Sarasota, FL 4/1/2008 9:58:10 PM
Quick History of Financial Industry Regulation
Pennycents Reports on U.S. Treasury Secretary Henry Paulson
Pennycents Magazine, the market’s most valuable research tool covering micro-cap, penny stocks and otcbb equities, issued the following daily column by Brine Kline.
Yesterday, U.S. Treasury Secretary Henry Paulson proposed regulatory changes that will give the Federal Reserve control of virtually the entire financial industry. Key elements of the proposal are:
• Transform the Federal Reserve from regulator of the banking industry to regulator of the entire financial industry
• The Federal Reserve will have the ability to review the financial condition of any institution capable of affecting market stability
• Merge the Securities and Exchange Commission with the Commodity Futures Trading Commission
• Increased self regulation by stock exchanges
Most of the details will not be worked out for several months and will require congressional approval. However, democratic leaders have indicated agreement with the major changes. They even think more needs to be done. Final details and an approval vote are not expected before President Bush leaves office next January. A lot can change in the mean time.
Major regulatory change does not come often to the securities industry. Small changes do happen more frequently such as the Markets Reform Act of 1990 following Black Monday on October 19, 1987. The SEC was granted powers to take emergency action to maintain and restore orderly markets.
The most recent major SEC regulatory change was the Sarbanes-Oxley Act of 2002. It came about as a direct result of the many scandals that rocked the corporate world at the beginning of the 21st century, the era of the Enron type scandals. On July 30, 2002, when President Bush signed it into law, he characterized it as "the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt." The Act mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures, combat corporate and accounting fraud, and created the "Public Company Accounting Oversight Board," also known as the PCAOB, to oversee the activities of the auditing profession.
Prior to the Sarbanes-Oxley Act, it is necessary to go all the back to 1940 to find another major change to SEC regulatory authority. The Investment Advisors Act of 1940 was designed to regulate investment advisers. With certain exceptions, the Act requires that firms or sole practitioners compensated for advising others about securities investments to register with the SEC and conform to regulations designed to protect investors.
Also in 1940 was the Investment Company Act. This Act regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. The regulation is designed to minimize conflicts of interest that arise in these complex operations. The Act requires these companies to disclose their financial condition and investment policies to investors on a regular basis. The focus of this Act is on disclosure to the investing public information about the fund and its investment objectives, as well as on investment company structure and operations.
Congress established the SEC in 1934 following the 1929 stock market crash. The SEC was given broad authority to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies as well as the nation's self-regulatory securities organizations (NYSE, NASDAQ, American Stock Exchange, etc.).
Exerting its new authority over the market resulted in two other important congressional acts between 1934 and 1940. The Public Utility Holding Act of 1935 brought utility companies under the regulations of the SEC after years of utility company scandals negatively affecting both investors and consumers. Today this authority belongs to the Federal Energy Regulatory Commission.
1939 brought the Trust Indenture Act of 1939. This Act applies to debt securities such as bonds, debentures, and notes that are offered for public sale. These securities must be registered under the Securities Act and they may not be offered for sale to the public unless a formal agreement between the issuer of bonds and the bondholder conforms to the standards of this Act.
Today’s history lesson is intended to shed light on the importance of Secretary Henry Paulson’s announcement of major regulation changes to the financial industry. Investors should not take this lightly. Only once in the last 68 years has such change been enacted.
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