Swiss FINMA Issues Guidance on Governance and Risk Management in Artificial Intelligence Applications
On 18 December 2024, the Swiss Financial Market Supervisory Authority (FINMA) published Guidance 08/2024 on governance and risk management for supervised financial institutions using artificial intelligence (AI). The guidance addresses operational, legal, and reputational risks posed by AI while reinforcing oversight practices in Switzerland’s financial sector.
- FINMA’s guidance elaborates on the importance of risk management frameworks to address challenges such as model risks, data quality, IT and cyber risks, legal exposure, and reputational harm.
- Most financial institutions in Switzerland are in the early stages of AI adoption, with governance frameworks still under development.
- FINMA’s principle-based approach ensures technology neutrality and proportionality, helping institutions remain competitive while mitigating risks.
- Institutions must establish centralised governance structures with clearly defined roles and responsibilities for AI applications.
- Comprehensive inventories of AI applications are required, alongside training measures for staff.
- For outsourced AI solutions, rigorous due diligence and contractual clauses covering liability and responsibility are mandated.
- Institutions are encouraged to define AI broadly, including traditional and generative models, and maintain complete AI inventories.
- Risk classification must account for the materiality and specific challenges posed by each AI application.
- FINMA highlighted deficiencies in data quality controls, emphasising the need for directives ensuring data completeness, accuracy, and relevance.
- Institutions must secure access to data and evaluate the suitability of third-party datasets.
- Rigorous testing, including stress tests and sensitivity analyses, is required to validate AI functionality.
- Performance thresholds, ongoing monitoring, and manual reviews of AI outputs must be implemented to detect data drift and ensure reliability.
- Institutions must document data selection, model performance, assumptions, limitations, and fallback mechanisms to enhance transparency and compliance.
- AI-driven decisions must be understandable, reproducible, and critically assessed, particularly for decisions impacting investors, customers, or regulatory compliance.
- The guidance is effective immediately. Supervised institutions are expected to integrate these measures into their frameworks promptly. FINMA will conduct reviews to assess compliance and may refine the guidance based on findings and international developments.
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US SEC Approves PCAOB’s 399.7 Million USD Budget for 2025, Establishes Accounting Support Fee
On 18 December 2024, the United States Securities and Exchange Commission (US SEC) approved the 2025 budget of the Public Company Accounting Oversight Board (PCAOB), amounting to $399.7 million. This approval includes an annual accounting support fee of $374.9 million, allocated to public company issuers ($346.1 million) and registered broker-dealers ($28.8 million). The PCAOB was established under the United States Sarbanes-Oxley Act of 2002 to enhance trust in financial reporting by overseeing the audits of public companies and broker-dealers.
- The PCAOB’s 2025 budget was approved after evaluations by the US SEC’s Office of the Chief Accountant and Office of Financial Management.
- A total of $374.9 million will be assessed, divided between public company issuers and registered broker-dealers based on their share of public financial activity.
- The US SEC urged the PCAOB to implement cost-saving measures and process improvements, including quarterly discussions with SEC staff about policy changes, budget variances, and potential cost reductions.
- Under the United States Budget Control Act of 2011, the PCAOB’s budget is subject to a sequestration amount of $22.8 million (5.7%), requiring a $0.9 million reduction in expenditures.
- The PCAOB is required to submit its annual report by 31 March 2025, detailing progress, challenges, and the budgetary impact of sequestration adjustments.
- The approved budget will take effect on 1 January 2025, with quarterly updates and continuous evaluations throughout the year to ensure alignment with investor protection and public interest objectives.
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US SEC Approves Rule Changes for Listing Hashdex and Franklin Crypto Index ETFs
On 19 December 2024, the United States Securities and Exchange Commission (US SEC) approved rule changes proposed by Nasdaq Stock Market LLC and Cboe BZX Exchange, Inc. to list and trade two new cryptocurrency-based exchange-traded funds (ETFs): the Hashdex Nasdaq Crypto Index ETF and the Franklin Crypto Index ETF. These ETFs are designed to hold spot bitcoin and ether, with proportions determined by their respective market capitalisations, offering investors diversified cryptocurrency exposure under robust regulatory oversight.
- The US SEC approved amendments to Nasdaq’s Rule 5711(d) and Cboe’s Rule 14.11(e)(4), establishing a regulatory framework for the listing and trading of the ETFs.
- Both ETFs will hold a mix of spot bitcoin and ether, with weightings determined by market capitalisations, aiming to provide transparency and secure asset storage.
