The CUBE RegNews team is taking a break between 25th and 30th September. Your next RegNews briefing will be published on 2nd October.
SEC finalises “names rule” guidance
The Securities and Exchange Commission (SEC) has published final guidance on its new rule which aims to crack down on “greenwashing” and similar deceptive or misleading marketing practices by investment funds.
The final guidance states that 80% of a fund’s portfolio should match the asset advertised by its name and that the terms used to name the fund should be the “plain English meaning or established industry use”. Additional reporting and recordkeeping requirements for funds regarding compliance with the names-related regulatory requirements are also covered by the final guidance.
The move follows other global regulators, notably ASIC in Australia, in enforcing against greenwashing activity by firms keen to capitalise on the interest in environmental, social and governance issues.
NCU adopts final rule on financial innovation
The National Credit Union has approved a new rule which provides flexibility for federally insured credit unions to take advantage of advanced technologies and opportunities offered by the financial technology sector.
The new rule:
- formalises existing supervisory guidance on third-party due diligence, indirect lending, and loan participations.
- Shifts the regulatory framework from a prescriptive structure to a principles-based system, granting greater flexibility but emphasising increased responsibility.
- relocates and provides clarity on the NCUA’s provisions regarding indirect lending and indirect leasing.
- Provides credit unions more flexibility to participate in loans acquired through indirect lending arrangements, leveraging fintech opportunities and advanced technologies.
- Removes certain restrictions and qualifying requirements pertaining to eligible obligations, offering credit unions increased flexibility to purchase eligible obligations of their members.
The new rule comes into effect 30 days after its publication in the Federal Register.
SFC adopts changes to takeovers and share buy-back codes
On 19 May 2023, the Securities and Futures Commission (SFC) issued a consultation paper inviting market participants and interested parties to submit comments on proposed amendments to the Codes on Takeovers and Mergers and Share Buy-backs. The consultation has now ended and the SFC has confirmed a number of changes including adoption of all the proposals outlined in the consultations. Changes include revising the definitions of important terms, streamlining processes to enhance efficiency, and introducing green initiatives to reduce the carbon footprint of future documents pertaining to the Codes.
BaFIN president on innovation challenges
In a speech at the Handelsblatt Banking Summit, Mark Branson, President of the Federal Financial Supervisory Authority ( BaFin ) covered the challenges to regulators of innovation in financial services. Branson drew out the following key points:
- Innovation is considered essential for success in the financial sector, but it must ultimately benefit customers.
- The financial industry emphasises strict adherence to rules to safeguard customer interests and maintain financial system integrity.
- Regulators need to be prepared for emerging technologies like generative artificial intelligence (AI) and must ensure they align with consumer interests and transparency.
- Innovations should make financial products or services cheaper, faster, safer, or more user-friendly, with customer benefits as the primary focus.
- Technology-driven risks should not unduly expose customers, and robust regulatory standards should prioritise customer protection.
- The market is expected to consolidate as fintechs mature, and a focus on plausible business models and proper market exits is necessary for sustainability.
- Thorough regulation is vital in crypto asset markets to instill trust in customers and support market stability.
- AI, including generative models, can optimise financial processes, but responsible and transparent use is crucial to prevent discrimination and uphold collective principles.
- The rapid growth of digital processes increases dependency on technology, necessitating a proactive approach to mitigate IT and cyber risks for operational resilience.
- EU regulations, like the Digital Operational Resilience Act (DORA), aim to enhance the resilience of the financial industry against IT-related risks and promote stability and must be supported.
Branson concluded: “We are open to innovations as long as they serve consumers. But that also means that we closely monitor technologies.”
CFTC commissioner calls for new rules to close disintermediation regulatory gap
In a comprehensive speech, CFTC Commissioner Commissioner Kristin N Johnson discussed the twin issues of disintermediation and decentralisation within financial services markets and why regulatory intervention might be needed.
The speech covered the following topics:
- Resilience amidst challenges: The financial markets’ ability to maintain resilience during challenging times, including the global financial crisis and the COVID-19 pandemic, underscores the effectiveness of reforms implemented after the crisis. These reforms fortified the financial system, enhancing collateral and credit risk management. Johnson commended the markets for successfully navigating liquidity stresses during these tumultuous periods.
- New market structures – disintermediation and decentralisation: The speech highlighted the growing impact of disintermediation and decentralisation, leading to the rise of direct-to-customer services. Disintermediation involves removing intermediaries from transactions, providing customers direct access to financial services. On the other hand, decentralisation refers to the distribution of control and decision-making across a network. These shifts in market structure, especially within emerging technologies and cryptocurrencies, are transforming how financial services are accessed and utilised.
- Call for stronger regulation: Recent crises and the subsequent call for regulatory action emphasise the critical need for stronger regulation in emerging market spaces. Johnson advocates for regulations that enhance customer protection, ensure market integrity, and mitigate risks. This includes measures to protect customer funds, cybersecurity protocols, risk management strategies, and conflicts of interest policies. The call for consistent regulations reflects the intent to provide a level regulatory playing field for all market participants.
- Same activity, same risks, same rules: The principle of “same activity, same risks, same rules” underscores the importance of a uniform regulatory approach. It aims to prevent regulatory arbitrage and ensure a fair and equitable market environment. By advocating for this principle, Johnson aims to maintain a balance between fostering innovation and standardising regulations to safeguard customers and maintain market stability.
- Balancing benefits and risks of disintermediation: While acknowledging the potential benefits of disintermediation, including efficiency gains and increased transparency, Johnson emphasised the importance of balancing these advantages with potential risks. The risks include customer protection concerns, market integrity issues, and the rise of fraudulent activities. Striking a balance between enabling innovation and mitigating risks is crucial for a sustainable and robust financial ecosystem.
- Addressing regulatory gaps: The need to address regulatory gaps arising from novel market structures is a key takeaway. The call for specific rulemakings to protect customer property and establish due diligence requirements for novel market structures demonstrates a proactive approach to regulatory adaptation. This approach aims to ensure that evolving market dynamics do not create vulnerabilities or compromises in customer protection and market stability.
A selected summary of key developments for regulated financial institutions
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