Order Code RL33235
CRS Report for Congress
Received through the CRS Web
Banking and Securities Regulation and Agency
January 17, 2006
William D. Jackson, Mark Jickling, and Gary Shorter
Government and Finance Division
M. Maureen Murphy and Michael V. Seitzinger
American Law Division
Congressional Research Service ˜ The Library of Congress
Banking and Securities Regulation and Agency
The federal bank regulatory agencies — the Office of the Comptroller of
the Currency, the Federal Deposit Insurance Corporation, the Board of Governors of
the Federal Reserve System, and the Office of Thrift Supervision — have extensive
authority to enforce various legal and regulatory standards with respect to the
banking institutions that they supervise. Similarly, the Securities and Exchange
Commission (SEC) has a wide range of tools to enforce the securities laws. This
report provides a brief sketch of these authorities and identifies the organizational
entities within each agency that Congress assigns enforcement responsibilities. It
includes a table comparing the formal enforcement tools that the banking agencies
may use with those of the SEC. This report will be updated as legislative activity
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
An Overview of Banking and Securities Regulation . . . . . . . . . . . . . . . . . . . . . . 2
Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Major Enforcement-Related Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Organization of Enforcement Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Comparison of Enforcement and Compliance Tools . . . . . . . . . . . . . . . . . . . . . . 10
For Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
List of Tables
Enforcement Tools of Federal Bank Regulators and the SEC . . . . . . . . . . . . . . . 11
Banking and Securities Regulation and
Agency Enforcement Authorities
In the United States, following several decades of divergence, the businesses of
commercial banking and securities activities have converged.1 Yet the regulatory
framework for them, crafted largely in the 1930s, remains mainly under different
statutory roofs.2 This report summarizes the enforcement and compliance programs
of federal banking regulators and those of the Securities and Exchange Commission
(SEC). It begins by discussing the key objectives of banking and securities
regulation, which shed light on why enforcement programs differ. There follow brief
overviews of the statutory basis for enforcement, the major enforcement tools, and,
finally, how regulators organize enforcement programs.
This report focuses on the primary goals of bank and securities regulation
respectively. Banks are to be run in a safe manner, seeking to avoid risk and thus
losses. Their regulation is largely in the background, “opaque.” Although banking
operations are subject to penetrating examinations by federal regulators, agencies do
not make most of the details public. The SEC, on the other hand, requires securities
firms and securities issuers to disclose various details of their operations, including
all material information that may generate losses as well as expected profits. In
contrast to bank regulation, therefore, SEC regulation of securities businesses may
be labeled “transparent,” that is, although sources of volatility are acceptable in the
industry, they must be adequately and accurately revealed or disclosed.
In both sectors, other goals are promoted by industry standards or self-policing
and by government regulation. Among these are the following: business continuity
planning in case of natural and unnatural (terrorist) disasters that could weaken
operations;3 preventing use of financial institutions as conduits for money laundering
or terrorist financing;4 providing consumer protection against fraud and misconduct;
safeguarding data security and the privacy of customer information; and supervising
CRS Report RL30516, Mergers and Consolidation Between Banking and Financial
Services Firms: Trends and Prospects, by William Jackson.
CRS Report RL32672, Financial Institutions and Markets: Major Federal Statutes, by M.
CRS Report RL31873, Homeland Security: Banking and Financial Infrastructure
Continuity, by William Jackson.
CRS Report RL33020, Terrorist Financing: U.S. Agency Efforts and Inter-Agency
Coordination, coordinated by Martin Weiss, especially section “Financial Regulators and
technological service providers. Banking and securities regulators and institutions
have long cooperated, both nationally and internationally, informally and formally,
and share cooperative arrangements of many kinds, often extending beyond U.S.
An Overview of Banking and Securities Regulation
Banking is one of the most heavily regulated businesses in the United States.6
The reasons for this lie in the economics of banking. A typical bank balance sheet
features long-term assets (loans and investments) and short-term liabilities (deposits).
This means that banks face liquidity problems if depositors suddenly choose to
withdraw their funds. Furthermore, a run on a single bank can become an industrywide problem, if cautious depositors at otherwise healthy banks — understanding
that only some withdrawal claims can be satisfied — decide to get in line early.
Banks are monitored closely through regulatory systems that require governmental
chartering; periodic reporting on virtually every aspect of their business; systematic
examination and supervision; independent auditing; and annual reports to
shareholders, depositors and the public.7 Under the dual banking system, banks may
be chartered by a state government or by the federal government.
