CHAPTER-

5
TheRegul
ati
onofFi
nanci
alMar
ket
sandI
nst
it
uti
on
I
ntr
oduct
ion
Thef
inanci
almar
ket
spl
ayani
mpor
tantr
olei
nmanyeconomi
esandgov
ernment
s
ar
oundt
hewor
ldhav
elongdeemedi
tnecessar
ytor
egul
atecer
tai
naspect
soft
hese
mar
ket
s.Becauseofdi
ff
erencesi
ncul
tur
eandhi
stor
y,di
ff
erentcount
ri
esr
egul
ate
f
inanci
almar
ket
sandf
inanci
ali
nst
it
uti
onsi
nvar
yingway
s,emphasi
zi
ngsomef
orms
ofr
egul
ati
onmor
ethanot
her
s.Di
ff
erencesal
soexi
sti
nthesy
stem ofr
egul
ati
onand
di
ff
erentcount
ri
esadoptdi
ff
erentsy
stemsofr
egul
ati
onandt
oregul
atef
inanci
al
mar
ket
s. Thi
s chapt
er,t
her
efor
e,di
scusses t
he r
ole ofgov
ernment
sint
hei
r
r
egul
ator
ycapaci
ty,t
her
ati
onal
eforr
egul
ati
on,f
ormsofr
egul
ati
onandsy
stemsof
r
egul
ati
on.
TheRol
eofGov
ernment
Ov
erv
iew
I
nthei
rregul
ator
ycapaci
ti
es,gov
ernment
shav
egr
eat
lyi
nfl
uencedt
hedev
elopment
andev
olut
ionoff
inanci
almar
ket
sandi
nst
it
uti
ons.I
nthi
ssect
ion,wewi
l
ldi
scuss
t
her
oleofgov
ernmenti
nregul
ati
onoff
inanci
almar
ket
sandi
ntui
ti
ons.
Gov
ernment
s'Rol
einRegul
ati
on
Gov
ernment
sinmostdev
elopedeconomi
eshav
ecr
eat
edel
abor
atesy
stemsof
r
egul
ati
on f
orf
inanci
almar
ket
s,i
n par
tbecause t
he mar
ket
sthemsel
ves ar
e
compl
ex and i
n par
tbecause f
inanci
almar
ket
s ar
eimpor
tantt
othe gener
al
economi
es i
n whi
ch t
heyoper
ate.I
tisi
mpor
tantt
oreal
i
ze t
hatgov
ernment
s,
mar
ket
s,andi
nst
it
uti
onst
endt
obehav
eint
eract
ivel
yandt
oaf
fectoneanot
her
's
act
ionsi
ncer
tai
nway
s.Thus,i
tisnotsur
pri
singt
ofi
ndt
hatamar
ket
'sr
eact
ionst
o
r
egul
ati
onsof
tenpr
omptanew r
esponsebyt
hegov
ernment
,whi
chcancauset
he
i
nst
it
uti
onspar
ti
ci
pat
ingi
namar
kett
ochanget
hei
rbehav
iorf
urt
her
,andsoon
Thest
andar
dexpl
anat
ionorj
ust
if
icat
ionf
orgov
ernment
alr
egul
ati
onofamar
keti
s
t
hatt
hemar
ket
,lef
ttoi
t,wi
l
lnotpr
oducei
tspar
ti
cul
argoodsorser
vicesi
nan
ef
fi
cientmannerandatt
hel
owestpossi
blecost
.Ofcour
se,ef
fi
ciencyandl
ow-
cost
pr
oduct
ionar
ehal
lmar
ksofaper
fect
lycompet
it
ivemar
ket
.Thus,amar
ketunabl
e
t
opr
oduceef
fi
ci
ent
lymustbeonet
hati
snotcompet
it
iveatt
het
ime,andt
hatwi
l
l
notgai
nthatst
atusbyi
tsel
fint
hef
oreseeabl
efut
ure.Ofcour
se,i
tisal
sopossi
ble
t
hatgov
ernment
smayr
egul
atemar
ket
sthatar
evi
ewedascompet
it
ivecur
rent
lybut

1
unabl
etosust
aincompet
it
ion,andt
husl
ow-
costpr
oduct
ion,ov
ert
hel
ongr
un.A
v
ersi
onoft
hisj
ust
if
icat
ionf
orr
egul
ati
oni
sthatt
hegov
ernmentcont
rol
saf
eat
ureof
t
heeconomyt
hatt
hemar
ketmechani
smsofcompet
it
ionandpr
ici
ngcoul
dnot
managewi
thouthel
p.
