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Regulatory bodies are critical to ensure the smooth functioning of certain sectors. Especially in industries where fraudulent activities and manipulations are highly possible, like the financial sector, regulatory bodies are all the more essential. Often, such regulatory bodies run their daily functions based on a statutory Act.
In today’s article, we will discuss one such Act – The Securities Exchange Act of 1934, which is one of the most significant legislative documents in the financial markets of the United States of America.
Securities Exchange Act of 1934
The Securities Exchange Act of 1934 is a law that monitors the activities of the secondary market, i.e., stock exchanges, in the United States of America. It covers various aspects, including registration of companies under the law, the process of listing on stock markets, reporting and disclosures, fines and penalties for non-adherence to the law, etc.
The Securities Exchange Act of 1934 (SEA) is also responsible for the establishment of the Securities and Exchange Commission (SEC), which is the primary regulatory body of stock market activities in the United States of America.
Since the Securities Exchange Act of 1934 deals with end-to-end monitoring of stock market activities, it covers stock exchanges, brokerage houses, clearing houses, Self Regulatory Organisations (SROs) and all other related parties.
History
It was not until the Great Depression of 1929 that the US stock market realised the need for a regulatory body. But, when they noticed that few investors defrauded the entire public, the need for such regulations arose.
It began with the creation of the Securities Exchange Act of 1933, to govern the acts of primary markets that dealt with Initial Public Offerings (IPOs). Then came the Securities Exchange Act of 1934, exclusively for the secondary market.
Securities and Exchange Commission
The SEA of 1934 gave birth to the Securities and Exchange Commission (SEC). SEC is a regulatory body that works on three primary objectives:
- To protect investors against fraud and market manipulation
- To enforce a regulatory framework that is in line with the growing technology
- To employ a skilled workforce to meet SEC’s goals.
The body has six different divisions working together to ensure that the SEC’s objectives are met.
Some significant rules of the Act
Disclosure and reporting
The Securities Exchange Act mandates every company listed on stock exchanges to disclose all material information to the public. Such information is crucial in decision-making, and the SEA equips investors to make informed decisions through the disclosure rule.
Another aspect of disclosure is reporting. Companies on the stock exchange exceeding a certain size must file their financial reports with the SEC and disclose these reports to the general public. These reports include annual and quarterly financial reports, significant announcements in the company which can have monetary impacts, etc.
Besides regular disclosures, the SEA requires companies to disclose the required information during proxy solicitations. It is where information is passed on to shareholders before they vote for major decisions of the company.
Monitoring and penalising for fraudulent activities
Insider trading, pool trading, etc., are some of the many forms of manipulating stock prices and the market. The Securities Exchange Act prohibits these acts of manipulation and has different sections that talk about fines, penalties and punishments, which may even include a criminal case against such traders.
Bottomline
Established in 1934, the Securities Exchange Act is one of the major governing laws of the secondary markets in the United States of America. The Act covers multiple aspects of stock market trading and lays out rules regarding reporting, disclosures, registrations, trading processes, punishment for non-adherence and more.
Being the primary governing legislation of stock market activities, the Securities Exchange Act, through its regulatory body, the Securities and Exchange Commission, plays a significant role in ensuring fair trading practices and investor protection in the U.S. financial market.
FAQs
SRO stands for Self Regulatory Organisation. It is an entity authorized by law to regulate the activities of members, primarily in the financial sector. Examples include stock exchanges and regulatory bodies overseeing brokers.
SROs play an important role in imposing rules, overseeing compliance, and maintaining market integrity, supporting the primary regulatory body like the SEC. In the U.S., NYSE, NASDAQ, FINRA, etc., are examples of SROs.
Section 12 of the Securities Exchange Act of 1934 deals with rules on disclosures. It mandates listed companies to register with the SEC and disclose material information at periodic intervals, to promote transparency and investor protection.
The sub-sections of Section 12 deal with different types of disclosures, including financial statements, ownership, and operations details, to enable informed investment decisions.
Section 13 of the Securities Exchange Act of 1934 also deals with a specific kind of disclosure. According to Section 13 of the Securities Exchange Act of 1934, every investor who owns more than 5% of a company’s stock must disclose the details of their holdings to the SEC and to the company.
This is again done to promote transparency and monitor the activities of such investors to ensure they do not manipulate the stocks.
Section 10(b) is one of the most important rules of the Act, dealing with the most significant aspect of the law – the prohibition of fraudulent practices. According to this, SEA prohibits the use of fraudulent practices while trading securities.
This section forms the basis of the SEC’s role in taking legal actions against insider trading, market manipulation, and other forms of securities fraud, to promote market integrity and investor confidence.
The Securities Act of 1933 was formed after the stock market crash of 1929. The aim of the Act was to restore investor confidence after the crash. It did so by mandating full disclosure of information in the primary market, during the issue of IPOs, to prevent fraud and ensure transparency in the issuance and sale of securities, promoting fair and informed investment decisions.
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