- Real-time updates of net asset values and intraday indicative values will be disseminated every 15 seconds during trading hours, ensuring timely and accurate pricing information for investors.
- Surveillance-sharing agreements with the Chicago Mercantile Exchange (CME) will facilitate monitoring of market activity to address risks of insider trading and market manipulation.
- Institutional-grade custody solutions are mandated to safeguard assets against risks such as hacking or theft, with strict reporting requirements on private key security and insurance coverage.
- Both ETFs are subject to ongoing compliance with equity trading rules and exchange standards, including provisions for delisting in cases of non-compliance.
- The US SEC approved pricing methodologies based on CME futures market data and globally recognised spot market indices, ensuring accurate valuation.
- The approval sets a regulatory precedent for future cryptocurrency-based ETFs, signalling broader acceptance of such financial products in US markets.
- The Franklin ETF proposal received accelerated approval due to its alignment with prior SEC-approved operational structures.
- Both ETFs are expected to commence trading in early 2025, following final preparations by Nasdaq and Cboe.
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UK FCA Publishes Consultation Paper on Investment Disclosure Rules for Retail Investors
On 19 December 2024, the United Kingdom’s Financial Conduct Authority (UK FCA) issued Consultation Paper CP24/30:, proposing a new product information framework for Consumer Composite Investments (CCIs). This initiative aims to replace EU-derived regulations, such as PRIIPs and UCITS, with a domestic framework to enhance clarity, flexibility, and consumer empowerment in investment decisions. The proposal aligns with the UK Treasury’s commitment to streamline retail disclosure regulations and the UK FCA’s Consumer Duty introduced earlier in 2024.
- Objective of the new framework is to replace the rigid EU-based PRIIPs and UCITS disclosure requirements with a more flexible and tailored domestic regime.
- Further enhance clarity and engagement for retail investors, enabling them to make more informed and effective investment decisions and align the framework with the Consumer Duty.
- Consultation Paper CP24/30 builds on the UK FCA’s 2022 discussion paper DP22/6 and the UK Treasury’s 2024 Retail Disclosure Consultation Response. It draws insights from the July 2024 Call for Input on simplifying FCA requirements under the Consumer Duty and replaces the PRIIPs and UCITS frameworks with regulations under the Consumer Composite Investments (Designated Activities) Regulations 2024.
- Features of the framework are removal of rigid templates like PRIIPs and UCITS KIIDs, allowing firms to design disclosures using plain language, graphics, and digital enhancements along with simplified and tailored disclosures with summaries of costs, risks, and performance to improve consumer understanding and decision-making.
- Use of modern communication methods, such as interactive dashboards and layered disclosures, to increase consumer engagement.
- Standardised metrics for key areas like costs and charges to allow for meaningful product comparisons.
- Clear rules for both authorised and unauthorised firms regarding the preparation, presentation, and distribution of product summaries, with mandatory reviews for accuracy.
- Consultation open for feedback until 20 March 2025, with responses accepted via an online form or email (cp24-30@fca.org.uk). Another consultation addressing transitional provisions and consequential amendments is planned for early 2025.
- Final rules will be published in a policy statement later in 2025. Firms will have an 18-month transitional period to adopt the new regime, while closed-ended investment companies will have a shorter 12-month compliance window.
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US CFTC Finalises Rule on Margin Adequacy and Separate Account Treatment for Futures Commission Merchants
On 20 December 2024, the United States Commodity Futures Trading Commission (US CFTC) published the Final Rule along with a fact sheet, outlining requirements for futures commission merchants (FCMs) regarding margin adequacy and the treatment of separate customer accounts. This rule codifies and expands prior no-action positions detailed in US CFTC Letter 19-17 and subsequent guidance, providing structured risk management protocols for FCMs.
- The Final Rule introduces US CFTC Regulation 1.44, applicable to all FCMs, establishing margin adequacy requirements to prevent customer fund withdrawals that could lead to initial margin shortfalls.
- It allows FCMs to treat separate accounts of a single customer as distinct entities under specific risk-mitigating conditions.
- These conditions include maintaining robust internal controls, adhering to same-day margin call standards, and meeting additional capital and risk management calculations.
- The rule builds on prior guidance from Letters 19-17, 20-28, 21-29, 22-11, 23-13, and 24-07, transitioning from temporary no-action relief to formal regulation.
- Amendments to existing US CFTC regulations i.e. 1.3, 1.17, 1.20, 1.32, 1.58, 1.73, 22.2, 30.2, 30.7, and 39.13 which address inconsistencies and facilitate implementation, including updates on segregation obligations, capital treatment, and foreign banking holiday considerations.
