Now that the Dodd-Frank Act has been enacted and many of the underlying regulations promulgated, I feel it is the responsibility of former government officials like myself to assist companies in responding to the many overlapping regulations that have been put into place. In this book, with the assistance of many very distinguished experts, I have tried to provide detailed, step-by-step guidance for the compliance professional seeking to manage these regulatory responsibilities. The hope is that the information in this book will lead compliance officials and companies to be in a better position to comply fully with their regulatory responsibilities while also achieving both their business and ethical goals and objectives.
Acknowledgments
I want to thank my colleagues at Berkeley Research Group for their helpful comments and edits to the first draft of the book. I wish to mention particularly the contributions of Alexandra Martin and Matthew Caselli. Alex assisted greatly in compiling the information from the interviews that I conducted with the leading experts, and in providing comments and suggestions with respect to all aspects of the book. Matt, as he has done for me on many previous occasions, expertly edited the manuscript and gave me invaluable guidance and direction.
In addition, much, if not most, of the valuable information in the book comes not from me, but from the contributions of the many experts who took the time from their very busy schedules to speak to me and furnish me their insights about the many diverse topics described in the book. These individuals – Amy Lynch, Matt Dwyer, Debbie Monson, Brad Bondi, Richard Roth, Ken McCracken, Jay Knight, and Tom Fox – could not have been more informative or more of a pleasure to work with. It was truly a joy and an honor for me to be able to speak to them about their areas of regulatory expertise, and to be able to incorporate their extremely valuable guidance in this book.
Finally, I am very grateful for the team at John Wiley & Sons, and specifically Thomas Hyrkiel, Tessa Allen and Jeremy Chia. This was a very personal project for me as I was tremendously honored to be able to publish a book for the same publishers for whom my late father, Dr Samuel Kotz, published so many of his books. It was a pleasure to work with Thomas, Tess and Jeremy and I very much appreciated the excitement and dedication that they brought to the project.
About the Author
H. David Kotz (Washington, DC) presently serves as a Managing Director at Berkeley Research Group (BRG), a leading global expert services and consulting firm that provides independent expert testimony, litigation and regulatory support, authoritative studies, strategic advice, and document and data analytics to major law firms, Fortune 500 corporations, government agencies, and regulatory bodies around the world. He is a member of BRG's Capital Markets Practice, where he specializes in the regulation of, and securities trading by, broker-dealers, investment advisers, hedge funds, insurance companies, and banks. He consults with and provides expert testimony on behalf of clients in a wide variety of areas relating to securities fraud, Ponzi schemes, securities market regulation, internal control risk policies, regulations of Futures Commission Merchants, and commodities trading regulation. He also conducts internal investigations and serves as a compliance monitor for firms that have entered into deferred prosecution agreements and similar arrangements with government agencies. Prior to BRG, Kotz served for over four years as the Inspector General of the Securities and Exchange Commission (SEC).
CHAPTER 1
Jurisdiction of Regulators – Who Regulates Whom and What
Compliance professionals face a myriad of overlapping and confusing regulations and regulators. In the aftermath of the financial crisis, new regulations and increased aggressiveness on the part of regulators have led to growing demands placed on financial firms. The volume and pace of regulatory change has created new and diverse pressures on compliance functions. A primary reason for the overlapping nature of the regulations is that traditionally, financial regulation has evolved through a series of responses to developments and crises in the financial markets. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank” Act), enacted on July 21, 2010, offered some of the most sweeping and comprehensive changes to the financial industry since the Great Depression. The chief impetus for the enactment of the Dodd-Frank Act was the perception that deregulation allowed and encouraged Wall Street to indulge in excesses, resulting in the financial crisis.
Over the years, the financial regulatory system has been modified to address various sources of potential financial instability and attempt to provide regulation and a structure for areas with purported regulatory gaps. With each new crisis, efforts are made to address perceived weaknesses in the regulatory system. The result is a complex regulatory system in which federal Agencies have overlapping jurisdictions. Furthermore, Congress has adopted self-regulation by self-regulatory organizations (“SROs”) to prevent excessive government involvement in market operations, and as a more efficient and less expensive way to conduct oversight. However, SRO oversight is, often, in addition to, not instead of, federal regulatory oversight. These structures have resulted in tremendous confusion on the part of compliance professionals whose responsibility it is to make decisions regarding the allocation of often scarce resources to compliance efforts necessitated by the overlapping regulatory schemes.
1.1 FEDERAL FINANCIAL REGULATORY STRUCTURE
The following describes the current federal financial regulatory structure, including the Agencies and the financial institutions they regulate. Federal Agencies regulate banking institutions, securities and futures exchanges, brokers, dealers, mutual funds, and investment advisers. Banking institutions are regulated by several Agencies, led by the Federal Reserve System (commonly referred to as “the Federal Reserve”), which regulates Federal Reserve Bank holding companies, financial holding companies, state banks that are members of the Federal Reserve System, U.S. branches of foreign banks, and foreign branches of U.S. banks.3 The Office of the Comptroller of the Currency (“OCC”) regulates national banks and U.S. federal branches of foreign banks. The Federal Deposit Insurance Corporation (“FDIC”) regulates federally-insured depository institutions, including state banks that are not members of the Federal Reserve System.4 The Office of Thrift Supervision (“OTS”) regulates federally chartered and insured thrift institutions and savings and loan holding companies.5 The National Credit Union Administration (“NCUA”) regulates federally-chartered or insured credit unions.6
Beyond the banking regulators, the Securities and Exchange Commission (“SEC”) regulates securities exchanges and brokers.7 Lastly, the Commodity Futures Trading Commission (“CFTC”) regulates futures exchanges and brokers.8
1.2 THE SECURITIES AND EXCHANGE COMMISSION (SEC)
Congress established the SEC in 1934 to enforce the Securities Act of 1933 and the Securities Exchange Act of 1934 (the “Exchange Act”).9 The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.10 The SEC oversees the key components of the securities world, including securities exchanges, securities brokers and dealers, investment advisers, and mutual funds. The SEC's primary focus is to promote the disclosure of market-related information, maintain fair dealing, and protect against fraud.11
Although the SEC is the principal overseer and regulator of the U.S. securities markets, it works closely