Pur
posesandFor
msofRegul
ati
on
Ov
erv
iew
Ther
ear
evar
iousj
ust
if
icat
ionsr
egar
dingt
heneedf
ormar
ketr
egul
ati
onandt
his
sect
ionpr
ovi
desusadet
ail
edexpl
anat
ionofwhyr
egul
ati
onoff
inanci
almar
ket
sand
i
nst
it
uti
oni
sneeded.I
naddi
ti
on,t
hissect
ional
sodi
scussest
hedi
ff
erentf
ormsof
r
egul
ati
on.
Just
if
icat
ionf
orRegul
ati
on
Thet
hreecor
ejust
if
icat
ionsf
orr
egul
ati
onar
e:
1.Thepr
otect
ionofi
nvest
ors;
2.Ensur
ingt
hemar
ket
sar
efai
r,ef
fi
cientandt
ranspar
ent
;and
3.Ther
educt
ionofsy
stemi
cri
sk
Thet
hreej
ust
if
icat
ionsf
orr
egul
ati
onar
ecl
osel
yrel
atedand,i
nsomer
espect
s,
ov
erl
ap;manyoft
her
equi
rement
sthathel
ptoensur
efai
r,ef
fi
cientandt
ranspar
ent
mar
ket
sal
sopr
ovi
dei
nvest
orpr
otect
ionandhel
ptor
educesy
stemi
cri
sk.Si
mil
arl
y,
manyoft
hemeasur
est
hatr
educesy
stemi
cri
skpr
ovi
depr
otect
ionf
ori
nvest
ors.
Theaf
orement
ionedobj
ect
ivesofr
egul
ati
onar
efur
therdescr
iedbel
ow.
1.ThePr
otect
ionofI
nvest
ors
I
nvest
orsshoul
dbepr
otect
edf
rom mi
sleadi
ng,i
nsi
dert
radi
ng,andt
hemi
suseof
cl
i
entasset
s.Ful
ldi
scl
osur
eofi
nfor
mat
ionmat
eri
alt
oinv
est
ors'deci
sionsi
sthe
mosti
mpor
tantmeansf
orensur
ingi
nvest
orpr
otect
ion.I
nvest
orsar
ether
ebybet
ter
abl
etoassesst
hepot
ent
ialr
isksandr
ewar
dsoft
hei
rinv
est
ment
s.Di
scl
osur
e
r
equi
rement
s,account
ingandaudi
ti
ngst
andar
dsshoul
dbei
npl
aceandt
heyshoul
d
beofahi
ghandi
nter
nat
ional
l
yaccept
abl
equal
i
ty.Unl
essi
nvest
orsar
eaccor
ded
suf
fi
cientpr
otect
ionst
heywi
l
lnothav
efai
thi
nthesy
stem.Thi
slackoff
ait
hwi
l
lbe
det
ri
ment
alt
obui
l
dav
ibr
antandr
obustcapi
tal
mar
ket
.

I
fbusi
nessi
smeantt
othr
iveandpar
ti
cipant
stopr
osper
,bui
l
dingupconf
idence
amongstt
hepopul
acei
shi
ghl
yimpor
tant
.Thati
swhymaj
orr
egul
ator
yconcer
ns
wer
emai
nlyf
ocusedoni
nvest
ors.I
nef
fect
,regul
ati
oni
nthi
srespectwi
l
lnotonl
ybe

2
benef
ici
alt
oinv
est
orsbutal
sot
ocompani
esorcor
por
ati
onswhowoul
dbeabl
eto
expandandmakepr
ofi
tsi
nvi
abl
est
ock.

