Financial Compliance

The regulation and enforcement of the laws and rules in finance and the capital markets

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What is Financial Compliance?

Financial compliance is the regulation and enforcement of the laws and rules in finance and the capital markets. It ranges through the entire financial spectrum, from investment banking practices to retail banking practices.

`Financial Compliance

Why is Financial Compliance Important?

In the aftermath of the 2008 Global Financial Crisis, financial compliance became a serious matter for regulators and other concerned parties. Adequate financial compliance in 2008 could’ve saved people’s retirement funds, houses, pensions, and decreased the overall magnitude of the recession. Additionally, financial compliance is important in order to maintain the public’s trust in capital markets and the banking system.

Who Oversees Financial Compliance?

Financial compliance covers a broad spectrum. Additionally, financial compliance and regulations vary internationally. Listed below are the important regulators in the United States financial system.

1. The Federal Reserve

The Federal Reserve is the central bank of the United States. The Federal Reserve regulates the monetary policy for the United States. It ensures that inflation is maintained at around 2%, how much money to print, and regulates the federal funds rate.

The Fed is regulated and managed by a Board of Governors. There are currently five individuals on the board. Compliance and regulation within the Federal Reserve are paramount, as their policies and decisions can greatly impact the nation’s economy.

One way it is achieved is by ensuring that the Federal Reserve is not influenced by other branches of government, such as the Secretary of the Treasury and the President. The independence of the Federal Reserve is of utmost importance to ensure the US economy is stable.

2. Securities and Exchange Commission (SEC)

The Securities and Exchange Commission (SEC) is a regulatory agency that is independent of the government and oversees the United States securities market, monitors security exchanges, and enforces securities law. When monitoring security exchanges, the SEC looks for signs of front running, trading on public information, fraud, and corporate malfeasance.

The SEC’s main goal is to establish transparency throughout the securities market. An important way in which the federal agency regulates the securities market is by requiring that public companies file quarterly and annual financial reports, which are available to the public.

Also, the SEC monitors rating agencies such as Standards and Poor’s and Moody’s. The SEC regulates rating agencies to ensure that they maintain the integrity of their ratings; thus, not misleading investors.

3. Federal Deposit Insurance Corporation (FDIC)

The Federal Deposit Insurance Corporation (FDIC) provides deposit insurance of at least $250,000 for accounts with banks and thrift institutions. By providing deposit insurance, the FDIC aims to preserve and promote the public’s confidence in the US financial system.

However, the FDIC only insures deposit accounts such as checking accounts, savings accounts, and certificate of deposits (CD’s). It does not insure stocks, bonds, and mutual funds. The FDIC helps with the financial compliance of the US financial system by examining over 4,000 banks for operational safety and soundness.

Additionally, the agency ensures that banks are complying with consumer protection laws, including the Truth-In-Lending Act, the Gramm-Leach-Bliley Act, and the Community Reinvestment Act.

Know Your Client

Know your client (KYC) is a standard practice that entails investment advisors can identify the client they are working with, ensure the client is who they say they are, know the client’s tolerance to risk, and that the advisor is aware of the client’s financial position. A major benefit of KYC is the reduction of fraud.

Additionally, KYC protects clients by informing their advisors of the type of investments that best suit their personal experiences. However, one of the main benefits and uses of KYC is to ensure the financial system is not being used for criminal activities, such as money laundering, fraud, and forgery. KYC compliance is important among financial institutions to maintain trust in all financial systems.

Money Laundering

Money laundering is the act of illegally passing obtained funds through a complex system in order to make the funds appear legitimate and legal. in the United States, the Financial Crimes Enforcement Network (FinCEN) oversees government efforts to combat money laundering. FinCEN detects, prevents, and deters money laundering and terrorist financing.

The organization enforces its mandates by analyzing financial transaction reports, identifying suspicious transaction reports, ensuring compliance of reporting entities, and researching trends and patterns in money laundering and terrorist financing activities.

Examples of Unethical Financial Compliance Practices

The agencies and regulators listed above work to mitigate unethical compliance practices. The following are some unethical practices in the capital markets and banking system:

  • Deceiving behavior to distort transaction prices or the value of any security.
  • Distorting or attempting to mislead the appearance of public trading in a security.
  • Entering an arrangement to attempt to manipulate the market or market prices.
  • Not accurately disclosing the magnitude of risk of a security to a client.
  • Aggressively pressuring clients into buying or selling securities that are not in their best interest.

Additional Resources

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

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