3.3.1 Purpose Of Regulation

Purpose Of Regulation

The ongoing evolution of the securities industry presents new risks and challenges for the people who work in the industry. Over the past three decades, significant structural changes have included the elimination of ownership restrictions for securities dealers, the removal of fixed commission rates, the demutualization of stock exchanges, and the advent of new trading venues. Securities dealers and their representatives have been further challenged by new products, heightened competition, technological advances, and demographic changes.

Did You Know?

Demutualization refers to a company’s transition from member ownership to shareholder ownership.

In this high-pressure environment, inadequate corporate governance at an individual firm can have a ripple effect throughout the industry. Corporate governance refers to the system of rules, policies, and procedures by which a company is controlled. Rules are essential to foster an environment of fairness and protect the integrity of the marketplace. The extent to which a firm complies with external rules is strongly influenced by the strength of its internal compliance systems. Ultimately, corporate governance represents a balancing act between the interests of a company’s stakeholders, including senior management, shareholders, customers, government, and the broader community.

Did You Know?

Business failure or loss of reputation at one securities dealer can affect the entire industry. For example, rogue trading at one firm can cause all investors to lose confidence. When new regulations are developed in response to negative incidents, all securities dealers must adhere to them.

Regulators strive to proactively protect the integrity of the capital markets, often acting where there is a perceived need for new rules and regulations. Occasionally, new rules are introduced in response to market breakdowns.

Objectives of Regulation

Consumer Protection

Without reassurance of protection from fraud and abusive or manipulative practices, investors would be reluctant to participate in the capital markets.

Fairness

Investors must perceive that the markets are fair and that no participant has an unfair advantage over them.

Economic Stability

The efficient flow of capital across the economy is essential for growth and stability, preventing disruptions through market failures.

Social Objectives

Regulations support government efforts to deter criminal activities such as money laundering.

Frequently Asked Questions (FAQs)

1. What is the primary purpose of regulation in the securities industry?

The primary purpose of regulation in the securities industry is to protect the integrity of the marketplace, ensure consumer protection, foster fairness, enable economic stability, and achieve broader social objectives.

2. How does corporate governance impact the securities industry?

Corporate governance impacts the securities industry by influencing the degree of compliance with external rules, supporting fairness and integrity, and balancing the interests of various stakeholders. Inadequate corporate governance can lead to ripple effects that impact the entire industry.

3. What happens when there is a market breakdown?

In cases of market breakdowns, regulators may introduce new rules and regulations to address the underlying issues, protecting investor confidence and maintaining market stability.

Key Takeaways

• The securities industry’s evolution has introduced new risks and challenges requiring robust regulation.
• Corporate governance is vital for maintaining market integrity and balancing stakeholder interests.
• Regulation has four primary objectives: consumer protection, fairness, economic stability, and achieving social objectives.
• Proactive regulation helps protect the capital markets from fraud, manipulative practices, and economic disruptions.

Key Objectives of Regulation:

    graph TD
	    A[Objectives of Regulation] --> B[Consumer Protection]
	    A --> C[Fairness]
	    A --> D[Economic Stability]
	    A --> E[Social Objectives]
	    B --> F[Prevent Fraud]
	    C --> G[Ensure Fair Market]
	    D --> H[Enable Growth]
	    E --> I[Prevent Money Laundering]

Glossary

• Demutualization: The process by which a member-owned company becomes shareholder-owned.
• Corporate Governance: The system of rules, policies, and practices by which a company is directed and controlled.
• Regulator: An authority or agency responsible for enforcing rules and regulations within an industry.
• Market Breakdown: A situation where market mechanisms fail, often leading to a need for new regulation.
• Rogue Trading: Unauthorized or unapproved trading activities by a trader, which can lead to significant losses and affect investor confidence.