Tosum upr
egul
ati
onhel
pst
o:
 Sol
ve mor
alhazar
d pr
obl
em-
taki
ng up unexpect
ed act
ivi
ti
es by cor
por
ate
(
bor
rower
s)af
termobi
l
izi
ngf
undsf
rom t
hepubl
i
caf
fect
ingi
nvest
orsi
nter
est
s.
Di
scl
osur
erequi
rement
sar
egoodi
nthi
sregar
d.
 Av
oidmar
ketf
ail
uresduet
oasy
mmet
ri
cinf
ormat
ion.Thi
sisbecausel
ackof
pr
operi
nfor
mat
ionf
ori
nvest
orswi
thr
egar
dtodi
rect
ionoft
hemar
ketmaygi
ve
di
si
ncent
ivest
ost
ayi
nthemar
ketandt
heymi
ghtmov
eoutoft
hemar
ket
.
 Li
mitoppor
tuni
ti
esf
oragent
stoactagai
nstt
hei
nter
est
soft
hei
rshar
ehol
der
s.
Agent
s/manager
shav
ingspeci
ali
nfor
mat
ionmayusef
ort
hei
rownadv
ant
ageat
t
heexpenseofshar
ehol
der
saf
fect
ingcor
por
ategov
ernance.Thus,r
egul
ati
ons
suchasl
awsagai
nsti
nsi
dert
radi
ngcoul
dreducet
hemagni
tudeoft
hepr
obl
em.
 Regul
atei
nvest
mentbanker
sbecause,i
ftheyar
elef
tfr
ee,t
ogetmor
ebusi
ness
t
heymayj
oinhandswi
tht
hecor
por
atet
odef
raudi
nvest
orpubl
i
c.Regul
ati
ons
suchascodeofconductf
ori
nvest
mentbanker
sar
ehel
pful
tot
hisend.
2.Ensur
ingt
heMar
ket
sar
eFai
r,Ef
fi
cientandTr
anspar
ent
Thef
air
nessoft
hemar
ket
siscl
osel
yli
nkedt
oinv
est
orpr
otect
ionand,
inpar
ti
cul
ar,
t
othepr
event
ionofi
mpr
opert
radi
ngpr
act
ices.Mar
ketst
ruct
uresshoul
dnotundul
y
f
avorsomemar
ketuser
sov
erot
her
s.Regul
ati
onshoul
ddet
ect
,det
erandpenal
i
ze
mar
ketmani
pul
ati
onandot
herunf
airt
radi
ngpr
act
ices.
I
n an ef
fi
ci
entmar
ket
,the di
ssemi
nat
ion ofr
elev
anti
nfor
mat
ion i
sti
mel
yand
wi
despr
eadandi
sref
lect
edi
nthepr
iceofsecur
it
ies.Thepr
ocessofr
egul
ati
on
shoul
dpr
omot
emar
ketef
fi
ciency
.
Tr
anspar
encymaybedef
inedast
hedegr
eet
owhi
chi
nfor
mat
ionaboutt
radi
ng(
bot
h
f
orpr
e-t
radeandpost
-t
radei
nfor
mat
ion)i
smadepubl
i
clyav
ail
abl
eonar
eal
-t
ime
basi
s.Pr
e-t
radei
nfor
mat
ionconcer
nst
hepost
ingoff
ir
m bi
dsandof
fer
sasameans
t
oenabl
einv
est
orst
oknow,wi
thsomedegr
eeofcer
tai
nty
,whet
herandatwhat
pr
icest
heycandeal
.
