Headline:  Close Enough for Government Work?

Date: 1/23/2021

Body :  I was re-reading some of my old posts and noted that I had mentioned a few governmental bodies that regulate investing and finance.   I used their names, and it struck (not too hard, fear not, gentle reader) that it might be useful to define the functions and features of each as they relate to investing.

OK, general overview time.   If you were afraid that your eyes would glaze over when you consider regulation of financial topics… you are in good company.   Largely speaking, Congress doesn’t like these topics either, and will often delegate powers to another agency to regulate things.   Arguably, this might explain the often overlapping and otherwise very confusing jurisdictions of several agencies.   For instance, your car antenna is likely a very straightforward rod, that receives:  When government gets involved, it can sometimes look a bit like this

So, here, in no pre-determined order, are a few of the most involved agencies that are either Federal Government agencies, or maybe not.   More on that as we go.

Federal Government Agencies

SEC Stands for “Securities & Exchange Commission. “  The mandate for this agency is quite broad.  They have been in existence for 85 years now, so they are not a new regulator on the block.   Speaking of “the block” that’s what they regulate.   They regulate the $29 Billion of investing that private individuals do (That represents over 58% of the stock market, so, it’s nothing to sneeze at.)  Their objective is to make sure that all investors are on an equal footing, information-wise, and when there’s an imbalance, the SEC can bring a civil action against an entity.  Broadly speaking, the way that companies and other entities can avoid tangling with the SEC is to disclose information fairly.  There is even an Office of Investor Education and Advocacy.

The SEC, like many other federal agencies, seems to be keen on going digital.  Toward this end, on their homepage is a variety of links to news on their activities.   There is, certainly, a “Strategic Plan” which largely revolves around going digital.   But, for the average investor, I think the biggest news is EDGAR.   It is a clearinghouse of financial disclosures from all public companies.  This resource is REALLY helpful because the Annual Reports of many companies are gussied up with pretty color pictures that take forever to download, and the reports here are literally black and white.  The regular formats help too, as you can quickly get to know what to expect.   The Forms 8-K are also here.   These represent “material’ changes in policy or financial attribute.

IRS Stands for “Internal Revenue Service”.  Everybody loves the IRS, and every citizen’s pulse goes up substantially when they rip open an envelope with their address on it.   Each year, all citizens report to them about the money they made in the calendar year just ended (Form 1040, anybody?) and we are all used to filling these in, or buying software to do it for us.

The IRS is an agency under the Treasury Department, and is very fond of reminding us of how efficient they are  Per their own website, in 2019, they processed over 253,000,000 tax returns and collected over $3 Trillion in tax revenues.  Per the same source, the agency paid just $.33 for each $100 of tax revenue collected.  It is divided into 4 main sections, and you might be surprised to know that one of them focuses on Tax-Exempt entities.   This might seem counter-intuitive to some, but to comply with legislation passed by Congress, the IRS has enacted regulations to make sure that Not-for-Profit entities are in compliance with the requirements from Congress.    This is actually a very interesting agency (though for full-disclosure, I do work for them) because of the breadth of what they do.     On a day-to-day basis, they must make the activities of  “real world” examples of individual and businesses fit into the “boxes” setup by Law.  

CFPB Stands for the “Consumer Financial Protection Board.”

The CFPB is one of the newest “watchdogs”  (a regulatory puppy?) on the block.   It was legislatively sponsored by Senator Elizabeth Warren and others, and seeks to both protect and educate consumers to be more informed about their financial alternatives.  Some opponents suggest that their mandate is overlarge, and the agency should be sutured and shuttered, but repeated attempts have proven ineffective.  The main argument is that all of these functions had previously been implemented by other government agencies.   In return, the CFPB advocates argue that it stands as a very useful one-stop-shop for investors to become empowered by information and representation, if need be.  (The puppy DOES have sharp teeth!!)

Quasi-Governmental agencies

The Federal Reserve a.k.a. “The Fed.”

