Be aware you are using the STAGING server.
Cadwalader Logo
Link to home page
Filters »
Cabinet News - Research and commentary on regulatory and other financial services topics. Cabinet News - Research and commentary on regulatory and other financial services topics. Cabinet News - Research and commentary on regulatory and other financial services topics.
Filters »

September 28, 2023

Welcome to the latest edition of Cabinet News and Views, where we delve into the latest regulatory updates and pivotal developments shaping the financial services landscape.

This week Alix Prentice discusses some breaking news in the latest changes to Basel 3.1 as well as a new joint consultation regulatory framework on diversity and inclusion from the UK’s Financial Conduct Authority and Prudential Regulation Authority. Alix also covers the FCA and PRA’s consultation on regulatory framework on diversity and inclusion. 

I discuss the recently released results of the Federal Deposit Insurance Corporation’s annual Summary of Deposits survey for all FDIC-insured institutions as of June 30, 2023.

We also highlight the consultation launch on the proposed International Standard on Sustainability Assurance 5000, which covers the general requirements for sustainability assurance engagements and the proposed regulations by the IRS addressing digital asset broker reporting requirements and more details on the 2021 changes to the Internal Revenue Code.

We’re always here for comments and questions. Just drop me a note here

Daniel Meade 
Partner and Editor, Cabinet News and Views

Profile photo of contributor Alix Prentice
Partner | Financial Regulation

The UK’s banking regulator, the Prudential Regulation Authority (“PRA”) has announced its intention to move the implementation date of the final Basel 3.1 policies by six months to 1 July 2025 and commensurately reduce the transitional period to 4.5 years so implementation will still be complete by 1 January 2030.

The PRA is also staggering it’s responses to last November’s consultation on its approach to Basel 3.1 standards and has announced that:

  • In Q4 2023, it will publish near-final policies on market risk, credit valuation adjustment risk, counterparty credit risk and operational risk. 
  • In Q2 2024, it will publish publish near-final policies on the remaining requirements for credit risk, the output floor, and reporting and disclosure requirements.
Profile photo of contributor Alix Prentice
Partner | Financial Regulation

The UK’s Financial Conduct Authority and Prudential Regulation Authority have released a joint consultation on new regulatory framework on diversity and inclusion. This article focuses on the FCA’s Consultation Paper CP23/20.

With starting points: (1) non-financial misconduct (“NFM”) is misconduct for regulatory purposes; and (2) greater diversity and inclusion can lead to better customer outcomes, the UK’s Financial Conduct Authority (FCA”) and Prudential Regulation Authority (“PRA”) have released a joint consultation on new regulatory framework on diversity and inclusion (“D&I”). This article focuses on the FCA’s Consultation Paper CP23/20.

CP 23/20 sets out a number of proposals intended to develop diversity and inclusion strategies backed up by data and targets and subject to regulatory reporting requirements. These are framed within proportional and flexible principles that will mean that obligations will largely attach to larger firms depending on their number of employees, status under the Senior Managers and Certification Regime (“SMCR”) and whether they are regulated by both the FCA and PRA. The large firm threshold is being set at 250 employees based on an average number over a rolling three-year period as at a specified annual reference date, and calculated on a solo entity basis capturing activities carried out from an establishment in the UK.


  1. Better integration of non-financial misconduct (“NFM”) into staff fitness and propriety assessments, conduct of business rules and suitability criteria for firms

The proposals here will apply to all regulated firms with a ‘Part 4A permission’ i.e. authorised firms with the exception of credit rating agencies, payment services and e-money firms and will include NFM within conduct rules, fit and proper assessments for employees and senior personnel and suitability guidance on threshold conditions. The requirements are all framed behind the guiding principle that NFM is misconduct and not a principle in and of itself and will make it clear that misconduct within the workplace, and similarly serious behaviour in a person’s private life can also be relevant. Proposed expansions to the scope of conduct rules will make it clear that serious instances of NFM may amount to breaches of those rules. Also proposed is consideration of material NFM and its impact on a firm’s ability to satisfy the threshold conditions for doing business when applying for authorisation.

