Legal Topics


Financial Regulation Laws

In the United States, the stock market, corporations, and banking are major foundations of the economy and the fabric of society. However, as the 1920s and 1930s proved, enough reckless or unchecked behavior from these institutions can cause a terrible collapse, which we remember today as the Great Depression.

To prevent such a disaster from occurring again, the federal government enacted several laws and agencies to regulate the financial market.

The Need for Regulation

Each law that governs the American financial system is designed to promote a level playing field for economic producers, consumers, and bankers. Without these laws, there would be no force to stabilize the market in the event of a sudden shock and consumers would be left without protection from fraud and financial ruin by dishonest business practices.

How Financial Regulation Works

Federal authorities are responsible for monitoring all aspects of the economy and ensuring that all trading and investment is conducted fairly. This includes:

* Supervising stock exchanges for pricing and trading

* Receiving financial compliance reports from listed companies

* Overseeing asset management and investment firms

* Setting up guidelines for banks on managing customer accounts and investments

Key Financial Laws and Agencies

The following laws and agencies have all been major components of the US financial regulation system, most of which were created as part of the New Deal program in the 1930s.

* Securities Act: This law requires that all companies that sell securities must provide a complete disclosure about each investment they put up for public offering or sale. The security for sale must also be registered with the Securities and Exchange Commission unless it falls into an exempt category. This is designed to protect consumers from being defrauded about a bad investment, though they're not prevented from purchasing that security once informed.

* Glass-Steagall Act: Although not a complete law, the "Glass-Steagall Act" refers to four sections of the Banking Act of 1933. These provisions mandated a separation between commercial banks and investment banks, so that the money held in commercial bank accounts could not be used by affiliated investment banks in a stock market gamble. However, the Glass-Steagall Act was eventually repealed in 1999 under the Gramm-Leach-Bliley Act. Some critics believe this led to the downfall of several key investments banks in the 2008 financial crisis.

* Commodities Exchange Act: This 1936 law requires that all commodities and futures trading be put for sale on organized public exchanges. The law also set up the Commodity Futures Trading Commission, which oversees competition within the exchanges.

* Federal Reserve System: Established in 1913, the Federal Reserve is the central banking system in the US. Its mission is to promote maximum employment, price stability, and moderate interest rates through banking oversight and handling the country's supply of money.

* Securities and Exchange Commission (SEC): This agency regulates stock exchanges and the securities industry. The SEC receives routine financial reports from public companies and is empowered to investigate stock brokering and banking practices for signs of fraud and other criminal activities.

Image by epSos .de on Flickr

Subscribe Your Email for Newsletter