Snapshot: the regulatory framework for financial services compliance in USA

Regulatory framework

Regulatory authorities

What national authorities regulate the provision of financial products and services?

The structure of the regulatory regime for financial products and services in the United States is arguably the most complex of any jurisdiction due to a variety of factors, including historical precedent, the federalist nature of the United States and national politics. Changes since the 2008 financial crisis were aimed at addressing regulatory gaps and systemic risk issues, although the financial regulatory structure has remained largely intact.

• Banking supervisors, market regulators and a consumer financial products agency have the authority to regulate the provision of financial products and services.
• Banks in the United States may choose to be chartered at the state or federal level and the applicable banking supervisor or supervisors depends on the charter type. The federal banking supervisors include the Board of Governors of the Federal Reserve System (the Federal Reserve), the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) (collectively, the Banking Regulators). The National Credit Union Association, which regulates credit unions, is outside the scope of this chapter.
• Financial products and services, and financial markets and certain participants in those markets are regulated by the financial markets regulators. At the national level, these regulators include the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) (collectively, the Markets Regulators). In addition to these federal regulators, state authorities may also have jurisdiction to oversee certain products and services, although these supervisors are generally outside the scope of this chapter.
• The Consumer Financial Protection Bureau (CFPB) was formed in 2010 to focus on consumer protection with regard to financial products and services.

 

The complex array of supervisory agencies necessitates coordination between regulators.

What activities does each national financial services authority regulate?

The Banking Regulators are tasked with monitoring the safety and soundness of depository institutions, and supervising all activities of depository institutions within their jurisdictions. The OCC regulates national banks and federal thrifts, and the Federal Reserve and the FDIC serve as the primary federal regulator for state-chartered banks and thrifts – the former regulating state-chartered banks that choose to be Federal Reserve members, and the latter regulating non-member banks and state-chartered thrifts. The FDIC also has a role in regulating all federal and state banks and thrifts as the insurer of their deposits. Finally, in its capacity as the consolidated supervisor of bank and thrift holding companies, the Federal Reserve oversees the activities of institutions that control or are affiliated with banks or thrifts.

The SEC regulates the offer and sale of securities (which include securities options and security-based swaps), US securities markets, and certain market participants such as securities exchanges, clearing agencies, broker-dealers, investment advisers and investment funds. The CFTC regulates activities relating to most non-security derivatives – primarily futures, options on futures and swaps. Persons regulated by the CFTC include, among others, futures exchanges, derivatives clearing organisations, futures commission merchants (FCMs), swap dealers, commodity pool operators and commodity trading advisors.

The CFPB regulates consumer financial products and services, which include extensions of credit, certain real estate settlement services, cheque cashing and financial data processing, among others.

Many financial institutions are subject to multiple regulators to the extent that they engage in multiple financial activities or are part of a diversified holding company structure.

What products does each national financial services authority regulate?

The Banking Regulators exercise comprehensive supervisory oversight over the activities of depository institutions; however, certain Banking Regulators’ rules apply specifically to certain types of products or activities (eg, consumer lending or fiduciary services). While they are generally required to defer to functional regulators, the Banking Regulators may also regulate certain products or services that are subject to primary regulation by the Markets Regulators. For instance, the Federal Reserve may impose regulatory or supervisory restrictions on the ability of a broker-dealer affiliate of a bank to engage in underwriting or dealing activity. 

The Markets Regulators regulate the offers and sales of financial products within their jurisdictions. The SEC regulates securities and does so primarily through a registration and disclosure regime, as well as through its anti-fraud authority. The SEC also focuses on investor protection and market integrity issues through rules that apply to intermediaries such as exchanges, broker-dealers and investment advisers. The CFTC regulates futures and swaps, among other derivative instruments. While most of the requirements that relate to these instruments apply to registered entities, some apply more generally to users of these products (such as mandatory clearing for certain standardised swaps and, in some cases, swap trade reporting requirements).

The CFPB regulates consumer financial products and services, including deposit products, secured and unsecured loans, and prepaid cards.

Authorisation regime

What is the registration or authorisation regime applicable to financial services firms and authorised individuals associated with those firms? When is registration or authorisation necessary, and how is it effected?

To accept deposits, an entity must be chartered as a depository institution by either a federal or state authority. The choice of charter determines both the legal framework that will apply and the regulator that will supervise the institution. In choosing the appropriate charter, an entity will likely consider most heavily the restrictions imposed, and the activities permitted by laws and regulations applicable to a depository institution (or its affiliates) based on the charter type.

To receive a charter, a proposed depository institution must apply to:

• the appropriate regulatory authority (ie, the OCC for national banks and federal thrifts and state regulators for state banks and thrifts); and
• the FDIC to obtain deposit insurance.

 

In addition, if the proposed bank or thrift is under the control of a parent company, the parent company must apply to the Federal Reserve to become a bank or thrift holding company. The application process requires the submission of extensive materials, including detailed business plans, pro forma financial statements, and biographies and financial reports for proposed shareholders, directors and officers.

With regard to the Markets Regulators, the registration regime depends on the particular activity engaged in by a firm. For example, unless an exemption applies, a firm will have to register with:

• the SEC as an investment adviser if it is engaged in the business of providing investment advice to others for compensation;
• the SEC as a broker-dealer if it is engaged in the business of effecting transactions in securities for the account of others or buying and selling securities for its own account, other than in an ordinary trader capacity;
• the CFTC as a swap dealer if it is engaged in swap dealing activities above certain de minimis thresholds;
• the SEC as a security-based swap dealer if it is engaged in security-based swap dealing activities above certain de minimis thresholds; and
• the CFTC as an FCM if it solicits or accepts orders to buy or sell products subject to general CFTC regulation (eg, futures, security futures products, swaps, retail FX or commodity transactions on a leveraged, margined or financed basis, and certain leverage transactions) and accepts money or other assets from customers to support such orders.

