Question

● Discuss the role of the Securities Exchange Commission (SEC) and the National Association of Securities Dealers (NASD) in regulating the securities industry. Also discuss the role that the stock exchanges play in regulation.

● The Securities Investor Protection Corporation (SIPC) plays an interesting role in the securities market; discuss its purpose.

● Discuss the role foreign markets have played in the expansion of U. S. securities firms. Include details.

● Define arbitrage as it applies to the securities markets and discuss how securities firms can facilitate arbitrage activity in the securities industry.

● Discuss the meaning of the term “insider information.” Then discuss why securities firms often have inside information that could affect future stock prices.

● Describe the different types of insurance coverage: whole life, term insurance, and universal life.

● Whole life insurance can be a form of savings to policyholders; describe how this works.

● Define reinsurance and how it is used by property and casualty companies.

● Describe the role of the Pension Benefit Guaranty Corporation (PBGC).

● Explain the Employee Retirement Income Security Act (ERISA) and how it affects individuals when they change jobs (employers)

Answer 1

(1). Role of Securities & Exchange Commission(SEC) in regulating securities industry:

• The main purpose of the SEC is to protect investors by enforcing rules and regulations which regulates the securities industry.
• These rules are created to oversee work that the entities in the financial industry is doing. These entities includes, Stockbrokers, public utility companies, investment advisors and companies, etc.
• The National Association of Securities Dealers is Non-government organisation that regulates NASDAQ.
• It play very important role in maintaining, efficient, transparent market by itself.
• It creates more robust regulation for the operation of credit bureaus & OTC derivatives.

Role of National Association of Securities Dealers in regulating securities industry:

• the main function includes the oversight of all brokerage firms, branch offices and securities representatives.
• It is a self regulatory organisation which operates and regulates NASDAQ stock market.
• It develops and operates a number of market place and systems and services and also formulates market policies and listing criteria.

(2). Securities Investor Protection Corporation (SIPC): It was mandated by an act called Securities investors protection act 1970 and was created by a federal law, it is niether a US government agency nor funded by government.

• Purpose include to protect consumers, but it doesnot protect investors against market risk.
• It also offers protection to limited event if incase a broker becomes insolvent.
• Though the protection provided by SIPC is limited, so it is necessary to define who is eligible for the benefits.
• The SIPC has no authority or control over a firm unless the firm becomes solvent.

(3). There are many reasons to why US firms have expanded their market operations to foreign markets and foreign markets have played a major role in the expansion of US securities firms.

• Because of the globalization, a number of significant international and financial developments have taken including the major development due to the emergence of the regulatory authorities.
• The liberalization of financial markets have opened doors for the US securities firms to enter into the foreign markets, thus it has expanded the firms operations.
• The phaseout of the interest ceilings and the ease on the portfolio restriction on the pension funds and also the removal of a variety of restrictions on the bank's permissible activities have also helped in the expansion of US securities firms.
• The changes in the structure and the easing out of the restrictions have helped the firms to diversify their risks into several foreign markets.
• Thus, the foreign markets have played major role in the expansion of the US securities firms.

(4). Arbitrage: It is an strategy which is used to gain from the price discrepancies for the same security into different financial markets.

An arbitrageur uses this strategy to purchase an identical security and selling of that security to get a benefit from the changes in the price.

This can happen because all markets are not perfect.

How to facilitate arbitrage activity:

As all markets are not perfect, one can facilitate a gain from the arbitrage activity buying a security from one market and simultaneously selling into another where the price for that security is high, thus locking a sure gain from this activity.

There are also some transactions cost incurs when we buy and sell securities, one should also consider this while entering into arbitrage activity.

So, these are the ways by which a security firm can facilitate arbitrage activity and can get a gain from it.