Keeping Up with the SEC: Is Your Digital Transition Ready & Is the SEC Ready for You?

Mammoth government agencies are not your typical go-to when highlighting the frontrunners in technology.

The U.S. Securities and Exchange Commission (SEC) may change that.

While it’s true the 87-year-old institution is more in a catch-up mode than leading the charge, the SEC should be given credit for acting swiftly in response to the digital revolution overtaking the business landscape the past several years.

Some acknowledgments of note in this area are the agency’s recognition that financial technology (FinTech) and innovation were among its key 2021 examination priorities, and the 2018 update of the commission’s decade-old rule requiring the use of eXtensible Business Reporting Language (XBRL) to ensure the format is both human- and machine-readable for disclosure documents. Both clear markers of what is in the SEC line-of-sight at the moment.

“Something is happening that has sharpened the focus on whether rules and regulations need adjustment,” noted former SEC Commissioner Troy A. Paredes in an opinion piece for The Regulatory Review late last year. “Namely, technology is being developed and deployed at an incredible velocity. Technological advances are not just incremental, but in many ways are profound. We are living through a digital revolution and information age, and the Fourth Industrial Revolution will impact our lives for generations.”

Added Paredes: “A forward-looking perspective allows regulators a head start in modernizing regulatory requirements to ensure they are workable when new uses of innovation arrive.”

In a March 2021 article from the analyst firm of JD Supra on this year’s priorities for the SEC’s Division of Examinations, risks related to FinTech and financial services are expected to generate a significant amount of attention.

Audits, the piece notes, will focus on whether company operations are consistent with the representation to customers and investors. Additionally, “the SEC will also examine the handling of customer orders and the use of remote mobile applications (i.e. apps) to process financial transactions. The SEC further plans to scrutinize companies that utilize digital assets (think cryptocurrency) as part of their investment strategies, as well as management and portfolio trading practices, the safety of client funds, the effectiveness of internal controls and other related matters.”

As noted in a wonderfully-titled recent article in Forbes, the SEC’s efforts to keep up with technology should be front and center in the minds of CFOs of both pre- and post-IPO companies for a few interesting reasons:

1. The pace of such technology-laden SEC oversight activities could increase under the agency’s newly confirmed chairman, Gary Gensler, considered an activist by nature.
2. The in-house resources the SEC would hope to snap up to help maintain this momentum - computer scientists, data scientists, cryptographers, engineers, developers and programmers - are the same experts in high demand by corporate finance teams seeking to complete their firms’ own individual digital transformation efforts.
3. The pandemic-enforced move to a more remote working way of life has only served to accelerate these digital transformation efforts, both on the part of the SEC and individual corporations.

“Never before have the SEC and other financial regulators stared at a present and future full of so much technological advancement,” said Paredes, highlighting lower costs for investors, new investment choices, enhanced detection and deterrence of wrongdoing, increased job creation and financial inclusion among the potential offerings of such innovation.

“The SEC has a pivotal role to play in this being realized,” he said.

We all do, actually.

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