Business

Conduct Of Business Regulation

Conduct of Business Regulation via SSRN

Andrew F. Tuch

Washington University in Saint Louis – School of Law

June 30, 2014

Oxford Handbook of Financial Regulation (N Moloney, E Ferran and J Payne eds) (OUP 2015, Forthcoming)

Washington University in St. Louis Legal Studies Research Paper No. 14-06-04

Abstract:

This chapter provides a survey and comparative analysis of conduct of business (COB) regulation. COB regulation governs financial intermediaries’ conduct toward their clients, that is, toward the actors – whether individuals or institutions – with whom financial intermediaries transact in providing financial products and services. Modal regulatory strategies include anti-fraud rules, and duties of care, loyalty, fair-dealing and best-execution – and variants of these duties.

The chapter describes the justifications for COB regulation, the modal regulatory strategies used and the complex frameworks within which COB regulation operates. It then generally assesses US COB regulation, focusing on the regulation of broker-dealers and investment advisers. It outlines important market and regulatory developments over the past several decades and draws comparisons with corresponding EU and Australian conduct of business regulation. The chapter concludes by discussing reforms proposed or adopted in the wake of the global financial crisis of 2007-09.

Conduct Of Business Regulation – Introduction

Conduct of business (COB) regulation governs financial intermediaries’ conduct toward their clients; that is, toward the actors – whether individuals or institutions – with whom financial intermediaries transact in providing financial products and services. While the expression ‘conduct of business regulation’ is not widely employed in some jurisdictions,
including the US, it is commonly used by international financial regulatory bodies and by financial regulators in many jurisdictions, including the Member States of the EU. COB regulation governs financial intermediaries acting for or on behalf of their clients, such as in giving advice, exercising discretion, and executing orders. It may also govern intermediaries’ arm’s-length arrangements with clients – transactions in which intermediaries act as principals, or counterparties, in buying or selling financial products. COB regulation typically applies across the spectrum of financial intermediaries’ functional lines of business, including their securities, banking, and insurance activities. It takes various forms, including requirements for registration or licensing; rules governing sales, marketing, and other business practices; and mechanisms of enforcement.

Conduct of business regulation serves the objectives of protecting clients (investors) from harm, preserving and enhancing the integrity and orderly operation of financial markets, and otherwise serving the public interest. Because its focus is ‘client-facing,’ it does not encompass ‘firm-facing’ regulation, such as the imposition of general supervision obligations, recordkeeping requirements, or net capital requirements – regulation that nevertheless serves to protect clients. Moreover, because of its focus on conduct, COB regulation does not encompass product regulation except to the extent such rules shape financial intermediaries’ conduct toward their clients.

This Chapter considers various functional lines of business, but focuses on securities. As Professor Eddy Wymeersch observed, conduct of business regulation is more symptomatic of securities regulation than of banking and insurance regulation. The latter areas of financial regulation have been primarily concerned with the solvency of banks and insurance companies, whereas securities regulation has focused on investor protection – an objective served by COB regulation.

The Chapter begins with the regulatory backdrop to COB regulation. It describes the justifications for COB regulation, the modal regulatory strategies used, and the complex frameworks within which COB regulation operates. The Chapter then generally assesses US COB regulation, outlining important market and regulatory developments over the past several decades, and drawing comparisons with corresponding EU and other COB regulation. The Chapter concludes by discussing reforms proposed or adopted in the wake of the global financial crisis of 2007-09.

Conduct Of Business Regulation

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