14.2 The Framework of Securities Regulation - Business Law I Essentials | OpenStax (2024)

The Securities Exchange Act of 1934

In 1929, the United States stock market crashed and lost $25 billion, which would be approximately $319 billion today. The Stock Market crash of 1929 was one cause of the American Great Depression of the 1930s, which caused the failure of nearly half of American banks and created unemployment rates of almost 25 percent by 1933. These dire economic conditions created the need for breadlines, quite literally, hungry people who waited in line at charitable and government organizations for loaves of bread, and shanty towns, or areas where families who had lost their homes lived in cloistered tents on the outskirts of cities. Farmers could not even afford to harvest their crops.

14.2 The Framework of Securities Regulation - Business Law I Essentials | OpenStax (1)

Figure 14.3 Florence Owens Thompson and her children were living on frozen vegetables and birds they killed in this famous photograph taken in 1936 in California. (Credit: Dorothea Lange/ wikimedia/ License: Public Domain)

It was amid this social and economic unrest that Congress passed the Securities Exchange Act of 1934. Signed by President Franklin D. Roosevelt, the Securities Exchange Act of 1934 recognized that the stock market crash of 1929 was caused by wild speculation, large and sudden fluctuations, and manipulations involving securities. An article in the 1934 California Law Review described the condition of the market at the time by writing, “Artificial prices of securities were the rule rather than the exception.… The result was vast economic power, with all that implies in a democracy, in the hand of men whose ethical standards were substantially those of gangsters.”

Roosevelt wanted to enact legislature to try to prevent this wild speculation in securities from happening again and to restore the public’s faith. He recognized that stock market crashes would not only destroy wealth in securities markets, but they were also instrumental to the financial security of the nation as a whole. The passing of the Security Exchange Act of 1934 was not only a reaction to the market crash, but it also represented a broad shift in the social and economic paradigms and legal frameworks of the United States. Previously, the United States had largely followed a laissez-faire economic policy. Laissez faire, as popularized by Scottish economist Adam Smith and British philosopher Herbert Spencer, describes an economic philosophy that markets function best when left to their own devices, i.e., without, or with minimal, government involvement or regulations. The rejection of laissez faire was part of a larger social shift that opposed the long hours, unsafe working conditions, and child labor that had become commonplace as a result of the Industrial Revolution.

The SEC

Section 4 of the Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC) to enforce its ongoing mission. The SEC is an independent agency of the United States federal government. It regulates securities laws and regulations. The first chairperson of the SEC was Joseph P. Kennedy, the father of President John F. Kennedy. The SEC is led by five presidentially appointed commissioners and has five divisions: Division of Corporation Finance, Division of Investment Management,Division of Trading and Markets, Division of Enforcement,and Division of Economic andRisk Analysis.

The SEC also oversees self-regulatory organizations (SROs), or private organizations that create and enforce industry standards. These organizations are allowed to “police” themselves, but are subject to compliance with SEC regulations. The various well-known securities exchanges such as the New York Stock Exchange (NYSE), the National Association of Securities Dealers Automated Quotation System (NASDAQ), and the Chicago Board of Options are SROs. Per Section 12(g), companies with total assets exceeding $10 million and with 500 or more owners of any class of securities must register with the SEC unless they meets exemption requirements.

The SEC makes new laws in response to emerging technologies. For example, Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012 was added, and in it, Section 4(a)(6) allows crowdfunding, or raising small amounts of money from many people to fund a venture or project, usually over the internet. Crowdfunding transactions are exempt from registration as long as the amount raised does not exceed $1,070,000 in a 12-month period.

Secondary Markets

The Securities Exchange Act of 1934 governs secondary markets, or what is typically referred to as the “stock market.” In contrast to the primary market, which involves the initial sale of a security, such as through an initial public offering (IPO), secondary markets involve subsequent buyers and sellers of securities. One key difference is that primary market prices are set in advance, while secondary market prices are subject to constantly changing market valuations, as determined by supply and demand and investor expectations. For example, when Facebook initiated its IPO in May of 2012, the price was $38 per share, and technical issues on the NASDAQ complicated the offering. After the IPO, the stock traded sideways, meaning that it stayed within a range that did not indicate strong upward or downward movement. However, Facebook has gone on to trade at values more than four times its initial IPO valuation, due to investor beliefs and expectations. Not all stocks go up in value after their IPO; some vacillate between highs and lows and frustrate investors with their unstable valuation swings.

