by The Securities Exchange Act of 1934 (SEA) created to govern securities transactions on the secondary market, after issue, ensuring greater financial transparency and accuracy and less fraud or manipulation.
The Securities Exchange Act of 1934 (also called the Exchange Act, ’34 Act, or 1934 Act) (Pub.L. 73–291, 48 Stat. 881, enacted June 6, 1934, codified at 15 U.S.C. § 78a et seq.) is a law governing the secondary trading of securities (stocks, bonds, and debentures) in the United States of America. A landmark of wide-ranging legislation, the Act of ’34 and related statutes form the basis of regulation of the financial markets and their participants in the United States. The 1934 Act also established the Securities and Exchange Commission (SEC), the agency primarily responsible for enforcement of United States federal securities law.
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, frequently through brokers or dealers. Trillions of dollars are made and lost each year through trading in the secondary market.
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.
Securities exchanges
One area subject to the ’34 Act’s regulation is the physical place where securities (stocks, bonds, notes of debenture) are exchanged. Here, agents of the exchange, or specialists, act as middlemen for the competing interests in the buying and selling of securities. An important function of the specialist is to inject liquidity and price continuity into the market. Some of the more well known exchanges include the New York Stock Exchange, the NASDAQ and the NYSE American.
Self-regulatory organizations (SRO)
In 1938 the Exchange Act was amended by the Maloney Act, which authorized the formation and registration of national securities associations. These groups would supervise the conduct of their members subject to the oversight of the SEC. The Maloney Act led to the creation of the National Association of Securities Dealers, Inc. the NASD, which is a Self-Regulatory Organization (or SRO). The NASD had primary responsibility for oversight of brokers and brokerage firms, and later, the NASDAQ stock market. In 1996 the SEC criticized the NASD for putting its interests as the operator of NASDAQ ahead of its responsibilities as the regulator, and the organization was split in two, one entity regulating the brokers and firms, the other regulating the NASDAQ market. In 2007, the NASD merged with the NYSE (which had already taken over the AMEX), and the Financial Industry Regulatory Authority (FINRA) was created.
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 issue within 4 business days an 8-K filing that reflects these changed conditions (see Regulation 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.
History of the Securities Exchange Act of 1934
The SEA of 1934 was enacted by Franklin D. Roosevelt’s administration as a response to the widely held belief that irresponsible financial practices were one of the chief causes of the 1929 stock market crash. The SEA of 1934 followed the Securities Act of 1933, which required corporations to make public certain financial information, including stock sales and distribution.
Other regulatory measures put forth by the Roosevelt administration include the Public Utility Holding Company Act of 1935, the Trust Indenture Act of 1934, the Investment Advisers Act of 1940, and the Investment Company Act of 1940. They all came in the wake of a financial environment in which the commerce of securities was subject to little regulation, and controlling interests of corporations were amassed by relatively few investors without public knowledge.
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.
