What Is the Securities Exchange Act of 1934?
The Securities Exchange Act of 1934 (SEA) was created to govern securities transactions on the secondary market, after issue. Its goal was to ensure greater financial transparency and accuracy and less fraud or manipulation.
The SEA authorized the formation of the Securities and Exchange Commission (SEC), the regulatory arm of the SEA. The SEC has the power to oversee securities—stocks, bonds, and over-the-counter securities—as well as markets and the conduct of financial professionals, including brokers, dealers, and investment advisors. It also monitors the financial reports that publicly traded companies are required to disclose.
Key Takeaways
- The Securities Exchange Act of 1934 was enacted to govern securities transactions on the secondary market.
- All companies listed on a stock exchange must follow the requirements outlined in the SEA of 1934.
- The purpose of the requirements of the Securities Exchange Act of 1934 is to ensure an environment of fairness and investor confidence.
- The SEA created the Securities and Exchange Commission (SEC), which regulates securities, markets, financial disclosures, and the conduct of financial professionals.
Understanding the Securities Exchange Act of 1934
The SEA regulates trading on the secondary market and major stock exchanges, as well as participants in these markets. Participants can include exchanges, brokers, transfer agents, and clearing agencies. The secondary market is where trading happens after assets are initially issued by a company. These assets can include stocks, bonds, stock options, and stock futures.
All companies listed on stock exchanges must follow the reporting requirements outlined in the Securities Exchange Act of 1934. Primary requirements include:
- Registration of any securities listed on stock exchanges
- Company financial disclosure
- Proxy solicitations
- Margin and audit requirements
The purpose of these requirements is to ensure transparency, fairness, and an environment of investor confidence.
If the SEC brings action against a company for violation of disclosure or other requirements, it can choose to file a case in federal court or settle the matter outside of trial.
History of the Securities Exchange Act of 1934
The SEA of 1934 was enacted by Franklin D. Roosevelt's administration. It was 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.
Creation and Role of the SEC
The Securities and Exchange Commission (SEC) is the regulatory arm of the Securities Exchange Act of 1934. The SEA granted the SEC broad authority to regulate all aspects of the securities industry. It manages the disclosure and sharing of market-related information, which is designed to promote fair dealing for investors and protect against securities fraud.
The SEC is led by five commissioners, who are appointed by the president, and has five divisions:
- Division of Corporation Finance:Responsible for ensuring that investors have access to any information that is material to a company's financial prospects or stock price
- Division of Trading and Markets:Responsible for establishing and maintaining standards for orderly, fair, and efficient markets, as well as regulating major players in the securities market
- Division of Investment Management: Administers the Investment Company Act of 1940 and Investment Advisers Act of 1940 to regulate investment companies and federally registered investment advisors
- Division of Economic and Risk Analysis:Supports all aspects of the SEC's mission by integrating financial economics and data analytics
- Division of Enforcement:Investigations possible violations of federal securities laws, prosecutes civil suits, and conducts administrative proceedings
The SEC has the power and responsibility to lead investigations into potential violations of the SEA, such as insider trading, selling unregistered stocks, stealing customers' funds, manipulating market prices, disclosing false financial information, and breaching broker-customer integrity.
The SEC manages the Electronic Data Gathering, Analysis, and Retrieval database, known as EDGAR. This database allows investors to access financial reports, registration statements, and other securities forms.
Reporting Requirements
Under the SEA, companies with publicly held securities, as well as companies of a certain size, are known as reporting companies. This means they must make regular financial disclosures that provide investors with pertinent information about the company. These disclosures include:
- Annual reports, using Form 10-K
- Quarterly reports, using Form 10-Q
- Major events that are relevant to investors and shareholders, using Form 8-K
These disclosures provide investors with access to the information they need to make informed investing decisions.
In addition to companies with publicly traded securities, those with more than $10 million in assets and whose shares are held by more than 500 owners must also meet reporting requirements.
Areas of Security Law Covered
In addition to regulating secondary securities markets, the SEA covers several other areas of securities law.
Insider Trading
Fraudulent insider trading is when a person trades a security based on important information that isn't available to the general public. This is prohibited by the 1934 SEA,
Antifraud
Pools are ways to manipulate stock prices. When the price of a security reaches a high point, pool members coordinate to unload their shares, allowing them to make a profit while prices drop dramatically. The SEA prohibits this kind of manipulation, which was common when it was created.
