The Role of the “Fed”
and Regulatory Agencies
Lesson 2
Other Regulatory Agencies and Laws
Other Regulatory Agencies
Aim:
 What agencies have a role in ensuring
our financial markets function properly?
Do Now:
 From what you know about our
financial markets, identify why involved
parties might want to tilt the system in
their favor.
Other Regulatory Agencies
 Do Now answer: There are billions of
dollars of stocks bought and sold each
day. Just a small fraction of that is a lot of
money. If a party can figure out a way to
gain just a small advantage, that party can
become very wealthy.
Other Regulatory Agencies
The goal of a regulatory agency is
to protect individual investors. The
most highly regulated business in
the U.S. is the securities industry.
SEC (Securities And Exchange Commission):
Created in 1933, the top government
regulatory agency in the securities
industry. The SEC is responsible for
overseeing the securities industry
and ensuring that markets work
efficiently. The SEC regulates the
securities market and protects
investors against fraudulent and
manipulative practices.
SEC (Securities And Exchange Commission):
Securities cannot be sold
to investors without a
prospectus.
Oversees all of the stock
exchanges and any
organization connected
with the selling of
securities.
Has a strong anti-fraud unit
that monitors advertising and
marketing to make sure
companies comply with strict
rules concerning the sale of
securities.
Monitors any U.S.
corporate takeovers.
Commodity Futures Trading
Commission (CFTC)
A U.S. federal agency established by the Commodity
Futures Trading Commission Act of 1974. It ensures the
open and efficient operation of the futures market. The
CFTC protects investors from abusive trade practices,
manipulation, and fraud. The CFTC ensures that the
markets are liquid and that both parties of options or
futures transactions are able to meet their contractual
obligations.
Self-Regulatory Organization (SRO):
A non-governmental organization that
has the power to create and enforce
industry regulations and standards. The
goal of all SROs is to protect investors
through the establishment of rules that
promote ethics and equality.
Financial Industry Regulatory
Authority (FINRA)
A self-regulatory body that aims to eliminate
regulatory overlap and cost inefficiencies. FINRA
is responsible for governing business between
brokers, dealers and the investing public.
What is a Stock Exchange?
A marketplace where people buy
and sell securities. The NASDAQ
and NYSE are two exchanges on
such trading can be done. When
they go public, companies
choose to trade on one or
another of these exchanges.
Municipal Securities Rulemaking Board
(MSRB)
A self-regulating
organization that
creates rules and
policies for
investment
companies and
banks in the
issuing and sale of
municipal
securities
(Example: notes,
bonds).
Regulates
underwriting,
trading and
selling of
municipal
securities.
Subject
to
supervisi
on by
the SEC.
National Futures Association (NFA):
A self-regulatory organization for the U.S. futures market.
NFA membership is mandatory for all participants in the
futures and commodities market, providing assurance to
the investing public that all firms, intermediaries and
associates who conduct business with them in the U.S.
comply with their regulations.
Oversees and protects investors from fraudulent
commodities and futures activities.
Conducts background checks and licensing exams, regulates
futures trading, provides information for investors, and
monitors how firms comply.
Dodd-Frank Wall Street Reform and
Consumer Protection Act - 2010
The Dodd-Frank Wall Street Reform and
Consumer Protection Act promotes the financial
stability of the United States by improving
accountability and transparency of the financial
system.
Dodd-Frank Wall Street Reform and
Consumer Protection Act - 2010
Protect American taxpayers
by ending bailouts.
Protect consumers from
abuse of financial services
practices.
Restrict the types of
proprietary trading that
financial institutions will be
able to do.
Proprietary Trading: The act of
trading stocks, bonds,
commodities, or derivatives
with a firm’s own capital rather
than investor’s capital. It allows a
firm to make a profit for itself.
Establish government
agencies to monitor banking
practices and oversee
troubled financial
institutions
Protect borrowers against
abusive lending and
mortgage practices.
Dodd-Frank Wall Street Reform and
Consumer Protection Act - 2010
Reasons for Dodd-Frank:
Major financial institutions, such as Lehman Brothers,
collapsed in 2008.
The housing bubble burst.
Investment firms were packaging risky mortgages into
Mortgage Backed Securities and passing them off as
safe bonds.
Dodd-Frank Wall Street Reform and
Consumer Protection Act
Historical Perspective:
The Dodd-Frank
Financial Regulatory
Reform Bill was
named after
Senator Christopher
J. Dodd and U.S.
Representative
Barney Frank.
Signed into
Federal law by
President Obama
on July 21, 2010.
Represents
the most
comprehensive
financial regulatory
reform measures
taken since the
Great Depression
This act made
changes in the
American financial
regulatory
environment that
affects all Federal
financial regulatory
agencies.
This was
a reaction to
the late 2000’s
recession. It also
sought to reduce
banks from over
leveraging
themselves.
Dodd-Frank Wall Street Reform and
Consumer Protection Act
Consequences of Dodd-Frank:
Affected the oversight of financial institutions.
Provided a new resolution procedure for large financial companies.
Resolution Procedure: A set of guidelines that spell out the proper steps
a financial company must make if they file for bankruptcy.
Created a new agency responsible for implementing and enforcing
compliance with consumer financial laws.
Made significant changes in the regulation of over-the-counter derivatives.
Reformed the regulation of credit rating agencies.
Dodd-Frank Wall Street Reform and
Consumer Protection Act
Impact on Hedge Funds
• Requires all large hedge fund advisors to register with the
SEC.
• The new rules on derivatives trading have an additional
impact on many hedge funds.
• Increase of compliance costs on funds and investors.
• Hedge fund advisors must maintain extensive records
about their investment and business practices. They must
provide this information to the SEC.
Lesson Summary
1. Which government agency, created in 1933 after
the stock market crash of 1929, is the primary
regulator of the markets?
2. Which agency regulates the more exotic
investments called futures and options?
3. What do we call an organization that represents
an industry trying to police itself?
•
What organization exists for the financial industry?
4. What extensive reform law was pass in the
aftermath of the recession of 2008?
•
Identify three major accomplishments in the law.
5. What agencies have a role in ensuring our
financial markets function properly?
Web Challenge #1
Challenge: One of the explanations for the
existence of financial practices that victimized
consumers was that there was no one agency
whose sole responsibility was to look out for the
public. That agency exists now as a result of
the Dodd-Frank law. What is the name of
agency? Visit its web site and identify three
issues that it is taking an active role in. Who is
it headed by? Find out if there was any
contention in the appointment of this person.
Web Challenge #2
Challenge: The SEC has vast power over the
financial industry. Critics of the 2008 financial
crisis wonder how it could have allowed the
practices that lead to the meltdown. Research
the criticisms of the SEC’s role in the crisis.
Identify the three you find the most frequently
cited. Finally, what is your opinion? Are these
criticisms fair? Why or why not?
Web Challenge #3
Q: Could the housing bubble and economic crisis
of 2008 have been predicted?
 A: Many people say yes, that it can be traced
back to the repeal of an important Depressionera law called the Glass-Steagall Act.
 Challenge: In what year was Glass-Steagall
passed? Why was it passed? What was the
argument for repealing it? What abuses do
critics say began creeping back in? Finally,
how soon after it was repealed did the financial
meltdown occur?