On the US side, while there was an abundance of news stemming from the incoming presidential administration, nothing too significant came about from any of the US regulators. While we are yet to see anything concrete, significant shifts are anticipated in the regulatory and enforcement approaches of the Securities and Exchange Commission and the Commodity Futures Trading Commission.
At the SEC, the nomination of Paul Atkins as chairman would seem to signal a move towards less aggressive enforcement. Atkins has previously been critical of DoddFrank and has argued that regulators frequently overreach. If confirmed by the US Senate it is expected that the SEC under his leadership will scale back enforcement in areas emphasized during prior administrations, including cryptocurrency and ESG disclosures. It is also expected that standalone off-channel communication enforcement actions will decrease. In a September 2024 enforcement action, two Republican-appointed commissioners dissented, noting that even with reasonable procedures in place to address off-channel communications, certain firms would still not always find themselves fully compliant.
At the same time, the CFTC under Acting Chair Caroline D. Pham is implementing new enforcement guidelines to encourage members to self-report misconduct. These guidelines offer substantial penalty reductions for voluntary disclosures, aiming to resolve cases more efficiently while upholding accountability.
As we look to the months ahead, investment advisers can expect continued scrutiny from SEC and National Futures Authority examiners, though it is anticipated the regulators will refocus on fraudulent conduct and trading abuses.
UK / Asset Management
Asset Management portfolio letter
The Financial Conduct Authority's ("FCA's") Asset Management and Alternatives – Supervisory Strategy letter, published on 26 February 2025, sets out the regulator's supervisory focus and targeted work for 2025.
It also alludes to the work the FCA is doing to support its "growth objective".
Supervisory Focus
Private Markets
The UK is the largest centre for private markets in Europe. The FCA has identified three risk areas: asset valuation; conflicts of interest; and retail engagement.
(i) Asset valuation
There is a risk that firms might value private assets inappropriately, for example through poorly managed conflicts of interest or insufficient expertise. The FCA has undertaken supervisory work and will shortly release its multi-firm review on Private Market Valuation Practices. Firms should consider the report's findings regarding the robustness of valuation processes, governance arrangements (including sufficient information on valuations provided to boards and valuation committees) and audit trails.
(ii) Conflicts of interest
The FCA will commence a multi-firm review focussing on conflicts of interest at firms managing private assets. This will include application of conflicts frameworks through governance bodies and reviews by the three lines of defence (business units, compliance and internal audit) to ensure investor outcomes are not compromised.
(iii) Retail engagement
Whilst there are limited opportunities for retail investors to invest in private assets, innovative retail product development is underway. The FCA indicates firms should consider their product governance frameworks for such products and – to meet Consumer Duty expectations – understand distribution chains to retail clients and take steps to deliver good outcomes.
Resilience
The letter notes challenges for the asset management sector in terms of market volatility and geopolitical risk, and the increasing interconnectedness of the sector and reliance on third parties. In the last five years, market disruptions have included the liability driven investment crisis following the Truss/Kwarteng budget in September 2022, the "dash for cash", the Crowdstrike outage and basis and carry trade volatility.
The FCA indicates firms should review the FCA's and the Bank of England's findings from the System Wide Exploratory Scenario ("SWES") in the context of their risk management practices. Informed by this report, the FCA will focus surveillance on prudent risk management, liquidity management and operational resilience.
Firms should also consider the resilience and effectiveness of their operational processes and collateral management practices. This includes oversight of third parties where services are outsourced.
Consumers
Since the Consumer Duty took effect in 2023, firms have made significant efforts to implement and embed it into their business practices.
The FCA plans to publish the findings from its multi-firm review of unit-linked funds later in 2025. It will also commence a multi-firm review of model portfolio services.
The letter also notes the Consumer Composite Investments consultation which will replace Packaged Retail and Insurance-based Investment Products ("PRIIPS") with a more flexible disclosure framework.
Targeted Work
- Sustainable finance – the letter notes the introduction of the Sustainability Disclosure Requirements ("SDR") and Investment Labels regime. The FCA will engage with firms to understand how they are implementing the labelling, naming, and marketing rules.
- Financial crime and market abuse – firms should be alert to financial crime risk including fraud, money laundering, terrorist financing and bribery and corruption. The FCA will have a supervisory focus on anti-money laundering controls in private funds markets. It also notes its expectation that firms ensure their market abuse controls enable compliance with the Market Abuse Regulation ("MAR").
Accountability
The regulator reiterates the importance of good governance and a healthy firm culture in achieving good outcomes. There will be a focus on assigning senior accountability for the risks identified as supervisory priorities, as set out above.
Growth
The UK's position as a leading centre for asset management is noted in the context of the FCA's secondary international competitiveness and growth objective. Particular areas of growth include private credit and infrastructure, exchange traded funds ("ETFs") and model portfolio services ("MPS"), and digital innovation including tokenisation.