- FCMs that are members of a DCO as of the publication date in the Federal Register have 180 days to comply. Non-member FCMs have 365 days from the publication date to implement the necessary changes.
- The rule applies directly to FCMs under Part 1 US CFTC regulations, shifting from an earlier proposal targeting derivatives clearing organizations (DCOs) under Part 39.
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US SEC Sanctions Tai Mo Shan for Misleading Investors and Unregistered Crypto Sales in Terra USD Stablecoins
On 20 December 2024, the United States Securities and Exchange Commission (US SEC) issued a cease-and-desist order against Tai Mo Shan Limited, a subsidiary of Jump Crypto Holdings LLC, for misleading investors about Terraform Labs’ Terra USD (UST) stablecoin and engaging in unregistered sales of LUNA, classified as a security. Tai Mo Shan has been fined $123 million in penalties and disgorgements.
- Tai Mo Shan partnered with Terraform Labs in 2019, promoting UST as an “algorithmic stablecoin” designed to maintain a 1:1 US dollar peg through mechanisms involving LUNA.
- Between 2021 and 2022, Tai Mo Shan distributed LUNA on US-based crypto platforms without registering these transactions, violating US securities laws.
- In May 2021, UST devalued sharply, prompting Tai Mo Shan to conduct trading activities to restore the peg. These actions misled investors about UST’s stability and Terraform’s technology.
- The US SEC found that Tai Mo Shan acted as a statutory underwriter for LUNA, requiring registration under Sections 5(a) and 5(c) of the United States Securities Act of 1933, which the company failed to obtain.
- The company’s activities during UST’s devaluation created a false impression of stability, violating Section 17(a)(3) of the United States Securities Act of 1933, by deceiving investors.
- Terraform incentivised Tai Mo Shan to purchase over $20 million worth of UST during the de-peg, misleading the market about the efficacy of its stabilisation mechanisms.
- Tai Mo Shan has been ordered to pay $73,452,756 in disgorged profits, $12,916,153 in prejudgment interest, and a $36,726,378 civil penalty, totalling $123,095,287.
- A Fair Fund has been established under the United States Sarbanes-Oxley Act to compensate affected investors. Undistributed funds will be transferred to the US Treasury.
- Terraform Labs, in a separate case, was previously ordered to pay $4.5 billion in damages for fraud and unregistered securities offerings.
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US SEC Bars Richard Brown for Securities Fraud and Undisclosed Kickbacks
On 23 December 2024, the United States Securities and Exchange Commission (US SEC) issued an order under Section 15(b) of the United States Securities Exchange Act of 1934, permanently barring Richard Brown from associating with any broker-dealer, investment adviser, or other regulated entities. This action follows Brown’s involvement in a fraudulent kickback scheme tied to Forcefield Energy, Inc. stock sales and a final judgment entered by the United States District Court for the Eastern District of New York.
- The US SEC’s administrative order enforces sanctions against Richard Brown, permanently barring him from the securities industry and penny stock offerings.
- Richard Brown, a former registered representative at a broker-dealer, engaged in a scheme involving undisclosed cash kickbacks to induce customers to purchase Forcefield Energy, Inc. shares without disclosing his financial incentives.
- On 2 August 2016, Richard Brown pleaded guilty to one count of securities fraud in a criminal case before the United States District Court for the Eastern District of New York.
- He was sentenced on 27 January 2021 to three years’ probation and ordered to pay $1,735,000 in restitution.
- The SEC’s civil complaint alleged violations of Section 17(a) of the United States Securities Act, Section 10(b) of the United States Exchange Act, and US SEC Rule 10b-5, which prohibit fraudulent conduct in securities transactions, including nondisclosure of material conflicts of interest.
- The SEC’s order enjoins Richard Brown from further violations of antifraud provisions under the United States Securities Act and Exchange Act.
- Richard Brown is permanently barred from associating with any SEC-regulated entities, including brokers, dealers, and investment advisers, and is prohibited from participating in penny stock offerings.
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Sanjay Malhotra Appointed as 26th Governor of Reserve Bank of India
On 11 December 2024, Mr. Sanjay Malhotra was appointed as the Governor of the Reserve Bank of India (RBI). Mr. Sanjay Malhotra, who has considerable administrative and financial experience, assumed charge as the 26th Governor for a three-year term.
