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2.4 Financial Regulation and Ethics

3 min readjuly 18, 2024

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 , , and . These laws require , prohibit , 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

    • 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
    • Conducts monetary policy by setting interest rates and controlling money supply
    • Supervises banks and promotes financial stability by acting as lender of last resort
    • 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
    • Regulates the 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 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 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 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)
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© 2024 Fiveable Inc. All rights reserved.
AP® and SAT® are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.

© 2024 Fiveable Inc. All rights reserved.
AP® and SAT® are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.
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