Although the chartering authority — state or federal — prescribes the
requirements that a banking institution must meet with respect to the basic aspects
of its business, an array of federal laws and regulations provide for close federal
supervision of nearly all depository institutions in the United States. A major
component of federal regulation of banking is the deposit insurance system. To
discourage runs on banks and reduce the risk of contagion, Congress began federal
deposit insurance during the Great Depression, following collapses of statesponsored deposit guaranty schemes.8 Because under the deposit insurance program,
the federal government assumes part of the financial risk of bank failure, federal law
requires that banking regulators have access to confidential business data and gives
them broad powers to assure that the managers of insured depository institutions
operate them in a safe manner.
Nearly every aspect of the operation and management of an insured institution
is subject to close regulatory supervision. In an economic sense, bankers and
regulators are business partners: a bank that becomes insolvent is not just a business
failure; it also represents a failure of regulation. As vigilant as the regulators may be,
Institute of International Bankers, “Global Survey 2005, Regulatory and Market
Developments,” at [http://www.iib.org/GS2005.pdf].
See Jonathan R. Macey and Geoffrey P. Miller, BANKING LAW AND REGULATION 73 (2d
See Patricia A. McCoy, BANKING LAW MANUAL § 12.03 [Matthew Bender, 2d ed.].
CRS Report RS20724, Federal Deposit and Share Insurance: Proposals for Change, by
bad business decisions are inevitable, as are downturns in the economy that may
result in negative effects flowing from risks that are otherwise acceptable. In other
words, depositories cannot completely avoid risks. With federal insurance of
deposits, however, comes a safety net that lessens the impact of bank failure on
depositors and, consequently, on the entire monetary economy.
Congress divides federal regulatory authority over banking institutions among
five regulators. The Federal Deposit Insurance Corporation (FDIC), besides
administering the federally guaranteed insurance fund that covers any insured deposit
losses, regulates state-chartered banks (and savings associations), except those
belonging to the Federal Reserve System (FRS). The Board of Governors of the FRS
(Fed) regulates such “member banks.” The Office of the Comptroller of the
Currency (OCC) regulates federally-chartered “national banks.” The Office of Thrift
Supervision (OTS) regulates federally-chartered and state-chartered savings
associations. Besides federal regulation, all state-chartered banking institutions are
subject to state banking laws and to supervision by state supervisory agencies.9
Federal regulators also have authority to monitor safety and soundness in various
related organizations, known as bank “affiliates,” 10 which may be bank subsidiaries,
bank service companies, or other entities related to the bank through corporate family
structures known as “holding companies.” Regulation of holding companies and
their subsidiaries depends on what kind of firm is at their core. The Fed regulates
bank-based holding companies; OTS regulates savings institution-based complexes;
and the SEC, securities-based “investment bank holding companies.”11
The federal securities laws require companies that sell securities to the public
to register with the SEC. In contrast to bank regulation, however, the act of
registration with the SEC does not mean that the government has deemed a
corporation’s securities to be a safe investment. Registration documents, known as
“prospectuses,” state in bold type at their beginning that these securities have not
been approved or disapproved by the SEC, and any representation to the contrary is
a criminal event. The prospectus for even a high-quality stock or bond issue sets
forth a long list of risk factors, some of which are unlikely to occur, while others such
as weather, labor cost, and raw material conditions are intuitively obvious. In fact,
the standard prospectus for a high-yield (junk) bond offering usually includes
statements to the effect that it is highly unlikely that the issuing corporation will be
able to pay interest on the bonds, let alone repay the principal. Under federal
securities law, such an offer is entirely legal if all material information is fully and
accurately disclosed to the public. All parties concerned expect the value (price) of
traded securities to fluctuate, unlike bank deposits of fixed value.
Conference of State Bank Supervisors, “State Banking Department Links,” at
CRS Report RS21680, Affiliates in Banking, Finance, and Commerce: Development and
Regulatory Background, by William Jackson.
The most recent structural legislation governing financial holding companies is the
Gramm-Leach-Bliley Act, 113 Stat. 1138, P.L. 106-102.
In other words, there is no securities law term equivalent to safety and
soundness, the central notion of banking regulation. No one sees failure of a
publicly-traded corporation or the decline of its share price as a SEC failure if the
firm has disclosed all material risks fully and accurately. The SEC seeks to protect
investors from fraud, not risk. Banking regulation transfers the risk of bank failure,
including any failure resulting from fraud, from the customer to the government.
