We’ve all heard the major economic news throughout 2022. As we head into 2023, a significant theme is uncertainty, with key issues being stability of global markets, inflationary challenges, recession concerns and ever-evolving regulatory requirements.
In this article, Eric Johnson, DFIN’s president of Global Investment Companies, outlines three key areas of focus for the Fintech industry.
One, Serving Investor Needs and Expectations
This has been an ongoing priority for the industry at large and perhaps never as relevant as now. As ICI CEO Eric Pan noted during the opening remarks of this year’s ICI Tech Summit, “through Fintech we can bring in a new wave of investors,” adding that “we need to work as an industry to make fund investing more attractive.”
As investors at all experience levels look at their portfolio performance, they are seeking information that is understandable and meaningful. The recently announced Tailored Shareholder Reports ruling was developed in response to this need, designed to deliver concise summary reports into the hands of investors.
We’ve seen increasing interest in ESG over the last few years as investors have demanded more accountability in their investments. However, concern is growing among policymakers over fund greenwashing. In addition, ESG funds are more heavily regulated, because they need to meet higher enforcement standards. We’re currently seeing some funds pull back or reevaluate their ESG positioning. Funds may see this more of a balancing act right now as the degree of commitment to ESG, fund performance and regulatory requirements are all evaluated.
Crypto has been the hot commodity over the last few years. As crypto markets have fallen by a significant percent this year — punctuated by the latest FTX situation — questions are arising on how sustainable crypto will be in the long term. Investors are watching to see where it is going and will need more guidance before investing in those markets. We can expect to see more oversight on the regulatory front in the future.
Lastly, there is the overall market performance. Much more attention is put on fund performance when there is market instability. We believe we’ll see more cost pressure on the funds industry if the financial downturn continues, resulting in investors weighing investment options and possibly pulling money out of the market. This accelerated outflow can present challenges for firms in managing investor transactions and communications.
Two, Meeting Evolving Regulatory Requirements
Looking ahead to 2023, we’ll continue to see tighter regulatory activity, specifically around data, recordkeeping and security.
Structured Data Filings
We can expect more structured data filings like the CEF iXBRL ruling. Having an iXBRL component (in place of HTML) enables the SEC to quickly mine the data to make market predictions and ensure compliance. Many recent rulings and proposals, including Tailored Shareholder Reports, have a structured data requirement.
After an investigation into widespread record-keeping failures — including using messaging apps with end-to-end encryptions — the SEC recently announced charges against 15 major broker-dealers, resulting in $1.1 billion in fines. To hold brokers to a higher standard, the SEC has adopted amendments to modernize electronic record-keeping requirements and maintain digital audit trails.
As the crypto market has fallen over the past year, there has been a call for greater regulatory oversight, especially in the wake of recent FTX happenings. The SEC has established a special unit for monitoring crypto. There are also questions as to which regulatory body should own the crypto segment. The Federal Reserve, the SEC and Commodities Futures Trading Commission (CFTC) are all showing interest in taking the reins.
Private Equity and Hedge Funds
There will be tighter regulations around private funds, which have grown about 50% in the last decade. These funds require a higher risk tolerance, are generally less regulated, and typically are used by more seasoned investors. More to come on whether the heavier regulation will affect the growth of this sector.
Of additional note on the regulatory front: The SEC recently introduced their five-year strategic plan, which provides valuable insight into upcoming initiatives and trends.
A common theme of late has been giving investors the information they need, in the format they desire. Over the last few years, the 498A and the 30e-3 rulings were developed to address those needs. The recent SEC Tailored Shareholder Reports ruling will ultimately transform the way mutual funds and exchange-traded funds provide disclosure documents to investors. Read DFIN’s article on key takeaways from the ruling here.
Looking ahead, we see this commitment continuing, as the SEC seeks to modernize the design, delivery and content of investor communications. The use of technologies such as personalization, QR codes, interactive web designs, and videos will be actively encouraged — which will have a lasting impact on how the industry develops future investor communications.
Three, Reducing Risk and Driving Efficiency
The current economic climate and evolving regulatory environment have put outward pressures on the Fintech industry. Fund companies also have ever-present challenges to reduce risks and drive efficiency.
On the cybersecurity front, the SEC recently proposed rules and amendments to enhance and standardize disclosures for public and investment companies. They include increased disclosure requirements and record-keeping obligations, the creation of cyber security protocols, and tighter guardrails around timely self-reporting of any incidents as they occur.
The need to maintain a digital audit trail is more critical than ever. The SEC made that clear with the new regulations around electronic recording-keeping and recent enforcement actions underscoring the importance of risk reduction by maintaining a Regulatory Book of Record (RBOR). An RBOR gives you the confidence that all your investment data and global reporting meet industry compliance standards, now and in the future.
We can also expect to see continued cost pressures on internal operations, which heightened during the pandemic and are currently still a priority. As investment firms look to reduce overhead and increase margins, one of the first places they look is at middle- and back-office operations, underscoring the need for digitalization and automation to deliver optimum efficiency.
As markets fluctuate, regulations evolve and technology advances, financial firms need solutions that will ensure compliance at every level. DFIN’s cloud-based Arc Suite is the industry’s leading end-to-end platform, offering regulatory, reporting, legal, filing and distribution solutions. With our new Trust Center, clients have access to the latest information about security, privacy, compliance and resiliency when they need it.