1. The Role of the “Fed” and Regulatory Agencies Lesson 2 Other Regulatory Agencies and Laws

2. Aim:  What agencies have a role in ensuring our financial markets function properly? Do Now:  From what you know about our financial markets, identify why involved parties might want to tilt the system in their favor. Other Regulatory Agencies

3.  Do Now answer: There are billions of dollars of stocks bought and sold each day. Just a small fraction of that is a lot of money. If a party can figure out a way to gain just a small advantage, that party can become very wealthy. Other Regulatory Agencies

4. The goal of a regulatory agency is to protect individual investors. The most highly regulated business in the U.S. is the securities industry.

5. SEC (Securities And Exchange Commission): Created in 1933, the top government regulatory agency in the securities industry. The SEC is responsible for overseeing the securities industry and ensuring that markets work efficiently. The SEC regulates the securities market and protects investors against fraudulent and manipulative practices.

6. SEC (Securities And Exchange Commission): Securities cannot be sold to investors without a prospectus. Oversees all of the stock exchanges and any organization connected with the selling of securities. Has a strong anti-fraud unit that monitors advertising and marketing to make sure companies comply with strict rules concerning the sale of securities. Monitors any U.S. corporate takeovers.

7. Commodity Futures Trading Commission (CFTC) A U.S. federal agency established by the Commodity Futures Trading Commission Act of 1974. It ensures the open and efficient operation of the futures market. The CFTC protects investors from abusive trade practices, manipulation, and fraud. The CFTC ensures that the markets are liquid and that both parties of options or futures transactions are able to meet their contractual obligations.

8. Self-Regulatory Organization (SRO): A non-governmental organization that has the power to create and enforce industry regulations and standards. The goal of all SROs is to protect investors through the establishment of rules that promote ethics and equality.

9. Financial Industry Regulatory Authority (FINRA) A self-regulatory body that aims to eliminate regulatory overlap and cost inefficiencies. FINRA is responsible for governing business between brokers, dealers and the investing public.

10. What is a Stock Exchange? A marketplace where people buy and sell securities. The NASDAQ and NYSE are two exchanges on such trading can be done. When they go public, companies choose to trade on one or another of these exchanges.

11. Municipal Securities Rulemaking Board (MSRB) A self-regulating organization that creates rules and policies for investment companies and banks in the issuing and sale of municipal securities (Example: notes, bonds). Regulates underwriting, trading and selling of municipal securities. Subject to supervisi on by the SEC.

12. National Futures Association (NFA): A self-regulatory organization for the U.S. futures market. NFA membership is mandatory for all participants in the futures and commodities market, providing assurance to the investing public that all firms, intermediaries and associates who conduct business with them in the U.S. comply with their regulations. Oversees and protects investors from fraudulent commodities and futures activities. Conducts background checks and licensing exams, regulates futures trading, provides information for investors, and monitors how firms comply.

13. Dodd-Frank Wall Street Reform and Consumer Protection Act - 2010 The Dodd-Frank Wall Street Reform and Consumer Protection Act promotes the financial stability of the United States by improving accountability and transparency of the financial system.

14. Dodd-Frank Wall Street Reform and Consumer Protection Act - 2010 Protect American taxpayers by ending bailouts. Protect consumers from abuse of financial services practices. Restrict the types of proprietary trading that financial institutions will be able to do. Proprietary Trading: The act of trading stocks, bonds, commodities, or derivatives with a firm’s own capital rather than investor’s capital. It allows a firm to make a profit for itself. Establish government agencies to monitor banking practices and oversee troubled financial institutions Protect borrowers against abusive lending and mortgage practices.

15. Dodd-Frank Wall Street Reform and Consumer Protection Act - 2010 Major financial institutions, such as Lehman Brothers, collapsed in 2008. The housing bubble burst. Investment firms were packaging risky mortgages into Mortgage Backed Securities and passing them off as safe bonds. Reasons for Dodd-Frank:

16. Dodd-Frank Wall Street Reform and Consumer Protection Act The Dodd-Frank Financial Regulatory Reform Bill was named after Senator Christopher J. Dodd and U.S. Representative Barney Frank. Represents the most comprehensive financial regulatory reform measures taken since the Great Depression Signed into Federal law by President Obama on July 21, 2010. This was a reaction to the late 2000’s recession. It also sought to reduce banks from over leveraging themselves. This act made changes in the American financial regulatory environment that affects all Federal financial regulatory agencies. Historical Perspective:

17. Dodd-Frank Wall Street Reform and Consumer Protection Act Consequences of Dodd-Frank: Affected the oversight of financial institutions. Provided a new resolution procedure for large financial companies. Resolution Procedure: A set of guidelines that spell out the proper steps a financial company must make if they file for bankruptcy. Created a new agency responsible for implementing and enforcing compliance with consumer financial laws. Made significant changes in the regulation of over-the-counter derivatives. Reformed the regulation of credit rating agencies.

18. Dodd-Frank Wall Street Reform and Consumer Protection Act Impact on Hedge Funds Requires all large hedge fund advisors to register with the SEC. The new rules on derivatives trading have an additional impact on many hedge funds. Increase of compliance costs on funds and investors. Hedge fund advisors must maintain extensive records about their investment and business practices. They must provide this information to the SEC.

19. Lesson Summary 1.Which government agency, created in 1933 after the stock market crash of 1929, is the primary regulator of the markets? 2.Which agency regulates the more exotic investments called futures and options? 3.What do we call an organization that represents an industry trying to police itself? What organization exists for the financial industry? 4.What extensive reform law was pass in the aftermath of the recession of 2008? Identify three major accomplishments in the law. 5.What agencies have a role in ensuring our financial markets function properly?

20. Web Challenge #1 Challenge: One of the explanations for the existence of financial practices that victimized consumers was that there was no one agency whose sole responsibility was to look out for the public. That agency exists now as a result of the Dodd-Frank law. What is the name of agency? Visit its web site and identify three issues that it is taking an active role in. Who is it headed by? Find out if there was any contention in the appointment of this person.

21. Web Challenge #2 Challenge: The SEC has vast power over the financial industry. Critics of the 2008 financial crisis wonder how it could have allowed the practices that lead to the meltdown. Research the criticisms of the SEC’s role in the crisis. Identify the three you find the most frequently cited. Finally, what is your opinion? Are these criticisms fair? Why or why not?

22. Web Challenge #3 Q: Could the housing bubble and economic crisis of 2008 have been predicted?  A: Many people say yes, that it can be traced back to the repeal of an important Depression- era law called the Glass-Steagall Act.  Challenge: In what year was Glass-Steagall passed? Why was it passed? What was the argument for repealing it? What abuses do critics say began creeping back in? Finally, how soon after it was repealed did the financial meltdown occur?