The SEC also regulates and requires registration of broker/dealers, investment
advisers, mutual fund operators, and other members of the securities industry.
Although the SEC exercises regulatory authority over the securities industry, its
authority is somewhat limited. An illustrative comparison is between the capital
requirements imposed upon banks and the SEC’s net capital rule, which requires
brokerage firms to maintain a minimum level of capital above mere solvency.
Lawmakers intend bank capital requirements to permit institutions to weather
unexpected losses or unfavorable market developments. The net capital rule, on the
other hand, is a liquidation rule — it seeks to ensure that failing brokerages are shut
down while they have money left to meet customer claims. Even in such cases, the
brokerage industry’s self-funded protection arrangement — the Securities Investor
Protection Corporation — may have to cover many account shortfalls.12
As in banking, state securities supervisors retain certain oversight power over
securities businesses.13 Unlike the banking agencies, which supervise without
intermediary organizations, the SEC has delegated significant authority to privatesector bodies. For corporation accounting, it has granted the Financial Accounting
Standards Board and Public Company Accounting Oversight Board major decisionmaking capabilities. For securities firms, it has allowed many oversight
responsibilities to be carried on by the National Association of Securities Dealers
(NASD), a “self regulatory organization” (SRO). The stock exchanges are also SROs
and thus exercise certain regulatory authority over their membership and over the
corporations whose shares they list. The SEC, however, may veto rulings of these
nongovernmental bodies, may require them to modify their rules (or adopt new ones),
and exercise further oversight over them.
Major Enforcement-Related Statutes
Although Congress has scattered provisions delegating various enforcement
authorities to federal banking agencies under specified circumstances throughout
U.S. laws, a full range of the civil enforcement powers of the federal banking
CRS Report RS21741, Securities Investor Protection Corporation, by William Jackson
and Gary Shorter.
North American Securities Administrators Association, “About Nasaa,” at
agencies is set out in section eight of the Federal Deposit Insurance Act.14 Banking
violations are also punishable under federal criminal laws, and banking regulators
often refer suspected violations to the Department of Justice for possible prosecution.
Many prosecutions involving banks or banking officials are based on charges under
general criminal statutes, such as the federal laws against mail fraud, wire fraud,
racketeering, false statements, and money laundering. In addition, many federal
criminal laws apply more narrowly to banking. These include:
18 U.S.C. § 215
18 U.S.C. § 656
theft or embezzlement of bank funds
18 U.S.C. § 709
false advertising or misuse of federal terms such as
“federal deposit insurance”
18 U.S.C. § 1005
false entries by bank employees or false statements
18 U.S.C. § 1014
false statements on a loan or credit application
18 U.S.C. § 1029
access device fraud
18 U.S.C. § 1344
18 U.S.C. § 2113
Because both banking and securities companies operate as intermediaries in
financial transactions, law requires them to make anti-money laundering and antiterrorist financing procedures to monitor and report on certain types of currency and
foreign transactions under various federal laws and under regulations issued by the
Department of the Treasury’s Financial Crimes Enforcement Network.15 They also
must report suspicious transactions.16 Violation of these requirements is subject to
potential criminal and civil penalties.17 In addition, Congress requires them to
institute procedures to comply with the various economic sanction programs
administered by Treasury’s Office of Foreign Assets Control (OFAC) and subjects
them to potential civil and criminal penalties for failure to comply with the
requirements that include blocking assets of designated entities and persons and
notifying OFAC of that.18 Of course, banks and banking officials may be prosecuted
under criminal laws of general applicability, such as those covering bribery of public
or foreign officials and tax fraud and evasion.
12 U.S.C. § 1818.
31 C.F.R., Part 103.
31 C.F.R. § 103.19 (brokers and dealers); 31 C.F.R. § 103.18 (banks).
See, e.g., 31 U.S.C. §§ 5321, 5322.
See U.S. Department of the Treasury, Office of Foreign Assets Control, “Foreign Assets
Control Program for the Financial Community,” at [http://www.treas.gov/offices/
The securities laws give the SEC a range of administrative sanctions that it can
apply to violators. Like the banking regulators, the SEC cannot bring criminal
charges itself but makes recommendations for prosecutions to the Justice
Department. The principal securities statutes are four, as follows.
The Securities Act of 1933,19 called a “truth-in-securities” law, requires that
securities be registered with the SEC before a sponsor/issuer sells them to the public.
Registration requires disclosure of detailed information about the issuing
corporation’s business, management, and financial condition. Failure to make
complete and accurate disclosures creates liability for civil and criminal penalties.