  1. Data reporting

All firms will need to report their average number of employees annually, with the exception of Limited Scope SMCR firms (as financial services are typically ancillary to their main business). Firms with 251 or more employees have additional reporting obligations, again excluding all Limited Scope SMCR firms.

  1. D&I strategies and targets

These will be required of all dual regulated firms (FCA and PRA) and all firms with 251 or more employees excluding all Limited Scope SMCR firms. Larger firms will be expected  to develop and embed a flexible, evidence-based D&I strategy with a plan for measuring and meeting objectives and goals,  anticipating obstacles and ensuring the adequate dissemination of awareness amongst staff. Maintenance and oversight of the D&I strategy will be a board responsibility and firms will need to be satisfied that the strategy is and remains fit for purpose and take it into account when setting targets. Those targets are expected to address underrepresentation at board and senior leadership level and across the employee population as a whole, but the FCA is not proposing to mandate the demographic characteristics targets should cover.

  1. Data disclosure and risk and governance

These measures will be required of all firms with 251 or more employees excluding all Limited Scope SMCR firms. Firms will be required to annually collect and report on data across a range of demographic characteristics, inclusion metrics and targets through a regulatory return, with a reporting window of three months from the reference date. The FCA is also proposing to produce their own regular aggregated report and to identify areas that need further supervisory input.

On risk and governance, the FCA is proposing new guidance for large firms on treating D&I as a non-financial risk, including groupthink and poor decision-making.

Next Steps 

Responses to the consultation are due by 18 December 2023, and rules will come into force 12 months from the publication of a Policy Statement in 2024.

Profile photo of contributor Daniel Meade
Partner | Financial Regulation

Last Friday,  the Federal Deposit Insurance Corporation (“FDIC”) released its annual Summary of Deposits (“SOD”) data, as of June 2023 (available here).   

The annual SOD data is the result of the FDIC’s annual survey of branch office deposits for all FDIC‐insured institutions, and “provides deposit totals for each of the more than 77,000 domestic offices operated by more than 4,600 FDIC‐insured commercial and savings banks, savings associations, and U.S. branches of foreign banks.” The SOD data plays a crucial role in the competitive analysis of bank mergers, as it is the SOD data that underlies the market share information and Herfindahl‐Hirschman Index (“HHI”) calculations considered by the regulators in any given banking market. 

As we have been discussing for about the last year and a half, both the banking agencies and the DOJ are considering updates to their respective merger guidelines. This latest batch of SOD data is likely to be part of what the DOJ and the banking agencies will look at in their deliberations.

Profile photo of contributor Jason M. Halper
Partner | Global Litigation
Profile photo of contributor Sukhvir Basran
Partner | Financial Services

In August 2023, the International Auditing and Assurance Standards Board (IAASB) issued its proposed International Standard on Sustainability Assurance (ISSA) 5000, “General Requirements for Sustainability Assurance Engagements.” ISSA 5000 is described as a comprehensive sustainability assurance framework designed to enhance the trust that investors, regulators and other stakeholders can place in corporate sustainability information.

ISSA 5000 is intended to be adaptable to sustainability information shared by any entity across industry and sector, regardless of the sustainability topic or applicable international reporting framework. This is particularly relevant as sustainability regulatory frameworks change, disclosure requirements grow more complicated, and investors, consumers and regulators have increased concerns over greenwashing. In a press release accompanying the issuance of ISSA 5000, IAASB stated that the framework serves as a standalone standard adaptable to both limited and reasonable assurance engagements (respectively, review and examination, using U.S. terminology). As Vice Chair of the IAASB Josephine Jackson clarified in a video introducing the draft standard, the proposed ISSA 5000 was developed to be profession-agnostic, so that it can be used by both accountants and non-accountant assurance practitioners.

The ISSA 5000 is a principles-based standard, with a greater focus on establishing principles or facilitating beneficial outcomes rather than on the mechanics of particular procedures. This scalability may make the ISSA 5000 in its final form broad enough to remain useful to diverse stakeholders, while leaving flexibility for assurance practitioners to rely on their own professional judgment in planning and executing assurance engagements.

