Briefly discuss the DoddFrank Reform Act and the SarbanesOxl

Briefly discuss the Dodd-Frank Reform Act and the Sarbanes-Oxley Act. How does each of these regulations protect Money Market and Security Market investors? Briefly discuss insider trading. Considering, you are an Investment Analyst in one of the U.S. Fortune 500 investment firm and you are asked to put together a report recommending how your firm can prohibits employees from \"Insider Trading.\" List your recommendations and explain how those will allow your firm to comply SEC\'s rules and guidelines.

Solution

Dodd-Frank Reform Act came in the picture after the great recession started in 2007 and lasted till 2009. During that period, economy declined and millions of American lost their jobs. Obama adminstration first proposed a lesiglation to combat the fragile economy. Then Senator Dodd and U.S representative Frank proposed new revisions in the bill and that lesiglation was named after their name. This Dodd-Frank Act became a law in July 2010.Some major highlights of this complex bill are: Any bank having more than $50 Billion of assets, must go for Annual Stress test given by Fed to determine Bank\'s readiness to survive any future financial crisis.

Banks also need to increase their reserve to combat the future financial slump.

The office of credit ratings would ensure credit rating agencies provide reliable ratings for evaluated institutions.

Extension of Dodd-Frank act known as Volcker Rule which stop the banks from investing in certain areas like proprietary trading with their own accounts.

However in 2017, President Trump issued executive order to review the Dodd-Frank Act and possible reforms.

Sarbanes-Oxley Act commonly known as \"SOX\". US Congress passed this in 2002 to combat the situation created post Enron, Worldcom financial scandals. SOX major purpose was to enhance the integrity of corporate finacial reporting and better regulation for accountants.

SOX requires executive must certify financial statements and confirm the accuracy of the financial reports. Companies should maintain internal controls for fraud detection. Criminal penalties, whistleblowers protection and Public Company Accounting Oversight Board creation are some other hallmark of SOX Act.

Both SOX and Dodd-Frank Act later took significant steps for investor protection in Security and Money Market. As discussed above, SOX came up with whistleblowers protection, Criminal penalties, fraud detection mechanism, Public Company Accounting Oversight Board creation kind of provisions which played important role in investor protection.

Talking about Dodd-Frank, post 2007-09 great recession, when financial market faced its worst backlace only next to 1929 great depression,it came up with some fresh ideas. Dodd-Frank and Volcker pushed Banks and financial institution to comply with more regulatory actions like deposit requirement increase, Annual mandatory stress test for big banks, monitoring credit rating agencies activities, banning of proprietary trading etc. All of them were some significant steps towards more investor protection in Security and money market.

Insider trading is the malpractice of using sensitive information, not visible in public domain, for trading activities.This actually gives traders unfair advantages over others and maximum forms of insider trading is strictly prohibited by SEC. Also SEC conduct routine investigation and punishes in the event of insider trading got caught.

Insider tradings are generally performed using members of organization purchasing shares, professionals doing business with the company, friends/families of corporate employees, government officials, hackers, corporate espionage etc.

Some of the infamous case of insider tradings are Ivan Boesky, Martha Stewart, R.Foster Winans, Rajat Bose etc.

As an Investment Analyst in one of the U.S. Fortune 500 investment firm, my recommendations to prohibit employees from Insider Tradings:

Always check the source of your information. From any source you receive something before trade, try to find out how much public information available for the same.

Immediately report to proper authorities when you are unsure about the private or public nature of your receipt information related to your portfolio. This will ensure your honest intention and no wish for insider tradings.

The timings of receiving some information related to some security is also very important. Also while asking questions, your intentions should not provoke someone to reveal some sensitive private information.

Also raise red flag when some information provide by someone is clear violation of breach of duty. Revealing some undersigned secret information, trade secret, breaching confidentiality agreement should be brought in SEC\'s notice immediately. In this way, you can comply with SEC rules and guidelines reated to insider tradings.

You must make sure that all your trading partners have clear idea on SEC rules towards Insider Tradings. As an organization, we should have policies and agreements to ensure trades take place within permissible boundaries of SEC laws.

Also while repaying some favors, must make it sure that even you ahve some sensisitive information with you as part of your work or role, don\'t reveal the same in any situations.

Following above set of major recommedations we can comply with SEC rules and guidelines and avoid the trap of insider tradings.