Middle Market Risk, Regulatory and Compliance Strategies

Middle Market Risk, Regulatory and Compliance Strategies
August 19, 2024 11 mins

Middle Market Risk, Regulatory and Compliance Strategies

Middle Market Risk, Regulatory and Compliance Strategies

Helping midsize organizations strike the right balance between risk and compliance with a comprehensive regulatory and compliance framework.

Key Takeaways
  1. Middle market organizations may find that simply maintaining compliance takes most of their resources and effort.
  2. The rapidly changing regulatory landscape, case law and provisions of existing law are complex and challenging.
  3. Midsize organizations can strike the right balance between minimizing risk and maintaining compliance to remove barriers to growth.

Middle market organizations are part of a sector experiencing significant growth — and with it, key inflection points in their regulatory and compliance approaches. Rapidly evolving regulation1 and rising risk across human capital, cyber, directors and officers (D&O), environmental social and governance (ESG) policies and beyond, push businesses from a proactive opportunity mindset to a compliance mindset. Organizations of all sizes are grappling with uncertainty, regulatory complexity and changing laws. But it's the larger organizations that tend to have dedicated teams to navigate change and manage compliance so leaders can focus on strategic business growth initiatives.

Middle market organizations, on the other hand, typically have fewer resources and much smaller teams. Therefore, remaining compliant — and keeping up with change — can be a challenge and take precedence over opportunities like Mergers and Acquisitions (M&A), strategic risk management, and health and wealth offerings for attracting and retaining top talent.

While risk and compliance add pressure on growth for middle market organizations, there are promising paths forward. Tapping into the right resources and talent to make better regulatory decisions today, can result in a better tomorrow.

The Current Regulatory Landscape

Organizations today are wading through a morass of regulations, often attempting to keep up with a patchwork of U.S. federal and state regulations, in addition to regulatory concerns that come with expanding geographic footprints internationally. The SECURE 2.0 Act, the Health Insurance Portability and Accountability Act, Health Savings Account regulations, leave laws and beyond — particularly ESG regulation in Europe — are just some examples of increasing legislation.

Every middle market company needs a compliance strategy and framework to manage and mitigate risk. But this is not a growth or investment strategy. Directing resources and talent to compliance versus performance and growth initiatives can add stress to these organizations, slowing expansion and business plans — whether investing in new markets, products, services, and people or pursuing mergers and acquisitions.

With middle market organizations experiencing much of the same critical and complex human capital and risk capital risks as large organizations —their risk approach should evolve.

Middle Market Barriers and Considerations

There are several key areas where middle market organizations seek growth, but may face risk, regulatory and compliance burdens:

Talent strategies and associated compliance and risk - Middle market organizations want to provide premium talent offerings,2 which could include market competitive rewards, health and retirement benefits, and meaningful career opportunities. However, they often find themselves spending more time managing risk and regulations than exploring potential opportunities. Many large organizations have recognized the role HR plays in shaping and executing strategy and capitalized on it.

Research shows HR teams have shifted to spending 60 percent of their time on strategic initiatives, and the CHRO role continues to evolve at major organizations.3 But middle market organizations with smaller HR teams can easily fall behind these trends as they manage important administrative and operational needs versus larger strategic human capital initiatives.

Leave laws or pay transparency, for example, are a key legislative areas where middle market organizations need to assess their exposure, understand what’s applicable to their workforce, and make decisions about how to manage their business and talent accordingly.

When it comes to employee benefit plans, organizations must navigate laws that differ across cities, states, and countries. Many middle market organizations, which have fiduciary responsibilities, don’t have the in-house expertise or bandwidth to regularly review changing laws and proactively manage contract terms — opening them up to potentially overwhelming risk. For example, the litigation activity in the 401(k) market4 remains high‚ and employees who serve on fiduciary committees are personally liable. Participants are suing 401(k) sponsors for varied reasons, all of which put organizations of all sizes on edge — from not using the lowest share class for mutual funds, not satisfying their fiduciary duty to monitor providers, for excessive fees charged to participants, and beyond.

For middle market organizations, focusing on minimizing risk and managing case law versus being proactive or strategic about plans, can be a barrier to long-term growth.

Keeping ahead of M&A compliance matters - Sixty percent of middle market organizations that participate in M&A say it is vital to their growth strategy.5 But it’s critical for these organizations to focus on compliance throughout the process — from reviewing the compliance history of the target company along with potential liabilities to the changing laws and regulations that influence dealmaking.