The Securities Exchange Act of 193420 created the SEC and gave it broad
authority to adopt rules and regulations to maintain fair and orderly securities
markets. This act requires ongoing disclosure and gives the SEC control over the
form and content of corporate financial statements (quarterly and annual reports,
etc.). The act also applies to exchanges where securities are bought and sold —
stock, bond, and stock option markets must submit their rules for SEC approval.
Brokers, the firms that employ them, and other industry professionals must register;
revocation of registration may prevent them from working in the securities industry.
The Exchange Act also governs communications between firms and their
shareholders as well as certain merger transactions.
The Investment Company Act21 provides for regulation of defined investment
companies such as mutual funds. As securities, mutual funds must be registered
before public sale, a process that requires public disclosures regarding the fund and
its managers. The law also places certain limits on the type of investments that funds
are permitted to make and on various other business practices.
The Investment Advisers Act of 194022 applies to persons engaging in the
business of advising others, either directly or through publications, as to the
advisability of the purchase or sale of securities. Advisers whose assets under
management exceed specified thresholds must register with the SEC. In 2004, the
SEC required hedge funds to register as advisers.23
15 U.S.C. §§ 77a et seq.
15 U.S.C. §§ 78a et seq.
15 U.S.C. §§ 80a et seq.
15 U.S.C. §§ 80b et seq.
CRS Report 94-511, Hedge Funds: Should They Be Regulated?, by Mark Jickling.
Organization of Enforcement Programs
Congress has vested enforcement of federal banking laws generally in an
institution’s primary federal regulator. Each of the federal banking agencies issues
regulations applicable to the entities under its authority. Typically, these are
coordinated through the Federal Financial Institutions Examination Council
(FFIEC).24 It is an interagency body composed of the heads of the federal banking
agencies, which is charged with making “uniform principles and standards and report
forms for examination of financial institutions,” 25 encouraging “application of
uniform examination principles and standards by State and Federal supervisory
agencies,”26 and reviewing all federal banking regulations at least once every 10 years
“to identify outdated or otherwise unnecessary regulatory requirements.”27
Federal banking regulators have both considerable enforcement options and
wide discretion in choosing among them. Besides the formal enforcement tools
specifically authorized by statute, each of the federal banking agencies employs
informal methods of insuring that regulated institutions meet safety and soundness
standards as well as regulatory and statutory standards. These range from moral
suasion to written requirements that corrective action be taken. Much of the
information upon which informal enforcement actions are based derives from
periodic bank examinations. Each banking agency has its own examination force that
detects violations during recurring safety and special-purpose examinations of bank
books and operations. Upon completion of a bank examination, the regulator will
present a Report of Examination to the institution’s board of directors, which is to
order remedial action or present information refuting the findings. Other forms of
informal enforcement tools to correct perceived weaknesses in an institution include
supervisory directives, board-of-director resolutions drafted by the regulator, and
written instructions or agreements from the regulator.28
Institutions usually make correction and remediation voluntarily following the
examination process and consider such self-correction a normal part of their business
because of the multiplicity and complexity of banking laws and regulations. If this
informal process of enforcement is unavailing, the banking agencies resort to the
formal mechanisms available to them. They, thus, typically issue progressively
stricter enforcement decrees against more serious weaknesses: memoranda of
understanding, civil money penalties, cease-and-desist orders, and orders requiring
the removal of officials. Should errant practices continue, an institution may be
closed either by charter revocation or termination of its deposit insurance.
U.S. Federal Financial Institutions Examination Council, “About the FFIEC,” at
12 U.S.C. § 3305.
12 U.S.C. § 3306.
12 U.S.C. § 3310.
See Patricia A. McCoy, BANKING LAW MANUAL § 13.02 (2d ed.).
Enforcement units within each agency are as follows.
(1) OCC, the primary regulator of nationally chartered banks, which is
organizationally placed within the U.S. Department of the Treasury, assigns bank
supervision and enforcement operations to the Office of the Chief National Bank
Examiner, within which there are “Large Bank Supervision” and “Midsize/Community Bank Supervision” units and four district offices.
(2) Fed, the primary regulator of state-chartered member banks and bank
holding companies including financial holding companies, conducts supervisory and
enforcement activities through its Division of Banking Supervision and Regulation
and delegates to 12 regional Federal Reserve Banks certain supervisory and
(3) FDIC, the primary federal regulator of state-chartered banks not belonging
to the Fed, allocates enforcement to its Division of Supervision and Consumer
Protection, which has Risk Management, Policy and Examination Oversight, and
Compliance and Consumer Protection units within eight regional offices.