The ISSA 5000 builds on existing standards, including the International Standard on Assurance Engagements (ISAE) 3000 (Revised) and ISAE 3410, by extension also building on the Non-Authoritative Guidance on Applying ISAE 3000. Therefore, in addition to the ISSA 5000, IAASB also published Proposed Conforming Amendments and Consequential Amendments to Other IAASB Standards, and an Explanatory Memorandum. The project proposal was approved September 2022, and the draft ISSA 5000, Amendments and Explanatory Memorandum will remain open to public comments for four months.

Stakeholders can provide commentary on the proposed revisions until December 1, 2023, through the IAASB website, using either the Response Template designed for more technical feedback, or a stakeholder survey designed to allow “sustainability reporting users and preparers, [who] may wish to share views or provide input at a more overall or less technical level,” to provide feedback. After reviewing stakeholder commentary, the finalized standard will be issued in 2024.

Final Thoughts

We have commented on trust in sustainability reporting as a broader theme a number of times, including here and here. External assurance can help increase confidence in financial and other reporting for investors, regulators, and other stakeholders. ISSA 5000 supports greater use of external assurance by offering more sustainability assurance standardization than had previously been proposed.

As we have reported, IAASB moved up the projected release date of the draft ISSA 5000 in order to facilitate a longer public consultation period while maintaining its promised 2024 deadline for publication of the final standard. Although the release date is on the latter end of the expected timeline, the August 2 draft is nonetheless two months ahead of the initial projection of October, allowing more time for input from stakeholders. IAASB has stressed that stakeholder participation is vital for better quality (and better trusted) sustainability standards.

As we discussed, developing global standards for assurance on sustainability is a key component of IAASB’s medium-term progress, and is listed as a key strategic objective in its 2024-2027 work plan. The finalized ISSA 5000 will accommodate the reporting frameworks issued by jurisdictions like the EU and the U.S., and those of other sustainability standard setters, including (among others) the International Sustainability Standards Board, the Global Reporting Initiative and the International Organization for Standardization. As a result, numerous regulatory and standard-setting actors may provide feedback before the ISSA 5000 is finalized.

This standard is notable for its broad scope. One element that likely increases ISSA 5000’s appeal is that, as an overarching standard, it works in both limited and reasonable assurance engagements. The decision about which level of assurance is optimal for a company’s ESG reporting is a meaningful one, and must take into account budget, confidence and reputational factors. ESG assurance is likely to become an important differentiator, and ISSA 5000 (in its final form) may become a useful tool as companies seek to distinguish themselves through the quality of their reporting.

(This article originally appeared in Cadwalader Climate, a twice-weekly newsletter on the ESG market.)

On August 29, 2023, the IRS published detailed proposed regulations addressing digital asset broker reporting requirements (the “Proposed Regulations”). The Proposed Regulations elaborate on the 2021 changes to the Internal Revenue Code that expanded the definition of broker to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person” (as we discussed here). 

The 282 pages of Proposed Regulations can be boiled down to these bullets: 

  • Digital assets subject to crypto broker reporting include (among others) cryptocurrencies, stablecoins, and non-fungible tokens;
  • Players treated as reporting brokers include crypto platforms and exchanges, payment processors, and certain wallet providers, BUT NOT miners and stakers;
  • The proposed rules take effect in two stages: first, reporting of gross proceeds from digital asset sales begins in 2025, and second, reporting of tax basis and tax character from digital asset sales begins in 2026; and
  • Only the largest of the digital platforms and intermediaries may have the resources to comply with the Proposed Regulations, and smaller market participants may be potentially driven out for lack of tax compliance resources.

As amended in 2021, Sections 6045 and 6045A impose mandatory tax reporting requirements for brokers of certain digital asset transactions.  Generally speaking, Section 6045 requires brokers to report certain information about taxpayers, including names and addresses, as well as certain information about the property underlying the transaction, including the sale date and gross proceeds of a sale (and for so-called covered securities, the adjusted basis of the property sold and the character of any gain or loss) as well as to furnish payee statements to customers. The Proposed Regulations expand upon these reporting obligations for digital asset brokers and, in many ways, are quite broad in scope. 

