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The Securities And Exchange Commission

In 1934 the Securities Exchange Act created the SEC (Securities and Exchange Commission) in response to the stock market crash of 1929 and the Great Depression of the 1930s. It was created to protect U. S. investors against malpractice in securities and financial markets. The purpose of the SEC was and still is to carry out the mandates of the Securities Act of 1933: To protect investors and maintain the integrity of the securities market by amending the current laws, creating new laws and seeing to it that those laws are enforced.

During the 1920s, approximately 20 million Americans took advantage of post-war prosperity by purchasing shares of stock in various securities exchanges. When the stock market crashed in 1929, the fortunes of many investors were lost. In addition, banks lost great sums of money in the Crash because they had invested heavily in the markets. When people feared their banks might not be able to pay back the money that depositors had in their accounts, a “run” on the banking system caused many bank failures. After the crash, public confidence in the market and the economy fell sharply.

In response, Congress held hearings to identify the problems and look for solutions; the answer was found in the new SEC. The Commission was established in 1934 to enforce new securities laws that were passed with the Securities Act of 1933 and the Securities Exchange Act of 1934. The two new laws stated that “Companies publicly offering securities must tell the public the truth about their businesses, the securities they are selling and the risks involved in the investing. ”

Secondly, “People who sell and trade securities must treat investors fairly and honestly, putting investors’ interests first. Franklin Delano Roosevelt defeated Herbert Hoover in a landslide in the 1932 election and began to work on his “New Deal”. In the New Deal four key regulatory bodies were established: The National Labor Relations Board, Civil Aeronautics Authority, Federal Communications Commission, and the Securities and Exchange Commission. Wall Street was not enamored with the coming regulation, but Congress was confident that the Street was seen as an easy target for the Crash and the Depression that followed.

In response, the SEC was created by Congress on June 6, 1934 for the purpose of protecting the public and the individual investors against malpractice in the financial markets. Commenting on the creation of the SEC, Texas Congressman and future Speaker Sam Rayburn admitted3 “he didn’t know whether the legislation passed so readily because it was so good or so incomprehensible. ” However, historian David Kennedy viewed the SEC as “ingeniously simple”. In his book Freedom From Fear he states that “For all the complexity of its enabling legislation, the power of the SEC resided principally in just two provisions, both of them ingeniously simple.

The first mandated detailed information, such as balance sheets, profit and loss statements, and the names and compensation of corporate officers, about firms whose securities were publicly traded. ” The second “required verification of that information by independent auditors using standardized accounting procedures. ” These two simple concepts ended the monopoly enjoyed by the House of Morgan and their like on investment information. Wall Street was saturated with data that was relevant, accessible, and comparable across firms and transactions.

The SEC’s regulations unarguably imposed new reporting requirements on businesses. They also gave a huge boost to the status of the accounting profession. But they hardly constituted a wholesale assault on the theory or practice of free- market capitalism. The SEC’s regulations dramatically improved the economic efficiency of the financial markets by making buy and sell decisions well-informed decisions, provided that the contracting parties consulted the data that was then so copiously available. It was less reform than it was the rationalization of capitalism. “5

The SEC prohibited the “pools” and other devices used by the likes of Joseph Kennedy to amass their fortunes. While manipulation of the markets was still possible, there were now risks. FDR decided that instead of naming Kennedy Secretary of Treasury, he would name him the first commissioner of the SEC. Thus, Joseph Kennedy was appointed to oversee the very activities he had participated in. A position appointed from FDR that was long overdue after the contributions of over $250,000 to FDR’s convention campaigns. However, this resulted in FDR initially being accused of selling out to Wall Street.

However, Kennedy was the right choice since he was the only one with the intimate knowledge of the very acts that the SEC was set up to prevent. It was a classic case of “the fox guarding the henhouse. ” Joseph Kennedy proved to be a highly effective leader of the SEC. As one of his first official duties he delivered a national radio address: “We of the SEC do not regard ourselves as coroners sitting on the corpse of financial enterpriseWe do not start with the belief that every enterprise is crooked and that those behind it are crooks. ” At this Wall Street realized that regulation didn’t necessarily mean persecution.

Although Kennedy only stayed one year as commissioner, he was most effective in establishing the credibility of the organization. Historian John Steele Gordon described his time in office: “Kennedy knew where the bodies were buried. But he regarded his job to be not only to restore the confidence of the country in Wall Street, but, equally important, to restore the confidence of Wall Street in the American economy and government. ” In addition to the importance of the commissioner’s personality there were also the laws that governed the commission.

