Investing Regulations

The number of people who are investing in the stock and bond markets through various ways has increased significantly, and the demand for innovative and complex investment products has also gone up. To meet the growing demand for investment products, the government has created regulations to manage and regulate investing at all levels. 

Examining how the past has shaped government regulation of investing helps us to understand how organizations and its members are held accountable. Regulations are enforced by rules that control an activity or process. So let’s take a step back and look at why government regulation of investing is necessary, and begin with the Glass-Steagall Act.

While the Glass-Steagall act was repealed in 1999, it is important to understand why the act was needed and what remains because of its inception. The Banking Act of 1933, also known as the Glass-Steagall Act was created due to the Great Depression by the U.S. Congress. Over four million Americans lost their life savings when banks and financial institutions reinvested customer’s money into high risk and sometimes fraudulent stocks.

At the time, the Federal Deposit Insurance Corporation (FDIC) did not exist and banks did not have restrictions on how they could invest customer’s money. After four thousand banks went bankrupt, all banks were closed for several days in order to stop more people from withdrawing money (bank-run) as Americans lost trust in financial services.

The Glass Steagall Act was created three days after President Franklin Roosevelt took office in 1933, under emergency legislation. The bill was named after two congressmen Senator Carter Glass of Virginia, a former Treasury secretary and Representative Henry Steagall of Alabama, then chairman of the House Banking and Currency Committee.

Its primary purpose was to:

  • Separate commercial banking from investment banking. Commercial banks, which took in deposits and made loans, were no longer allowed to underwrite or deal in non-government securities. Investment banks, which underwrote and dealt in non-government securities, were no longer allowed to have close connections to commercial banks.
  • Direct bank credit into areas such as manufacturing, commerce, and agriculture.
  • Create the FDIC which insures bank deposits with a pool of money collected from banks.

Before the formation of the FDIC, state governments failed in setting up deposit insurance institutions because doing so was considered a “moral hazard”. The creation of the FDIC was Glass-Steagall’s greatest accomplishment as it was given the authority to insure banks under the Federal Reserve System and act as the regulator of banks chartered by state governments but not under the Federal Reserve System.

In 1956, the U.S. Congress amended the Glass-Steagall Act in order to redefine bank holding companies and passed the Bank Holding Company Act. The new law targeted banks involved in underwriting insurance and banks that held more than twenty-five percent ownership in two or more banks.

In 1999, the Glass-Steagall Act was repealed, because the banking industry complained the act restricted them too much. They said they couldn’t compete with foreign financial firms that could offer higher returns. The repeal of Glass-Steagall consolidated investment and retail banks through financial holding companies. The Federal Reserve supervised the new entities. 

When the stock market crashed in October 1929, which triggered the Great Depression, it was estimated that 25 billion dollars of new stocks being offered in the market were completely worthless. This made up half of all new stocks issued during that time.

In order to restore the public’s faith in capital markets, Congress passed the Securities Act of 1933. This law, together with the Securities Exchange Act of 1934, which created the Securities and Exchange Commission (SEC), was designed to restore investor confidence in U.S. capital markets. It also provides investors and the markets with more reliable information and clear rules.

The purpose of these laws is to ensure that:

  • Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing.
  • People who sell and trade securities – brokers, dealers, and exchanges – must treat investors fairly and honestly, putting investors’ interests first.

To safeguard non-partisanship, the SEC is organized as follows:

  • Five presidential-appointed Commissioners, each with staggered five-year terms, and one of them is designated by the President as Chairman of the Commission, who is the agency’s chief executive.
  • By law, no more than three of the Commissioners may belong to the same political party.
  • The agency’s functional responsibilities are organized into five Divisions and 24 Offices, each of which is headquartered in Washington, DC.
  • The Commission’s approximately 4,600 employees are located in Washington and in 11 Regional Offices throughout the U.S.

The SEC is responsible for:

  • interpreting and enforcing federal securities laws;
  • issuing new rules and amending existing rules;
  • overseeing the inspection of securities firms, brokers, investment advisers, and ratings agencies;
  • overseeing private regulatory organizations in the securities, accounting, and auditing fields;
  • coordinating U.S. securities regulation with federal, state, and foreign authorities.

Following a need to refer back to details of circumstances that led to changes in the law that governed capital markets, retired commissioners of the SEC created the Securities and Exchange Commission Historical Society.

Founded in 1999, the Society is a 501(c)(3) non-profit organization, independent of and separate from the U.S. Securities and Exchange Commission. The SEC Historical Society is funded solely by gifts and grants from the private sector, and receives no government funding.

