Financial Regulations

Financial regulations are laws that govern banks, investment firms, and insurance companies. They protect you from financial risk and fraud. But they must be balanced with the need to allow capitalism to operate efficiently.

As a matter of policy, Democrats generally advocate more regulations. Republicans typically promote deregulation.

Federal and state governments have a myriad of agencies in place that regulate and oversee financial markets and companies. These agencies each have a specific range of duties and responsibilities that enable them to act independently of each other while they work to accomplish similar objectives.

Although opinions vary on the efficiency, effectiveness, and even the need for some of these agencies, they were each designed with specific goals and will most likely be around for some time. With that in mind, the following article is a review of many of the regulatory bodies active in the U.S. financial sector.

Why Financial Regulations Are Important

Regulations protect consumers from financial fraud. These include unethical mortgages, credit cards, and other financial products.

Effective government oversight prevents companies from taking excessive risks. Some have concluded, for example, that tighter regulations would have stopped Lehman Brothers from engaging in risky behavior, a change that could have prevented or curbed the 2008 financial crisis. Laws like the Sherman Anti-Trust Act prevent monopolies from taking over and busing their power. Unregulated monopolies have the freedom to gouge prices, sell faulty products, and stifle competition.

Government protection can help some critical industries get started. Examples include the electricity and cable industries. Companies wouldn't invest in high infrastructure costs without governments to shield them. In other industries, regulations can protect small or new companies. Proper rules can foster innovation, competition, and increased consumer choice.

Regulations protect social concerns. Without them, businesses will ignore damage to the environment. They will also ignore unprofitable areas such as rural counties.\

Who Regulates the Financial Industry?

There are three types of financial regulators.

Banking

Bank regulators perform four functions that help to strengthen and maintain trust in the banking system—and trust is critical to a functioning system. First, they examine banks' safety and soundness. Second, they make sure the bank has adequate capital. Third, they insure deposits. Fourth, they evaluate any potential threats to the entire banking system.4

The Federal Deposit Insurance Corporation (FDIC) examines and supervises more than 5,000 banks, a significant portion of the banks in the U.S. When a bank fails, the FDIC brokers its sale to another bank and transfers depositors to the purchasing bank. The FDIC also insures savings, checking, and other deposit accounts.

The Dodd-Frank Wall Street Reform and Consumer Protection Act strengthened the Fed's power over financial firms. If any become too big to fail, they can be turned over to the Federal Reserve for supervision. The Fed is also responsible for the annual stress test of major banks.

The Office of the Comptroller of the Currency supervises all national banks and federal savings associations. It also oversees national branches of foreign banks.7 The National Credit Union Administration regulates credit unions.

Financial Markets

The Securities and Exchange Commission (SEC) is at the center of federal financial regulations. It maintains the standards that govern the stock markets, reviews corporate filing requirements, and oversees the Securities Investor Protection Corporation.

The SEC also regulates investment management companies, including mutual funds. It reviews documents submitted under the Sarbanes-Oxley Act of 2002. Most importantly, the SEC investigates and prosecutes violations of securities laws and regulations.

The Commodity Futures Trading Commission regulates the commodities futures and swaps markets. Commodities include food, oil, and gold. The most common swaps are interest-rate swaps.

Consumers

The Consumer Financial Protection Bureau (CFPB) is under the U.S. Treasury Department. It makes sure banks don't overcharge for credit cards, debit cards, and loans. It requires banks to explain risky mortgages to borrowers. Banks must also verify that borrowers have an income.

Who Regulates the Financial Industry

• Regulatory bodies are established by governments or other organizations to oversee the functioning and fairness of financial markets and the firms that engage in financial activity.
• The goal of regulation is to prevent and investigate fraud, keep markets efficient and transparent, and make sure customers and clients are treated fairly and honestly.
• Several different regulatory bodies exist from the Federal Reserve Board which oversees the commercial banking sector to FINRA and the SEC which monitor brokers and stock exchanges.

The Federal Reserve Board

The Federal Reserve Board (FRB) is one of the most recognized of all the regulatory bodies. As such, the "Fed" often gets blamed for economic downfalls or heralded for stimulating the economy. It is responsible for influencing money, liquidity, and overall credit conditions. Its main tool for implementing monetary policy is its open market operations, which control the purchase and sale of U.S. Treasury securities and federal agency securities. Purchases and sales can change the number of reserves or influence the federal funds rate—the interest rate at which depository institutions lend balances to other depository institutions overnight. The Board also supervises and regulates the banking system to provide overall stability to the financial system. The Federal Open Market Committee (FOMC) determines the Fed's actions.

One of the key regulatory roles of the FRB is to oversee the commercial banking sector in the United States. Most national banks must be members of the Federal Reserve System; however, they are regulated by the Office of the Comptroller of the Currency (OCC). The Federal Reserve supervises and regulates many large banking institutions because it is the federal regulator for bank holding companies (BHCs).

Office of the Comptroller of the Currency

One of the oldest federal agencies, the Office of the Comptroller of the Currency (OCC) was established in 1863 by the National Currency Act.1 Its main purpose is to supervise, regulate, and provide charters to banks operating in the U.S. to ensure the soundness of the overall banking system. This supervision enables banks to compete and provide efficient banking and financial services.

The OCC is an independent bureau within the Department of Treasury. Its mission statement verifies it is to "ensure that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations."

Federal Deposit Insurance Corporation

The Federal Deposit Insurance Corporation (FDIC) was created by the Glass-Steagall Act of 1933 to provide insurance on deposits to guarantee the safety of funds kept by depositors at banks.3 Its mandate is to protect up to $250,000 per depositor. The catalyst for creating the FDIC was the run on banks during the Great Depression of the 1920s.

