Did you know in 2022, PE deals with IA and Broker-Dealer involvement broke records, with $61.8 billion valued across 210 deals?
Why does that matter?
Well, that same year, firms contended with the compliance date of the SEC’s New Marketing Rule.
The takeaway: Heightened pressure from increased regulatory activity has culminated in shifting M&A strategies.
In this blog, we’ll break down the data behind recent M&A and PE deal activity, highlighting why new deals may, in fact, be driven by new rules.
Increased Regulatory Activity: New Rules from the SEC, FINRA, and DOL
Over the past year, the financial industry has borne witness to numerous rule proposals from regulatory bodies. And if passed? Firms would likely find themselves facing the somewhat insurmountable task of adjusting and evolving their compliance program to meet new requirements…all while managing the day-to-day activities which come with managing a firm’s compliance program.
A tall order to say the least.
So, how are firms adapting?
According to COMPLY Chief Regulatory Officer John Gebauer, “The veritable onslaught of new rules which have been proposed in the past two years will continue to create new burdens for firms of all sizes. We have been witness to a small portion of those rules being approved, which has already created significant challenges for some firms. As we look toward the dozens of additional proposals which may be approved in the coming year, firms must adequately prepare themselves to deal with significant compliance overhauls.
As firms run this gauntlet of regulatory change, on one side, while also navigating markedly difficult economic factors on the other, they would be wise to partner with a comprehensive compliance partner in an effort to effectively navigate the tumultuous years ahead. In working with a partner who not only provides comprehensive technology, but also consulting and education resources, firms will best position themselves to be able to proactively implement the necessary changes to meet new obligations.”
M&A Activity Driven by New Rules
While the level of deal activity slowed in 2023, the rate decrease may likely have been driven by fewer major rules coming into effect and thereby easing compliance programs’ burden, in terms of change and adaptability.
However, regulatory bodies have made it abundantly clear that there will be no grace periods regarding the implementation of new rules. Which may prove difficult as firms contend with managing the day-to-day and effectively implementing requirements of new rules going into 2024.
As John Gebauer highlights, “While not unique to any one firm type, firms today face the somewhat daunting challenge of keeping their compliance programs up-to-date and functional. Although that may seem like a baseline activity, given the rapid pace of regulatory change and rulemaking, managing the day-to-day operations and functionality, while also assessing the scope and impact of possible new rules and amendments has become a much more significant undertaking. A challenge which is compounded by the fact that the number of regulatory examinations has continued to increase and, as was proven by recent Marketing Rule hypothetical performance allegations, regulatory bodies are no longer giving grace periods to implement new rules.”
But why turn to deals and mergers?
“One clear driver is the ability of larger firms to absorb the new regulatory obligations. As smaller firms, with fewer resources, are tasked with additional regulatory burdens, they may look to join forces with larger players to create efficiencies.”
Maintaining Compliance Amidst Ongoing Regulatory Change
It’s clear we are facing a rate of unprecedented rulemaking, and as we look towards 2024, and the potential ramifications of passing amendments and rules, firms must make the choice of how they will maintain effective compliance.
John Gebauer says it simply, “Advisory firms must be willing to allocate the necessary time and resources, whether that be personnel, automation or a combination of the two, to maintain compliance amid the very active regulatory environment in which we currently exist.”
While for some, that may mean looking to make strategic M&A deals, for others, it could look more like a technology integration that eases day-to-day burdens and makes addressing the evolution of compliance that much more feasible.
Or it could be a mixture of the two. As larger firms – made up of multiple acquisitions – face increased complexities and new challenges.
The good news? The data also supports an increased growth in Regtech evolution, pointing toward comprehensive solutions which enable firms of any size to meet the complex regulatory burdens.
Ready to learn more about the complex nature of the private equity deal and M&A market? Download COMPLY’s new report “Regulatory-Driven M&A: Why New Rules Means New Deals for Financial Firms” today!
Interested in hearing about how COMPLY solutions support firms as they broach the next chapter of regulatory change? Speak with an expert today!