While there is a lot of give and take in the capital markets, with supply and demand setting the prices for securities, it’s not a total free-for-all. Several different groups regulate the markets, including government and financial industry organizations.
The government regulates the capital markets and the securities industry primarily through the
Securities and Exchange Commission (SEC).
Publicly held companies, the securities they offer, and the exchanges that trade securities are all subject to SEC regulations meant to prevent fraud.
Once a company has issued stock it must regularly report its financial position to the SEC and have that report
audited
by an outside source. Additionally, the exchanges and investment advisers who manage investments for clients are must register with the SEC and are subject to anti-fraud rules.
All this capital markets regulation is meant to protect investors from fraudulent activities. That protection is important for its direct benefit to investors, but it also increases the available capital for companies, since investors who are confident in a fair marketplace are more likely to invest their money.
Professor Samuel L. Hayes,
Harvard Business
School
Professor Samuel Hayes discusses the role that market regulation plays.
In an idealized economy, there would be no need for government regulation as the markets would regulate themselves and entrepreneurial activities would flourish. In contrast, in the real world, which isn’t a perfect, rational economic environment, there needs to be enough regulation to assure the public that the markets are fair and transparent.
Consumer protections don’t only apply to securities. When you take a loan, for example, the bank must disclose how much you’ll pay in interest and any fees, so that you can determine the actual cost of borrowing the money.
The government regulates the capital markets and the securities industry primarily through the
Professor 