Post
-t
radei
nfor
mat
ioni
srel
ated t
othepr
icesand t
hev
olumeofal
lindi
vi
dual
t
ransact
ionsact
ual
l
yconcl
uded.Regul
ati
onshoul
d ensur
ethehi
ghestl
evel
sof
t
ranspar
ency
.

3
3.TheReduct
ionofSy
stemat
icRi
sk
Al
thoughr
egul
ator
scannotbeexpect
edt
opr
eventt
hef
inanci
alf
ail
ureofmar
ket
i
nter
medi
ari
es,r
egul
ati
onshoul
dai
mtor
educet
her
iskoff
ail
ure(
incl
udi
ngt
hrough
capi
talandi
nter
nalcont
rolr
equi
rement
s).Wher
efi
nanci
alf
ail
urenonet
hel
essdoes
occur
,regul
ati
on shoul
d seek t
oreduce t
he i
mpactoft
hatf
ail
ure.Mar
ket
i
nter
medi
ari
esshoul
d,t
her
efor
e,besubj
ectt
oadequat
eandongoi
ngcapi
taland
ot
herpr
udent
ialr
equi
rement
s.I
fnecessar
y,ani
nter
medi
aryshoul
dbeabl
etowi
nd
downi
tsbusi
nesswi
thoutl
osst
oit
scust
omer
sandcount
erpar
tsorsy
stemi
c
damage.
Ri
skt
aki
ngi
sessent
ialt
oanact
ivemar
ketandr
egul
ati
onshoul
dnotunnecessar
il
y
st
if
lel
egi
ti
mat
eri
skt
aki
ng.Rat
her
,regul
ator
sshoul
dpr
omot
eandal
l
ow f
ort
he
ef
fect
ive managementof r
isk and ensur
ethatcapi
taland ot
herpr
udent
ial
r
equi
rement
sar
esuf
fi
ci
entt
oaddr
essappr
opr
iat
eri
skt
aki
ng,al
l
owt
heabsor
pti
on
ofsomel
osses,
andcheckexcessi
ver
iskt
aki
ng.
I
nst
abi
l
itymayr
esul
tfr
om ev
ent
sinonesownj
uri
sdi
cti
onori
nanot
herj
uri
sdi
cti
on
oroccuracr
osssev
eralj
uri
sdi
cti
ons.Sor
egul
ator
sshoul
dtr
ytof
aci
l
itat
est
abi
l
ity
domest
ical
l
yandgl
obal
l
ythr
oughcooper
ati
onandi
nfor
mat
ionshar
ing.Aspar
tof
t
his,oneobj
ect
iveofr
egul
ati
oni
stor
est
ri
ctt
heact
ivi
ti
esoff
orei
gnconcer
nsi
n
domest
ic mar
ket
s and i
nst
it
uti
ons whi
ch pl
ayan i
mpor
tantr
olei
nfaci
l
itat
ing
st
abi
l
ityoft
hef
inanci
alsy
stem.
For
msofRegul
ati
on
Cor
respondi
ngt
oeachr
ati
onal
eforr
egul
ati
oni
sani
mpor
tantf
orm ofr
egul
ati
on.
Di
scl
osur
eRegul
ati
on
Thi
sist
hef
orm ofr
egul
ati
ont
hatr
equi
resi
ssuer
sofsecur
it
iest
omakepubl
i
ca
l
argeamountoff
inanci
ali
nfor
mat
iont
oact
ualandpot
ent
iali
nvest
ors.Thest
andar
d
j
ust
if
icat
ionf
ordi
scl
osur
erul
esi
sthatt
hemanager
soft
hei
ssui
ngf
ir
m hav
emor
e
i
nfor
mat
ionaboutt
hef
inanci
alheal
thandf
utur
eoft
hef
ir
mthani
nvest
orswhoown
orar
econsi
der
ingt
hepur
chaseoft
hef
ir
m'ssecur
it
ies.Thecauseofmar
ketf
ail
ure
her
e,i
findeedi
toccur
s,i
scommonl
ydescr
ibedasasy
mmet
ri
cinf
ormat
ion,whi
ch
meansi
nvest
orsandmanager
shav
eunev
enaccesst
oorunev
enpossessi
onof
i
nfor
mat
ion.Thi
sisr
efer
redt
oast
heagencypr
obl
em,i
nthesenset
hatt
hef
ir
m's
manager
swhoactasagent
sfori
nvest
ors,mayacti
nthei
rowni
nter
est
stot
he
di
sadv
ant
ageoft
hei
nvest
ors.Theadv
ocat
esofdi
scl
osur
erul
essayt
hat
,int
he

4
absenceoft
her
ules,t
hei
nvest
ors'compar
ati
vel
yli
mit
edknowl
edgeaboutt
hef
ir
m
woul
dal
l
owt
heagent
stoengagei
nsuchpr
act
ices.