 

Many firms regulated by a Markets Regulator must also become members of a self-regulatory organisation (SRO), which are subject to oversight by the relevant Markets Regulator. For example, broker-dealers must generally become members of the Financial Industry Regulatory Authority (FINRA), and swap dealers and FCMs must become members of the National Futures Association (NFA).

Registration for firms involves submitting an application to the relevant Markets Regulator or SRO. The application requirements vary but will generally request information regarding the ownership of the applicant; certain prior criminal, civil or regulatory history; evidence of financial and capital adequacy; and information relating to its proposed operations and compliance capabilities, among others. Certain firm personnel are also subject to individual licensing and qualification requirements.

Legislation

What statute or other legal basis is the source of each regulatory authority’s jurisdiction?

Each of the primary financial regulators in the United States was created by statute to address a national crisis or market event.

• The OCC was created by the National Currency Act of 1863 as part of an effort to create the financial infrastructure necessary to finance the American Civil War.
• The Federal Reserve System was established under the Federal Reserve Act of 1913 in response to instability in the financial sector best represented by the Banking Panic of 1907. The Federal Reserve has additional jurisdiction over depository institution holding companies and their non-depository institution subsidiaries under the Bank Holding Company Act of 1956 and the Home Owners’ Loan Act of 1933.
• The FDIC and the system of federal deposit insurance were created during the Great Depression under the Banking Act of 1933 (which has since been replaced by the Federal Deposit Insurance Act of 1950) in response to the panic and bank runs that accompanied the economic downturn.
• The SEC was initially established pursuant to the Securities Exchange Act of 1934, following the stock market crash of 1929, to oversee the US securities market and has additional jurisdiction relating to the offer and sale of securities under the Securities Act of 1933.
• The CFTC was created in 1974 pursuant to the Commodity Futures Trading Commission Act. At the time, the predecessor to the CFTC generally regulated only agricultural commodities. The CFTC, however, was granted the authority to regulate the growing trading in futures and options on non-agricultural commodities.
• The CFPB was established after the financial crisis of 2008 by the Consumer Financial Protection Act of 2010.

What principal laws and financial service authority rules apply to the activities of financial services firms and their associated persons?

The primary statute that applies to national banks is the National Bank Act, which sets out the parameters for the activities in which national banks may engage. Bank holding companies and their non-bank subsidiaries are subject to activities limitations imposed by the Bank Holding Company Act of 1956. Federal thrifts and thrift holding companies are subject to the activities restrictions of the Home Owners’ Loan Act of 1933. The activities of state banks and thrifts are primarily limited by state banking laws, but are also subject to federal limits such as those set out in the Federal Deposit Insurance Act of 1950. The Federal Reserve Act of 1913 also imposes restrictions on the inter-affiliate activities of bank holding companies and thrift holding companies and their subsidiaries.

The primary statutes that apply to financial services firms regulated by the SEC include:

• the Securities Act of 1933, which is generally designed to ensure that investors receive sufficient information regarding securities offered for public sale, and to prevent misrepresentations and other fraud in the sale of securities;
• the Securities Exchange Act of 1934, which, among other things, authorises the SEC to regulate various securities market participants;
• the Investment Advisers Act of 1940, which governs the regulation of investment advisers; and
• the Investment Company Act of 1940, which governs the regulation of investment companies, including mutual funds.

 

The primary statute that applies to financial services firms regulated by the CFTC is the Commodity Exchange Act, which governs futures, options on futures and swaps, and certain persons that engage in activities with regard to those products, among others.

The primary rules that apply to financial services firms include the rules adopted to implement the foregoing statutes. Certain SEC and CFTC-regulated entities and their associated persons are also subject to the rules of SROs of which they are members.

Scope of regulation

What are the main areas of regulation for each type of regulated financial services provider and product?

The principal areas of regulation for depository institutions and their holding companies include:

• activities restrictions;
• safety and soundness requirements;
• capital and liquidity requirements;
• lending restrictions;
• fiduciary regulations;
• consumer protection laws and regulations; and
• affiliate transaction restrictions.

 

For persons and entities regulated by the Markets Regulators, the principal areas of regulation include:

• registration requirements;
• capital and margin requirements;
• clearing requirements;
• business conduct standards;
• reporting requirements;
• requirements to adopt policies and procedures; and
• record-keeping obligations.

Additional requirements

What additional requirements apply to financial services firms and authorised persons, such as those imposed by self-regulatory bodies, designated professional bodies or other financial services organisations?

Many firms regulated by a Markets Regulator must also become members of an SRO, such as FINRA or the NFA, and certain firm personnel must register with the same SRO and pass a qualification examination.

Securities and derivatives exchanges and clearing organisations are also SROs. As a result, market participants that have direct access to such exchanges or clearing organisations must become members of these institutions and comply with their rules.

Requirements imposed by SROs on their members vary depending on the type of regulated entity and the type of SRO. In some instances, SRO rules implement existing federal statutory or regulatory requirements. In other cases, SROs are provided with discretion to adopt additional or more detailed requirements. FINRA, for example, in addition to enforcing the Securities Exchange Act of 1934 and SEC rules, imposes extensive obligations on all aspects of a broker-dealer’s activities and requires its member broker-dealers to comply with ‘just and equitable principles of trade’, which is a higher conduct standard than the anti-fraud standard that the SEC can impose under the Securities Exchange Act of 1934.