The Securities Exchange Act of 1934 was created to provide governance of securities transactions on the secondary market (after issue) and regulate the exchanges and broker-dealers in order to protect the investing public.
Investopedia Says: All companies listed on stock exchanges must follow the requirements set forth in the Securities Exchange Act of 1934. Primary requirements include registration of any securities listed on stock exchanges, disclosure, proxy solicitations and margin and audit requirements.
From this act the Securities Exchange Commission (SEC) was created. The SEC's responsibility is to enforce securities laws.
Law governing the securities markets, enacted June 6, 1934. The act outlaws misrepresentation, Manipulation, and other abusive practices in the issuance of securities. It created the Securities and Exchange Commission (SEC) to enforce both the Securities Act of 1933 and the Securities Exchange Act of 1934.
Principal requirements of the 1934 act are as follows:
1. Registration of all securities listed on stock exchanges, and periodic Disclosures by issuers of financial status and changes in condition.
2. Regular disclosures of holdings and transactions of "Insiders"-the officers and directors of a corporation and those who control at least 10% of equity securities.
3. -solicitation of Proxies enabling shareholders to vote for or against policy proposals.
4. Registration with the SEC of stock exchanges and brokers and dealers to ensure their adherence to SEC rules through self-regulation.
5. -surveillance by the SEC of trading practices on stock exchanges and over-the-counter markets to minimize the possibility of insolvency among brokers and dealers.
6. Regulation of Margin Requirements for securities purchased on credit; the Federal Reserve Board sets those requirements.
7. -SEC subpoena power in investigations of possible violations and in enforcement actions.
The Securities Act Amendments of 1975 ratified the system of free-market determination of brokers' commissions and gave the SEC authority to oversee development of a National Market System.
Act passed by Congress establishing the Securities and Exchange Commission, an independent agency, to enforce federal securities laws. The act extended the registration and disclosure requirements of the Securities Act of 1933 to all companies with securities listed for sale on a national exchange, as well as other companies with assets over $1 million and more than 500 shareholders. These companies must file a registration application with the exchange and the Securities and Exchange Commission. The act also required disclosure of proxy solicitations, in which an organization attempts to gain the shares of other shareholders.
The act also exempted state chartered banks and national banks from having to register as broker-dealers with the Securities and Exchange Commission. (The Glass-Steagall Act restricted banks to underwriting bank-eligible securities, mainly government bonds, making further regulation unnecessary.) The Gramm-Leach-Bliley Act of 1999 authorizing banks to deal in a wide range of securities through subsidiaries, amended this section of the Securities and Exchange Act and put broker-dealer activities of banking companies under the supervision of the Securities and Exchange Commission.
There are a number of federal securities acts other than the Securities Exchange Act of 1934. The most important of these is the Securities Act of 1933. The Securities Exchange Act of 1934 does not generally regulate the initial distribution of securities like the Securities Act of 1933. The Securities Act of 1933 imposes disclosure obligations upon companies when they are issuing securities.
As previously discussed, for over six decades the federal securities laws, including the Securities Exchange Act of 1934, provided investor remedies that were in addition to any remedies under state law. In 1998, however, Congress reversed this outcome and preempted all class actions under state "Blue Sky" laws, which generally extended investors more generous avenues of recovery than those remaining under the act after the Private Securities Litigation Reform Act of 1995.
Excerpt from the Securities Exchange Act of 1934
(3) Frequently the prices of securities on such exchanges and markets are susceptible to manipulation and control, and the dissemination of such prices gives rise to excessive speculation, resulting in sudden and unreasonable fluctuations in the prices of securities which (a) cause alternately unreasonable expansion and unreasonable contraction of the volume of credit available for trade, transportation, and industry in interstate commerce, (b) hinder the proper appraisal of the value of securities and thus prevent a fair calculation of taxes owing to the United States and to the several States by owners, buyers, and sellers of securities, and (c) prevent the fair valuation of collateral for bank loans and/or obstruct the effective operation of the national banking system and Federal Reserve System.
(4) National emergencies, which produce widespread unemployment and the dislocation of trade, transportation, and industry, and which burden interstate commerce and adversely affect the general welfare, are precipitated, intensified, and prolonged by manipulation and sudden and unreasonable fluctuations of security prices and by excessive speculation on such exchanges and markets, and to meet such emergencies the Federal Government is put to such great expense as to burden the national credit.
The Securities Exchange Act of 1934 (P.L. 73-291, 48 Stat. 881) was the first federal legislative initiative specifically intended to regulate stock exchanges and publicly held companies that have distributed securities (i.e., stocks and bonds) to the public. The act requires publicly held companies to make periodic public disclosures and disclosures in connection with proxy solicitations. The act also mandates certain disclosures in connection with tender offers for the shares of publicly held companies. Finally, the act regulates trading by certain company insiders and broadly prohibits all fraud in connection with the sale of securities.