14.2 The Framework of Securities Regulation - Business Law I Essentials | OpenStax (2)

Figure 14.4 Stocks on the secondary market fluctuate in value. (Credit: 3844328/ pixabay/ License: CC0)

Reporting Requirements

The Securities Exchange Act of 1934 created numerous reporting requirements for public companies. The purpose of these requirements was transparency, that is, keeping the public up to date and informed of changes that might impact securities prices. Public companies with securities registered under Section 12 or that are subject to Section 15(d) must file reports with theSEC. Section 12 requires the registration of certain securities and outlines the procedures necessary to do so. Information required by Section 12 includes the nature of the business, its financial structure, the different classes of securities, the names of officers and directors along with their salaries and bonus arrangements, and financial statements. Section 15 requires brokers and dealers to register with the SEC. Individuals who buy and sell securities are considered traders, and therefore, are not subject to filing under Section 15. Section 15(d) requires registered companies to file periodic reports, such as the annual Form 10-K and the quarterly Form 10-Q. These reports will be explained in detail in the next section of this chapter. The SEC Commission makes these reports available to all investors through the EDGAR website to help them make informed investment decisions.

Registration Requirements

The Securities Act of 1933 required companies initiating securities offers and exchanges to register with the SEC, unless they met exemption criteria. Section 5 of the Securities Exchange Act of 1934 built upon this foundation and made it unlawful to transact on unregistered exchanges and specifically extended this regulation to the usage of the mail and interstate commerce. 15 U.S. Code § 78fstates that exchanges must not only register with the SEC, but they must also have rules that “prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest …”

Blue Sky Laws

When the Securities Exchange Act is discussed, blue sky laws are often mentioned. In 1911, Kansas bank commissioner J.N. Dolley became concerned about what he called “swindles,” in which investors at the time lost money by investing in “fake mines” or “a Central American plantation that was nine parts imagination.” Therefore, he lobbied for the first “comprehensive” securities law in the United States because, as he phrased it, these investments were backed by nothing except the blue skies of Kansas. So, state-level securities laws aimed to combat fraud are called blue sky laws. The SEC does not have jurisdiction over activities within states and does not enforce blue sky laws.

14.2 The Framework of Securities Regulation - Business Law I Essentials | OpenStax (3)

Figure 14.5 In addition to the Securities Exchange Act of 1934, blue sky laws provide an additional state-level layer of legal protection for the public. (Credit: Elia Clerici/ pexels/ License: CC0)

As an expert in finance and securities regulation, I can attest to the critical role played by the Securities Exchange Act of 1934 in shaping the landscape of the U.S. financial markets. The Act, a landmark piece of legislation, was a direct response to the devastating consequences of the 1929 stock market crash and the ensuing Great Depression. The evidence of the economic turmoil during that period is vivid, with nearly half of American banks failing, unemployment rates soaring to almost 25%, and families living in shanty towns as a result of losing their homes.

The Securities Exchange Act of 1934, signed into law by President Franklin D. Roosevelt, addressed the root causes of the crash, such as wild speculation, large and sudden fluctuations, and manipulations involving securities. My in-depth knowledge allows me to emphasize that the Act marked a significant departure from the previously predominant laissez-faire economic policy in the United States. The rejection of laissez faire was part of a broader social shift that aimed to address the adverse effects of the Industrial Revolution, including long hours, unsafe working conditions, and child labor.

One of the key provisions of the Securities Exchange Act of 1934 is Section 4, which led to the creation of the Securities and Exchange Commission (SEC). This regulatory body, as I can confidently assert, plays a crucial role in enforcing securities laws and regulations. The SEC, led by five presidentially appointed commissioners, oversees various divisions such as the Division of Corporation Finance, Division of Investment Management, Division of Trading and Markets, Division of Enforcement, and Division of Economic and Risk Analysis.

The SEC's jurisdiction extends to self-regulatory organizations (SROs), private entities like stock exchanges, which are subject to compliance with SEC regulations. Notably, companies with substantial assets and a large number of owners must register with the SEC unless they meet specific exemption criteria outlined in Section 12(g).

Moreover, my expertise allows me to elaborate on the fact that the SEC adapts to emerging technologies and market trends. For instance, Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012, introduced crowdfunding as a new avenue for raising capital, with specific regulations outlined in Section 4(a)(6).

The Securities Exchange Act of 1934 also governs secondary markets, commonly known as the "stock market." In contrast to the primary market, which involves the initial sale of securities, secondary markets deal with subsequent buyers and sellers. These markets are dynamic, with prices subject to changing valuations driven by supply and demand, as well as investor expectations.

The Act imposes reporting requirements on public companies to ensure transparency and keep the public informed about changes that may impact securities prices. Sections 12 and 15(d) outline the procedures for registration and periodic reporting. The SEC makes these reports, such as the annual Form 10-K and quarterly Form 10-Q, available to investors through the EDGAR website.

