Financial regulation aims to protect investors and maintain market integrity. It ensures fair markets through disclosure requirements and prevents fraud through enforcement. Regulatory bodies like the SEC, Fed, FDIC, and CFTC oversee different aspects of the financial system.
Key regulations include the Securities Act of 1933 , Securities Exchange Act of 1934 , and Dodd-Frank Act . These laws require transparency , prohibit insider trading , and promote financial stability. Ethics in finance is crucial for maintaining trust and protecting stakeholders.
Financial Regulation
Objectives of financial regulation
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Protects investors and maintains market integrity by
Ensuring fair and transparent markets through disclosure requirements and oversight
Preventing fraud, manipulation, and insider trading through enforcement actions
Promotes financial stability by
Reducing systemic risk through prudential regulation and supervision
Preventing financial crises and contagion effects through early intervention and resolution mechanisms
Enhances public confidence in the financial system by
Fostering trust in financial institutions and markets through effective regulation and supervision
Encouraging participation and investment by providing a level playing field and protecting investor rights
Key regulatory bodies
Securities and Exchange Commission (SEC)
Regulates securities markets and enforces federal securities laws (Securities Act of 1933, Securities Exchange Act of 1934)
Oversees stock exchanges (NYSE, NASDAQ), broker-dealers, and investment advisors
Federal Reserve System (Fed)
Conducts monetary policy by setting interest rates and controlling money supply
Supervises banks and promotes financial stability by acting as lender of last resort
Federal Deposit Insurance Corporation (FDIC)
Insures deposits in banks and thrift institutions up to $250,000 per account
Examines and supervises financial institutions for safety and soundness to prevent bank failures
Commodity Futures Trading Commission (CFTC)
Regulates the derivatives markets, including futures (commodities, currencies), options, and swaps
Protects market participants from manipulation, abusive practices, and fraud by enforcing the Commodity Exchange Act
Regulations for financial markets
Securities Act of 1933
Requires registration of securities offerings with the SEC and disclosure of material information through prospectuses
Prohibits misrepresentation and fraudulent activities in the sale of securities (primary market)
Securities Exchange Act of 1934
Established the SEC and empowered it to regulate securities markets and market participants
Requires periodic reporting by public companies (10-K, 10-Q) and prohibits insider trading (secondary market)
Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)
Introduced sweeping reforms in response to the 2008 financial crisis to promote financial stability and protect consumers
Established the Consumer Financial Protection Bureau (CFPB) to regulate consumer financial products and services
Imposed stricter capital and liquidity requirements on financial institutions to enhance their resilience
Basel Accords (Basel I, II, and III)
International regulatory framework for banks developed by the Basel Committee on Banking Supervision
Sets minimum capital requirements based on risk-weighted assets and promotes sound risk management practices
Ethics in Finance Industry
Ethics in finance industry
Maintaining trust and confidence is crucial because
Ethical conduct preserves the integrity of financial markets by ensuring fair and transparent practices
Unethical behavior erodes public trust and can lead to market instability (2008 financial crisis)
Protecting stakeholders is a key responsibility of financial professionals who
Have a fiduciary duty to act in the best interests of their clients (retail investors, institutional investors)
Must ensure fair treatment of investors, depositors, and borrowers to prevent exploitation and discrimination
Preventing financial misconduct is essential to mitigate risks and avoid negative consequences such as
Significant financial losses for investors and financial institutions due to fraud, insider trading, and manipulation
Reputational damage that can lead to loss of clients, decreased market share, and regulatory sanctions
Promoting long-term sustainability is a strategic imperative because
Ethical behavior contributes to the long-term stability and growth of the financial industry by building trust and confidence
Short-term gains from unethical practices are unsustainable and ultimately destructive (Enron, WorldCom scandals)
Complying with professional codes of conduct is mandatory for financial professionals who are
Bound by ethical codes set by industry associations that outline standards of integrity, competence, and diligence
Required to adhere to the CFA Institute Code of Ethics and Standards of Professional Conduct (for CFA charterholders)