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Investment Banking
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Examines the legal rules & regulations that govern the investment banking industry. Discusses some of the proposed changes to these regulations & assesses their possible impacts.... More...
5 Pages / 1125 Words
3 sources, 3 Citations, MLA Format
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Paper Abstract:
Examines the legal rules & regulations that govern the investment banking industry. Discusses some of the proposed changes to these regulations & assesses their possible impacts.

Paper Introduction:
Investment banking is governed by numerous regulations, most set forth and regulated by the Securities and Exchange Commission. Several of these laws are discussed below. Rule 144A is a restriction placed on buyers of privately placed securities so that these securities cannot be sold for two years after acquisition. This means there is no liquidity in the market over that period of time. Buyers of privately placed securities must be compensated for this lack of liquidity. SEC Rule 144A went into effect in April 1990. The rule eliminated the two-year holding period and permitted large institutions instead to trade securities acquired in a private placement among themselves without having to register these securities with the SEC. A large institution is defined as one that holds at least $100 million of the security.

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The new rules will establish the infrastructure fora new approach to the regulation of investment advisers. Other rules are also changing and altering the nature of the business. This gives the states a greaterrole in regulating and overseeing financial planners and small advisoryfirms that conduct primarily local business. It is expected that some two-thirds of the 23,5 investment advisers currently registered with thecommission will withdraw their registrations and be regulated by statesecurities regulators. The NASD also requires a number of additional materials beforeit will grant membership approval, including: 1. Under SEC regulations, investment firms must register with the SECusing form BD, a form which solicits detailed information concerning thebroker-dealer applicant, its principals, and controlling persons. Several of theselaws are discussed below. The Securities and Exchange Commission adopted new rules in May thatplace large investment adviser firms under federal oversight while leavingthe smaller ones under state authority. The rule also improves liquidity byreducing the cost of raising funds (Fabozzi and Modigliani 75). Works CitedFabozzi, Frank J. Under the rules of the SEC,a broker-dealer may not conduct business until its NASD (NationalAssociation of Securities Dealers, Inc.) membership has been approved.Prior to January, 1993, broker-dealer registrants were required to fileseparate applications for SEC registration and NASD membership, but becauseof certain rule amendments adopted by the staff of the SEC, all broker-dealer registrants may now file one application for registration on Form BDwith the NASD. before passage of this rule because they had to registertheir securities and furnish the necessary disclosure, but privateplacement involves less disclosure. private placement market. entities may decide to issue securities. Acquisition of investment banks by commercial banks, on the otherhand, could help the latter regain lost market share and bolster theirrange of services. The NASD passes the application information on to the SECfor review. Under the new rules, big investment advisers will be examinedby the SEC every four to five years, as opposed to the current eight- tonine-year standard. Rule 144A is a restriction placed on buyers of privately placedsecurities so that these securities cannot be sold for two years afteracquisition. The impact of this rule is not yet known as far as what effect itmight have on the growth of the private placement market. Some analystsbelieve the rule will encourage non-U.S. fingerprint cards and Form U-4 registration applications forindividuals conducting business on behalf of the applicant; 5. "Regulation : Bankers Get Set to Go for Brokers." Business Week (December 2, 1996), 92."Securities Regulator Trims Adviser Oversight." Reuters Business Report (May 12, 1997). The Glass-Steagall Act was intended to maintain a wallbetween banks and securities firms, but that wall has been crumbling forsome time even without the proposed changes in the law. The first reason for this would beto attract new large institutional investors into the market, investors whowere not willing to buy private placements in the past because of therequirement that they be held for two years. The new rules will establish the process by whichadvisers who are currently registered with the Commission will determinetheir status as Commission-or-state-registered advisers. Capital Markets. Analysts believe that the majority ofsecurities firms will be acquired by the end of the decade, and thisconsolidation will mean the survival of a few very large houses and thedisappearance of smaller firms. Englewood Cliffs, New Jersey: Prentice-Hall, 1991.Rea, Alison and Leah Nathans Spiro. evidenceof fidelity bonding; 4. and Franco Modigliani. SEC Rule 144A went into effect in April 199 .The rule eliminated the two-year holding period and permitted largeinstitutions instead to trade securities acquired in a private placementamong themselves without having to register these securities with the SEC.A large institution is defined as one that holds at least $1 million ofthe security. a clearing agreement with a clearing broker-dealer, if applicable.The NASD will also conduct a pre-membership interview of one of theapplicant's registered principals in order to review the applicability ofvarious securities regulations to the applicant's proposed operations andin order to determine the applicant's ability and qualifications to engagein such operations. Currently, 46states have registration requirements for most investment advisers, and thefour states that have no regulation are Colorado, Iowa, Ohio, and Wyoming("Securities regulator trims adviser oversight" Reuters). The change wouldgive opportunity to a number of large European firms desirous of expandingand of acquiring investment firms in the United States (Rea and Spiro 92). Thisform must be updated regularly because it is also the source of currentinformation concerning registered broker-dealers maintained by the SEC.The system of broker-dealer regulation under the Exchange Act provides fora large degree of industry self-regulation, subject to SEC oversight, byindustry organizations as well as by direct SEC regulation, and eachsecurities exchange (e.g., New York Stock Exchange) is responsible forsetting standards of qualification and business conduct and for exercisingsupervisory responsibilities over its members. a copy of written supervisory procedures for the conduct of theapplicant's business and supervision of its personnel; 3. an NASD initial membership fee of between $1,5 and $5, ; and 6. Except for a handful of the largest, strongestbrokerages, which could stay independent or even buy banks, the brokerageindustry could dwindle sharply, reducing the regional diversity that existstoday. Investment banking is governed by numerous regulations, most set forthand regulated by the Securities and Exchange Commission. The second reason is that foreign investors have been unwilling to raisefunds in the U.S. However, both theSEC and the states will be able to bring enforcement actions for violationof anti-fraud laws, which is important to both state and federalregulators. a statement of financial condition; 2. This means there is no liquidity in the market over thatperiod of time. With an increase in thenumber of such investors, non-U.S. Buyers of privately placed securities must be compensatedfor this lack of liquidity. The 1933 Glass-Steagall Act inhibits banks from buying brokers and viceversa, but the Federal Reserve Board is changing this rule to make iteasier for commercial banks to acquire even the largest brokerage firms.Changes in the rules will encourage more acquisitions, and smallerinvestment banking firms will be swallowed up either by commercial banks orby other investment banking firms. corporations to issue securitiesin the U.S. Such a change will mean a radicalreshaping of the business.

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