Chapter 3. Role of Government in Financial Markets why regulate? types of regulation regulation in the U.S. why regulate? types of regulation regulation in the U.S.

I. Why regulate? regulation necessary when there is a market failure market outcome is NOT optimal by itself financial markets important to entire economy regulation necessary when there is a market failure market outcome is NOT optimal by itself financial markets important to entire economy

asymmetric information some investors have access to more/better information use it to profit at expense of others discourage participation in markets some investors have access to more/better information use it to profit at expense of others discourage participation in markets

II. Types of Regulation Disclosure issuers make financial information public level playing field? Disclosure issuers make financial information public level playing field?

Disclosure today issues about accuracy of info made public fraud creative but legal accounting issues about accuracy of info made public fraud creative but legal accounting

Financial activity how orders to buy/sell securities are handled rules to avoid conflicts-of-interest rules against insider trading (trading on info not available to public) Financial activity how orders to buy/sell securities are handled rules to avoid conflicts-of-interest rules against insider trading (trading on info not available to public)

recent controversy conflicts of interest between investment banking clients brokerage clients did brokerage houses give stocks high ratings to gain the business of those companies? conflicts of interest between investment banking clients brokerage clients did brokerage houses give stocks high ratings to gain the business of those companies?

Financial institutions depository & nondepository permissible activities protection of investor funds Foreign participation type/amount of institution ownership Financial institutions depository & nondepository permissible activities protection of investor funds Foreign participation type/amount of institution ownership

III. Regulation in the U.S. result of financial crises panic 1907 crash of 1929 & Great Depression S&L crisis 1980s result of financial crises panic 1907 crash of 1929 & Great Depression S&L crisis 1980s

Federal Reserve System 1913, after panic of 1907 central bank to prevent bank panics regulator of financial institutions control of money supply and interest rates 1913, after panic of 1907 central bank to prevent bank panics regulator of financial institutions control of money supply and interest rates

Great Depression creation of SEC and rules about disclosure, insider trading insurance for bank deposits other bank regulations later repealed creation of SEC and rules about disclosure, insider trading insurance for bank deposits other bank regulations later repealed

S&L crisis changes in regulation of S&Ls changes in permissible activities of S&Ls changes in regulation of S&Ls changes in permissible activities of S&Ls

Current issues in regulation conflicts between stock research and investment banking at securities firms accounting rules & conflicts between accounting & consulting mutual fund oversight conflicts between stock research and investment banking at securities firms accounting rules & conflicts between accounting & consulting mutual fund oversight

Case 1: Mutual funds Elliot Spitzer, NYS Attorney General late trading allowing certain clients to trade mutual fund shares after 4 p.m. illegal Elliot Spitzer, NYS Attorney General late trading allowing certain clients to trade mutual fund shares after 4 p.m. illegal

market timing allowed CERTAIN investors to buy and sell share to profit from daily market movements not illegal UNLESS only certain investors allowed to do it market timing allowed CERTAIN investors to buy and sell share to profit from daily market movements not illegal UNLESS only certain investors allowed to do it

fees Spitzer complaining that fees are excessive BUT fees are within SEC guidelines fees Spitzer complaining that fees are excessive BUT fees are within SEC guidelines

Case 2: Martha Stewart currently on trial accused of obstruction of justice (lying) stock fraud NOT insider trading currently on trial accused of obstruction of justice (lying) stock fraud NOT insider trading

allegationsallegations Stewart sold ImClone stock before big drop did she get tipped off? (company Pres. or by broker) Stewart then lied to investigators & tampered with evidence Stewart sold ImClone stock before big drop did she get tipped off? (company Pres. or by broker) Stewart then lied to investigators & tampered with evidence

Martha Stewart lied to prevent the stock in here own company from falling stock fraud Martha Stewart lied to prevent the stock in here own company from falling stock fraud

Stewart claims that she had a prior agreement with her broker to sell when price fell below $60 read more at Slate.com Stewart claims that she had a prior agreement with her broker to sell when price fell below $60 read more at Slate.com