.,theemergenceofcloudstorage).Thecompliancedatefortheamendmentstorule17a-4issixmonthsaftertherule’spublicationintheFederalRegister(orapproximatelyMay2023),andfortheamendmentstorule18a-6,12monthspost-publication,orapproximatelyNovember2023.

Inresponsetotherule,firmsshouldconsider:

.Conductingagapassessmentofexistingrecordkeepingsystemsandprocessestoassesscompliancewithexistingrecordkeepingrequirementsanddeterminewhetherimprovementsorcostsavingscanberealizedbecauseoftheruleamendments.

.Updatingorcreatingpoliciesandproceduresfor

providingelectronicrecordstotheSECifrequested.

.Upgradingrecordkeepingsystemsandprocessesas

identifiedbythegapassessment.

Branchofficeinspections

TheFINRAisconsideringupdatingitsdefinitionofabranchofficeandrulesforbranchofficeinspectionstoreflecttrendsinremoteworkanddigitaltransformation.Acoreissueisthetreatmentofemployees’homesasbranchoffices.Liketheregulatoryexpectationsaroundelectroniccommunications,treatmentofemployees’homesasbranchofficeswouldextendtheregulatoryperimeterbeyondthetraditionalimageof“thefirm.”

Complexproducts

WhileFINRAroutinelyreviewsitsrulesforcomplexproducts,thecurrentreviewhasnewsignificancegiventhegrowthofretailinvestingincomplexproducts.In2022,FINRAissuedarequestforinformationonthesuitabilityofcomplexproductsforretail.Therearemanyapproachesthattheregulatorcouldtake,butlikelyanynewregulatoryrequirementswouldprescribeexpectationsforfirms’screeningandapprovalprocessesforcomplexproducttrading.Thus,firmsmaywanttothinkproactivelyabouttheirprocessesandwaysthattheycandemonstratethattheyareadequatelyscreeningcustomersbeforeallowingthemtotradecomplexproducts.

11

Lookingforward

Takeninaggregate,theintensityofproposedchangeto

thecapitalmarketsregulatoryframeworkisremarkable

bothinnumberandsignificanceofrulemaking.The

weightoftheregulatoryagendawillimpactfirmsand

potentiallyfinancialmarketsthemselvesasbedrock

practicesarereimaginedandreshapedinthecoming

yearagainstabackdropofchallengingmacroeconomic

conditions.Theriskintroducedbytherapidpaceand

heavyvolumeofchangeisnotisolatedtoindividual

firmsbutalsospreadacrosstheindustryand,therefore,

potentiallyacrossthebroadereconomy.Thisisan

importantconsiderationfortheregulatorsthemselves

in2023,astheyseektofinalizekeytenetsofthe

proposedagenda.

Theweightoftheregulatoryagendawillimpactfirmsandpotentiallyfinancialmarketsthemselvesas bedrockpracticesarereshapedinthecoming

yearagainsta backdropofchallengingmacroeconomicconditions.

Fortheirpart,firmsneedtomakeinvestmentsin

thesystemsandteamsthatsupportregulatory