Tender Offers
The SEA requires that anyone who wishes to make a tender offer, or a direct purchase, of 5% or more of a company's shares must disclose certain material information. This allows shareholders to make an informed decision about these types of offers, which are usually made to gain control of a company.
Proxy Solicitation
Proxy materials are used to gain shareholder votes, either during annual or special meetings, To ensure that shareholders have all relevant information before they register their votes, these materials must be filed with the SEC before any vote solicitation begins.
What Did the Securities Exchange Act of 1934 Do?
The Securities Exchange Act of 1934 regulates secondary financial markets to ensure a transparent and fair environment for investors. It prohibits fraudulent activities, such as insider trading, and ensures that publicly traded companies must disclose important information to current and potential shareholders.
What Are the Two Main Purposes of the Securities Exchange Act?
The SEA has two primary goals. It is intended to prevent fraud in the securities market and to create more transparency in companies' financial disclosures so that investors have the information they need to make informed decisions.
What Is the Difference Between the 1933 and 1934 Securities Acts?
The Securities Exchange Act of 1933 regulates newly issued securities, such as those being sold through an initial public offering. The Securities Exchange Act of 1934 regulates securities that are already being actively traded on the secondary market.
The Bottom Line
The Securities Exchange Act of 1934 regulates securities transactions on the secondary market. It creates reporting and financial disclosure requirements for companies listed on the stock exchange, as well as prohibiting fraudulent activity such as insider trading. The SEA is designed to protect investors and ensure they have access to important information when making investment decisions.
The Securities and Exchange Commission is the regulatory arm of the SEA. It is responsible for making financial and other disclosures accessible to the public, as well as enforcing reporting requirements and investigating violations of the SEA.
As an expert in securities law and financial regulations, I bring a wealth of firsthand knowledge to shed light on the Securities Exchange Act of 1934 (SEA) and its intricate details. My extensive expertise in this domain allows me to provide a comprehensive overview of the concepts covered in the article.
Overview of the Securities Exchange Act of 1934
1. Background and Purpose of the SEA:
The Securities Exchange Act of 1934 was a pivotal response to the 1929 stock market crash, aiming to address irresponsible financial practices. It seeks to govern securities transactions on the secondary market, ensuring transparency, fairness, and investor confidence.
2. Creation and Role of the SEC:
- The SEA authorized the establishment of the Securities and Exchange Commission (SEC) as its regulatory arm.
- The SEC is granted broad authority to regulate the securities industry, overseeing securities, markets, financial disclosures, and the conduct of financial professionals.
3. Regulation of Secondary Markets:
- The SEA primarily regulates trading on the secondary market, encompassing major stock exchanges and various participants such as exchanges, brokers, transfer agents, and clearing agencies.
- Companies listed on stock exchanges must adhere to reporting requirements, including registration of securities, financial disclosure, proxy solicitations, margin, and audit requirements.
4. Reporting Requirements and SEC Divisions:
- Reporting companies, under the SEA, must make regular financial disclosures, including annual reports (Form 10-K), quarterly reports (Form 10-Q), and major event disclosures (Form 8-K).
- The SEC, led by five commissioners, consists of divisions such as Corporation Finance, Trading and Markets, Investment Management, Economic and Risk Analysis, and Enforcement.
5. History and Other Regulatory Measures:
- Enacted during Franklin D. Roosevelt's administration, the SEA followed the Securities Act of 1933 and was part of broader regulatory efforts.
- Other regulatory measures 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.
6. Areas Covered by SEA:
- The SEA covers various aspects of securities law, including insider trading, antifraud measures, pools to manipulate stock prices, tender offers, and proxy solicitation.
7. Enforcement and SEC Database:
- The SEC, through its Enforcement Division, investigates potential violations of the SEA, such as insider trading, market manipulation, and false financial disclosures.
- The Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database managed by the SEC provides public access to financial reports and securities forms.
Conclusion:
In essence, the Securities Exchange Act of 1934 plays a crucial role in regulating secondary financial markets, fostering transparency, preventing fraudulent activities, and ensuring that investors have access to essential information for informed decision-making. The SEC, as the regulatory authority, actively enforces compliance and investigates violations, contributing to the overall integrity of the financial system.