Working under the supervision of the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) was created in 2007, following a consolidation of regulations. FINRA is a not-for-profit organization made up of 20 industry and public members.

Members are selected to the board after a nomination process, background check, and screening to make sure there is representation by firms of all sizes. Members who are also known as governors are appointed or elected for three-year terms and may not serve more than two consecutive terms.

FINRA is responsible for regulating:

  • Broker-Dealers in the business of buying or selling securities on behalf of its customers or its own account, or both.
  • Capital Acquisition Brokers who are Broker Dealers subject to a narrower rule book.
  • Funding Portals which are a crowdfunding intermediary. 

In order to prevent investor fraud, FINRA has created the following tools and resources for individual investors:

  • Broker Check where investors can check the background of an investment professional or firm, including any prior client complaints, and financial disclosures;
  • Fund Analyzer that analyzes mutual funds and ETFs for fees and fund information;
  • Market Data Center that provides market information on stocks and bonds;
  • Publications and Podcasts where investors can find news articles and interviews created for educational purposes.

The International Organization of Securities Commissions (IOSCO) is the international body that brings together the world’s securities regulators and is recognized as the global standard setter for the securities sector. IOSCO develops, implements and promotes adherence to internationally recognized standards for securities regulation.

The IOSCO Objectives and Principles of Securities Regulation sets out principles based on three objectives:

  • Protect investors
  • Ensure fair, efficient and transparent markets
  • Reduce systemic risk

IOSCO is a multilateral organization of securities regulators in which the SEC actively participates. Together, its members regulate over 95% of the world’s securities markets. IOSCO members have resolved to:

1) Cooperate in developing internationally recognized standards of regulation, oversight, and enforcement to:

  • protect investors
  • maintain fair, efficient and transparent markets
  • seek to address systemic risks

2) Enhance investor protection through:

  • strengthened information exchange
  • enforcement against misconduct
  • supervision of markets and market intermediaries

3) Exchange information regarding global and regional experiences in order to assist with:

  • the development of markets,
  • strengthen market infrastructure
  • implement appropriate regulation.

In July 2010, Congress passed and President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act created the Consumer Financial Protection Bureau (CFPB).

The CFPB consolidates most Federal consumer financial protection authority into one place. The consumer bureau is focused on one goal: watching out for American consumers in the market for consumer financial products and services.

The CFPB was created to provide a single point of accountability for enforcing federal consumer financial laws and protecting consumers in the financial marketplace. Before, that responsibility was divided among several agencies.

CFPB follows three basic principles:

  • Empower: They create tools, answer common questions, and provide tips that help consumers navigate their financial choices and shop for the deal that works best for them.
  • Enforce: They take action against predatory companies and practices that violate the law and have already returned billions of dollars to harmed consumers.
  • Educate: They encourage financial education and capability from childhood through retirement, publish research, and educate financial companies about their responsibilities.

The core functions of the CFPB are to:

  • Root out unfair, deceptive, or abusive acts or practices by writing rules, supervising companies, and enforcing the law
  • Enforce laws that outlaw discrimination in consumer finance
  • Take consumer complaints
  • Enhance financial education
  • Research the consumer experience of using financial products
  • Monitor financial markets for new risks to consumers

Interested in learning more about our Investment Series? Take the full course by becoming an MFF Fellow.

A Journey to Personal Financial Success

At Morgan Franklin Fellowship (MFF), we support the concept of financial freedom – by teaching participants how to save by paying themselves first, invest for their future and grow their net worth.

Learning how money works and how to talk about money with others are the first steps towards recognizing an individual’s lifelong financial goals. Our online programs, podcasts, blogs, and book reviews and resources are designed to help you learn the concepts, rules and vocabulary of money, finance and investing.

Becoming an MFF Fellow

Our Standards of Financial LiteracyLearning about money series is engaging, full of interesting information, and easy to navigate. Adapted from the National Standards for Personal Financial Education developed by the Council for Economic Education (CEE), this robust curriculum features six short lessons on such important topics as earning income, understanding the value of saving and using credit. When completed, this program lays the foundation for becoming an MFF Fellow.

Becoming an MFF Fellow is the ticket to access additional MFF programs and opportunities for mentoring, networking, internships and real-world opportunities. Hear from the MFF Fellow themselves on how these opportunities encourage them to continue their journey to personal financial success.

Learn More about Money

Begin the journey towards personal financial independence today. START LEARNING TODAY

Like this article?

Share on Facebook
Share on Twitter
Share on Linkdin
Share on Pinterest