(4) OTS, the primary federal regulator of savings or thrift institutions, and their
savings and loan holding companies, organizationally within the U.S. Department of
the Treasury, allocates its supervisory and enforcement activity to its Office of
Examinations, Supervision, and Consumer Protection, with certain line supervisory
responsibilities delegated to four regional offices.
(5) State-chartered banks are subject to regulation by state banking agencies.
Each state has a banking agency and usually designates an administrative position,
Chief Examiner, Deputy Commissioner, or Supervisory Examiner, to enforce
banking laws applicable to state banks.29 They usually make examinations on
alternating cycles under general cooperative agreements with federal banking
agencies, often negotiating them through the FFIEC.30
Two units within the SEC have enforcement responsibilities: the Division of
Enforcement and the Office of Compliance, Inspections, and Examinations. They
may operate via 11 regional SEC offices.
The Division of Enforcement conducts investigations into possible violations
of federal securities laws and oversees civil suits and administrative proceedings.31
The division conducts two levels of investigations:
12 U.S.C. § 484 prohibits states from examining national banks except for compliance
with state laws on unclaimed property and escheat.
Under 12 U.S.C. § 1820(d)(6)(A)(iii), federal banking agencies are to coordinate
examinations with state bank supervisors.
Informal investigations, which rely primarily on the voluntary
cooperation of witnesses and/or the target of the investigation,32 and
Formal investigations, in which it uses subpoenas to compel
testimony or the production of documents. To obtain subpoena
authority, the division submits a memorandum to the commissioners
(via the General Counsel). The memorandum is a justification for
the proposed investigation and the need for subpoenas. A majority
of commissioners, or the single commissioner then serving as the
duty officer, may then authorize a formal order authorizing
administrative action or filing in federal court.33
Normally, the agency conducts investigations on a nonpublic basis; the SEC
generally refuses to comment on whether an investigation is in progress. It
announces enforcement actions to the public, but not all investigations result in
enforcement actions. Before bringing an action, division staff may send out a “Wells
Call,” suggesting intent to bring an action, giving the target the opportunity to
respond in writing before bringing formal charges.34 Disclosure requirements of the
securities laws ensure that the recipient will likely have to publicize a Wells Call,
since news that an action is forthcoming is normally considered material to investors.
The Office of Compliance, Inspections, and Examinations (OCIE) is responsible
for examinations and inspections of registered entities — broker-dealers, investment
companies, investment advisers, transfer agents, clearing agencies, and selfregulatory organizations. This office conducts inspections to attempt to assure
compliance with the securities laws, to detect violations, and to apprise the SEC of
developments in the regulated community. When OCIE detects deficiencies, it issues
a “deficiency letter” which identifies problems that should be corrected, and the
office will monitor the situation until it believes that compliance has occurred. If the
office believes that violations are too serious for its process of correction, it will refer
the violations to the Division of Enforcement.35
As in banking, each state continues to have its own set of securities laws, called
blue sky laws; state agencies are responsible for enforcing these laws. SROs also
have enforcement roles. For example, the National Association of Securities Dealers
(NASD) oversees the registration of broker/dealers and their personnel and may bring
a variety of sanctions against those who violate its rules and standards. The stock
exchanges, as SROs, are required to conduct market surveillance and maintain and
enforce rules to protect their public customers. SROs must submit proposed new
rules to the SEC for approval.36
A.A. Sommer, Jr. (ed.) 6 SECURITIES LAW TECHNIQUES § 87.03 (2005).
Id. at § 87.04.
Sommer, at § 88.10.
See, e.g., 15 U.S.C. § 78s.
Comparison of Enforcement and Compliance Tools
Beyond the informal enforcement methods mentioned above, banking regulators
have a wide array of statutorily authorized formal enforcement tools that range from
civil administrative fines and orders to civil suits for damages and referrals to the
Department of Justice for criminal prosecution. Among the laws delegating civil
enforcement authorities is Section 8 of the Federal Deposit Insurance Act, which
delegates to the federal banking regulators authority to issue cease and desist orders,
prohibition and removal orders, civil money penalties, and orders canceling an
institution’s insured status.37
Likewise, the SEC has a wide range of enforcement tools. For example, it may
use its discretion in investigating possible violations of the securities laws and in
obtaining injunctions against practices that may constitute violations.38 It has the
authority to impose civil penalties for insider trading violations39 and to impose civil
penalties in administrative proceedings for violations of the laws.40 The SEC may
also, after notice and opportunity for hearing, begin cease-and-desist proceedings.41
A brief sketch of the formal enforcement tools available to federal banking
regulators and to the SEC is set out in the following table. 42
12 U.S.C. § 1818.
See, e.g., 15 U.S.C. § 78u.