I
tisi
nter
est
ing t
o not
ethatsev
eralpr
omi
nenteconomi
stsdenyt
heneed and
j
ust
if
icat
ion f
ordi
scl
osur
erul
es.Theyar
gue t
hatt
he secur
it
ies mar
ketwoul
d,
wi
thoutgov
ernment
alassi
stance,getal
lthei
nfor
mat
ionnecessar
yforaf
airpr
ici
ng
ofnewaswel
lasexi
sti
ngsecur
it
ies.Onewayt
olookatt
hisar
gumenti
stoaskwhat
i
nvest
orswoul
ddoi
faf
ir
mtr
yingt
osel
lnew shar
esdi
dnotpr
ovi
deal
lthedat
a
i
nvest
orswoul
dwant
.Int
hatcase,i
nvest
orsei
therwoul
dref
uset
obuyt
hatf
ir
m's
secur
it
ies,gi
vi
ngt
hem azer
oval
ue,orwoul
ddi
scountorunder
pri
cet
hesecur
it
ies.
Thus,af
ir
m conceal
i
ngi
nfor
mat
ionwoul
dpayapenal
tyi
nthef
orm ofr
educed
pr
oceedsf
rom sal
eoft
henewsecur
it
ies.Thepr
ospectoft
hispenal
tyi
spot
ent
ial
l
y
asmuchi
ncent
ivet
odi
scl
oseast
her
ulesofagov
ernment
alagency
.
Fi
nanci
alAct
ivi
tyRegul
ati
on
I
tconsi
stsofr
ulesaboutt
rader
sofsecur
it
iesandt
radi
ngonf
inanci
almar
ket
s.A
pr
imeexampl
eoft
hisf
orm ofr
egul
ati
oni
sthesetofr
ulesagai
nstt
radi
ngby
i
nsi
der
swhoar
ecor
por
ateof
fi
cer
sandot
her
sinposi
ti
onst
oknow mor
eabouta
f
ir
m'spr
ospect
sthant
hegener
ali
nvest
ingpubl
i
c.I
nsi
dert
radi
ngi
sanot
herpr
obl
em
posedbyasy
mmet
ri
cinf
ormat
ion,
whi
chi
sofcour
sei
nconsi
stentwi
thacompet
it
ive
mar
ket
.Asecondexampl
eoft
hist
ypeofr
egul
ati
onwoul
dber
ulesr
egar
dingt
he
st
ruct
ureandoper
ati
onsofexchangeswher
esecur
it
iesar
etr
aded.Thear
gument
suppor
ti
ngt
heser
ulesr
est
sont
hepossi
bil
i
tyt
hatmember
sofexchangesmaybe
abl
e,undercer
tai
nci
rcumst
ances,t
o col
l
udeanddef
raudt
hegener
ali
nvest
ing
publ
i
c.
