The regulatory space is constantly evolving, which makes it challenging for busy teams to stay up-to-date with the latest requirements. But with 2024 well underway, now is an ideal time to revisit your firm’s compliance policies and procedures, especially considering the costs in regard to regulatory errors.
While the cost of compliance clocks in somewhere around 3% of your total labor costs, the cost of non-compliance can be several times higher. As you analyze and identify potential areas for improvement to your compliance program, it can be helpful to know what regulators will be focusing on closely in the coming year.
And here they are!
6 Must-Know Compliance Trends for 2024
We believe the following trends will be among the top priorities of the Securities and Exchange Commission (SEC) and other regulators in 2024, and they’ll likely have a lasting impact on your firm’s compliance program:
1. Emphasis on Cybersecurity
Financial professionals routinely embrace new tech solutions to streamline operations and keep firms more connected with clients. It should come as no surprise that with such widespread adoption of technology in financial services also comes an increase in cybersecurity attacks.
FINRA has made it clear that cybersecurity threats are growing, and firms must take increased measures to protect their firm and client data.
As we move through 2024, expect regulators to continue cracking down on cybersecurity procedures and protocols. Take time now to review your current policies with team members, including how to mitigate cybersecurity risks, protect client data, and execute an incident response plan.
2. Cryptocurrency-focused Regulations
Cryptocurrency has taken the financial world by storm over the last few years, causing much compliance-related confusion in its wake.
Decentralized currency like crypto is both risky and volatile. Not to mention, it has a history of being used for market manipulation, money laundering, and funding illegal ventures. Yet, as it grows in popularity, more advisers are excited (albeit apprehensive) about incorporating cryptocurrencies into client portfolio offerings.
As more financial professionals dip their toes into the crypto waters (or even dive head first), a broker-dealer or investment firm’s ability to meet regulatory requirements will continue to depend heavily on employee trade monitoring.
In 2024, keep a close eye on the SEC’s Custody Rule, which may soon be amended to better require advisers to safeguard cryptocurrencies and other client assets with a “qualified custodian.”
3. Regulation Best Interest (BI)
Regulation Best Interest (or Reg BI for short) establishes a standard of conduct for broker-dealers specifically regarding how they recommend an investment strategy or securities transaction to clients.
According to the SEC, the broker-dealer must put the client’s best interest above their own when making such recommendations and adhere to certain obligations including providing disclosures, exercising a reasonable level of care, and more.
The SEC’s 2024 Examination Priorities Report indicates that in 2024, they will focus heavily on Reg BI and the regulatory requirements needed to satisfy this ruling. In the report, the SEC states that it will evaluate whether a broker-dealer has “established, maintained, and enforced written policies and procedures reasonably designed to achieve compliance” with Reg BI.
4. Artificial Intelligence (AI)
Artificial intelligence (AI) is no longer a thing of the future – it’s here and it’s impacting the way investment firms and broker-dealers do business each and every day.
In mid-2023, the SEC proposed a new ruling regarding conflicts of interest and predictive data analysis. If passed, the ruling will require firms to identify and eliminate conflicts of interest that come as a result of using AI tools. In its proposed ruling, the SEC specifically cites evidence of AI tools delivering results biased toward the firm’s own products while also making incorrect assumptions about clients.
If you are using generative AI systems to inform financial decision-making in 2024 and beyond, it’s critical to train your system to detect potential biases and use diverse data sets.
Incorporating AI also requires additional policies and procedures regarding data collection and storage.
Moving forward, keep a close eye on how the SEC and other regulators continue to adjust rulings to account for the use of AI.
5. Increased Pay-to-Play Enforcement
In a highly anticipated election year, paying extra attention to your firm’s pay-to-play policies and procedures can help steer your firm clear of political contribution pitfalls.
Take some time now to refamiliarize your firm with the SEC’s Rule 206(4)-5, which is the core ruling regarding pay-to-play compliance. While the foundational ruling is unlikely to change much in 2024, continued scrutiny and rule enforcement are expected – especially as more unsavory actors try to implement workarounds with pay-to-play arrangements.
We anticipate an increased number of audits and investigations regarding this particular area of compliance in 2024.
6. Anti-Money Laundering Initiatives
On February 13, 2024, the Treasury’s FinCEN Department proposed a regulation requiring investment advisers to develop anti-money laundering programs and advise the government of suspicious client activity via Suspicious Activity Reports (SARs). According to FinCen, the proposed ruling is designed to both protect the U.S. financial system and safeguard advisors from illicit activity.
An emphasis on anti-money laundering isn’t particularly new for 2024, but with a proposed ruling on the books, you’ll want to pay attention to evolving regulations and potential changes to your compliance/reporting requirements.
As you tackle compliance in the coming year, it’s important to keep these six top trends top of mind in developing your regulatory policies and procedures. Regulation is ever-changing, but with proper diligence, your firm can avoid costly errors in 2024.
Regulatory Compliance with COMPLY
The regulatory space is moving at breakneck speed, and you need a partner who doesn’t just help you keep up but get ahead!
COMPLY offers consulting and technology solutions to help your firm navigate the regulatory and compliance space, so you can focus more of your time on growth-oriented tasks. As technology and current events continue to influence financial regulations, we’re here to help you and your team stay up-to-date with evolving requirements and changes.
Are you ready to elevate your compliance program? Let’s talk!