Federal and state governments have a myriad of agencies in place that regulate and oversee financial markets and companies. These agencies each have a specific range of duties and responsibilities that enable them to act independently of each other while they work to accomplish similar objectives. Although opinions vary on the efficiency, effectiveness and even the need for some of these agencies, they were each designed with a goal in mind and will most likely be around for some time. With that in mind, the following article is a complete review of each regulatory body.
Federal Reserve Board The
Federal Reserve Board (FRB) is one of the most recognized of all the regulatory bodies. As such, the "Fed" often gets blamed for economic downfalls or heralded for stimulating the economy. It is responsible for influencing money,
liquidity and overall credit conditions. Its main tool for implementing monetary policy is its open market operations, which control the purchase and sale of
U.S. Treasury securities and federal agency securities. Purchases and sales can change the quantity of reserves or influence the
federal funds rate - the interest rate at which depository institutions lend balances to other depository institutions overnight. The board also supervises and regulates the banking system to provide overall stability to the financial system. The Federal Open Market Committee (FOMC) determines the actions of the Fed. (To learn more, see our tutorial on the
Federal Reserve.)
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Federal Deposit Insurance Corporation
The
Federal Deposit Insurance Corporation (FDIC) was created by the
Glass-Steagall Act of 1933 to provide insurance on deposits to guarantee the safety of checking and savings deposits at banks. Its mandate is to protect up to $250,000 per depositor through 2009, after which the protection is scheduled to revert to the former $100,000 per depositor limit. The catalyst for creating the FDIC was the run on banks during the Great Depression of the 1920s. (For background reading, see
The History Of The FDIC.)
Office of the Comptroller of the Currency One of the oldest federal agencies, the Office of the Comptroller of the Currency (OCC) was established in 1863 by the national Currency Act. Its main purpose is to supervise, regulate and provide charters to banks operating in the U.S. to ensure the soundness of the overall banking system. This supervision enables banks to compete and provide efficient banking and financial services.
Office of Thrift Supervision The
Office of Thrift Supervision (OTS) is a newer agency, which was established in 1989 by the Department of Treasury through the Financial Institutions Reform, Recovery and Enforcement Act of 1989. It is funded solely by the institutions it regulates. The OTS is similar to the OCC except that it regulates federal savings associations, also known as thrifts or savings and loans.
Commodity Futures Trading Commission The
Commodity Futures Trading Commission (CFTC) was created in 1974 as an independent authority to regulate commodity
futures and
options markets and to provide competitive and efficient futures markets. It also seeks to protect participants from market manipulation, investigates abusive trading practices and fraud, and maintains fluid processes for clearing. The CFTC has evolved since 1974 and in 2000, the Commodity Futures Modernization Act of 2000 was passed. This changed the landscape of the agency by combining a joint process with the Securities and Exchange Commission (SEC) to regulate single-stock futures. (Read
Futures Fundamentals for a basic explanation of how the futures market works.)
Financial Industry Regulatory Authority The
Financial Industry Regulatory Authority (FINRA) was created in 2007 from its predecessor, the National Association of Securities Dealers (NASD). FINRA is considered a self-regulatory organization (SRO) and was originally created as an outcome of the Securities Exchange Act of 1934. FINRA oversees all firms that are in the securities business with the public. It is also responsible for training financial services professionals, licensing and testing agents, and overseeing the mediation and arbitrations process for disputes between customers and brokers. (For more insight, see
Who's Looking Out For Investors?)
State Bank Regulators
State bank regulators operate similarly to the OCC, but at the state level for state-chartered banks. Their oversight works in conjunction with the Federal Reserve and the FDIC.
State Insurance Regulators State regulators monitor, review and oversee how the insurance industry conducts business in their states. Their duties include protecting consumers, conducting criminal investigations, enforcing legal actions, and providing licensing and authority certificates, which require applicants to submit details of their operations. (For a directory of specific state agencies visit
www.insuranceusa.com.)
State Securities Regulators
These agencies augment FINRA and the SEC for matters associated with regulation in the state's securities business. They provide registrations of investment advisors who are not required to register with the SEC and enforce legal actions with those advisors.
Securities and Exchange Commission The
SEC acts independently of the U.S. government and was established by the Securities Exchange Act of 1934. One of the most comprehensive and powerful agencies, the SEC enforces the federal securities laws and regulates the majority of the securities industry. Its regulatory coverage includes the U.S. stock exchanges, options markets and options exchanges as well as all other electronic exchanges and other electronic securities markets. It also regulates investment advisors who are not covered by the state regulatory agencies. (To learn more, read
The Treasury And The Federal Reserve,
Policing The Securities Market: An Overview Of The SEC and
Are Your Bank Deposits Insured?)
All of these agencies seek to regulate and protect those who participate in the respective industries they govern. Their areas of coverage often overlap; but while their policies may vary, federal agencies usually supersede state agencies where responsibility is a cloudy issue. This does not mean that state agencies wield less power, however, as their responsibilities and authorities are far-reaching.
Conclusion
Understanding the regulation of the banking, securities and insurance industry can be confusing. While most people will never deal directly with these agencies, they will affect their lives at some time. This is especially true of the Federal Reserve, which has a strong hand in influencing liquidity, interest rates and credit markets.
by
Michael Schmidt earned an MBA from Loyola University of Chicago and is a Chartered Financial Analyst. Mr. Schmidt contributes to the CFA Institute as part of the Educational Advisory Board and has been part of the annual grading team since 2001. He has spent 20 years working as an analyst, a portfolio manager and an institutional investment consultant with various firms including: Bank of NY Mellon, Evergreen Investments, Mercer Consulting, INDATA and Coastal Asset Management. As an analyst he provided buy side research for both internal use and published for investors. As a portfolio manager he has managed investment portfolios for the institutional and the high-net-worth arena with specialties in value and quantitative equity styles and multiple fixed income strategies. Mr. Schmidt is a staff member of FINRA's Dispute Resolution Board as an arbitrator and chairperson. He has also testified as an expert witness in arbitrations and security litigation in over 40 cases.