With respect to stock exchanges including the National Association of Securities Dealers, which operates the NASDAQ market, or the New York Stock Exchange, the act requires registration and adherence to certain principles of self-regulation to ensure that exchanges operate transparently and fairly. Every securities broker and every securities dealer must be a member of a so-called self-regulatory organization. If either a securities firm or an individual affiliated with a securities firm violates the rules or regulations of the exchange, or the federal securities laws, or just and equitable principles of trade, the law permits the government to impose sanctions. These sanctions can range from fines to censures to permanent barring from the securities industry. The act also includes civil and criminal penalties against those who violate its provisions. The Securities and Exchange Commission (SEC) is the primary regulatory agency that enforces the federal securities laws, including the Securities Act of 1933, and the Securities Exchange Act of 1934.
Constitutional Basis
Congress promulgated the act under its authority to regulate interstate commerce, pursuant to Article II, section 8 of the U.S. Constitution. The act therefore requires the use of an instrumentality of interstate communication or transportation before it applies. The courts have held that the use of mails or a telephone suffices to meet this requirement, even if the use is completely intrastate.
Circumstances Leading to the Adoption of the Act
In the election of 1932, President Roosevelt promised to deliver economic reform in the effort to resolve the Great Depression, an unprecedented economic calamity that ultimately gave rise to an unemployment rate of 25 percent and to a 33 percent contraction of the nation's economy. The Securities Act of 1933 was the first piece of President Roosevelt's New Deal, and Congress enacted it during the first one hundred days of his administration. Nevertheless, President Roosevelt made it clear that more securities regulation was needed, specifically legislation "relating to better supervision of the purchase and sale of all [securities] dealt with on exchanges." The Securities Exchange Act of 1934 was this act, fulfilling the New Deal's promise for systematic securities reform. The New Deal represented the first massive federal regulation of the economy.
The regulation of securities was a natural starting place for the New Deal reforms, as the market crash of 1929 seemed to have triggered the deep economic malaise that became the Great Depression. Roosevelt sought to "bring back public confidence" in the securities markets and was convinced that truthful and full disclosure was essential to this goal. Congress joined in this conclusion, finding that full disclosure would give investors pause before falling prey to panic selling. Regulating the exchanges and publicly held companies is how lawmakers decided to achieve full disclosure, not just when a company first distributed securities, but on an ongoing basis. Congress was convinced that unregulated exchanges meant cycles of booms and terrible depressions when a company is a public traded company. The Great Depression was all the convincing most needed.
Nevertheless, the financial community opposed the act, preferring a more laissez-faire approach to preserve the status quo. One opponent testified to Congress that the act was a conspiracy to take the nation "down the road from democracy to communism." (Davis, 368). Business interests feared the act would lead to government supervision of much of the business sector, and stock exchanges fought hard to maintain their autonomy. Despite this opposition, the Securities Exchange Act passed both houses of Congress with overwhelming support and became law on June 6, 1934.
Experience Under the Act
By 1995 experts widely acknowledged that the American securities markets were the strongest in the world. A large part of this perception rested upon the effectiveness of the Securities Exchange Act of 1934. The act completed the work that Congress started with the Securities Act of 1933, by insuring traders had the ability to make intelligent investment decisions through full and truthful disclosure. The 1933 Act mandated disclosures when companies distributed securities, and the 1934 Act mandated disclosures when a company publicly traded its securities.
Initially the courts were very receptive to the remedial and investor protection goals of the act. In J.I. Case v. Borak (1964), the Supreme Court held that private investors could obtain remedies under the act's proxy disclosure rules. In SEC v. Capital Gains Research (1963), the Supreme Court decided that the terms fraud and deceit, as used in the act with respect to the regulation of securities professionals, must be construed broadly to reach all unjust and unfair practices used by brokers to abuse the trust of their clients. More recently, the Supreme Court held that trading on nonpublic inside information could amount to securities fraud even when the investor did not obtain the information from an officer or director of the issuer of the traded securities. This is known as the "misappropriation theory" of insider trading, adopted in United States v. O'Hagan (1998).
Still, as the decades passed and memories of the Great Depression faded, courts appeared to have become far more skeptical of the act. In Lampf, Pleva, Lipkind, Purpis & Petigrow v. Gilbertson (1991), the Supreme Court greatly restricted the time period for bringing securities fraud claims before they were barred by the statute of limitations. In Central Bank of Denver v. First Interstate (1994), the Supreme Court severely limited the potential liability of attorneys and accountants under the act. It is fair to say that the early twenty-first century Supreme Court is not positively inclined toward private enforcement of the act, although it appears to continue to strengthen government enforcement. In SEC v. Zanford (2002), the Supreme Court upheld the enforcement authority of the SEC against a miscreant broker.
