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This chapter deals with relations with the outside world and their impact. It shows how the International Organization of Securities Commissions (IOSCO) occupied the centre stage in the International Accounting Standards Committee's (IASC) aims and deliberations between 1987 and 2000. A first phase in the relationship between the two organizations ended in a difficult period during the second half of 1994. The relationship was then set on a new footing in 1995, and a more promising phase began. The board's standards were registering very little impact in the developed, industrialized countries. The leaders felt it was essential that the board establish a closer relationship with securities market regulators, national standard setters, and major preparers. They also came to believe, with a nudge from the US Securities and Exchange Commission (SEC), that real progress towards international harmonization would not occur until most of the optional treatments in the board's standards were removed.

When buying stocks, bonds, mutual funds, and other securities, individuals seeking advice typically turn to broker-dealers or investment advisers before they invest. In many cases, brokers and advisers perform similar functions but they are regulated differently under laws enacted during the Great Depression. Regulators are considering ways to harmonize the regulation of these professionals, but harmonization is fraught with difficulties. This chapter discusses the debate over harmonization and explains how the U.S. Securities and Exchange Commission, the courts, and Congress have responded. The chapter concludes with insights into considerations that will likely determine how the harmonization debate will be resolved.

This chapter reviews the rules governing financial disclosure by corporations in the United States. It begins with an overview of state regulation (which is still in force) and then turns to federal regulation, which began in 1933. The public securities markets are described and the Securities and Exchange Commission’s (SEC) rules governing financial disclosure of public corporations are outlined. Standard setting by the American Institute of Certified Public Accountants (AICPA), the Financial Accounting Standards Board (FASB), and the Public Company Accounting Oversight Board (PCAOB), and investor protection and corporate governance are considered next. Current issues such as the scope of auditing practices, auditor independence, audit failures, principles- versus rules-based accounting standards, and convergence of U.S. and international standards are discussed.

This chapter addresses the issue of how trading systems should be classified and governed. The chapter is composed of three sections. In the first, the criteria that the Securities and Exchange Commission (SEC) has historically used to identify whether a trading system should be classified as an exchange or a broker are evaluated. In the second, various flaws with the exchange/broker distinction are identified and discussed. In the third section, various alternative approaches to regulating exchanges and trading systems, including the newest suggestions by the SEC, are analyzed. A joint approach of separating the regulation of market structure from the regulation of other areas of public concern, and of employing competition policy to regulate market structure, is recommended as the best way of classifying and regulating trading systems.

Most financial markets are highly competitive – there are hundreds or thousands of active traders and at any time and place prices vary only within a narrow range – the bid‐ask price spread. Regulation is usually associated with monopoly; it might seem, therefore, that regulation of financial markets is unnecessary. After an introductory section on the ethics of finance and the economic function of financial markets, the second section of this chapter explains why that conclusion is unwarranted. The third section discusses the various levels of US federal regulation (the exchanges, the regulatory commissions and the courts); the fourth looks at federal regulation of trading in corporate shares and bonds by the Securities and Exchange Commission; the fifth shows how futures markets are federally regulated in the US; and the sixth is a case study of an important regulatory failure – the silver manipulation of 1979–80 in the USA. The final section looks at regulation in the UK.

Much of the foundation of mutual funds' success was laid early on, in the 1920s and 1930s–mutual funds' use, beginning with the first fund in 1924, of redeemable shares and a simple capital structure that did not result in leverage; establishment of a federal agency, the Securities and Exchange Commission, devoted exclusively to administration of the federal securities laws; and enactment of the Revenue Act of 1936, which provided favorable conduit tax treatment for mutual funds and their shareholders.

Many developments in recent years have contributed to mutual funds' success, including generally rising securities markets, a growing middle class, the creation of new types of funds and new ways to distribute fund shares, and laws designed to encourage Americans to save for retirement. However, the foundation of mutual funds' success was laid early, in the 1920s and 1930s. Beginning with the creation of the first fund in 1924, mutual funds used redeemable shares and a simple capital structure that did not result in leverage. In 1934, a federal agency, the U.S. Securities and Exchange Commission, was established that was devoted exclusively to administration of the federal securities laws. In 1936, a law was enacted providing favorable tax treatment for funds and their shareholders. This chapter traces the history of mutual funds, which began in Europe.

This chapter discusses the modernization of mutual fund industry regulation. The explosive growth of and dramatic changes in the mutual fund industry during the 1980s and 1990s led the Securities and Exchange Commission (SEC) and the industry to seek to modernize SEC requirements in the areas of disclosure, substantive regulation of fund activities, and fund compliance with law and regulation. Disclosure requirements relating to fund prospectuses, shareholder reports, advertisements, and newsletters were updated (although disclosure of “shelf space” went unaddressed). Similarly, a number of SEC substantive rules and industry best practices in areas such as permissible investments by money market funds, 12b -1 plans, personal investing by fund managers, and the independence and effectiveness of fund directors were improved. In the area of compliance, the SEC did not adopt the industry's recommendation to require funds to establish formal compliance systems. Moreover, the SEC transferred oversight of its own inspections of mutual funds from the division responsible for fund regulation to a separate new unit, a step which many observers believe has harmed compliance.

This chapter discusses how federal regulators contributed to the subprime crisis. Congress laid the groundwork back in 1999 and 2000, when it deregulated over-the-counter credit default swaps, which ultimately became pathways of contagion. The Securities and Exchange Commission (SEC) for its part looked the other way while banks issued droves of subprime bonds and collateralized debt obligations (CDOs) marred by shoddy due diligence, skimpy disclosures, and inflated credit ratings. Then federal banking regulators sealed the financial system's fate by allowing commercial banks to load up on toxic mortgage-backed securities.

