Financial Regulation and Compliance

How to Manage Competing and Overlapping Regulatory Oversight

H. David Kotz

• Publisher: Wiley
• Year: 2015
• ISBN:
  9781118972229
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Gestión de riesgos financieros

Devise an organized, proactive approach to financial compliance

Financial Regulation and Compliance provides detailed, step-by-step guidance for the compliance professional seeking to manage overlapping and new regulatory responsibilities. Written by David Kotz, former Inspector General of the SEC with additional guidance provided by leading experts, this book is a one-stop resource for navigating the numerous regulations that have been enacted in response to the financial crisis. You'll learn how best to defend your organization from SEC, CFTC, FINRA, and NFA Enforcement actions, how to prepare for SEC, FINRA, and NFA regulatory examinations, how to manage the increasing volume of whistleblower complaints, how to efficiently and effectively investigate these complaints, and more. Detailed discussion of the regulatory process explains how aggressive you should be in confronting federal agencies and self-regulatory organizations and describes how commenting on issues that affect your business area can be productive or not. The companion website includes a glossary of terms, regulations and government guidance, relevant case law, research databases, and FAQs about various topics, giving you a complete solution for keeping abreast of evolving compliance issues.

These days, compliance professionals are faced with a myriad of often overlapping regulatory challenges. Increased aggressiveness on the part of regulators has led to increased demand on financial firms, but this book provides clear insight into navigating the changes and building a more robust compliance function.

• Strengthen internal compliance and governance programs
• Manage whistleblower programs and conduct effective investigations
• Understand how to minimize exposure and liability from Enforcement actions
• Learn how to prepare for the different types of regulatory examinations
• Minimize exposure from FCPA violations
• Understand the pros and cons of commenting on regulations

The volume and pace of regulatory change is causing new and diverse pressures on compliance professionals. Navigate the choppy waters successfully with the insider guidance in Financial Regulation and Compliance.

CHAPTER 1
Jurisdiction of Regulators – Who Regulates Whom and What

Compliance professionals face a myriad of overlapping and confusing regulations and regulators. In the aftermath of the financial crisis, new regulations and increased aggressiveness on the part of regulators have led to growing demands placed on financial firms. The volume and pace of regulatory change has created new and diverse pressures on compliance functions. A primary reason for the overlapping nature of the regulations is that traditionally, financial regulation has evolved through a series of responses to developments and crises in the financial markets. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank” Act), enacted on July 21, 2010, offered some of the most sweeping and comprehensive changes to the financial industry since the Great Depression. The chief impetus for the enactment of the Dodd-Frank Act was the perception that deregulation allowed and encouraged Wall Street to indulge in excesses, resulting in the financial crisis.

Over the years, the financial regulatory system has been modified to address various sources of potential financial instability and attempt to provide regulation and a structure for areas with purported regulatory gaps. With each new crisis, efforts are made to address perceived weaknesses in the regulatory system. The result is a complex regulatory system in which federal Agencies have overlapping jurisdictions. Furthermore, Congress has adopted self-regulation by self-regulatory organizations (“SROs”) to prevent excessive government involvement in market operations, and as a more efficient and less expensive way to conduct oversight. However, SRO oversight is, often, in addition to, not instead of, federal regulatory oversight. These structures have resulted in tremendous confusion on the part of compliance professionals whose responsibility it is to make decisions regarding the allocation of often scarce resources to compliance efforts necessitated by the overlapping regulatory schemes.

1.1 FEDERAL FINANCIAL REGULATORY STRUCTURE

The following describes the current federal financial regulatory structure, including the Agencies and the financial institutions they regulate. Federal Agencies regulate banking institutions, securities and futures exchanges, brokers, dealers, mutual funds, and investment advisers. Banking institutions are regulated by several Agencies, led by the Federal Reserve System (commonly referred to as “the Federal Reserve”), which regulates Federal Reserve Bank holding companies, financial holding companies, state banks that are members of the Federal Reserve System, U.S. branches of foreign banks, and foreign branches of U.S. banks.¹ The Office of the Comptroller of the Currency (“OCC”) regulates national banks and U.S. federal branches of foreign banks. The Federal Deposit Insurance Corporation (“FDIC”) regulates federally-insured depository institutions, including state banks that are not members of the Federal Reserve System.² The Office of Thrift Supervision (“OTS”) regulates federally chartered and insured thrift institutions and savings and loan holding companies.³ The National Credit Union Administration (“NCUA”) regulates federally-chartered or insured credit unions.⁴