Recent legislative trimming of the act's operation mirrors this judicial pruning. Specifically, in 1995 Congress enacted (over a presidential veto) the Private Securities Litigation Reform Act, limiting class action lawsuits under the act and shifting most enforcement responsibility to the SEC. In 1998 Congress went an additional step, in the Securities Litigation Uniform Standards Act, and preempted class actions based upon state law. The net effect of these two acts was to greatly undermine the efficacy of private litigation as a means of enforcement.
These legislative steps are particularly notable as Congress tends to chronically underfund the SEC, making it difficult for the agency to enforce the securities law. In addition, the SEC lacks one very important element—it has no authority to repay investors for their losses. Moreover, the SEC is certainly not immune from political pressure that may impact agency decisions and lead to a lax approach to law enforcement. Recently, former Chairman Arthur Levitt disclosed that political influence had undermined the SEC's ability to pursue a number of reform initiatives.
The impact of the Securities Exchange Act of 1934 on society has been controversial. The laissez-faire enthusiasts that unsuccessfully opposed the act have succeeded over the past few decades in undercutting the act's efficacy. They maintain, for example, that the market furnishes sufficient incentives for the disclosure of information such that no mandatory disclosure regime is needed. One commentator, however, has recognized that the market did not seem to function in the way these laissez-faire enthusiasts predicted before 1934. This commentator recognized that "[p]ervasive systemic ignorance blanketed Wall Street like a perpetual North Atlantic fog before the New Deal." This suggests that regulation was needed to free up disclosure and to allow markets to operate more efficiently, as investors make more informed decisions. The act, together with the Securities Act of 1933, seems to have enhanced investor confidence as a result.
Bibliography
Davis, Kenneth S. FDR: The New Deal Years. New York: Random House, 1986.
Posner, Richard. The Economic Analysis of Law. New York: Aspen, 1998.
Ramirez, Steven. "The Law and Macroeconomics of the New Deal at 70." MarylandLaw Review 62, no. 3 (2003).
Ramirez, Steven. "Fear and Social Capitalism." Washburn Law Journal 42, no. 1 (2002): 31–77.
Ramirez, Steven. "The Professional Obligations of Securities Brokers Under Federal Law." University of Cincinnati Law Review 72, no. 2 (2002): 527–568.
Roosevelt, Franklin D. The Public Papers and Addresses of Franklin D. Roosevelt. New York: Random House, 1938.
Stiglitz, Joseph. Globalization and its Discontents. New York: W.W. Norton, 2002.
The Securities Exchange Act of 1934, 48 Stat. 881 (June 6, 1934), codified at 15 U.S.C.§ 78a et seq., was a
sweeping piece of legislation. The Act and related statutes form the basis of regulation of the financial markets and their participants in the United States. It is commonly referred to as the
"Exchange Act", the "'34 Act", and the "Act of '34".
Companies raise billions of dollars by issuing securities in what is known as the primary
market. Contrasted with the Securities Act of 1933, which regulates these
original issues, the Securities Exchange Act of 1934 regulates the secondary trading of
those securities between persons often unrelated to the issuer. Trillions of dollars are made and lost each year through trading
in the secondary market.
One area subject to '34 Act regulation is the actual securities exchange -- the physical place where people purchase and sell
securities (stocks, bonds, notes of debenture). Some of the more well known exchanges include the New York Stock Exchange, the American Stock
Exchange, and regional exchanges like the Cincinnati Stock
Exchange, Philadelphia Stock Exchange and Pacific Stock Exchange. At those places, agents of the exchange, or specialists, act as middlemen for
the competing interests to buy and sell securities. An important function of the specialist is to inject liquidity and price
continuity into the market. Given that people come to the exchange to easily acquire securities or to easily dispose of a
portfolio of securities, the specialist's role is uniquely important to the exchange.
Securities associations
The '34 Act also regulates broker-dealers without a status for trading securities. A telecommunications infrastructure has
developed to provide for trading without a physical location. Previously these brokers would find stock prices through newspaper
printings and conduct trades verbally by telephone. Today, a digital information network connects these brokers. This system is
called NASDAQ, standing for the National Association of Securities Dealers Automated Quotation
System.
Self-regulatory organizations (SRO)
The '34 Act regulates NASDAQ both through regulations that apply to the association and by requiring that it have an
independent oversight organization - a self-regulatory organization (or SRO). The SRO for NASDAQ is the NASD, the National Association of Securities Dealers. The '34 Act requires virtually all broker-dealers to be
registered with the NASD, placing brokers under the Securities and Exchange Commission's direct oversight and under the NASD's
oversight.
