What Is the Securities Exchange Act of 1934? Reach and History

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.

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.

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.

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.

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.