Privatising Regulation: Whistleblowing and Bounty Hunting in the Financial Services Industries

Published date01 February 2001
Date01 February 2001
AuthorJames Fisher,Ellen Harshman,William Gillespie,Henry Ordower,Leland Ware,Frederick Yeager
Subject MatterAccounting & finance
Privatising Regulation: Whistleblowing and Bounty
Hunting in the Financial Services Industries
James Fisher, Ellen Harshman, William Gillespie, Henry Ordower, Leland Ware and
Frederick Yeager
Journal of Financial Crime Vol. 8 No. 4
In late 1999, Congress enacted financial modernisa-
tion legislation that dramatically deregulated the
financial services industry and expanded the powers
of financial institutions in the USA. In keeping
with this deregulation and expanded powers, the
regulatory landscape and enforcement mechanisms
also changed. While many applaud this legislation,
others point to previous US experience where finan-
cial deregulation overwhelmed federal regulators and
resulted in massive failures of financial institutions
and, consequently, in huge federal bailouts. The
authors examine here the prospect of supplementing
regulation with certain forms of private intervention.
Specifically, they address the question: is there a role
for whistleblowing and bounty hunting as means of
supplementing existing regulation in the financial
services industry?
Generally, governmental agencies bear the responsi-
bility for overseeing the activities of financial services
in the USA. Frequently separate agencies assume
jurisdiction over the various industry groups and
occasionally several agencies regulate a single indus-
try. For example, in the USA the Federal Reserve
Board, the Federal Deposit Insurance Corporation,
and the Comptroller of the Currency all regulate
some of the functions of most commercial banks.
The Securities and Exchange Commission (SEC)
has primary regulatory authority over investment
banking and the markets for the purchase and sale
of securities. On the other hand, no federal agency
has general regulatory authority over the insurance
industry, rather each of the states has an agency that
regulates insurance in that state.
Conflicts and turf skirmishes between or among
agencies arise with respect to overlapping authority.
Both the Commodities Futures Trading Commission
and the SEC, for example, have sought to regulate
the same financial products. Recently, the USA
enacted the Financial Modernization Act of 1999,1 a
statute that is likely to blur the lines between the
jurisdictions of various regulators. This Act removes
historical barriers that precluded participation in
multiple financial services sectors by a single com-
pany.2 As industry participants expand their activities
in response to the Financial Modernization Act, a
single company may find itself subject to examina-
tion by increasing numbers of regulators; however,
at the same time, regulators may find themselves
overwhelmed by the numbers of industry partici-
pants they must oversee. In addition, technological
advances, especially the Internet, as well as globalisa-
tion of economic activity make the regulatory task
diffuse and unwieldy.
Effective regulation may depend not only on
enforcement by governmental agencies, but also on
a number of private interventions. For example, as
financial services become increasingly complex,
regulators may find themselves relying heavily on
industry participants, trade groups and private, indus-
try-funded specialists to assemble data and develop
rules and oversight methodologies. In the USA,
there is a tradition of encouraging the market partici-
pant to regulate itself by adopting internal systems
that require its managers and employees to comply
with the law. To a limited extent, each industry
may bear part of the regulatory burden through
industry oversight groups and self-regulatory organi-
sations. Industry groups commonly wield consider-
able authority to regulate their members' activities
and discipline their members for violating industry
norms. In the learned professions, professional asso-
ciations define and enforce professional standards
and licensing, thereby enabling the profession to
guard against outside regulation while regulating
itself from within.3 In the USA, self-regulatory orga-
nisations have always played major roles in the
examination and licensing of brokers and dealers in
the securities industry and maintenance of the securi-
ties markets.4 Regulatory dependence upon industry
self-regulation exposes the public to market-driven
regulatory standards rather than standards defined
by consumer protection. Dependence also increases
the risk that industry participants will be able to
Journal of Financial Crime
8. No. 4, 2001, pp. 305-318
© Henry Stewart Publications
ISSN 0969-6458
Page 305

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT