1. Topic 5 Function, Purpose and Regulations of Financial Institutions

2. Topic 5: Function, Purpose and Regulations of Financial Institutions Learning Objectives – (a) Compare the secondary market institutions and their regulators for each security (stock, bond, ETFs, real estate, commodities and options exchanges) and of primary market institutions (investment banking firms, mutual funds and hedge funds).

3. Topic 5: Function and Purpose of Financial Institutions Financial institutions serve as an intermediary between those who have savings and those who have productive needs for capital – Direct funds to those who have the highest potential for productivity – Contributes to economic growth – Improves standard of living

4. Topic 5: Types of Financial Institutions Banks Credit unions Brokerage companies Insurance companies Mutual fund companies Trust companies

5. Topic 5: Banks and Credit Unions Commercial banks are corporations with a state or federal charter authorizing the bank to accept deposits, make business and consumer loans, invest in government and private securities, and provide other financial services (including trust department services) The credit union is owned by its members and is a nonprofit entity offering a wide variety of consumer financial services – There must be a “common bond” among the members A common employer, religious membership, union membership, or neighborhood or community

6. Topic 5: Brokerage Companies and Insurance Companies Brokerage companies are large corporate organizations that have grown to enormous size by merger, purchase, and the use of other acquisition techniques, and that offer a wide variety of financial services Insurance companies, both life and property- liability companies, obtain most of their funds from policy owners and they invest those funds until expenses and claims become payable

7. Topic 5: Mutual Fund Companies Mutual fund companies invest funds in a portfolio of stocks or bonds, depending on the type of mutual fund Examples – S&P 500 stocks – International stocks – High-quality corporate bonds

8. Topic 5: Trust Companies Trust companies manage trust assets which can include cash, stocks, bonds, business and real estate The trust companies can serve as the corporate trustee of the trust or they can assist an individual trustee in managing the trust assets

9. Topic 5: Regulations to Assure Safety of Funds FDIC Insurance SIPC Insurance PBGC NCUSIF

10. Topic 5: FDIC Insurance The FDIC insures depositor accounts in banks and most types of nonbank thrift institutions up to $250,000 – $250,000 insurance per depositor – Joint account can be insured up to $500,000 Retirement accounts are also insured up to $250,000

11. Topic 5: SIPC Insurance The SIPC insures depositor accounts in brokerage firms up to $500,000 – Limited to $250,000 in cash held in the account Insurance does not cover losses due to market fluctuations

12. Topic 5: Other Insurance Programs Pension Benefit Guaranty Corporation (PBGC) insures defined benefit plans – Does not insure defined contribution plans National Credit Union Share Insurance Fund (NCUSIF) insures Credit Union accounts

13. Topic 5: Key Laws Affecting the Financial Industry Securities Act of 1933 – Requires registration and full disclosure concerning all new securities so investors can make informed decisions when investing Securities Act of 1934 – Created the SEC to enforce laws pertaining to the securities industry – Requires the registration and regulation of broker/dealers

14. Topic 5: Key Laws Affecting the Financial Industry The Banking Act of 1933 (Glass-Steagall Act) – Created the Federal Deposit Insurance Corporation (FDIC) to insure investor deposits The Investment Company Act of 1940 – Granted the SEC power over the investment or security transactions of publicly owned investment companies, such as mutual funds

15. Topic 5: Key Laws Affecting the Financial Industry The Investment Advisers Act of 1940 – Requires investment advisers to register with the SEC if they are in the business of providing advice or analyses about securities for compensation The McCarran-Ferguson Act of 1945 – Determined that the insurance industry would be regulated at the state level, rather than at the federal level

16. Topic 5: Key Laws Affecting the Financial Industry The Securities Investor Protection Act of 1970 – Created the Securities Investor Protection Corporation (SPIC) to insure investors against losses arising from the failure of a brokerage firm The Employee Retirement Income Security Act of 1974 (ERISA) – Created minimum funding standards for pension plans and established the Pension Benefit Guaranty Corporation to insure employee pension benefits up to certain levels

17. Topic 5: Key Laws Affecting the Financial Industry The Insider Trading and Securities Fraud Enforcement Act of 1988 – Prohibits insider trading The Gramm-Leach-Bliley Act of 1999 – Allows banks and insurance companies to join together to serve clients and also requires giving customers the right to stop the sharing of their information with unrelated third parties

18. Topic 5: Market Institutions and Regulators SECURITY INSTITUTION REGULATORS Stock Exchanges/OTC SEC, FINRA Bond OTC SEC, FINRA ETF Exchanges SEC, FINRA REIT Exchanges SEC, FINRA FNMA/FHLMC OTC FHFA Commodities Futures exchanges CFTC/NFA Options on stock Options exchanges SEC/FINRA Options on futures Options exchanges CFTC/NFA Investment Banking Primary market SEC Hedge Funds Direct investment SEC(Dodd-Frank) with the fund

19. Class Exercise 5-1 As a group, students should explore the web sites of some of the more common regulators in areas where financial planners commonly work (e.g., SEC, FINRA). Pay attention to where you would go to find new regulations or changes to existing regulations, useful tools for planning clients (e.g., FINRA’s Broker Check), and tools available for consumer education. – http://www.consumerfinance.gov/ http://www.consumerfinance.gov/ – http://www.sec.gov/index.htm http://www.sec.gov/index.htm – http://www.finra.org/ http://www.finra.org/ – http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/ http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/ – http://apps.finra.org/fundanalyzer/1/fa.aspx http://apps.finra.org/fundanalyzer/1/fa.aspx – http://cfp.net/ http://cfp.net/

20. End of Topic 5