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For firms operating in the UK and US, or seeking to expand on the other side of the Atlantic, navigating the regulatory frameworks across jurisdictions can often be complex due to the regulators working in different ways. It’s therefore important to get a grasp on the fundamentals of cross-border financial promotions and make sure you’re complying on both sides of the pond.
What brings an investment firm into the regulatory perimeter in the UK?
The FCA’s strategic objectives focus on ensuring that financial markets function well, which encompasses consumer protection, maintaining the integrity of the financial system, and promoting effective competition.
You must obtain the FCA’s permission before carrying out activities such as:
- managing investments – handling separately-managed accounts or acting as a delegated investment manager to a fund or a portfolio
- advising on investments – covering both acting as an investment adviser to the General Partner of an investment vehicle and giving ongoing investment advice to a client
- arranging deals in investments – arranging the purchase an investment product when helping a prospect or when you line up a portfolio company transaction for an investment vehicle
- managing a UCITS or an AIF – acting as the authorised corporate director (ACD) or alternative investment fund manager (AIFM) of a UCITS or an AIF requires this type of permission.
Conducting regulated activities without the required permissions granted by the regulator may constitute a criminal offense. Although certain exemptions and exclusions may apply, such as doing business on behalf of a group or involving in the sale of at least 50 percent of the voting shares in a body corporate, it’s essential to understand your position in the UK regulatory environment.
What does the investment landscape look like in the US?
The SEC’s mission lines up with that of the FCA, with it focused on protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. The US regulator’s framework, as set out in the Investment Advisers Act of 1940, establishes a specific set of rules that all Registered Investment Advisor’s (RIAs) must abide by, and policies and procedures that all organizations governed by the regulation must maintain. The SEC has a principles-based regime which is a regulatory approach using high-level, broad principles to set standards for regulated businesses, instead of detailed rules. It focuses on the desired outcome, such as consumer protection or financial stability, rather than the specific steps to achieve it. This allows businesses to determine the best way to meet the objectives based on their circumstances.
The SEC delivers its mission through regulations, exams, and enforcements. Depending how severe a firm’s violations are, they may be taken to enforcement. Typically, the areas where the SEC finds the most issues in their exams helps guide where the future regulation will be focused.
For entities outside of the US that are entering the US market, it’s important to be aware of how to register with the SEC. Depending on how you engage with US clients, there are exemptions like those for Foreign Private Advisers or Private Fund Advisers that you may be able to claim, potentially easing the amount of oversight the SEC has into your organization.
Common pitfalls and compliance tips
For organizations entering the UK, here are some important things to consider:
- Location: Having a registered office in the UK isn’t sufficient to meet the FCA’s “Location of Offices” threshold conditions to allow a firm to become authorised. In a recent publication, the FCA has clarified its expectation, where the mind and management of a firm must be in the UK. This means the portfolio management and distribution activities must take place in the UK on a day-to-day basis. Setting your UK entity up as a mere letterbox with senior personnel flying in and out from time to time will not cut the mustard.
- Personnel: It’s necessary to arrange adequate and competent individuals in the UK to take up the senior management functions. Candidates without relevant experience or knowledge, or junior individuals with insufficient authority within the firm, will find it challenging to obtain approval by the FCA.
- Clarity: The authorisation process in the UK is a robust and sometimes lengthy process. Firms must be well-prepared, be able to set out its business model and risk management framework and demonstrate the competency of its senior management. Submitting a regulatory business plan with just a few pages, or with many items “to be confirmed” will likely be deemed to show that the firm is “unready, unwilling or unorganised” by the regulator, and therefore be turned away.
For organizations entering the US, there are a few key places we often see firm’s make mistakes.
- Requirements: Many often misunderstand registration requirements and don’t properly register with the SEC, not fully grasping the rules that govern them.
- Resources: We’ve seen firms not allocating the proper amount of time and resources to US compliance. Even when registering as an Exempt Reporting Adviser (ERA), there are still obligations you must meet as a firm.
- Exemptions: Many firms assume that if they are exempt from registering with the SEC, they are exempt from everything US-related. But there are other regulatory bodies like FINRA and the CFTC that have reporting requirements that may be necessary for your firm depending on your business.
Recent developments and future implications
In March 2024, the UK’s FCA published the finalised guidance on financial promotions on social media. Two months later, it brought charges against “finfluencers” promoting unauthorised foreign exchange trading schemes on social media. Firms considering using social media platforms or engaging with influencers to promote its products or services in the UK should review regulatory permissions and control measures regarding financial promotions.
On 31 May 2024, the anti-greenwashing rule came into play. This means any sustainability-related claims made in respect of your products and services must be fair, clear, and not misleading. You should review your financial promotion materials, including your website, to ensure the claims are substantiated and presented properly.
The FCA remains focused on protecting retail investors from harm. It’s Consumer Duty, which was implemented in July 2023, is not a one-off exercise. The FCA has indicated that the price and value outcome will be under the spotlight, as it’s keen to ensure the products and services offered to retail customers are of good value.
Meanwhile in the US, the SEC’s new marketing rule went into effect in November of 2022. While this may feel like old news, we’re still seeing this area heavily regulated by the SEC. It’s worth being thorough in your compliance with the new marketing rule, as we know this is a place that the US regulator will focus on during an exam.
In June of 2024, the 5th Circuit Court released a significant ruling vacating a new SEC rule. This rule proposal had been perceived as an overreach by many in the industry and has prompted a re-evaluation of certain regulatory approaches at the federal level. We’re waiting to see if the SEC tries to appeal the decision to the Supreme Court.
In May of 2024, the SEC passed a new rule adopting amendments to Regulation S-P that will require firms to have a formal incident response program for breaches of client information, requirements to notify customers of breaches, extended service provider oversight, and more.
While it has generally been a quiet summer from the SEC as we await the upcoming election in November 2024, there are a number of rules pending that we are keeping on radar:
For those operating businesses in either the UK or US, staying informed about the interplay between these jurisdictional regulations is crucial for effectively navigating market complexities without being penalised.
How can Bovill Newgate help UK and US investment firms comply with regulatory requirements?
Our experts regularly advise US and UK firms on complying with regulatory requirements on both sides of the Atlantic.
Whether you need help with a specific regulatory question or r a broader review of your activities in the UK or US , our team can help.
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