L. Describe the Objectives of Market Regulation

Question 1

The objectives of market regulation

Answer 1

Protect unsophisticated investors.
Establish minimum standards of competency.
Help investors to evaluate performance.
Prevent insiders from exploiting other investors.
Promote common financial reporting requirements so that information gathering is less expensive.
Require minimum levels of capital so that market participants will be able to honor their commitments and be more careful about their risks.

CFA Institute attempts to address both of these objectives of market regulation. The CFA Program is part of the effort to encourage minimum standards of competency among finance professionals. Global Investment Performance Standards are part of the effort to make performance evaluation easier for investors.

reduce information gathering costs by requiring common financial reporting standards.

One of the objectives of market regulation is to require firms to report their financial performance according to a single set of standards, such as those of the IASB or FASB, thereby reducing market participants’ cost of gathering information. Market regulation is not designed to prevent uninformed investors from trading, but to protect unsophisticated investors and thereby preserve trust in the financial markets. An objective of market regulation is to prevent those with non-public information from profiting at the expense of other investors, but not necessarily to make all inside information public.

Question 2

Market Regulation

Answer 2

• Regulations promote capital formation
and risk sharing by ensuring that the
financial markets and intermediaries
operate efficiently and fairly.
• Necessary because regulating certain
bad behaviors through market mechanisms
is too costly for
uninformed and unsophisticated
people.

Question 3

Regulatory Objectives

Answer 3

• Control fraud.
• Control agency problems.
• Promote fairness.
• Set mutually beneficial standards.

• Prevent undercapitalized financial firms
from exploiting their investors by
making excessively risk investments.
• Ensure that long-term liabilities are
funded.