Regulatory Framework for Investment Banks

Regulatory Framework for Investment Banks

Oversight of investment banks within the United States remains a dynamic process, overseen both by the Securities and Exchange Commission (SEC) and subject to intermittent congressional scrutiny. The legal differentiation of investment banks from commercial counterparts traces back to previous legislative enactments, forming the foundation of their existence.


The legal categorization of investment banks as distinct entities emerged through the Banking Act of 1933, commonly known as Glass-Steagall. Enacted as a response to the severe financial repercussions of the Great Depression, where over 10,000 banks either shut down or halted operations, this legislation bore significant consequences.

Supporters of Glass-Steagall contended that the financial landscape could be rendered less precarious by mitigating conflicts of interest between banks and clientele. Deliberations held within the Pecora-Glass Subcommittee sought to ascertain whether depositors encountered unwarranted hazards due to banks with affiliations in securities. Despite an absence of compelling evidence, the outcome determined a separation of banking activities, fortified by the Federal Deposit Insurance Corporation (FDIC) guardianship.

This shift led to the emergence of investment-only banks. Congress defined these establishments as institutions engaged in securities underwriting and trading. In contrast, commercial banks were characterized as entities that accepted deposits and extended loans.

The demarcation lines between affiliations of commercial and investment banking underwent dissolution in 1999 with the enactment of the Financial Services Modernization Act, also known as Gramm-Leach-Bliley. This legislative step adopted a more comprehensive terminology for all varieties of financial intermediaries, designating them as financial institutions.

Congressional Influences Shaping Investment Banks

Significant legislative milestones enacted by Congress have profoundly impacted the landscape of investment banks. The Banking Act's wake saw the emergence of multiple influential acts. In 1934, the Securities Exchange Act introduced groundbreaking regulations for securities exchanges and broker-dealers, culminating in the establishment of the Securities and Exchange Commission (SEC).

The year 1940 bore witness to the passage of the Investment Company Act and the Investment Advisers Act, which ushered in a new era of regulations overseeing advisers, money managers, and related entities. The momentum persisted into 1969, when apprehensions arose about investment banks grappling with burgeoning trading volumes post the stock market downturn. Responding swiftly, Congress gave rise to the Securities Investor Protection Corporation (SIPC).

The subsequent years witnessed a series of pivotal updates. In 1975, the Uniform Net Capital Rule (UNCR) revamped investment bank capital prerequisites, mandating the maintenance of specified liquid assets and submitting comprehensive quarterly Financial and Operational Combined Uniform Single (FOCUS) reports.

The repercussions of international capital standards paved the way for the 1988 Basel Accord, laying the groundwork for supranational financial institution regulations. Congressional endeavors to repeal the divide between investment and commercial banks unfolded in 1991 and 1995, culminating triumphantly in the Gramm-Leach-Bliley Act. This transformative legislation authorized the establishment of financial holding companies, uniting commercial and investment banks under aegis alongside insurance company affiliates.

In 2002, the Sarbanes-Oxley Act (SOX) emerged, a monumental stride aimed at executive oversight and auditor empowerment. In the aftermath of the 2008 financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act materialized, ushering in an extensive array of fresh regulations spanning diverse financial institutions.

SEC Oversight Impacting Investment Banks

The expansive jurisdiction of the SEC stems from legislative mandates, encompassing diverse facets of investment banking. Comprehensive regulation, ranging from licensing and compensation to reporting, accounting, and advertising, extends across this realm. Moreover, fiduciary obligations and product offerings fall within the purview of the SEC.

As overseer, the SEC exercises dominion over securities and its constituents, spanning stock exchanges, brokers, dealers, advisors, and mutual funds. At the heart of the SEC's mission lie imperatives such as facilitating transparent disclosure of pivotal market information, upholding equitable practices, and safeguarding against fraudulent activities.


US investment banking oversight involves a dynamic interplay between the SEC and Congress. Distinct investment and commercial banking roots stem from key acts like Glass-Steagall. Investment-only banks emerged, defined by Congress for securities activities. Transformative laws like Gramm-Leach-Bliley shaped the landscape alongside the pivotal role of the SEC. Vital rules like Sarbanes-Oxley and Dodd-Frank added accountability. The SEC oversees diverse aspects of investment banking, promoting transparency and preventing fraud. In essence, investment banking's evolution reflects intricate legislative and regulatory balance, driving innovation and stability.

Investment Bank
Glass-Steagall Act (GSA)
The Securities Exchange Act of 1934
Investment Company Act of 1940
Investment Advisers Act of 1940
Securities Investor Protection Corporation (SIPC)
Basel Accords
Sarbanes-Oxley Act (SOX)
Dodd-Frank Act
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