See, e.g., 15 U.S.C. § 78u-1.
See, e.g., 15 U.S.C. § 78u-2.
See, e.g., 15 U.S.C. § 78u-3.
The tabular description of the formal enforcement tools available to bank regulators in the
first column of the table closely follows information found in a table compiled by the
Government Accountability Office (GAO) letter to Chairman Baker of the Subcommittee
on Capital Markets of the House Financial Services Committee. “Comparison of Financial
Institution Regulators’ Enforcement and Prompt Corrective Action Authorities,” GAO-01322R, Jan. 3, 2001, pp. 13-21.
Enforcement Tools of Federal Bank Regulators and the SEC
May be imposed on insured
depository institution (IDI) or
institution-affiliated parties (IAP)
for (1) unsafe or unsound
practice, or (2) violation of any
law, rule, regulation, or any
written agreement. C&D order
may include affirmative order to
correct conditions resulting from
practices or violations, or
limitations on the activities of an
IDI or IAP.
May be imposed on any person
who violates federal securities
laws. Respondent may be
ordered to disgorge ill-gotten
May be taken against any IAP
who violates law, regulation,
final C&D order, or written
agreement; engages in unsafe or
unsound practices or breach of
fiduciary duty, where actual or
probable financial loss occurs, or
where dishonesty or mental
culpability is involved; or if
necessary to protect an institution
or depositors. Additional
grounds for removal or
prohibition apply to officers and
directors in violation of specific
banking statutes, and to an IAP
involved in criminal proceedings.
For registered entities (such as
brokers, dealers, and investment
advisers, the SEC may institute
administrative proceedings to
suspend or revoke registration, or
to impose bars or suspension
from employment in the
Section 305 of the SarbanesOxley Act gives the SEC the
authority to bar a person from
serving as an officer or director
of a publicly-traded company if
that person committed a
securities law violation and has
demonstrated unfitness to serve.
Three tiers of money penalties
exist: (1) for violation of law,
regulation, final enforcement
order, written condition or
agreement, temporary C&D
order, removal or suspension
order, or violation of transaction
reporting requirements; (2)
violation of law, etc., unsafe or
unsound practice, or breach of
fiduciary duty that is part of a
pattern of misconduct, causes
more than a minimal loss, or
results in pecuniary gain to the
violator; (3) knowing violation of
law, etc., engaging in unsafe or
unsound practice, breach of
fiduciary duty and knowingly or
recklessly causing substantial
loss or substantial pecuniary
gain. Fines range from $5,000
per day (tier 1) to $1,000,000 per
day (tier 3).
The SEC often seeks civil money
penalties and disgorgement of
illegal profits in civil suits. In
certain cases, fines imposed on
single firms and individuals have
run into the hundreds of millions
Bank regulators have authority to
seek court injunctions, but in the
vast majority of cases, pursue
The SEC often files civil suits
seeking injunctions to prohibit
future violations. Many cases are
settled out of court, with consent
agreements, whereby the target of
the investigation does not admit
to wrongdoing but agrees not to
commit violations in the future.
Consent agreements are used in
many major cases, and may
involve the payment of fines
and/or prohibition and
FDIC may terminate deposit
insurance based on (1) unsafe or
unsound practices by an IDI, its
directors, or trustees, (2) unsafe
or unsound conditions to
continue operations, or (3)
violation by IDI, directors, or
trustees of any applicable law,
regulation, etc., or written
agreement between the IDI and
No insurance, thus no
As a bank becomes
undercapitalized, or critically
undercapitalized, regulators can
take progressively more intrusive
steps to monitor banks, restrict
certain transactions, require
significant changes in business
operations, or replace
regulators may appoint a receiver
or conservator and close the
No directly comparable authority.
Registered broker/dealers must
comply with a net capital rule,
and cease operations if their
capital falls below the specified
For Further Reading
Insurance Information Institute and The Financial Services Roundtable.
Spong, Kenneth. Banking Regulation: Its Purposes, Implementation, and Effects, at
U.S. Securities and Exchange Commission. “The Investor’s Advocate: How the
SEC Protects Investors and Maintains Market Integrity,” at