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Marketing to Regulation & Ethics Leaders in Investment Banking

Understanding Their Role

The financial crisis of 2008 placed renewed focus on the ethics, or lack thereof, practiced by the Investment Banking industry. On Wall Street, your word is your bond. Integrity and high ethical standards are basic to success. To abide by the highest professional standards is an obligation of all securities industry professionals.


The basics of professional conduct are to maintain knowledge of and comply with all applicable laws and rules. Members of the markets are not to engage in any professional conduct involving dishonesty, fraud, deceit, or misrepresentation.1 To ensure that these guiding principles are followed most banks do ethics training for all new hires, and do ongoing training for more experienced employees. Firms that have a good ethical reputation can use this as a selling point when recruiting new employees, and it also helps them attract new clients.


Unfortunately, there have been many high-profile scandals involving unethical investment banking practices. Activities of investment banks affect the global economy and are important to the smooth functioning of capital markets. Given their significance, it is no surprise that the business of investment banking has been subject to a great deal of government regulation.2


Government regulation over the securities markets began with the Securities Exchange Act of 1934. With this Act, Congress created the Securities and Exchange Commission (SEC). The Act empowers the SEC with broad authority over all aspects of the securities industry. This includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies. 3 Congress passed this act as a response to the stock market crash of 1929, with the hope of preventing a similar crash in the future. The stock market crash of 1929 caused a worldwide “great depression” that lasted for many years.


One of the most common abuses investigated by the SEC is frequently called “insider trading”. Insider trading is the trading of a security by a person in possession of material nonpublic information in violation of a duty to withhold the information or refrain from trading. 4 Insider trading activity is a crime in the United States and is punishable by a fine and prison term.


The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into U.S. law on July 21, 2010, the culmination of a comprehensive legislative reform effort that followed the financial crisis of 2007-2008. This Act is the most far-reaching regulatory change to the financial services industry since 1934. It contains 16 provisions and is mainly focused on protecting consumers, ending "too big to fail" bailouts, improving coordination between various regulatory agencies, identifying systemic risk early, creating greater transparency for complex financial instruments, and providing greater transparency for executive compensation.5


One of the main concerns of the Dodd-Frank Act was to put an end to "too big to fail" banks. In an attempt to restrain banks from accumulating too much risk, regulators adopted the Volcker Rule. Under the Volcker Rule, banks are no longer allowed to engage in proprietary trading or act as principal investors in hedge funds and private equity funds. However, the definition of proprietary trading is murky and subject to ongoing debate. The Act also includes "funeral plans" requiring large financial companies to periodically submit plans regarding how they would shut down in an orderly manner if they were to fail in the future.6


Another big problem is that there were too many government agencies responsible for regulating financial institutions, which led to regulatory gaps. To address this issue, the Dodd-Frank Act also created the new Financial Stability and Oversight Council. One of the main tasks of the Council is to provide an early warning system for possible emerging systemic risks. Moreover, it is supposed to identify regulatory gaps, oversee the various government agencies involved in regulation of the financial industry, suggest priorities for financial market regulation, and promote market discipline.7


Since the passage of the Dodd-Frank Act the SEC has been much more aggressive in enforcing its regulations. It has fined big banks, busted hedge funds, and nabbed traders by the dozens. Since the financial crisis, the SEC has filed record numbers of enforcement actions and penalties.8

“It's very hard for outside entrants to come in disrupt our business simply because we're so regulated. We hear people in our industry talk about the regulation, and they talk about it with a sigh about the burdensome of regulation. But in fact in some cases the burdensome regulation acts as a bit of a moat around our business.”

- Goldman Sachs CEO Lloyd Blankfein9

1 Liaw, K. Thomas. The Business of Investment Banking: A Comprehensive Overview. 3rd ed. Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030

2 Stowell, David. Investment Banks, Hedge Funds, and Private Equity. 2nd ed. 225 Wyman Street, Waltham, MA 02451, USA The Boulevard, Langford Lane, Kidlington, Oxford, OX5 1 GB, UK: Academic Press, 2012

3 Ibid

4 Ibid

5 Ibid

6 Ibid

7 Ibid

8 Leonard, Devin, Sommer Saadi, David Voreacos, and Robert Schmidt. “Outmanned, Outgunned, And on a Roll. (cover Story).” Bloomberg Businessweek, no. 4276 (2012): 60 – 66. EBSCOhost(74467596).

9 “Episode 11: A Conversation with Lloyd Blankfein.” Goldman Sachs. May 2015. Accessed 11/25/15, available at: www.goldmansachs.com/our-thinking/podcasts/episode...


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Copyright © 2016 Fusion Point Research, Inc.

Investment Banking has a substantial influence on the global economy. Due to this importance, it is heavily regulated. Several high-profile scandals have damaged the industry’s reputation, and led to new regulations and massive changes to how Investment Banks operate.