The FCA will engage with the industry on initiatives to unlock capital and liquidity and accelerate innovation to improve productivity.
Notably, the FCA aspires to take forward ideas to reduce the regulatory burden. This will include the use of data and technology and making data collection more efficient and effective. During 2025 there will be a review of the Alternative Investment Funds Managers Directive ("AIFMD") so that regulatory requirements can be streamlined.
Next Steps
Firms should discuss the letter with their Board, Executive Committee and accountable
senior managers to consider whether each identified harm applies to their business and if so, strategies for managing them.
RQC View
Much of the letter's content is unsurprising, as topics like resilience, consumer protection, sustainable finance and financial crime have been highlighted in previous communications and initiatives. The focus on private markets, initially mentioned in the March 2024 interim supervisory letter with an emphasis on liquidity management and valuation, has been further amplified in the current letter. Firms in this sector should pay attention to the increased scrutiny on conflicts of interest and review their processes to ensure they are proportionate and appropriate.
Asset managers and alternatives should not consider these themes in isolation, as they often interact with one another. There is a subtle shift from viewing governance, conduct and culture as standalone areas of focus to recognizing them as fundamental to the success of a firm's approach to other regulatory priorities. Governance, conduct and culture will continue to be central to the FCA's supervisory activities.
The March 2024 letter identified a policy priority of making the regime for alternative fund managers more proportionate, but progress has been limited. There appears to be a holistic shift in focus, driven by the FCA's secondary growth objective and the need to revise the rulebook where requirements have become overly burdensome and disproportionate. Industry engagement on a review of the AIFMD is a positive development and should be welcomed. We may see changes in Annex IV reporting and the parameters of the "sub-threshold AIFM" regime, among other areas. Although not explicitly mentioned, Markets in Financial Instruments Directive ("MiFID") buy-side firms should not be overlooked in these initiatives. For instance, a review of the transaction reporting regime for these firms would be beneficial.
UK / Enforcement
Upper House publishes "Naming and shaming: how not to regulate"
In another body blow to the FCA, the House of Lords' Financial Services Regulation Committee (the "Committee")1 has published a damning report on the FCA's proposed approach to change the way it publicises enforcement investigations.
The report notes the previous criticism levelled at the FCA, from sources such as the financial services industry, legal firms and the former Chancellor of the Exchequer.
In February 2024, the FCA initially proposed using a "flexible public interest" framework to allow it to announce more investigations at an earlier stage. This would replace only announcing investigations at an earlier stage under "exceptional circumstances". Furthermore, firms would only be given 24 hours of notice of an investigation being made public.
Announcing an investigation before it is concluded, where ultimately no regulatory action is taken, but the subject has suffered reputational damage, is a key concern. Among other considerations, this is framed in the context of 2/3 of investigations resulting in no action, and investigations taking an average of 43 months to complete.
In April 2024, the Committee requested further clarification on the justification for the proposals, whilst warning that the proposals risked having a disproportionate effect on firms. The Committee also launched an inquiry to examine the proposals further.
On the basis of feedback received, the Committee found:
- Significant failings in the development and communication of the proposals;
- The FCA had not appropriately engaged with financial services firms beforehand;
- The FCA had not given any prior warning to the financial services industry prior to launching the consultation;
- Stakeholders were surpr
- ised by the proposals;
- Widespread concern about the proposed public interest framework, for example the non-exhaustive list by which the FCA could judge disclosure to be in the public interest was poorly defined and granted the FCA too much discretion;
- A lack of justification as to why the "exceptional circumstances" approach was no longer fit for purpose;
- The 24-hour notice period is insufficient; and
- A general concern about the potential impact on the FCA's secondary international competitiveness and growth objective
The report notes that the FCA has undertaken an extensive programme of engagement with the industry and in November 2024 it issued revised proposals, with a consultation period that closed on 17 February 2025. This includes revising the public interest test to include new factors such as the impact of an announcement on the relevant firm and extending the notice period from 24 hours to 10 days.
The Committee commends the FCA's willingness to listen to feedback and make changes to its proposals. However, the Committee remains concerned about the overall process. Among other things, the Committee asserts that the FCA exercised poor judgment on the likely response that the proposals would prompt, thereby losing control of the narrative and causing undue concern and uncertainty.
The Committee requests that the FCA is transparent about the feedback to the revised proposals and that it be willing to set out additional amendments to its proposals as necessary.
The report follows other engagement between the FCA and politicians on the FCA's effectiveness and the general theme of balancing the FCA's primary objectives, such as protecting the integrity of the UK financial system, and its secondary objective, to facilitate the international competitiveness and growth of the UK economy. We discussed recent trends in this regard in our November 2024 newsletter.
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