Financial Regulation and Compliance. Kotz H. David

      Copyright © 2015 H. David Kotz. All rights reserved.

      Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

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       Library of Congress Cataloging-in-Publication Data

      Kotz, H. David, author.

      Financial regulation and compliance: how to manage competing and overlapping regulatory oversight /H. David Kotz.

      pages cm. – (The wiley finance series)

      Includes index.

      ISBN 978-1-118-97221-2 (hardback)

      1. Financial institutions–Law and legislation–United States. I. Title.

      KF974.K68 2015

      346.73′08–dc23

      2015017704

      ISBN 978-1-118-97221-2 (hbk)

      ISBN 978-1-118-97223-6 (ebk)

      ISBN 978-1-118-97222-9 (ebk)

      ISBN 978-1-118-97224-3 (ebk)

      Cover Design: Wiley

      Cover Images: Top image ©iStock.com/scyther5; Bottom image ©iStock.com/jwohlfeil

      Foreword

      Few topics in finance are more confusing to outsiders than regulation. There are many among us who understand financial valuation and even the technical intricacies of the esoteric contingent claims analysis, copula functions, and risk mapping algorithms. But the supervision and regulation of banks, much less securities firms, tend to make the eyes of most financial analysts glaze over.

      Yet the compliance function is one of the most important, and valuable, functions in any financial institution. Compliance is more than just records retention. As recent crisis-era litigation has shown, managing compliance properly can help reduce vast legal costs later. While we may not want to admit it, compliance creates value.

      The problem is that not many people – whether they be financial practitioners, policymakers, or sometimes even compliance professionals – really understand compliance. Part of the problem is the unique path dependence that has created a fractured supervisory structure with some delineations by institution and some by function, creating considerable regulatory overlap. Even understanding who is responsible for what, in any real sense, after accounting for “primary” supervisory responsibility, can be massively confusing.

      This became apparent to me when I began to advise staff at the European Union (EU) Parliament on their own reforms to financial regulation. At the time the U.S. was (and is still) urging them to just adopt U.S. institutional features, which EU staff did not understand. Thereupon, we embarked on an almost two-year project to educate the staff in this massively tangled and – to the uninitiated – thoroughly confusing framework for U.S. financial supervision.

      The problem became even worse when we ran into the subject of administrative law – that is, regulation – and also its enforcement, venues for defense, and appeal. While I was able to treat the subjects in just a few areas (primarily banking) with a wide variety of existing resources, the present manuscript pulls together far more material in a single volume than ever before published on the subject.

      Moreover, this book's treatment of securities regulation pushes into a much newer area of financial supervision, covering the securities sector. Historically, only banks were supervised – that is, subjected to examinations that required producing confidential records to supervisory personnel with the threat of sanctions. But in recent years, the SEC's examination function has grown significantly, and if some policymakers have their way, it will continue to grow.

      In conjunction with such growth, some of the more troubling aspects of bank regulation seem to be spilling over into securities regulation. In the 2015 examination priorities of the Office of Compliance Inspections and Examinations (OCIE), the SEC is putting more emphasis on “using data analytics to identify signals of potential illegal activity.” The idea is that trading or payment patterns can indicate firms or brokers that are “potentially engaged in fraudulent

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