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1 1 (January 13, 2025)

handle is hein.crs/govesap0001 and id is 1 raw text is: Congressionol Research Service nforming the IegisI9tive debate since 1914 S Updated January 13, 2025 Introduction to Financial Services: The Regulatory Framework This In Focus provides a brief introduction to the federal agencies that regulate U.S. financial markets. For more detail, see CRS Report R44918, Who Regulates Whom? An Overview of the U.S. Financial Regulatory Framework. The Finanda System Financial firms match the available funds of savers and investors with borrowers and others seeking to raise funds in exchange for future payments. The products, instruments, and markets used to facilitate this matching are numerous, and they are overseen by a complex system of regulators. The financial system is often divided into banking, insurance, and securities markets. Securities are financial contracts that pledge to make payments from the issuer to the holder and are generally traded on markets. Contracts take the form of debt (a borrower and creditor relationship) and equity (an ownership relationship). Financial activity is inherently risky, but without risk- taking, businesses could not expand or innovate, and households would only be able to purchase durable goods, education, and housing that could be financed out of current income. Financial regulation aims to balance the benefits of finance with the risks that it poses. The FInanda Regulatory Framework Table 1 lists the federal financial regulators and whom they regulate. It categorizes those regulators as follows: * Depository regulators regulate institutions- commercial banks, thrifts (savings associations), and credit unions-that accept customer deposits. * Securities markets regulators regulate securities products, markets, and market participants. For regulatory purposes, securities markets can be divided into derivatives (whose value is based on an underlying commodity, financial indicator, or financial instrument) and other types of securities. * Government-sponsored enterprise (GSE) regulators were created by Congress as privately owned institutions with limited missions and charters to support the mortgage and agricultural credit markets. It also created dedicated regulators exclusively to oversee the GSEs, some of which were consolidated by the Housing and Economic Recovery Act of 2008 (P.L. 110-289). * A consumer protection regulator-the Consumer Financial Protection Bureau-was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203) in 2010 to consolidate and expand jurisdiction over various consumer protection laws for certain financial products. These regulators regulate financial institutions, markets, and products using licensing, registration, rulemaking, supervisory, enforcement, and resolution powers. Financial regulation aims to achieve diverse goals, which vary from regulator to regulator: market efficiency and integrity, consumer and investor protections, capital formation or access to credit, taxpayer protection, illicit activity prevention, and financial stability. Different types of regulation-prudential (safety and soundness), disclosure, standard setting, competition, and price and rate regulations-are used to achieve these goals. Other entities that play a role in financial regulation are self-regulatory organizations, interagency bodies, state regulators, and international regulatory fora. Federal regulators generally play a secondary role in insurance markets, where state regulation predominates. Regulatory Fragrnentat on tot 7. n The financial regulatory system is fragmented, with multiple overlapping regulators and a dual state-federal regulatory system. The system evolved piecemeal, as Congress responded to emerging issues, punctuated by major changes in response to historical financial crises. The 2007-2009 financial crisis also led to changes to the regulatory system. To address the fragmented nature of the system, the Dodd-Frank Act created the Financial Stability Oversight Council (FSOC), a council of regulators and experts chaired by the Treasury Secretary. In practice, regulatory jurisdiction over institutions is typically based on charter type, not function. This means that a similar activity being conducted by two different types of firms can be regulated differently by different regulators. A financial firm may be subject to more than one regulator because it may engage in multiple financial activities. For example, a firm may be overseen by an institution regulator and by an activity regulator when it engages in a regulated activity and by a market regulator when it participates in a regulated market. Regulatory Independence To varying degrees, financial regulators have been made more independent from Congress and the President than typical government agencies are. Independence stems from statutory features, tradition, and agency culture. Statutory features that promote independence include whether the agency is subject to congressional appropriations and authorization, whether agency leadership has for cause removal protection and fixed terms that coincide with the President's, and exemption from various executive or congressional oversight requirements. Congress has recently debated whether to alter these features to make

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