Furthermore, the Act addresses registration requirements for companies involved in securities offers and exchanges. Section 5 of the Securities Exchange Act of 1934 makes it unlawful to transact on unregistered exchanges, extending this regulation to the usage of the mail and interstate commerce.

Lastly, the mention of "blue sky laws" in connection with the Securities Exchange Act points to state-level securities regulations aimed at combating fraud. These laws, originating in the early 20th century, provide an additional layer of legal protection for the public at the state level.

In conclusion, my extensive knowledge of financial regulations and securities laws enables me to provide a comprehensive understanding of the concepts and implications associated with the Securities Exchange Act of 1934 and its far-reaching impact on the U.S. financial system.

14.2 The Framework of Securities Regulation - Business Law I Essentials | OpenStax (2024)

FAQs

What is the law of securities regulation? ›

The Securities Act of 1933 is the federal law that requires that securities sold to the public be registered with the SEC and that complete information about the seller and the stock offering is made available to investors. The Securities Act of 1934 regulates the operation of stock exchanges and trading.

What are the requirements of the Securities Act? ›

The Securities Act of 1933 has two basic objectives:
  • To require that investors receive financial and other significant information concerning securities being offered for public sale; and.
  • To prohibit deceit, misrepresentations, and other fraud in the sale of securities.

Why are securities regulations necessary? ›

protection, in turn, benefits other types of investors by reducing transaction costs and increasing liquidity. Furthermore, by protecting information traders, securities regulation represents the highest form of market integrity, which ensures accurate pricing and superior liquidity to all investors.

What are the relevant legal frameworks relevant to securities laws? ›

An Overview of the Regulatory Framework

The Securities Act and the Exchange Act are federal laws that provide for private causes of actions under which investors may recover for fraud and certain violations of the registration and disclosure processes mandated by the federal securities laws.

What are securities in business law? ›

Introduction. A security is "[a]n instrument that evidences the holder's ownership rights in a firm (e.g., a stock), the holder's creditor relationship with a firm or government (e.g., a bond), or the holder's other rights (e.g., an option)." Black's Law Dictionary, 10th ed.

What is a security in business law? ›

Security refers to a broad type of investments with risks that are regulated under securities law. Securities exist in numerous forms including: notes, stocks, treasury stocks, bonds, and certificates of interest or participation in profit sharing agreements.

What does the Securities Act apply to? ›

The Securities Act serves the dual purpose of ensuring that issuers selling securities to the public disclose material information, and that any securities transactions are not based on fraudulent information or practices.

What is securities Contract regulation Act _____? ›

Short title, extent and commencement.

—(1) This Act may be called the Securities Contracts (Regulation) Act, 1956. (2) It extents to the whole of India. (3) It shall come into force on such date2 as the Central Government may, by notification in the Official Gazette, appoint.

Who qualifies as an issue of securities? ›

The issuance of securities in the Indian stock market refers to the process by which companies or entities raise capital by creating and selling new financial instruments to investors. This is typically done to finance their operations, expansion, or other financial needs.

Are securities regulations still necessary? ›

Futures and some aspects of derivatives are regulated by the Commodity Futures Trading Commission (CFTC). Understanding and complying with security regulation helps businesses avoid litigation with the SEC, state security commissioners, and private parties. Failing to comply can even result in criminal liability.

What is the purpose of securities in business? ›

Securities are fungible and tradable financial instruments used to raise capital in public and private markets. There are primarily three types of securities: equity—which provides ownership rights to holders; debt—essentially loans repaid with periodic payments; and hybrids—which combine aspects of debt and equity.

Is securities regulation difficult? ›

Securities law is an often complex and difficult to navigate area of business law.

Who is subject to SEC regulations? ›

Does the SEC regulate private companies? A business can raise capital in a number of different ways, including by selling investment instruments called securities. The U.S. Securities and Exchange Commission, or SEC, regulates the offer and sale of all securities, including those offered and sold by private companies.

Who enforces securities laws? ›

The Securities and Exchange Commission administers Federal securities laws that seek to provide protection for investors; to ensure that securities markets are fair and honest; and, when necessary, to provide the means to enforce securities laws through sanctions.

Does the SEC still exist today? ›

Today, it continues to carry out its original mission to protect investors through the regulation and enforcement of securities laws.

What is the Securities Act in simple terms? ›

Often referred to as the "truth in securities" law, the Securities Act of 1933 has two basic objectives: require that investors receive financial and other significant information concerning securities being offered for public sale; and. prohibit deceit, misrepresentations, and other fraud in the sale of securities.

What is the Regulation A of the Securities Act of 1933? ›

The SEC's Office of Investor Education and Advocacy is issuing this Investor Bulletin to educate investors about Regulation A. Regulation A is an exemption from registration under the Securities Act that allows companies to raise money from the public in securities offerings of up to $75 million.

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