Most governments around the world regulate various aspects of economic activity because they recognize the important role played by a country's financial system. Although the degree of regulation varies from country to country, they tend to choose only one of these.

Disclosure Regulation.

Regulation of Economic Activities.

Regulation of Financial Institutions.

Regulation of Foreign Participants.

Disclosure regulation requires that any publicly traded company must provide timely financial information and nonfinancial information that actual and potential investors would expect to affect the value of its security. Governments justify disclosure regulation by pointing out that the issuer may have better information about the financial well-being of the entity than those who own or consider owning the securities.

Economies of scale are the decrease in cost per unit as the number of units produced and sold increases. In this context, it is a cost advantage when an intermediary increases the scale of its operations in contracts and processes.

Economists refer to this unequal access or unequal information as asymmetric information. Disclosure regulation in the United States is embodied in various securities laws that mandate the Securities and Exchange Commission (SEC) to collect and publish relevant information and to punish issuers who provide fraudulent or misleading data. Nor does the disclosure regulation seek to prevent the distribution of risky assets. Rather, the SEC's sole motivation is to ensure that issuers provide diligent and intelligent investors with the information they need to fairly evaluate securities.

Regulations on dealers in securities and trading on financial markets include regulation of financial activities. Perhaps the best example of this type of regulation is a set of rules that restrict the trading of securities by people who, because of their privileged position within the corporation, know more about the financial prospects of the issuer than the general investing public. Such persons are insiders and include, but are not limited to, corporate managers and members of the board of directors. Although it is not illegal for insiders to buy or sell a company's stock, they are still considered insiders. Illegal insider trading is when a person is an insider and trades in a company's security. Illegal insider trading is another problem caused by asymmetric information. The SEC is responsible for monitoring the transactions that corporate officers, directors, and major stockholders make in their firm's securities.

Another example of financial activity regulation is the trading of securities where a set of rules is enforced by the SEC regarding the structure and operations of exchanges. The justification for such rules is that they reduce the likelihood that exchange members will be able to commit fraud by colluding with the general investing public under certain circumstances. Both the SEC and the self-regulatory agency, the Financial Industry Regulatory Authority (FINRA), are responsible for the regulation of markets and securities firms in the United States.

The SEC and the Commodity Futures Trading Commission (CFTC), another federal government agency, share responsibility for federal regulation of trading in options, futures, and other derivative instruments. Derivatives are securities whose value depends on a specific other security or asset. For example, a call option on a stock is a derivative security whose value depends on the value of the underlying stock, and if the value of the stock increases, the value of the call option on the stock also increases.

Regulation of financial institutions is a form of government oversight that restricts their activities. Such regulation is justified by the government due to the important role of financial institutions in the country's economy.

Government regulation of foreign participants includes restrictions on the role that foreign companies can play in a country's domestic market and on the ownership or control of financial institutions. Although many countries have these types of regulations, the trend is to loosen these restrictions.

The current US regulatory system consists of industry and market focused regulators. Although the details of financial regulatory reform have not been finalized, there are several elements of reform that appear in key proposals:

> An advanced warning system, which will seek to identify systemic risks before they affect the general economy.

> Increased transparency in consumer finance, mortgage broking, asset backed securities and complex securities.

> Increased transparency of credit rating firms.

> Enhanced consumer protection.

> Increased regulation of nonbank lenders.

>Some measures to address the problems of financial institutions may be so large that their financial distress has an impact on the rest of the economy.

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