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The Need for Government Regulation

Government regulation of business has become a way of life in the United States.

Government regulation is designed to protect private enterprise.

Protection of rights.

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The Authority of Government to Regulate Business

U.S. Constitution Article I, Section 8 (commerce clause).

Police power.

Intrastate commerce.

Interstate commerce.

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Police Power

Police power: power of a state to protect the welfare of its citizens.

There are only two limitations on this power: The regulation must be needed, and it must be reasonable.

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Intrastate and Interstate Commerce

Intrastate commerce: business activity solely within one state.

Interstate commerce: business activity conducted in two or more states.

Congress has almost unlimited authority to control business. That control, however, must be needed, must be reasonable, and must not violate anyone’s constitutional rights.

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Areas of Government Regulation

Protection of the public by maintaining competition and free trade.

Preventing monopolies.

Maintaining fair competition.

Taxing business.

Regulating crucial industries.

Regulating securities.

Preserving the general welfare and environment.

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Preventing Monopolies

Monopoly: limiting of competition by act or agreement.

Antitrust laws: laws that prohibit monopolies.

Sherman Act (1890).

Clayton Act (1914).

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Maintaining Fair Competition

The Sherman Act prohibits any contract, combination, or conspiracy in restraint of trade.

Market allocation, an agreement by competitors not to compete in certain markets, is prohibited.

Federal Trade Commission Act of 1914.

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Maintaining Fair Competition

Tying arrangement: agreement between a buyer and a seller requiring the buyer, as a condition of sale, to buy other products by the seller.

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Maintaining Fair Competition

Exclusive dealing arrangement: agreement between a buyer and a seller requiring the buyer to refrain from buying a similar product from a competitor.

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Taxing Business

Taxation involves every aspect of business and affects business decisions on every level.

Income tax.

Sales tax.

Payroll tax.

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Regulating Crucial Industries

Some industries are allowed to operate as monopolies or semimonopolies.

Transportation and communication companies, utilities.

Deregulation.

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Regulating Securities

The securities industry is one of the most heavily regulated industries in the United States.

Uniform Securities Act.

Securities Act of 1933.

The Securities Exchange Act of 1934.

Securities and Exchange Commission (SEC).

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SEC

Independent regulatory body charged with enforcing the provisions of both the 1933 and the 1934 acts.

Investment Company Act of 1940 provides for SEC oversight of investment company activities and requires registration of offerings.

The SEC is responsible for setting standards for disclosure, investigating fraud, regulating the activities of brokers and dealers, and regulating the trading of securities.

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Insider Trading

Insider trading: trading in securities by someone having information not available to the public.

Rule 10b-5 applies to almost every type of security traded on any exchange, and it has even been extended to apply to outsiders (known as “tippees”).

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Regulating Securities

Recapture.

Blue sky laws.

NYSE, ASE, and NASD have their own set of regulations as well.

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Regulating Corporate Conduct

Sarbanes-Oxley Act of 2002.

The Act established the Public Company Accounting Oversight Board to set standards for the audit of public companies.

The act covers issues such as auditor independence, corporate responsibility, enhanced public disclosure and the need to establish a public company oversight board.

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Preserving the General Welfare and the Environment

The courts have interpreted the term general welfare in such a broad manner that almost any type of regulation is considered permissible.

Licensing of certain businesses and professions.

Regulation of drugs and tobacco, alcohol.

Environmental regulations.

Zoning.

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Environmental Regulation

Clean Water Act.

Atomic Energy Act.

Clean Air Act.

National Environmental Policy Act of 1969.

Environmental Protection Agency was created in 1970.

The Superfund (1980), hazardous waste.

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How Government Regulations are Enforced

Administrative agencies.

Courts.

The public.

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Administrative Agencies

Administrative agencies: government bodies created to act in the public interest.

They have legislative, executive, and judicial powers.

Legislative: agencies make rules, set rates, and establish standards.

Executive: enforce their own rules.

Judicial: determine whether their rules have been violated and impose penalties for any violations discovered.

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Administrative Agencies

Local level: zoning boards, bridge and tunnel authorities.

State level: public utilities commissions, professional licensing boards.

Federal level: Occupational Safety and Health Administration (part of the Department of Labor).

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Independent Regulatory Agencies

The most active and powerful agencies.

Independent of Congress and do not have to account to anyone unless they exceed their powers.

Their decisions affect almost every aspect of business.

FCC, Federal Reserve Board, SEC.

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How Government Regulations are Enforced

Fines.

Court order.

Revocation of license.

Treble damages: punitive damages (three times the amount) awarded for violation of some government regulations.

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Limitations on Agency Powers

Any person who believes that an agency has acted improperly or incorrectly in making a decision may sue in court for a review of that decision.

The court will normally look at certain possible areas of agency error:

Did the agency violate due process?

Did the agency exceed its authority?

Did the agency violate a state constitution or the U.S. Constitution?

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Licensing and Liability of Professionals

To protect the public, all states require the licensing of professionals.

Attorneys, doctors, electricians, plumbers.

Professionals are liable to their clients or customers for negligence, breach of contract, improper performance of service.

Standards of conduct (bar associations).

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