The Securities Exchange Act of 1934 (SEA) was established to oversee securities transactions in the secondary market after issuance. It aims to enhance financial transparency, accuracy, and reduce instances of fraud and manipulation. The Act also authorized the formation of the Securities and Exchange Commission (SEC), giving it the power to regulate securities, markets, and the conduct of financial professionals including brokers, dealers, and investment advisors. This includes monitoring financial reports of publicly traded companies.
Key Takeaways
- The Securities Exchange Act of 1934 governs securities transactions in the secondary market.
- Companies listed on stock exchanges must adhere to SEA requirements.
- The Act ensures fairness and investor confidence through its stringent requirements.
- The SEA led to the creation of the SEC to regulate securities, markets, financial disclosures, and professional conduct within the financial sector.
Understanding the Securities Exchange Act of 1934
The SEA regulates secondary market trades and participants including exchanges, brokers, and clearing agencies. Companies listed on stock exchanges must follow specific reporting requirements, such as registering any securities, disclosing financial information, proxy solicitations, and adhering to margin and audit rules. These measures ensure transparency and an investor-friendly environment. If companies violate these rules, the SEC can pursue legal action or settle outside of court.
History of the Securities Exchange Act of 1934
The SEA of 1934 was enacted as part of Franklin D. Roosevelt’s response to the 1929 stock market crash, aiming to curb irresponsible financial practices. It followed the Securities Act of 1933 which required the public disclosure of certain financial information by corporations. Other significant regulatory measures from 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, all aiming to increase transparency and regulation in financial markets.
Creation and Role of the SEC
The SEC operates under the SEA, managing market-related information and protecting investors from fraud. The SEC has five commissioners appointed by the president and is divided into five divisions:
- Division of Corporation Finance: Ensures investors have access to material information affecting a company’s financial prospects.
- Division of Trading and Markets: Establishes and regulates orderly, fair, and efficient markets.
- Division of Investment Management: Administers the Investment Company Act of 1940 and Investment Advisers Act of 1940 to oversee investment companies and advisors.
- Division of Economic and Risk Analysis: Supports the SEC’s mission through financial economics and data analytics integration.
- Division of Enforcement: Investigates potential violations of federal securities laws and prosecutes civil suits, conducting administrative proceedings.
The SEC carries the responsibility to address violations such as insider trading, illegal securities sales, market price manipulation, false financial disclosures, and breaches of broker-customer integrity. The SEC also oversees the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system for public access to financial reports and other forms.
Reporting Requirements
Companies with publicly held securities or significant asset bases and ownership (more than $10 million in assets and over 500 owners) are known as reporting companies under the SEA. They must submit regular financial disclosures including:
- Annual reports (Form 10-K): Detailed financial performance over the year.
- Quarterly reports (Form 10-Q): Summarizing quarterly financial performance.
- Current reports (Form 8-K): Notifying of major events affecting stakeholders.
These disclosures ensure investors have the necessary information for making informed decisions.
Areas of Security Law Covered
In addition to secondary market regulation, the SEA addresses several other security law areas:
Insider Trading
Prohibits trading based on non-public, material information.
Antifraud
Bans manipulation schemes like pools meant to inflate or deflate stock prices for profit.
Tender Offers
Requires material information disclosure for anyone making offers to purchase 5% or more of a company’s shares.
Proxy Solicitation
Ensures shareholder proxy materials contain all relevant information and are filed with the SEC before vote solicitation.
What Did the Securities Exchange Act of 1934 Do?
The Act regulates secondary financial markets, enforcing transparency and fairness while prohibiting fraudulent activities like insider trading. It mandates public disclosure from publicly traded companies to inform and protect investors.
What Are the Two Main Purposes of the Securities Exchange Act?
The primary goals are to prevent market fraud and ensure company financial transparency. These objectives provide investors with the necessary information to make well-informed investment decisions.
What Is the Difference Between the 1933 and 1934 Securities Acts?
The Securities Act of 1933 regulates newly issued securities, governing initial public offerings, whereas the Securities Exchange Act of 1934 oversees the trading of existing securities on the secondary market.
The Bottom Line
The SEA regulates secondary market securities transactions and creates stringent reporting and financial disclosure requirements for listed companies. It prohibits fraud and ensures investors have access to essential information. The SEC, founded by the SEA, enforces these regulations, enhancing investor protection and market transparency.
Related Terms: SEC, secondary market, insider trading, financial regulation, market manipulation.
References
- U.S. Securities and Exchange Commission. “Division of Corporation Finance”.
- U.S. Securities and Exchange Commission. “Trading and Markets”.
- U.S. Securities and Exchange Commission. “Division of Investment Management”.
- U.S. Securities and Exchange Commission. “Economic and Risk Analysis”.
- U.S. Securities and Exchange Commission. “Division of Enforcement”.
- U.S. Securities and Exchange Commission. “About EDGAR”.
- U.S. Securities and Exchange Commission. “Exchange Act Reporting and Registration”.