Other trading platforms
In the last 30 years, brokers have created two additional systems for trading securities. The automatic trading system, or
ATS, is a quasi exchange where stocks are commonly purchased and sold through a smaller, private network of brokers, dealers, and
other market participants. The ATS is distinguished from exchanges and associations in that the volumes for ATS trades are
comparatively low, and the trades tend to be controlled by a small number of brokers or dealers. ATS acts as a niche market, a
private pool of liquidity. Reg ATS, an SEC regulation issued in the late 1990s, requires these small markets to 1) register as a
broker with the NASD, 2) register as an exchange, or 3) operate as an unregulated ATS, staying under low trading caps.
A specialized form of ATS, the Electronic Communications Network (or ECN), has been described as the "black box" of securities
trading. The ECN is a completely automated network, anonymously matching buy and sell orders. Many traders use one or more
trading mechanisms (the exchanges, NASDAQ, and the ECN or ATS) to effect large buy or sell orders -- conscious of the fact that
overreliance on one market for a large trade is likely to unfavorably alter the trading price of the target security.
Brokers
One central element of the '34 Act is the regulation of broker-dealers. The Act regulates them principally by making the
definition of broker extremely broad to include "any person engaged in the business of effecting transactions in securities for
the account of others" (see Act section 3(a) (4), codified at 15 U.S.C.§ 78c(a)(4)). One problematic area in the application of the definition of broker
involves persons who refer buyers to a broker or issuer (finders or promoters). A body of case law, subsequent SEC regulation,
and NASD oversight together place tight restrictions on 1) the commissions that brokers can receive
for their services, 2) the amount of notice that brokers must give their clients when trading in securities, 3) the broker's due
diligence requirements in finding securities that meet their clients needs, and 4) the broker's obligation not to compromise
their clients by disclosing or trading on material nonpublic information.
Issuers
While the '33 Act recognizes that timely information about the issuer is vital to effective pricing of securities, the '33
Act's disclosure requirement (the registration statement and prospectus) is a one-time affair. The '34 Act extends this
requirement to securities traded in the secondary market. Provided that the company has more than a certain number of
shareholders and has a certain amount of assets (500 shareholders, above $10 million in assets, per Act sections 12, 13, and 15),
the '34 Act requires that issuers regularly file company information with the SEC on certain forms (the annual 10-K filing and the quarterly 10-Q filing). The filed reports are available
to the public via EDGAR. If something material
happens with the company (change of CEO, change of auditing firm, destruction of a significant number of company assets), the SEC
requires that the company soon issue an 8-K filing that reflects these changed conditions (see
Reg. FD). With these regularly required filings, buyers are better able to assess the worth of the company, and buy and sell the
stock according to that information.
Antifraud provisions
While the '33 Act contains an antifraud provision (Section 17), when the '34 Act was enacted, questions remained about the reach of that antifraud provision and
whether a private right of action existed for purchasers (meaning that ordinary people, and not just the government, could
maintain a lawsuit against the bad actor). As it developed, section 10(b) of the 1934 Act and SEC Rule 10b-5 have sweeping antifraud language. Section 10(b) of the Act (as amended) provides (in
part):
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate
commerce or of the mails, or of any facility of any national securities exchange [. . .]
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or
any security not so registered, or any securities-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act), any manipulative or deceptive device or contrivance in contravention of
such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the
protection of investors.
It's hard to overstate the breadth and utility of section 10(b,) and Rule 10b-5, in the pursuit of securities litigation. Rule
10b-5 has been employed to cover insider trading cases, but has also been used against
companies for price fixing (artificially inflating or depressing stock prices through stock manipulation), bogus company sales to
increase stock price, and even a company's failure to communicate relevant information to investors. Many plaintiffs in the
securities litigation field plead violations of section 10(b) and Rule 10b-5 as a "catchall" allegation, in addition to
violations of the more specific antifraud provisions in the '34 Act.
Exemptions from reporting because of national security
Section 13(b)(3)(A) of the Securities Exchange Act of 1934 provides that "with respect to matters concerning the national
security of the United States," the President or the head of an Executive Branch agency may exempt companies from certain
critical legal obligations. These obligations include keeping accurate "books, records, and accounts" and maintaining "a system
of internal accounting controls sufficient" to ensure the propriety of financial transactions and the preparation of financial
statements in compliance with "generally accepted accounting principles."
On May 5, 2006, in a notice in the Federal Register, President Bush delegated
authority under this section to John Negroponte, the Director of National Intelligence. Administration officials told Business Week
that they believe this is the first time a President has ever delegated the authority to someone outside the Oval Office.[1]
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