Policy for Regulation of Stock Exchange Traders - Australia and the US - Coursework Example

Title: Policy For Regulation of Stock Exchange Traders; A Comparison Between Australia and The United States of America. Customer Inserts His/her Name Customer Inserts Name of Tutor Customer Inserts Grade/Course (Date) Introduction The securities sector is one of the most regulated financial professions in the world. This is because it is a very integral sector to the prosperity of any country’s economy. Heavy volumes of money are transacted on the stock exchange everyday. The financial performance of corporate companies depend on the results reported by the stock exchanges. These results ten become indicators for the viability of the national income which in turn help to determine whether the global economy of the world is healthy. It should be remembered that when the stock markets crashed in 1929, the entire world experienced The Great Depression (Black, 1991). The securities and investment sector which comprises of stock-brokers, brokerage firms and other indirect stake-holders must be regulated to avoid financial complications and other problems. Protection of the investors, who are the consumers to the industry, is vital and requires supervision and control. A poor regulatory framework portends danger for both individual and corporate entities .They are likely to suffer heavy financial losses following the collapse of a brokerage firm or the negligence of a stock-broker. The financial crisis that engulfed The United States and indeed the entire world between 2007-2008 has been blamed on a complex regulatory framework for the securities and investment industry (“United States Financial Inquiry Report”, 2010).Relaxation of the net capital required for Investments by The Securities Exchange Commission has been blamed as a key course for the financial meltdown. Investment giants such as Bear Stearns, Lehman Brothers and Merrill Lynch collapsed and filed bankruptcy to the detriment of many investors. The quick downward trend from liquidity to insolvency necessitates a solid dependable regulation framework. It’s against this background that this paper studies and analyzes the regulation policies for stock-exchange traders in Australia and The United States. This paper compares the effectiveness of both policies, their points of weakness and further reform measures that the governments of the two countries can institute The policy in Australia In Australia regulation is undertaken by The Australian Securities and Investments Commission (ASCIC).The main role of the commission is to enhance consumer confidence in the financial market through reduction fraud and elimination of unfair practices( Tate,1999).The commission sets policies and regulations based on: The Australian Securities and Investments Commission Act 2001;Insurance Contracts Act 1984 and The National Consumer Credit Protection Act 2009.The commission ensures that every broker or brokerage firm in the market is solvent( Kings&Maddock,1998 ).Stringent rules for issuing licenses are in place to ensure that scam businesses do no operate in The Australian Stock Exchange. The commission issues annual regulatory plans on the changes in regulation it makes in the previous financial year and the changes it intends to introduce in the incoming financial year. The ASIC has a dispute resolution mechanism in case of trade disputes between investors and brokers. Brokers have to undergo regular trainings and assessment of their skills to ensure that they have skills which are compliant with government regulations and standards international practices (Person, Balee&CCH, 2010).The commission has set listing rules and Business rules. The main purpose of listing rules is full protection of public interest. The rules create a fidelity fund to compensate an investor in case a brokerage firm collapses. Firms are also required to make full disclosure of material investment businesses. They must satisfy minimum standards in relation to size, quality and operations. They must fulfill the obligations they stipulate in their contracts and they must observe the highest standards of accountability, integrity and responsibility (Section 786 (2 a) of The Corporations Act ).The business rules govern conduct of business between the firm themselves and set qualifications for membership and conditions for trade. The rules are not drafted by the commission; they are drafted by the stock-exchange. The minister is responsible for approval or revocation of licenses. The commission acts as a watchdog and addresses infringement of the rights of investors. The policy in The United States In the United States, regulation takes place both at the state level and at the federal level (Lofchie, 2005).The regulation is undertaken by the government, self-regulators and independent stock-exchanges such as The New York Stock Exchange. The Securities and Exchange Commission has the mandate to manage the sector and the professions on the federal level. The Financial Industry Regulatory on the other hand is a self-regulator. The Financial Industry Regulatory is responsible for formulating and implementing rules and guideline that regulate stock-brokers and other professionals that play key roles in the investment and securities industry. It’s however subject to supervision by The Securities and Exchanges Commission. The main pieces of legislation that regulate the conduct of stock-brokers and other professionals are in chronological order: The Securities Act of 1933; The Securities Exchange Act of 1934; The Investment Advisers Act of 1940; and The Investment Company Act of the same year. The Investment Advisers Act is the most applicable to this paper because it specifically regulates stock-brokers and other professional who advise investors (Fredman, 2002). Fraud and insider trading in all transactions is expressly prohibited. Companies dealing in securities must apply for Registration with The Exchanges Commission. Brokers are also under an obligation for material disclosure of information to all prospective investors. The authority has the power to discipline individuals and brokerage firms which violate the principle