The SEC’s Technology Modernization Is Accelerating—Are You Ready? – Forbes
The U.S. Securities and Exchange Commission (SEC) is catching up on the advanced technology front. For CFOs at public reporting companies as well as those with pre-public organizations and companies with close ties to public companies, these developments bear monitoring.
Reflexively, seasoned CFOs may assert that the SEC is always playing catch-up when it comes to technology-related rules-making and enforcement activities. It’s a valid point, for most people would not consider a government agency as a likely poster child for the cutting edge. But to be fair, the SEC has notched significant progress adjusting rules and enforcement in response to technological disruptions over the past two decades. For example, the commission’s 2009 rule requiring the use of eXtensible Business Reporting Language (XBRL) and its 2018 update of that rule (calling for the use of the Inline XBRL format that makes the disclosure document human- and machine-readable) represent laudable strides in improving search and analysis capabilities.
Further SEC modernization is needed, of course, given the torrid pace of technology evolution and adoption as well as broader digital transformation and innovation developments in the past few years. What’s important for CFOs is this: Based on comments made in recent SEC conferences, points made by former commissioners in print and the way technological forces are affecting the market, it seems increasingly likely that more SEC rules and enforcement activity will address, and leverage, advanced technology.
“Technological breakthroughs have already necessitated some regulatory updating. Furthermore, new technologies on the horizon and how quickly they will be here make it more important than ever for the SEC and other financial regulators to anticipate how burgeoning research and development might be deployed in financial markets in the future,” former SEC Commissioner Troy A. Paredes writes in an article published in The Regulatory Review. “A forward-looking perspective allows regulators a head start in modernizing regulatory requirements to ensure they are workable when new uses of innovation arrive.”
Paredes also emphasizes that the SEC is integrating emerging technology into its oversight activities. In fact, the nature and pace of that integration may change under the Biden administration and with a new and recently confirmed SEC chairman in place who is expected to be an activist.
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Although discussions of potential new rules have so far centered on the possibility of mandated ESG disclosures (following on the recently required human capital disclosures), that should not distract CFOs and their regulatory compliance teams from monitoring developments coming out of the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub), along with other “regtech” focal points. Those developments affect companies occupying important real estate in the tech/fintech space, as well as how the commission will use tech to monitor all companies, regardless of industry.
Here are some areas to consider:
- Monitor FinHub reports and developments: Established three years ago, the FinHub’s mission, according to the SEC, is to “encourage responsible innovation in the financial sector, including in evolving areas such as distributed ledger technology and digital assets, automated investment advice, digital marketplace financing, and artificial intelligence and machine learning.” The group’s current leader, Valerie Szczepanik, has orchestrated the commission’s work with digital asset technologies and innovations, including initial coin offerings (ICOs) and cryptocurrencies. In December, the SEC announced that FinHub would begin operating as a standalone office with Szczepanik reporting directly to the SEC chairman. While that structural change occurred under the previous administration, it remains in place and seems well-suited for responding to technology-related developments in the markets—including the newly formed Crypto Council for Innovation, a financial services trade group dedicated to shaping policymaking on digital currencies.
- Remember, the SEC operates more like a freighter than a speedboat: The SEC is a deliberative body. New ESG disclosures currently being discussed would not likely become a requirement until more than a year from now, at the earliest. “Deliberative” also means that the SEC’s rules-making activity is never finished. Its digital transformation will remain a work in progress as new rules and enforcement approaches are added progressively to its toolbox.
- Track which technologies are affecting the market: In his article encouraging the SEC to bolster its technological chops, Paredes name-checks technologies – including artificial intelligence, machine learning, blockchain, quantum computing, the Internet of Things (IoT) and augmented reality—that affect financial markets and therefore require regulatory consideration. Furthermore, technology-related advancements, in the form of social media communications, recently have exerted outsized impacts on markets and the valuation of companies like GameStop, AMC and Blackberry. So, although the SEC does not currently define cryptocurrencies as securities, that could change depending on how they affect markets, how they are traded, and how large their presence on corporate balance sheets becomes.
- Keep in mind the SEC has a robust database and new analytical capabilities: Thanks to those XBRL rules that place all filings on a common platform, the SEC has amassed a robust database. SEC commissioners have signaled that they plan to intensify their use of data analytics. By mining that database for exceptions and patterns, the SEC can identify trends and anomalies that drive consistent and focused comment letter activity.
- Watch the new human capital disclosure requirement for clues about future technology rules changes and compliance responses: Last August, the SEC issued a rule, with a November 2020 effective date, requiring companies to report on human capital metrics. The new rule was manifest in disclosures made in annual reports for calendar year-end companies in the most recent round of filings, and caused companies to develop new human capital metrics and measurement approaches, quantify returns on talent investments, share this information with boards and senior leaders, and incorporate human capital metrics into earnings call preparation, among other steps. Much of that work was conducted on spreadsheets the first time around, and many CFOs and finance teams are subsequently moving to create dashboards to bring more rigor (and a clear audit trail) to the data collection and analytical processes that the disclosure necessitates. This experience and the work undertaken to respond is instructive given that new technology-related disclosures are likely to follow a similar structure and thus require a similar response.
Also of note, in his call for the SEC to quickly develop more tech-focused rules and capabilities, Paredes emphasizes that the agency has a pressing need to hire more in-house technologists, including data scientists, computer scientists, cryptographers, developers, programmers and engineers. How well the SEC fares in addressing its regtech talent needs will help determine the pace and efficacy of its efforts to adapt its oversight to the digital era.
Of course, the SEC had best get busy with that kind of hiring plan. Leading CFOs know that the SEC is hardly alone in its thirst for technologists. Corporate finance groups require the same infusion of digital expertise to make good on their own mandate. The SEC’s drive to become more technology-enabled should provide further motivation for CFOs and their teams to continue building their technology and digital talent base and expertise. After all, the talent pool isn’t exactly unlimited, and the door to SEC employment opens both ways for people with key skills.
Finally, there is another somewhat ironic development at the SEC that any CFO skeptical of the commission’s ability to catch up should keep in mind. The pandemic’s remote-work disruptions also affected public sector organizations like the commission, accelerating its digital transformation efforts. While some of those efforts may still lag, they are gaining ground, quickly. Those SEC conferences you should be monitoring for new technology-related rules? They’re now virtual.