This chapter is about the publicly held companies in the USA. Ever since independence the states have fought to limit the role of the Federal government. Wherever a company operates it may choose any state in which to incorporate, and the states compete for its business. The recent reforms led by the Sarbanes–Oxley Act (SOX) apply directly only to them and their audit firms. The chief, but not all-powerful, machine for exerting Federal pressure is the Securities and Exchange Commission (SEC) that regulates many of the processes affecting companies, shareholders, and the market, and the traffic between them. The New York Stock Exchange is the dominant institution in the stock market. Meanwhile, control of a US company can pass by replacing enough of the board through the proxy process, but the usual route is by acquiring a majority of the votes through a tender offer.

This chapter explains how legislative changes to, and the broader commentary on, US derivatives regulation illustrate the value of parsing the overlap/distinct and centralization/decentralization dimensions in assessing the tradeoffs of regulatory allocations. The Securities and Exchange Commission and the Commodity Futures Trading Commission have been tasked with decentralized authority over securities and futures, respectively. Over time, their jurisdictions have increasingly overlapped as the futures and securities markets converged. Reorganization proposals and legislation to correct perceived problems with the overlapping, decentralized regulatory regime (such as Title VII of the Dodd-Frank Act) have usually failed to parse the various tradeoffs between overlap and distinct or between centralized and decentralized authority. By limiting their analysis, policymakers and observers of derivatives regulation may have misdiagnosed problems with the existing allocation or missed potential opportunities to craft different regulatory configurations that might have better accommodated policy tradeoffs or been more politically viable.

Following the financial crisis and personnel changes at the US SEC, the prospect of adoption of IFRSs in the United States began to fade. This brought other jurisdictions, which had formed their policies in anticipation of a US adoption, to reconsider their approach to IFRSs. The most notable example was Japan, which in 2009 adopted a roadmap towards a decision on adoption of IFRSs, but where the lack of progress in the United States, coupled with increasing domestic scepticism about the desirability of moving to IFRSs, ushered in a period of indecision. China maintained its policy of substantial convergence, while India explored ways of adopting a modified version of IFRSs. Meanwhile, Brazil and many other Latin American countries announced or completed adoption of IFRSs.

The record 1982–2000 bull market ended with a bubble in high-technology and telecom stocks, followed by a severe bear market and revelations of a number of major corporate and accounting scandals, resulting in enactment of the Sarbanes–Oxley Act. In 2003–2004, there were revelations of illegal market timing and late trading in mutual fund shares at some twenty fund groups—the worst scandal ever in the fund industry. The scandal resulted in over a hundred proposals for legislative and regulatory reform, and led the Securities and Exchange Commission to adopt a record number of new regulations.

This chapter examines the potentially adverse effects of corporate civil liability and the role of prosecutors in regulating corporate behavior. After considering the distinction between a criminal enterprise case and a civil regulatory action, it discusses measures necessary to push civil regulatory liability in the direction of criminal liability. It then describes three key actors on the enforcement side of corporate regulation: private actors, criminal prosecutors, and regulatory bodies such as the Securities and Exchange Commission (SEC). It also explores problems that might arise from reforming the civil regulatory action by focusing on the SEC enforcement action. It argues that agencies should have a greater role in corporate regulation and that criminal sanctions are most effective as the cap of a pyramid of enforcement. Finally, it contends that civil enforcement must be augmented to make it more attractive to enforcers and reduce the need for criminal enforcement.

As earlier chapters have made clear, mutual funds not only are subject to Securities and Exchange Commission regulation under the federal securities laws but also they must meet requirements imposed by other bodies of law. The vast changes in the mutual fund industry that occurred during the bull market of 1982–2000 led the industry to seek changes in state securities laws, federal tax law, and federal pension law. Against all odds, the industry obtained federal legislation ending the state regulation of mutual funds. The industry was also successful in obtaining some degree of modernization of provisions of the Internal Revenue Code dealing with mutual funds. However, federal pension law and regulation were not updated to take account of the major shift from defined benefit plans to 401(k) and other types of defined contribution plans.

This chapter proposes a system for EU centralization of scrutiny and approval of public offers of securities or of listing of companies mature enough to conduct an IPO or those that seek a listing following a secondary offer. It first discusses the European Securities and Markets Authority's unique presence in the EU regulatory edifice and the true ambit and interpretation of its powers. It then sets out the preferred architecture and ambit for a possible European Listing Authority and Capital Markets Union–Securities and Exchange Commission (CMU–SEC), and the advantages their establishment could bring to the CMU project. Next, it discusses the legality of a possible CMU–SEC and brings the different strands of the present analysis into a comprehensive solution.

The Commodity Futures Trading Commission (CFTC) is an independent agency with exclusive jurisdiction over futures trading in all commodities. The CFTC’s mandate has been renewed and expanded several times since then, giving it expanded powers. This chapter focuses on the role of the CFTC with respect to regulation of derivatives, as well as its organizational structure and the sanctions it imposes as part of a disciplinary action against erring parties. It also provides an overview of the Commodity Exchange Act of 1936 and the Commodity Futures Modernization Act of 2000 (CFMA or 2000) and looks at the CFTC’s disputes with the Securities and Exchange Commission regarding jurisdiction over security derivatives. In addition, it discusses the CFTC’s rules concerning exclusions and trading in forwards, options, futures, swaps, hybrid instruments, and foreign exchange instruments.

This chapter reviews US federal and state regulation of financial planners, and it also addresses concerns related to consumer confusion over the standards of care that planners provide and the titles, designations, and certifications that they use. We discuss the advantages and disadvantages of some alternative regulatory approaches, and conclude that an additional layer of regulation specific to financial planners may not be warranted at this time.