There are six main laws that govern the Securities Industry, but only four that are relevant to the majority of people. The first law is the Securities Act of 1933, which is often referred to as the “truth in securities”. The Security Act of 1933 has two basic objectives: to require investors to receive significant information concerning securities being offered for public sale; and to prohibit deceit, misrepresentation, and other fraud in the sale of securities. These two objectives are accomplished primarily by registration which discloses important financial information.

While the SEC requires this information to be accurate, there is no guarantee that it will be. However, if investors purchase securities and suffer losses due to the fact that the information given was incomplete or inaccurate they have recovery rights. The registration process requires corporations to supply the essential facts while minimizing the burden and expense of complying with the law. These requirements include a description of the company’s properties and the security to be offered for sale, information about the management of the company and financial statements certified by independent accountants.

If U. S. domestic companies file this information, the statements are available on the EDGAR database. (Electronic Data Gathering, Analysis, and Retrieval system) “Its primary purpose is to increase the efficiency and fairness of the securities market for the benefit of investors, corporations, and the economy by accelerating the receipt, acceptance, distribution, and analysis of time-sensitive corporate information filed with the agency. ” The second law, the Securities and Exchange Act of 1934, created the SEC.

The Act grants the SEC authority over the securities industry, including the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies. The Act also prohibits dishonorable conduct in the market and gives the Commission the disciplinary power to regulate all companies and individuals associated. The Act also allows the SEC to require periodic reporting of information by companies with publicly traded securities. Under this Act corporations are required to file additional periodic reports that are available to the public through the SEC’s EDGAR database.

Companies required to file Corporate Reporting are those having more than $10 million in assets and whose securities are held by more than 500 owners. One of the most important parts of this Act is the disallowance of any kind of fraudulent behavior including any kind of connection with the offer, purchase, or sale of securities. “These provisions are the basis for many types of disciplinary action, including actions against fraudulent insider trading. Insider trading is illegal when a person trades a security while in possession of material nonpublic information in violation of a duty to withhold the information or refrain from trading.

The Investment Company Act of 1940 regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. This was designed to minimize conflicts of interest that arise in these complex operations by requiring these companies to disclose their financial condition and investment policies to investors when stock is initially sold and periodically afterwards.

The Act focuses on the disclosure of information to the investing public about the funds and its investment objectives as well as the investment companies’ structure and operations. The law that regulated investment advisors is the Investment Advisers Act of 1940. This Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors.

When the Act was amended in 1996, only advisors with at least $25 million in assets under management or who advise a registered investment company must register with the commission. ) The SEC is comprised of five presidentially appointed Commissioners, four divisions and 18 offices. There is approximately 2,900 staff in the Washington DC headquarters. The SEC has 11 regional district offices throughout the country. The Commissioners are appointed by the President with the consent of the Senate. Their terms are five years in length and are staggered so the Commission remains non-partisan.

No more than three commissioners can belong to a single political party. There is also one designated commissioner who is the Chairman, which is the top executive office. The Commissioner’s job is to interpret federal securities laws, amend existing rules, propose new rules to address changing market conditions and enforce the existing rules and laws. The SEC is organized in a hierarchy. Beneath the Commissioners are the eighteen divisions and offices. A key division of the SEC is the Division of Enforcement. This division enables the SEC to enforce the laws.

The division investigates possible violations of securities laws and recommends Commission action when necessary, either in a federal court or before an administrative law judge, and negotiates settlements. This is the division which gives the SEC its authority. There are six common violations of the laws in which the SEC will investigate: insider trading, inaccurate or incomplete trading information, manipulation of prices, stealing funds or securities, unfair treatment of the customer and sale of securities without proper registration.

If found guilty the SEC has the authority to disallow any further buying or selling of securities, and confiscate existing securities if there is just cause to this. The primary mission of the SEC has been to protect investors and maintain the integrity of the market. This has been accomplished through the combined efforts of the divisions of the SEC and its Commissioners. The economy and economic welfare of the U. S. has depended upon the effectiveness of the Securities and Exchange Commission, and the success of the Commission has been seen in that there has not been any repeat of the Crash of 1929 nor the Depression that followed.

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