In a previous article, we introduced the CFA Institute
Investment Foundation Program (Read
more here). It is a free program
designed for anyone who wants to enter or advance within the investment
management industry, including IT, operations, accounting, administration, and
marketing. Candidates who successfully
pass the online exam earn the CFA Institute Investment Foundations Certificate.
There are total of 20 Chapters in 7 modules, covering all
the essential topics in finance, economics, ethics and regulations. This series of articles will highlight the
core knowledge of each chapter.
Chapter 3 provides an overview of regulation. The learning
outcome of chapter 3 is as follows:
·
Define regulations;
·
Describe objectives of regulation;
·
Describe potential consequences of regulatory
failure;
·
Describe a regulatory process and the importance
of each step in the process;
·
Identify specific types of regulation and
describe the reasons for each;
·
Describe elements of a company’s policies and
procedures to ensure the company complies with regulation;
·
Describe potential consequences of compliance
failure.
Rules are important to the investment industry. Without
rules, customers could be sold unsuitable products and lose some or all of
their life savings. Customers can also be harmed if a company in the investment
industry misuses customer assets. Furthermore, the failure of a large company
in the financial services industry, which includes the investment industry, can
lead to a catastrophic chain reaction that results in the failure of many other
companies, causing serious damage to the economy.
Regulations are rules that set standards for conduct and
that carry the force of law. They are set and enforced by government bodies and
by other entities authorised by government bodies. This enforcement aspect is a
critical difference of regulations with ethical principles and professional
standards. Violations of ethical principles and professional standards have
consequences, but those consequences may not be as severe as those for
violations of laws and regulations. Therefore, laws and regulations can be used
to reinforce ethical principles and professional standards.
The broad objectives of regulation include the following:
1.
Protect consumers;
2.
Foster capital formation and economic growth;
3.
Support economic stability;
4.
Ensure fairness;
5.
Enhance efficiency; and
6.
Improve society.
Exhibit 1 shows the regulatory process.
Inadequate regulation and failure to enforce regulation can
have a variety of consequences, including failing to meet the objectives above.
The results of a regulatory breakdown can harm customers and counterparties as
well as damage trust in the financial services industry, which includes the
investment industry. Customers may lose their life savings when sold unsuitable
products or customers could be harmed if an investment firm misuses customer
assets. Furthermore, the failure of one
large company in the financial services industry can lead to a catastrophic
chain reaction (contagion) that results in the failure of many other companies,
causing serious damage to the economy.
Sample Question:
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