2023 capital markets regulatory outlook

Evolving capital markets regulation

In 2023, we expect capital markets regulation to have a sweeping impact across firms and markets, and we identify three key themes that firms may want to consider:

1. Regulatory churn: In 2022, regulators developed approaches toward emerging technology, outdated rules, and progressive topics. Most of the activity was led by the Securities and Exchange Commission (SEC), which approved more than 30 proposals to amend existing or create new regulations.
2. Reinvigorated enforcement: After years of light policing, capital markets regulators have intensified their enforcement efforts. When paired with the onslaught of new rulemaking activity, firms’ government affairs and compliance functions have not been under comparable regulatory pressure for years.
3. On the regulatory horizon: Despite the volume of new topics undertaken by regulators in 2022, we expect several more to be on the horizon in 2023, including overhauls of firms’ digital engagement and cybersecurity practices.

Regulatory churn

The massive number of rule proposals in 2022 will cast a long shadow of uncertainty over capital markets firms in 2023. The following proposals are among the most transformative, introduced by the SEC in 2022.

• T+1
  In the current agenda, T+1 is atypical in the scale of operational implementation effort required and simultaneous broad support from the SEC. Given its unanimous support, we expect a final rule to advance in 2023, and the industry has already begun preparations.

• Amendments to the definition of “broker-dealer”
  Two “definitional” proposals expand the scope of entities required to register with the SEC. In effect, these proposals would stretch the regulatory perimeter to new entities. Firms potentially impacted by the proposal should consider taking actions now.
  
• Market Structure Proposals
  In December 2022, the SEC approved three significant proposals related to equity market structure, which reflect skepticism about the practice of payment for order flow (PFOF) and are intended to improve retail order execution quality. Collectively, the package comprises the most significant proposed changes to market structure in more than a decade.

Reinvigorated enforcement

After years of light policing, capital markets regulators have drastically intensified their enforcement efforts.

• Electronic communications
  In September 2022, the SEC and Commodity Futures Trading Commission (CFTC) levied fines against 11 financial institutions for recordkeeping, monitoring, and supervisory failures associated with business communications conducted outside permissible channels. The charges primarily stemmed from employee use of personal devices to discuss business matters, a practice that in many cases violated the SEC’s and CFTC’s record-keeping and compliance requirements.

• Reg SP & Reg S-ID actions
  As the SEC intensifies its focus on cybersecurity and likely moves to finalize multiple cyber proposals in 2023, Reg SP and Reg S-ID remain existing enforcement tools, which we expect will be strictly enforced prior to the new rules going into effect.
• Digital assets
  The digital assets industry experienced something of an enforcement blitz in 2022 as the federal government sought to keep pace with—and codify its approach to—innovation. The SEC generally has led these efforts, but other market regulators, notably the CFTC, have recently redoubled their efforts.
   

The regulatory horizon

While the SEC is likely to lead the pack in terms of breadth and volume of significant changes, other capital markets regulators are considering impactful issues for the industry as well. These topics on the regulatory horizon include digital engagement, complex products, and numerous highly significant market structure proposals, including the following:

• Electronic recordkeeping
  In October 2022, the SEC adopted amendments to the recordkeeping rules for broker-dealers, security-based swap dealers, and major security-based swap participants. The amendments to SEC rule 17a-4 allow for an “audit-trail” recordkeeping format as an alternative to the existing requirement for electronic recordkeeping in a “write once, read many” format.

• Branch office inspections
  The Financial Industry Regulatory Authority (FINRA) is considering updating its definition of a branch office and rules for branch office inspections to reflect trends in remote work and digital transformation.
• Complex products
  In 2022, FINRA issued a request for information on the suitability of complex products for retail. Firms may want to think proactively about their processes and ways that they can demonstrate that they are adequately screening customers before allowing them to trade complex products.

Start preparing now

Taken in aggregate, the intensity of proposed change to the capital markets regulatory framework is remarkable both in number and significance of rule-making. The weight of the regulatory agenda will impact firms and potentially financial markets themselves as bedrock practices are reimagined and reshaped in the coming year against a backdrop of challenging macroeconomic conditions. Download our outlook to learn more.

If you are interested in learning more about the capital markets industry, check out our recently released 2023 capital markets industry outlook here.