There are three important regulatory developments that private capital investors should be aware of in 2024. The first is the U.S. Department of Justice's Safe Harbor Policy, which offers a presumptive declination for voluntary self-disclosure of misconduct identified during mergers and acquisitions. The second is the upcoming issuance of new regulatory requirements by the UK Financial Conduct Authority, integrating non-financial misconduct into the Conduct Rules. Lastly, the ongoing increase in sanctions, export control restrictions, and enforcement actions presents heightened risks for both financial and non-financial companies, particularly those operating in politically sensitive regions. We set out in more detail each of this issues here:
Monitoring impact of DOJ M&A Safe Harbor Policy
In October, in an effort to further incentivize voluntary self-disclosures, the U.S. Department of Justice announced a Safe Harbor Policy for voluntary self-disclosure made in the context of the mergers and acquisitions process. A six-month post-closing period will be provided to companies involved in bona fide arm's-length transactions to disclose identified misconduct at the acquired company in exchange for a presumptive declination. Following disclosure, companies will be expected to fully remediate the potential violations within one year of closing.
It remains to be seen whether the new, and specific, policy meaningful increases the number of voluntary disclosures, particularly amongst private equity and other investors. Regardless, in addition to robust pre-acquisition due diligence, the new Policy reinforces the need for prompt and thorough post-closing review where warranted.
New FCA culture regulatory requirements
Following a consultation in late 2023, the UK Financial Conduct Authority plans to issue new regulatory requirements in 2024 that will integrate non-financial misconduct into the Conduct Rules. While regulated UK firms should specifically await these new rules, the requirements come at a time of increasing focus on culture, and the importance of cultural assessments, by regulators in the United States, United Kingdom, and other jurisdictions.
Increased sanctions and export control restrictions and enforcement
In light of the continued war in Ukraine, along with geopolitical tensions throughout the world, the trend of new sanctions and export controls, as well as increased enforcement, will continue in 2024.
During 2023, the United States messaged that preserving the country's technological and military advantage is a top national security priority. Tougher sanctions and export controls, along with increased civil and criminal enforcement resources, will pose increased risk to both financial and non-financial companies.
In the United Kingdom, beefed up staffing and relatively broad mandatory reporting requirements for relevant firms, coupled with the strict liability standard adopted in 2022 for financial sanctions violations, as well as the announcement of a new governmental body responsible for civil enforcement of trade sanctions, may result in a meaningful increase in civil enforcement for the first time.
Legislative changes within the European Union may also result in increased, and easier, enforcement in certain member states. Lastly, for western companies that continue to operate in Russia, monitoring compliance with the UK professional services ban (together with similarly tighter controls taking effect in the European Union in June 2024), will represent an increasing challenge to maintaining operations in compliance with western sanctions.
Key takeaways
The combined impact of these developments requires investors to proactively assess compliance at the firm level, and throughout the lifecycle of investments. It is critical to understand compliance risks during the due diligence process so that they can be appropriately accounted for in the transaction documents and price, remediated in a timely and effective matter, and monitored throughout the investment so that the company is well positioned for exit.
Enhanced enforcement and regulator attention on culture and non-financial misconduct also require investors to look beyond traditional legal risks and to avoid a siloed approach to risk management.
On a positive note, effective risk management and focus on culture drives maximum performance and revenue, and investors are well positioned to stay ahead of these regulatory developments given trends in recent years.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