- Sanjay Malhotra is an Indian Administrative Service (IAS) officer from the 1990 Rajasthan cadre with experience in finance, taxation, IT, and the power sectors.
- Prior to his appointment, he served as Secretary in the Department of Revenue under the Ministry of Finance.
- He also held the position of Secretary in the Department of Financial Services, overseeing key reforms in India’s banking and financial sectors.
- His contributions to the power sector include his tenure as Chairman and Managing Director of Rural Electrification Corporation Limited.
- Sanjay Malhotra has prior association with the RBI, having served as a Government Nominee Director on its Central Board from February to November 2022.
- He holds a degree in Computer Science and Engineering from the Indian Institute of Technology, Kanpur, and a Master’s in Public Policy from Princeton University, USA.
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Māris Kālis Appointed Acting Governor of Latvijas Banka Amid Leadership Transition
On 19 December 2024, the Saeima of Latvia appointed Māris Kālis as Acting Governor of Latvijas Banka to ensure operational continuity at the central bank during a leadership transition. Kālis is currently serving as Deputy Governor, and will assume his new responsibilities on 21 December 2024, following the conclusion of outgoing Governor Mārtiņš Kazāks’ term on 20 December 2024.
- The appointment is an interim measure after the Latvian Saeima failed to elect a permanent Governor.
- Kālis will lead Latvijas Banka until a new Governor is elected, a process expected to be addressed in early 2025.
- Latvian law limits the Governor’s term to five years, with a maximum of two consecutive terms.
- During this transition, Latvia will temporarily lose its voting rights in the Governing Council of the European Central Bank, emphasising the importance of resolving the leadership vacancy promptly.
- Māris Kālis, an experienced central bank official, steps into the role with immediate effect to ensure the smooth functioning of Latvijas Banka.
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Swiss Federal Council Appoints Aline Darbellay to FINMA’s Board of Directors
On 20 December 2024, the Swiss Federal Council announced the appointment of Aline Darbellay as a member of the Board of Directors of the Swiss Financial Market Supervisory Authority (FINMA). Her term begins on 1 January 2025 and will run through to the end of 2027, succeeding Susan Emmenegger, who is stepping down at the end of the year.
- Aline Darbellay, a recognised expert in financial market law, is a Professor of Law at the University of Zurich, specialising in banking, commercial, and business law.
- Darbellay holds a law degree from Lausanne, a doctorate from the University of Zurich, and an LL.M. from the United States, where she was also admitted to the New York State Bar.
- Her professional experience includes roles at Baker & McKenzie, the District Court of Horgen, and academic positions at the University of Geneva and the University of Zurich.
- Susan Emmenegger, the outgoing member, is resigning effective 31 December 2024 to take up the position of Dean of the Faculty of Law at the University of Bern.
- From 1 January 2025, FINMA’s Board of Directors will consist of nine members, led by Chair Marlene Amstad and Vice-Chair Martin Suter.
- The Board, under the Financial Market Supervision Act, is responsible for FINMA’s strategic management, regulatory guidance, and organisational oversight.
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RBI Launches Framework for Responsible AI in Finance, Constitutes FREE-AI Committee
On 26 December 2024, the Reserve Bank of India (RBI) announced the establishment of the Committee for the Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) to guide the responsible and ethical adoption of AI in India’s financial sector. This initiative, outlined in the RBI’s Developmental and Regulatory Policies Statement on 6 December 2024, seeks to address the opportunities and challenges of AI while ensuring customer protection and operational resilience.
- The FREE-AI Committee will be chaired by Dr Pushpak Bhattacharyya, Professor at IIT Bombay, with members including industry experts such as Ms Debjani Ghosh, former president of NASSCOM, and Dr Balaraman Ravindran, Head of the Wadhwani School of Data Science and AI at IIT Madras.
- The FinTech Department of the RBI will provide secretarial support, with consultations involving domain experts, industry representatives, and other stakeholders as required.
- The committee will evaluate the current state of AI adoption in financial services in India and globally, reviewing regulatory and supervisory approaches to AI’s unique challenges.
- The evaluation will address risks such as data security, model bias, and operational vulnerabilities, proposing strategies for mitigation and ongoing monitoring.
- A governance model will be developed to ensure transparency, accountability, and compliance in AI adoption, aligning with ethical principles and regulatory standards.
- The framework will focus on safeguarding stakeholder interests while fostering customer trust, operational resilience, and long-term sustainability in AI-driven financial services.
- The committee is tasked with delivering a comprehensive report within six months from its first meeting, expected in mid 2025.
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