Beyond the banking regulators, the Securities and Exchange Commission (“SEC”) regulates securities exchanges and brokers.⁵ Lastly, the Commodity Futures Trading Commission (“CFTC”) regulates futures exchanges and brokers.⁶

1.2 THE SECURITIES AND EXCHANGE COMMISSION (SEC)

Congress established the SEC in 1934 to enforce the Securities Act of 1933 and the Securities Exchange Act of 1934 (the “Exchange Act”).⁷ The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.⁸ The SEC oversees the key components of the securities world, including securities exchanges, securities brokers and dealers, investment advisers, and mutual funds. The SEC's primary focus is to promote the disclosure of market-related information, maintain fair dealing, and protect against fraud.⁹

Although the SEC is the principal overseer and regulator of the U.S. securities markets, it works closely with the other federal departments and Agencies, self-regulatory organizations, state securities regulators, and various private sector organizations. For example, the Chairman of the SEC works with the Chairman of the Federal Reserve, the Secretary of the Treasury, and the Chairman of the CFTC, and serves as a member of the President's Working Group on Financial Markets.

The SEC is composed of five presidentially-appointed Commissioners, who have staggered five-year terms. 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 (Corporation Finance, Trading and Markets, Investment Management, Enforcement, and Economic and Risk Analysis) and 23 offices, headquartered in Washington, D.C.¹⁰

The SEC's Division of Corporation Finance oversees corporate disclosure of information to the investing public. Corporations are required to comply with regulations pertaining to disclosure that must be made when stock is initially sold and then on a continuing and periodic basis. Corporation Finance (known as “CorpFin”) reviews the disclosure documents filed by companies. CorpFin also provides companies with assistance interpreting the Commission's regulations and recommends to the Commission new rules for adoption.¹¹

The SEC's Division of Trading and Markets is responsible for maintaining fair, orderly, and efficient markets. Trading and Markets provides day-to-day oversight of the major securities market participants: the securities exchanges; securities firms; self-regulatory organizations; clearing Agencies that help facilitate trade settlement; transfer agents, parties that maintain records of securities owners; securities information processors; and credit rating Agencies. This Division also oversees the Securities Investor Protection Corporation (“SIPC”), which is a private, non-profit corporation that insures the securities and cash in customer accounts of member brokerage firms against the failure of those firms.¹²

The SEC's Division of Investment Management is involved in investor protection and promoting capital formation through oversight and regulation of America's $26 trillion investment management industry. This industry includes mutual funds and the professional fund managers who advise them; analysts who research individual assets and asset classes; and investment advisers to individual customers. Investment Management focuses on ensuring that disclosures about these investments are useful to retail customers, and that the regulatory costs which consumers must bear are not excessive.¹³

The Division of Enforcement is the law enforcement component of the SEC. It recommends the commencement of investigations of securities law violations, whether as civil actions in federal court or as administrative proceedings before an administrative law judge, and prosecutes these cases on behalf of the Commission. Enforcement also works closely with law enforcement Agencies such as the Department of Justice to bring criminal cases. Enforcement obtains evidence of possible violations of the securities laws from many sources, including market surveillance activities, investor tips and complaints, other divisions and offices of the SEC, and the self-regulatory organizations and other securities industry sources.¹⁴

The SEC's Division of Economic and Risk Analysis (known as “RiskFin”) is involved with integrating economic analysis and data analytics into the work of the SEC. RiskFin helps to inform the SEC's policymaking, rulemaking, enforcement, and examinations.¹⁵

The offices within the SEC include, among others, the Office of the General Counsel, Office of the Chief Accountant, Office of Credit Ratings, Office of International Affairs, Office of Investor Education and Advocacy, and Office of Compliance Inspections and Examinations (“OCIE”). OCIE administers the SEC's examination and inspection program for registered broker-dealers, transfer agents, clearing Agencies, investment companies, and investment advisers. OCIE conducts inspections to foster compliance of the securities laws and to detect violations of the law. When OCIE finds deficiencies, it is...