The Federal Reserve (a.k.a. The Fed) has a long and storied past, complete with a fascinating cast of characters.  While it is functionally independent of Congress, it is inherently tied to politics because:

  1.  Each governor is appointed by the President and approved by the Senate.
  2. It tries to craft policy that will support the intentions of Congress (as revealed in legislation, largely.)

Its function is to provide stability in the U.S. Economy.  More directly, it enacts policy to: maintain maximum employment, maintain stable pricing and regulate long-term interest rates in the US economy.  Please note that this is a VERY complex charge because sometimes when one objective is enhanced, another can be weakened.

The Fed might have been heard of by some people, in relation to a “lender of last resort.”  Usually when financial institutions want/need money, they trade amongst themselves.   Sometimes, however, they will not lend to each other readily.   This is when the Fed comes in, lending them money, so that they can in turn, lend the money to businesses and individuals.  They enact their policies (largely) by changing the rate at which they will lend.  (You might’ve heard of the Federal Open Market Committee, FMOC.   The FMOC meets quarterly to discuss whether they should change this percentage.   Professionals are paid handsomely to predict what they are about to say, and then translate what they DID say.)

FINRA a.k.a. Financial Industry Regulatory Authority

It seems that the role of FINRA as a quasi-independent agency, is to refer cases of ethical breaches and illegal activities to the SEC for prosecution or litigation.  It is NOT a governmental agency.  In fact it is a not-for-profit, supported by a foundation.   An intelligent person might ask why FINRA exists when there is an active SEC?   The SEC is largely concerned with individual investors, and FINRA is concerned mainly with disciplining brokers and brokerages for their wrong-doings.

It is an active agency, and in 2019 brought over 800 disciplinary actions against brokers, and levied over $64 Million in fines.   They referred over 800 cases of insider trading to the SEC and others.  They offer a lot of educational opportunities both online and offline, and offer a “Securities Helpline for Seniors.”  I happen to know a female attorney employed by FINRA.   I tell you, if all of their employees are as sharp as she is, we have a valuable watchdog represented in this agency.

FASB/GASB These stand for the “Financial Accounting Standards Board” and the “Governmental Accounting Standards Board,” respectively.    Not normally in a list of important agencies, they do formulate the standards that accountants have to follow with respect to reporting revenues and expenses of both private companies and governmental entities, so I consider them vital to the understanding of the regulatory environment.

A word on both of these regulatory bodies.   A brief look at the homepages suggests a more-than-casual similarity of these two bodies.  In fact, they are both supported by the Financial Accounting Foundation.   So, they are both not-for-profit entities.

FASB–> FASB was started in 1973 with the task of establishing Generally Accepted Accounting Principles (GAAP).   This is important because GAAP determines how the companies you invest in, report revenues, expenses and policies of their management.  Changes in GAAP could easily  change your investment decisions.  They derive their authority from the SEC.  (So, quick review, Congress–>SEC–>FAF–>FASB, simple, huh??)  FASB pronouncements are seen as authoritative by the AICPA and State Boards of Accountancy, so it is important.  FASB members are selected by trustees of the FAF to serve up to two 5-year terms.  They are full-time employed by FASB, and must first sever any and all ties with their former accounting firms, until completion of their term. 

GASB–> GASB works in a very similar manner, but focuses on the reporting of municipal governments (read State and local.)   The accounting behind the Federal Government, well, that can and does fill MANY books. 

The Verdict

We appear to be well-represented by agencies that will help us in our investing lifetimes.   All of these agencies and bodies seem to focus on the education of consumers and the federal agencies do also have enforcement powers to use if there is wrong-doing.  The system appears to be quite comprehensive, though it seems pretty efficient overall.  As American citizens, I think we should be proud of our system of Law and Regulation.


About IRS | Internal Revenue Service

SEC.gov | What We Do

About us | Consumer Financial Protection Bureau (consumerfinance.gov)

Federal Reserve Board – About the Fed

About FINRA | FINRA.org

About the FASB

About Us (gasb.org)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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