Regulations Roundup – September 2023

The financial market was relatively mixed in August as America’s bond yields surged and stocks and cryptocurrencies retreated. As an agency specialising in financial marketing, our team has rounded up the top regulation changes in August, and now we’re looking at what’s coming up in September 2023.

SEC new regulations on PE and hedge funds

The Securities and Exchange Commission (SEC) took a somewhat aggressive tone when implementing its regulations in the US. In August, one of its most serious tasks was its new rules affecting industries like venture capital, private equity, and hedge funds. For example, the rules will promote transparency by restricting the so-called side letters. These are situations where these companies entice large investors by offering them better terms.

The rules will also require private funds to provide their investors with quarterly financial statements detailing their expenses. Most importantly, the companies will be required to go through an annual audit.

The industry has long benefited from a light-touch regulatory environment, which has helped it to attract over $25 trillion in capital. As a result, associations representing them sued the SEC for regulatory overreach. The lawsuit said:

The rules exceed the Commission’s statutory authority, were adopted without compliance with notice-and-comment requirements, and are otherwise arbitrary, capricious, an abuse of discretion and contrary to law.

SEC suffers another loss

The SEC suffered a major legal defeat in August when a federal appeals court ruled that the agency must review Grayscale’s ability to convert GBTC into an ETF.

In the decision, the court said that the denial of the proposal was arbitrary and capricious since the SEC failed to explain the different treatment of similar products. Also, the court said that the SEC did not provide adequate information about how the application was not materially similar to futures based funds that it approved.

The lawsuit was followed closely by market participants because several large financial companies had applied for spot Bitcoin ETF with the SEC. In a statement, the SEC requested more time to review proposals by companies like Blackrock, Invesco, and WisdomTree.

SEC and influencers

The SEC, like other popular regulators, is dealing with the concept of finfluencers in the financial market as social media usage grows. In a statement in August, the SEC accused Fundrise Advisors of violating cash solicitation rules by paying 200 social media influencers and newsletter publishers to solicit clients.

In its complaint, the SEC said that the company did not let these influencers publish the required disclosures. Fundrise’s marketing brochure also failed to contain the required disclosures. As a result, Fundrise decided to settle the case by paying $250k to the regulator.

Finma is ill-equipped to police the industry

The biggest stories in finance this year was the collapse of Credit Swiss, one of the biggest banks in the world. This collapse and the eventual rescue by UBS, led to major scrutiny about Finma, the country’s financial regulator.

In August, experts warned that the regulator lacked the powers to investigate and enforce rules in the banking sector. These experts, who include academics, bankers, and former regulators, said this in a 98-page report that assessed the bank’s collapse.

For example, the regulator did not have the mandate to intervene even as the bank’s share price collapsed. The only option was for Finma to declare the bank non-viable, which would have exacerbated its collapse. The report also warned that Finma will need more power after the creation of a banking behemoth following the UBS and Credit Suisse merger.

Bank for International Settlement warns of crypto

Cryptocurrencies are going through a major winter season. Even so, a major regulator known as the Bank for International Settlement (BIS) warned that cryptocurrencies have amplified financial risks in less developed countries. It labelled the appeal of crypto as illusory. The 50-page report added:

However, crypto assets have so far not reduced but rather amplified the financial risks in less developed economies. Therefore, they should be assessed from a risk and regulatory perspective like all other assets.

Coinbase approval from National Futures Association

Coinbase, the biggest crypto exchange in the United States, inked a deal with the National Futures Association, to offer crypto futures to retail clients in the US.

This was the first time that a crypto group in the US has been classified as a futures commission merchant (FCM). In the past, Coinbase had limited futures products in its platform that were open to institutional investors. Coinbase has been experiencing some challenges recently. In June, the SEC filed a major lawsuit accusing the company of committing several crimes, including offering its staking products. Several states have also issued a cease and desist against staking.

FCA and PEP rules

One of the biggest financial crisis in the UK was the decision by NatWest’s Coutts to bar Nigel Farage from having an account. The move was criticized by people of all parties. Now, the Financial Conduct Authority is working to investigate banks for account closures. These rules were meant to prevent the UK banking industry from corrupt politicians. The FCA’s statement said:

We are reviewing how financial services firms have applied the politically exposed persons (Pep) regime and whether any changes are needed for UK Peps. We are keen to hear directly from UK Peps on their experiences, including any problems they have encountered.

FCA and UK asset managers

The FCA continued focusing on asset managers in the country. In a circular, the agency ordered asset management companies to justify the fees charged on their funds. The regulator wants to ensure that these funds are not solely focused on profitability compared to value for money. Further, the FCA recently implemented consumer duty rules that require financial services companies to demonstrate they are putting customers interest interests first.

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