Some key takeaways from the Proposed Regulations include:

  • Broker is defined broadly. The Proposed Regulations do not separately define broker for digital assets but utilize the existing definition of broker in the Treasury Regulations (e., a person that in the ordinary course of business stands ready to effect sales to be made to others). However, the Proposed Regulations modify the word “effect.”  Under this expanded definition, any person that provides facilitative services that effectuate sales of digital assets by customers will be considered a broker, provided that the person is in a position to know the identity of the party that makes the sale and the nature of the transaction, potentially giving rise to gross proceeds. The Proposed Regulations refer to this person as a Digital Asset Middleman.  The implications of this broader definition of broker are that virtually anyone facilitating sales of crypto assets may be subject to these broker reporting rules (e.g., online trading platforms, hosted wallets, decentralized autonomous organizations (“DAOs”)).  Additionally, the definition of broker includes so-called digital asset payment processors (i.e., persons that facilitate payments from one party to a second party by receiving digital assets from the first party, exchanging them into different digital assets or cash, and then paying the resulting property over to the second party).
  • Importantly, some persons are excluded from the broker definition. As previously mentioned here, the Act’s broad definition of broker created practical concerns that various actors who facilitate digital assets generally could be subject to the broker reporting rules irrespective of whether these persons would be in a position to obtain the necessary information from end users. The Proposed Regulations effectively exclude the following persons from broker status: persons providing validation services (e.g., miners and stakers), sellers of hardware or licensing, retailers accepting digital assets as a form of payment, and certain NFT creators.
  • Digital assets include more than crypto. As defined in the Proposed Regulations, digital assets broadly include any digital representation of value that is not cash and is recorded on a cryptographically secured distributed ledger (or any similar technology), without regard to whether each individual transaction involving that digital asset is actually recorded on that ledger. Further, the Preamble to the Proposed Regulations clarifies that digital assets also include non-fungible tokens and stablecoins. Thus, transactions in various asset classes may be subject to the broker reporting rules.
  • Specific rules are provided for determining amount realized and allocating basis for digital asset transactions, as well as special realization rules. The Proposed Regulations provide that when calculating gain or loss on digital asset transactions, amount realized is calculated as cash received, plus fair market value of property received, plus the fair market value of services received, less any transaction costs incurred at the time of the subsequent sale or exchange.  Adjusted basis is generally cost basis, plus any share of transaction costs incurred at the time of acquisition. For reporting purposes, gross proceeds are also calculated in the same manner as amount realized. The Proposed Regulations provide specific rules for allocating these transaction costs (e.g., fees charged by trading platforms to exchange one digital asset for a different digital asset).   
  • The timeline may be administratively burdensome. At 282 pages in total, the Proposed Regulations, together with the Preamble, provide a significant amount of information that market participants need to absorb (and which potential digital asset brokers need to update their internal compliance systems to address). The Proposed Regulations are generally effective in two stages: brokers (i) would be required to report gross proceeds of digital asset sales, in addition to taxpayer information, after January 1, 2025; and (ii) subsequently would be required to report tax basis and character for digital asset sales after January 1, 2026. It remains to be seen, however, whether market participants can enact systems to manage this compliance within that timeframe.
  • The reporting requirements include a new form. IRS Form 1099-DA is set to be published in 2024 to handle crypto broker reporting requirements in lieu of existing IRS Form 1099-B. This new, yet to be released form will add further complexity and pressure to update compliance systems in a timely manner to satisfy the broker reporting requirements. Information required to be obtained and reported under the Proposed Regulations would include the following: a customer’s name and address, name and number of units of the digital asset sold, date of the sale, and gross proceeds of the sale. Additionally, the Proposed Regulations would require digital asset verification information: transaction IDs, digital asset address, and an indication of the type of consideration received.

(This article originally appeared in Cadwalader Brass Tax)

Filters »
© 2024 | Notices | Manage Subscription | Contacts