Checking accounts, savings accounts, CDs, and money market accounts are generally 100% covered by the FDIC. Coverage extends to individual retirement accounts (IRAs), but only the parts that fit the type of accounts listed previously. Joint accounts, revocable and irrevocable trust accounts, and employee benefit plans are covered, as are corporate, partnership, and unincorporated association accounts.

FDIC insurance does not cover products such as mutual funds, annuities, life insurance policies, stocks, or bonds. The contents of safe deposit boxes are also not included in FDIC coverage. Cashier's checks and money orders issued by the failed bank remain fully covered by the FDIC.

Office of Thrift Supervision

The Office of Thrift Supervision (OTS) was established in 1989 by the Department of Treasury through the Financial Institutions Reform, Recovery and Enforcement Act of 1989.5 It is funded solely by the institutions it regulates. The OTS was similar to the OCC except that it regulated federal savings associations, also known as thrifts or savings and loans.

Commodity Futures Trading Commission

The Commodity Futures Trading Commission (CFTC) was created in 1974 as an independent authority to regulate commodity futures and options and other related derivatives markets and to provide for competitive and efficient market trading.7 It also seeks to protect participants from market manipulation, investigates abusive trading practices and fraud, and maintains fluid processes for clearing.

The CFTC has evolved since 1974 and in 2000, the Commodity Futures Modernization Act of 2000 was passed.8 This changed the landscape of the agency by creating a joint process with the Securities and Exchange Commission (SEC) to regulate single-stock futures.

Financial Industry Regulatory Authority

The Financial Industry Regulatory Authority (FINRA) was created in 2007 by its predecessor, the National Association of Securities Dealers (NASD).9

 FINRA is considered a self-regulatory organization (SRO) and was originally created as an outcome of the Securities Exchange Act of 1934.

FINRA oversees all firms that are in the securities business with the public. It is also responsible for training financial services professionals, licensing and testing agents, and overseeing the mediation and arbitration processes for disputes between customers and brokers.

State Bank Regulators

State bank regulators operate similarly to the OCC, but at the state level for state-chartered banks. Their oversight works in conjunction with the Federal Reserve and the FDIC.

For example, in New York State, the Department of Financial Services (DFS) supervises and regulates the activities of approximately 1,500 N.Y.-domiciled banking and other financial institutions with assets totaling more than $2.6 trillion and more than 1,800 insurance companies with assets of more than $4.7 trillion.

They include more than 130 life insurance companies, 1,168 property/casualty insurance companies, about 100 health insurers and managed care organizations, and more than 375,000 individual insurance licensees, 122 state-chartered banks, 80 foreign branches, 10 foreign agencies, 17 credit unions, 13 credit rating agencies, nearly 400 licensed financial services companies, and more than 9,455 mortgage loan originators and servicers.

State Insurance Regulators

State regulators monitor, review and oversee how the insurance industry conducts business in their states. Their duties include protecting consumers, conducting criminal investigations, and enforcing legal actions. They also provide licensing and authority certificates, which require applicants to submit details of their operations. (For a directory of specific state agencies visit www.insuranceusa.com.)

State Securities Regulators

These agencies augment FINRA and the SEC for matters associated with regulation in the state's securities business. They provide registrations for investment advisors who are not required to register with the SEC and enforce legal actions with those advisors.

Securities and Exchange Commission (SEC)

The SEC acts independently of the U.S. government and was established by the Securities Exchange Act of 1934.11

One of the most comprehensive and powerful agencies, the SEC enforces the federal securities laws and regulates the majority of the securities industry. Its regulatory coverage includes the U.S. stock exchanges, options markets, and options exchanges as well as all other electronic exchanges and other electronic securities markets. It also regulates investment advisors who are not covered by the state regulatory agencies.

The SEC consists of six divisions and 24 offices.12 Their goals are to interpret and take enforcement actions on securities laws, issue new rules, provide oversight of securities institutions, and coordinate regulation among different levels of government. The six divisions and their respective roles are:

Financial Regulatory Bodies in India

The Reserve Bank of India (RBI)

Established under the RBI Act, 1934, RBI is the central bank of India; and is vested with various responsibilities under the Banking Regulation Act, 1949. Following are some of its primary functions:

1. Issuance of banknotes
2. Banker to the government
3. Custodian of cash reserves of commercial banks
4. Custodian of foreign exchange reserves
5. Controller of credit
6. Lender of the last resort

Securities and Exchange Board of India (SEBI)

Established on April 12, 1992, under the SEBI Act 1992, the Securities and Exchange Board of India (SEBI) is a statutory body owned by the government of India. Its primary function is to safeguard the interests of investors in securities exchange and regulate the securities market. The headquarters of SEBI is located in Mumbai and the branch offices are located in Delhi, Kolkata, and Chennai.

Insurance Regulatory and Development Authority of India (IRDAI)

Established under the Insurance Regulatory and Development Authority Act, 1999, IRDAI is an autonomous statutory body tasked with regulating and promoting the insurance and re-insurance industries in India. Headquartered in Hyderabad, it is a 10-member body consisting of a Chairman, five full-time members, and four part-time members appointed by the government of India.

PFRDA under the Finance Ministry

PFRDA stands for Pension Fund Regulatory and Development Authority. Established by the government of India on August 23, 2003, by executive order, PFRDA was mandated to act as a regulator of pension funds. Headquartered in Delhi, India, it is currently headed by Mr. Supratim Bandopadhyay who is the chairperson of PFRDA. The organizational structure consists of a chairperson, 3 whole-time members from finance, law, and economics along with a chief vigilance officer.