rules and regulations. In case of indiscipline, the authority compels the defaulters to pay fines and has the power to revoke a license. It also receives consumer complaints on unethical or illegal behavior of brokers and monitors all activities of the brokers to ensure fair-dealings towards the investors. The security Exchange Commission undertakes protection of investors as its main goal. It protects them against fraudulent trading, discloses material information on the state of the investment market. It also monitors the dealings of brokers and other investment dealings.Brokerage firms must keep written documents pertaining to compliance with the standards laid down by The Securities Exchange Commission (Fredman, 2002). The financial melt-down of 2007-2008 prompted congress to enact a new law for further investor protection. The Wall Street Reform and Consumer Protection Act of 2010 introduce a new regulatory framework that will be enforced through changes to the current laws and regulation policies: the function of law-making vests with the congress. (“United States Financial Inquiry Report”, 2010) Effectiveness and Short Comings of The Policies The Australian policy has been effective in that The Australian Securities and Investment Commission has gone to extra-lengths to enforce the regulatory provisions. There have been civil proceedings and criminal prosecutions in respect to firms or brokers who have not disclosed material information to the public or the commission; Unethical conduct displaying intention to defraud investors; Insider trading and trading when insolvent; Continuing in a management position after disqualification; and failure to comply with the commissions investigation orders; and preventing or interfering with the commission’s investigations. (Pearson, Balee&CCH, 2010) This translates into investor confidence which boosts performance of The Australian Exchange. Due to the regulation mechanism in Australia no investor would be afraid to invest because they have recourse incase a stock-broker firm collapses or becomes insolvent. The active enforcement of disciplinary measures against defaulters reimburses the confidence among foreign investors. The business in the Securities and investment Sector in Australia is thus on a solid footing and will benefit the country in the future. However the Australian policy is inadequate when it comes to regulation of members of the profession. The Rae report indicated that this problem comes from the fact that the regulatory commission does not have power to draft regulatory rules, a responsibility that is bestowed on the stock-exchange. In exercising this function, the exchange tends to draft rules which favor the brokers at the expense of investors. This is as opposed to The USA, where the Securities and Exchange Commission can intervene to change rules set by The Federal Regulation authority and where all directives of The Federal Authority must comply with the standard set by the commission. Federal and self-regulation in The United States guarantees the consumer double protection. Individual investor can invest with confidence, making Wall Street one of the leading securities and industries sector in the world. Investing normally yields high returns and attracts both local and foreign investors. More reform is needed in the policy following the financial crash of 2007-2008 which revealed that The Securities and Exchange Council is bestowed with excessive powers (“United States Financial Crisis Inquiry Report”, 2010). Compared with the Australian policy, The US policy is less effective in matters of protection of public interest., The regulatory regime in Australia has a better mechanism for protection of the investor in particular and public interest in general. This is because if there is a breach of policy or rule which has not been enforced by the stock-exchange or the Investment Commission, the aggrieve investor may institute action for enforcement in a court of law. This provision is not there in The US frame-work where an aggrieved investor must go through The Federal Regulatory Authority or through The Securities and Exchange Commission. (Lofchie, 2005) Conclusion Both countries have excellent policies for regulation of stock-exchange traders. However; our discussion reveals that each policy has loopholes and deficiencies. The countries have different models and can borrow each other to remedy their areas of weaknesses. To avoid another ad hoc financial crisis that led to the collapse of trusted investment banks, the United States must ensure that the powers of The Securities and Exchanges council are distributed to other agencies. It must also ensure that an individual investor has the power to institute remedial measures in court in case The Securities and Exchanges Council or The Federal Investment Regulatory Authority fails to do so. On the other hand Australia must change the law to ensure that The Australian Investments and Securities Commission has the power to draft rules related to conduct of members of the profession and to discipline them. References Black, A. (May 01, 1991). Professional Responsibilities and Fiduciary Obligations of Securities Brokers. University of New South Wales Law Journal, The, 14, 1, 98-170. Friedman, L. M. (2002). American law in the 20th century. New Haven: Yale University Press. King, S., & Maddock, R. (1996). Unlocking the infrastructure: The reform of public utilities in Australia. St. Leonards, NSW: Allen & Unwin. Lofchie, S. (2005). Lofchie's guide to broker-dealer regulation: As of January 2005. Chicago, IL: CCH Wall Street. Pearson, G., Balee, R., & CCH Australia Limited. (2010). Understanding Australian consumer credit law: A practical guide to the national consumer credit reforms. Sydney, NSW: CCH Australia. Tate, C. (1999). Understanding options trading in Australia. Brighton, Vic: Wrightbooks. United States. (2010). The financial crisis inquiry report: Final report of the National Commission on the Causes of the Financial and Economic Crisis in the United States. Washington, DC: Financial Crisis Inquiry Commission. Vernon, R. (1972). The regulation of stock exchange members. New York: Da Capo Press. Read More