Since middle market organizations often have fewer compliance resources, preparing for M&A from a compliance and regulatory standpoint can be particularly daunting. Organizations that haven’t developed regulatory frameworks and controls — which most large, publicly traded organizations already have — may face barriers. And due diligence processes could uncover liabilities that, while they won’t ultimately halt the transaction, adversely affect the sale price for a middle market company. Using acquisition as a path for company growth requires understanding the associated regulatory and compliance shift.

Staying on top of growth risks - Unlike large organizations that have worked toward an enterprise risk management approach, middle market organizations may find they are managing a medley of high stakes risks that require extensive time and resources. There are material risks that come with human capital, and organizations of all sizes are increasingly paying attention.

In Aon’s Global Risk Management survey, failure to attract and retain talent was the fourth biggest risk organizations are facing, and respondents expect that to remain into 2026. At the same time, middle market organizations are managing risk capital and trying to ensure both compliance and strategic decision-making across all areas of risk. Cyber, ESG, E&O and D&O continue to rise to the top of the agenda.

No company is immune from rising cyber risk. Middle market organizations, in particular, may not have the IT teams and defenses that large organizations have. In one survey, 28 percent of middle market executives reported that their organizations experienced a data breach in the previous year;6 in another, nearly half of middle market firms reported that they didn’t have an incident response plan.7

Errors and omissions risk, along with directors and officers risk, are areas where middle market organizations need solid regulatory coverage, especially as they grow, bring on more talent and serve more clients. Additionally, climate and ESG — a constantly evolving set of regulations that vary across state and country borders — present new challenges, particularly as middle market organizations seek geographic expansion.

There are several paths middle market organizations can consider continuing on a strategic growth trajectory, while managing regulation and compliance more confidently today and in the future.

  1. Establish a compliance strategy. All middle market organizations should have a compliance strategy in place from the start. For those that don’t have the internal resources, working with partners or getting counsel to help anticipate future regulations and their impact, as well as outline the various options for complying with those regulations. Doing so will likely be a strategic investment that will save in the end. For middle market organizations sponsoring their own 401k plan, for example, as regulations change, understanding them, tracking developments, and determining which are applicable can require sizable effort and time.
  2. Seek out different human capital strategies. Middle market organizations should seek different strategies to meet the needs of their people and any future M&A transaction. For instance, pooled employer plans (PEP) can aid middle market 401(k) plan sponsors that find managing plans takes more time, effort, energy, and cost than they can afford, especially with SECURE 2.0 taking hold over time.8
  3. Use data to benchmark against peers. Benchmarking can help middle market organizations understand where they stand against their peers. Organizations should gather data across their industry to learn common regulatory and compliance pitfalls and address them proactively. Even for middle market organizations that don’t have an existing strategy, gathering data can help organize and develop a regulatory, compliance and governance framework for better decision making in the future.
  4. Stay on top of broader trends. Broader business trends, particularly regulation and investor scrutiny for publicly traded organizations, can signal what’s ahead and where middle market organizations should focus. For instance, investors recognize that human capital is a tangible asset for organizations — and that managing human capital well beyond compliance, drives corporate results.

    With the Investor Advisory Committee within the SEC pushes organizations to disclose more data on human capital practices,9 middle market organizations can take note and use this information to further understand where to invest their own time and resources.

Establishing comprehensive risk mitigation strategies and coverage approaches is critical. Bundling policies and seeking counsel mitigation tools and strategies, including business continuity plans, for instance, can help position middle market organizations more favorably when seeking coverage.

Middle market organizations that align risk and HR teams with their overall business strategy, develop frameworks, identify innovative solutions and focus on broader business trends, can ultimately find the right balance between compliance and opportunity with confidence.

1 https://www.moodys.com/web/en/us/insights/insurance/emerging-regulations-are-reshaping-the-global-insurance-industry.html
2 https://www.amalgamatedbenefits.com/amalgamated-life/middle-market-businesses-and-employee-benefits-trends/
3 https://chief.com/articles/why-chros-are-the-new-c-suite-power-player
4 https://www.investmentnews.com/retirement/news/401k-settlements-went-way-up-in-2023-247954
5 https://www.middlemarketcenter.org/Media/Documents/key-findings-middle-market-merger-and-acqusition-best-practices-key-findings.pdf
6 https://rsmus.com/middle-market/cybersecurity-mmbi.html
7 https://www.insurancebusinessmag.com/us/news/cyber/how-well-is-the-middle-market-keeping-up-with-cyber-risk-461144.aspx
8 https://woodruffsawyer.com/insights/pooled-employer-plan
9 https://www.sec.gov/files/spotlight/iac/20230921-recommendation-regarding-hcm.pdf

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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