Regul
ati
onofFi
nanci
alI
nst
it
uti
ons
Thi
sist
he f
orm ofgov
ernment
almoni
tor
ing t
hatr
est
ri
ctst
hese i
nst
it
uti
ons'
act
ivi
ti
esi
nthev
italar
easofl
endi
ng,bor
rowi
ng,andf
undi
ng.Thej
ust
if
icat
ionf
or
t
hisf
orm ofgov
ernmentr
egul
ati
oni
sthatt
hesef
inanci
alf
ir
mshav
easpeci
alr
olet
o
pl
ayi
namoder
neconomy
.Fi
nanci
ali
nst
it
uti
onshel
phousehol
dsandf
ir
mst
osav
e;
t
heyal
sof
aci
l
itat
ethecompl
expay
ment
samongmanyel
ement
soft
heeconomy
;
andi
nthecaseofcommer
cialbankst
heyser
veascondui
tsf
ort
hegov
ernment
's
monet
arypol
i
cy.Thus,
iti
sof
tenar
guedt
hatt
hef
ail
ureoft
hesef
inanci
ali
nst
it
uti
ons
woul
ddi
stur
btheeconomyi
nasev
ereway
.
Regul
ati
onofFor
eignPar
ti
cipant
s

5
Thi
sist
hatf
orm ofgov
ernment
alact
ivi
tyt
hatl
i
mit
sther
olesf
orei
gnf
ir
mscanhav
e
i
ndomest
icmar
ket
sandt
hei
rowner
shi
porcont
rol
off
inanci
ali
nst
it
uti
ons.
Regul
ati
onofEconomi
cAct
ivi
ty
Aut
hor
it
iesusebanki
ngandmonet
aryr
egul
ati
ont
otr
ytocont
rolchangesi
na
count
ry'
smoneysuppl
y,whi
chi
sthoughtt
ocont
rol
thel
evel
ofeconomi
cact
ivi
ty.
Sy
stemsofRegul
ati
on
Ov
erv
iew
Fi
nanci
ali
nst
it
uti
ons,mar
ket
sandt
hei
rpr
oduct
sar
eregul
atedt
hrought
hreemaj
or
sy
stemsofr
egul
ati
on.Thi
ssect
ionwi
l
ldi
scusseachoft
hesesy
stemsofr
egul
ati
on
separ
atel
y.
1.Feder
al/
Cent
ralRegul
ati
on
Thi
sty
peofr
egul
ati
oni
nvol
vest
hecont
rol
oft
hemar
ketatt
henat
ional
lev
elt
hrough
l
egi
slat
ion ort
hrough t
he cr
eat
ion ofgov
ernmentagenci
es t
o admi
nist
erand
ov
erseet
hel
egi
sl
ati
ons.Nat
ural
l
y,t
hesensi
ti
vi
tyofsecur
it
iesmar
ketf
ail
uresand
t
hespeci
alr
oleofdeposi
tor
yinst
it
uti
onsi
nmonet
arypol
i
cypl
acet
hem under
f
eder
alcont
rol
.Deposi
tor
yinst
it
uti
onsi
n manycount
ri
esi
ncl
udi
ng Et
hiopi
aar
e
r
egul
atedbyr
espect
ivecent
ral
banks.
Secur
it
iesmar
ket
sar
eont
heot
herhandr
egul
atedbyt
hesecur
it
iesandexchange
agencyoft
her
espect
ivecount
rysuchast
heSecur
it
iesandExchangeCommi
ssi
on
(
SEC)oft
heUS.

2.Sel
f-
Regul
ator
yOr
gani
zat
ions(
SRO)
Sel
f-
regul
ati
onamount
stoasi
tuat
ionwher
emember
sinv
olv
edi
naf
inanci
alact
ivi
ty
comet
oget
herandsetacodeofr
ulesandr
egul
ati
onst
oabi
debyi
ntheconductof
t
hei
ract
ivi
ti
es.
