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Securities Regulation - Necessary Evil or Valued Partner?

As with the equities markets themselves, complexity reigns in (and reins in) regulation.

The history of regulation is almost as old as the securities markets. Stock exchanges, then called bourses, were born in the 15th century in Burgundy's northern trading centers.(Now Belgium. The term 'bourse' is from the Latin 'purse' and is still used for some exchanges.) The Royal Exchange, created in 1566 to compete with Amsterdam, evolved into the current London Stock Exchange.

Rules for trading 'bills of exchange' were not far behind, at first from the traders self-formed organizations, later the crowns and parliaments. The pattern persists to this day. Self-regulatory bodies like the NASD (National Association of Securities Dealer) and the Hong Kong Stock Exchange work hand-in-hand with the SEC (Securities and Exchange Commission) and SFC (Securities and Futures Commission).

Well, that's all very interesting history but why should the average investor care? The answer, for good or ill, is simple: they make the rules. Every trade is governed by a set of complex regulations formed by the interplay between self-interested exchange members and the various government bodies overseeing their activities.

Though lobbyists abound in all industries, nowhere is the process so formalized as in the equities trading businesses.

In the U.S. the 800-pound gorilla granddaddy is the SEC, formed in 1934 on the basis of the Securities and Exchange Act after the market crash of 1929. (Governments moved slowly then, too.) It oversees almost all of the activity in the U.S. markets and it's a very busy body.

The NASD monitors more than 5,400 securities firms with over 58,000 branch offices and 505,000 registered securities professionals. NASD regulation is governed by a Board made up of half securities professionals and half representatives from the public.

Other countries have similar arrangements.


The UK Treasury has governmental responsibility for policy and for financial services under the Financial Services Act of 1986 ('FSA'), along with oversight of the Securities and Investments Board (the 'SIB') and the London Stock Exchange. The SIB is responsible for most of the functions under the Act.

The London Stock Exchange, especially since 1987, has evolved from a quasi-governmental agency to a for-profit enterprise.


The Stock Exchange of Hong Kong (HKEx) was formed in 1980 by unifying four separate exchanges and commenced trading in 1986, though it's roots go back to the 19th century. (Even private, quasi-governmental organizations move slowly sometimes.) The SFC, whose directors are appointed by the Chief Executive of the Hong Kong Special Administrative Region Government, supervises the HKEx. The rules are determined by both bodies, though.


The Italians have an interesting experiment underway. The regulatory structure of the Italian Stock Exchange changed radically in 1997 due to the Legislative Decree No.416 of 1996. The Italian Stock Exchange Council established a private company, 'Borsa Italiana Spa', responsible for defining the functioning of markets and market surveillance. It regulates the admission of securities and is behind a Code of Behavior for all market operators.

Most of the large exchanges have either completed or are undergoing a process called 'demutualisation', essentially turning the exchange from a quasi-governmental overseer into a fully private, for-profit organization. As a consequence, most are publicly traded companies themselves with shares that trade and Boards of Directors.

But whatever the name or form, they all have the same mission. To keep markets orderly, information public and trades honest. While keeping one skeptical eye open, as investors we can all wish them success in that. Our success depends on it.

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