ELLIOT BOOK CHAPTER 8 REGULATION AND COMPLIANCE

Key vocabulary and regulatory terms from Elliot Book Chapter 8, covering compliance structures, international standards like Basel and Solvency II, and the role of compliance officers.

Compliance

The process by which an organization adheres to its internal policies and procedures and to its external legal and regulatory requirements.

Chief compliance officer (CCO)

The individual tasked with ensuring the organization’s compliance with external requirements such as laws and regulations as well as compliance with internal policies and procedures.

Internal audit function

A function whose primary purpose is to verify that appropriate internal controls are in place and working.

Principles-based regulation

A regulatory approach that specifies the outcome that regulation is intended to achieve and then allows the regulated entities broad latitude in determining how to achieve that desired outcome.

Rules-based regulation

A regulatory approach in which the regulators define specific rules that the regulated entities are required to follow to achieve the desired outcome.

Regulatory arbitrage

The practice of circumventing unfavorable regulations by exploiting gaps and inconsistencies in competing regulatory systems.

Dodd-Frank Wall Street Reform and Consumers Protection Act of 2010

A federal law enacted in the wake of the 2008 financial crisis that transforms the regulatory structure for financial services, increases oversight of financial markets, and institutes new consumer protections.

Sarbanes-Oxley Act of 2002 (SOX)

Implementation of financial reporting and disclosure requirements resulting from reporting irregularities at corporations such as Enron and WorldCom, requiring auditors to assess internal controls over financial reporting.

Risk-based regulation

A regulatory approach that targets scarce regulatory resources where they can achieve the greatest good for society as a whole by directing resources toward activities with the lowest cost-benefit ratio.

Evidence-based regulation

An approach that emphasizes objective measures of the costs and benefits of regulatory initiatives and uses evidence to support or refute the benefits of proposed regulations.

Solvency II

A regulatory standard for insurers in the European Union (EU) to establish principles for risk management and consistency in regulation.

Basel II

A regulatory standard for the global banking industry that sets out risk management principles designed to prevent systemic risk from creating a financial crisis.

Basel III

A comprehensive set of reform measures developed in response to the 2007 financial crisis to strengthen the regulation, supervision, and risk management of the banking sector.

Risk-based capital (RBC)

The amount of capital an insurer needs to support its operations, given the insurer’s risk characteristics.

Pillar I (Solvency II)

The segment of Solvency II that covers financial requirements and aims to ensure firms are adequately capitalized with risk-based capital.

Pillar 2 (Solvency II)

The segment of Solvency II that imposes higher standards of risk management and governance and includes the Own Risk and Solvency Assessment (ORSA).

Pillar 3 (Solvency II)

The segment of Solvency II that aims for greater levels of transparency for supervisors and the public through required disclosure reports.

Own Risk and Solvency Assessment (ORSA)

A prospective self-assessment of risk and solvency required by insurers to align capital adequacy with risk appetite and future business plans.

Federal Sentencing Guidelines

Guidelines established in 1991 for corporations and other business entities convicted of federal criminal offenses, providing guidance on effective compliance and ethics programs.

Agents

Any individual, including a director, an officer, an employee, or an independent contractor, authorized to act on behalf of the organization.