SROsar
esai
dtobecostef
fect
iveandst
abl
efr
om pol
i
ticali
nter
fer
ence.Si
nceSROs
f
oll
owt
hei
rownr
ulesand pr
ocedur
e,t
heyar
einsul
atedf
rom gov
ernmentpr
essur
e,
whi
chmakest
hesy
stem mor
est
abl
eandl
ongl
ast
ing.I
ncont
rastt
othegov
ernment
bur
eaucr
acy
,the SROs show mor
e concer
n and pr
udentcar
efort
he pr
oper
i
mpl
ement
ati
onoft
hest
andar
dsoff
airpr
act
ice,f
ort
hei
rfat
eisent
winedwi
tht
he
pr
operf
unct
ioni
ng oft
hemar
ket
.Asf
arassel
f-
regul
ati
on i
sconcer
ned,st
ock
exchangest
aket
hef
ir
stst
ept
hrought
hei
rli
sti
ngr
equi
rement
s.St
ockexchanges
empl
oyquant
it
ati
veorqual
i
tat
ivel
i
sti
ngr
equi
rement
stoscr
eenoutpar
ti
cipant
sin

6
t
hemar
ket
.
Est
abl
i
shi
nggov
ernmentr
egul
ator
yagenci
esi
nvol
vesaheav
ybur
denandexpense
i
nter
msofmoney
,ti
meandmanpower
.Ital
soexer
tsconsi
der
abl
epr
essur
eon
t
axpay
ers,becauser
unni
ngsuchgov
ernmentagenci
esr
equi
resr
aisi
ngf
undsf
rom
t
hepubl
i
c.Hence,SROscangener
all
ybeconsi
der
edascostef
fect
iveandst
abl
e
whi
chmakest
hem ani
deal
mechani
sm f
orr
egul
ati
on.
3.Mar
ketRegul
ati
on
Thi
sappr
oachi
sal
sor
efer
redt
oasmar
ketact
ionandi
sinl
i
newi
tht
hel
aissezf
air
e
appr
oach,
whi
cht
ell
sust
hatt
hemar
ketwi
l
ltakecar
eofi
tsel
f.I
nfact
,whati
smeant
bymar
ketact
ioni
sthatamar
ketshoul
dbeabl
etor
egul
atei
tsel
f.Thi
sisespeci
all
y
wi
thr
egar
dto di
scl
osur
eregul
ati
on.As we not
ed bef
ore,pr
oponent
s oft
his
appr
oach cont
end t
hatt
her
eis no j
ust
if
icat
ion f
ordi
scl
osur
eregul
ati
on by
gov
ernmentbecauset
hemar
ketwoul
dwi
thoutgov
ernmentassi
stancegetal
lthe
i
nfor
mat
ionnecessar
yforaf
airpr
ici
ngofnewaswel
lasexi
sti
ngsecur
it
iest
hrough
i
tspowert
ounder
pri
cet
hesecur
it
iesoff
ir
mst
hatdonotpr
ovi
deal
lnecessar
ydat
a.
Mar
ketact
ion t
ell
s us t
hateconomi
cal
l
y ef
fi
cientdi
scl
osur
e wi
l
lbe made i
n
r
esponset
osophi
sti
cat
edi
nvest
ors.Theassumpt
ionsofef
fi
cientdi
scl
osur
eand
sophi
sti
cat
edi
nvest
orsmayhol
dtr
uegi
vent
hebackgr
oundoft
heAmer
icanSy
stem
wher
eint
uit
ionali
nvest
orsar
erampant
.Howev
er,ev
ent
her
e,t
hemar
ketl
eftal
one
wassupposedl
ypr
ovedt
obeaf
ail
urel
eadi
ngt
oachangei
nthepol
i
cyofr
egul
ator
y
mechani
sms.Then,i
tneedsnocr
it
icalanal
ysi
stoaf
fi
rmt
hei
mpr
act
icabi
l
ityoft
his
t
heor
yinadev
elopi
ngeconomyl
i
keEt
hiopi
awher
ethemar
keti
sati
tsembr
yoni
c
st
aget
husmaki
ngt
heneedf
ori
ssui
nggov
ernmentr
egul
ati
onsorsel
f-
regul
ati
onf
or
st
ockexchangeobv
ious.