Securities Exchange Act of 1934
The Securities Exchange Act of 1934 (the “1934 Act”) extended federal regulation to trading in securities, which are already issued and outstanding. The 1934 Act is a more comprehensive statute and regulates the secondary markets and many market participants. Provisions of the 1934 provide for the creation of (i) the Securities and Exchange Commission (“SEC” or the “Commission”); (ii) a system for regulating the markets themselves and those who trade in those markets; (iii) a continuous disclosure system for issuers; and (iv) anti-fraud provisions.
SEC
The 1934 Act created the SEC, which is an independent federal agency. The 1934 Act grants the SEC broad authority over all aspects of the securities industry and markets. Congress intended the SEC to be the regulator that establishes national policy over the Nation’s securities markets. The Commission adopts rules implementing the provisions of the federal securities laws. It also is the “eagle on the Street,” bringing civil enforcement cases against persons who violate the federal securities laws. The SEC also cooperates with the U.S. Department of Justice, which has responsibility for criminal enforcement of the federal securities laws, and with state securities officials.
Securities Markets and Broker-Dealers
The 1934 Act pervasively regulates participants in the trading markets. This includes the power to register, regulate, and oversee the following:
Self-Regulatory Organizations
Stock exchanges and the over-the-counter (“OTC”) market provide places for buyers and sellers of securities to meet. But under the 1934 Act, these markets share important regulatory responsibilities. The stock exchanges, such as the New York Stock Exchange (“NYSE”), and American Stock Exchange are self-regulatory organizations (“SROs”). The National Association of Securities Dealers (“NASD”) is the SRO for the OTC market. The 1934 Act requires broker-dealers, discussed below, to join at least one SRO.
Under the SEC’s careful supervision, SROs exercise quasi-governmental authority and have responsibility for policing their members and affiliated markets. SROs must have rules that regulating broker-dealers’ conduct, trading practices, and for establishing measures to ensure market integrity and investor protection. The SEC comprehensively oversees SRO rules and publishes proposed rules for comment before final SEC review and approval. SRO must enforce their rules and may discipline or expel members.
Broker-Dealer Regulation
Broker-dealers engage in a broad range of securities activities. For example, they may help a small investor sell 100 shares of common stock or underwrite millions of dollars worth of securities across the globe for an international corporation. The 1934 Act requires broker-dealers to register with the SEC and comply with its rules. Regulation of broker-dealers serves a number of purposes, which include:
- ensuring basic competency of registered broker-dealers and their employees;
- promoting financial solvency of broker-dealers;
- requiring broker-dealers to maintain accurate books and records; and
- preparing audited financial statements
The SEC coordinates its regulation of broker-dealers with the SROs. Both the SEC and SROs inspect broker-dealers for compliance with the laws and may bring enforcement actions for wrongdoing.
Other Provisions
The 1934 Act grants the SEC additional authority over the Nation’s securities markets. For example, the 1934 Act directs the SEC to foster the development of a national market system, to help ensure that investors get the best prices wherever they buy or sell securities. It also grants the SEC authority to ensure that the system for processing securities trading works smoothly and safely.
Creation of Continuous Disclosure System
The 1934 Act seeks to assure the availability of reliable information about publicly traded securities. Issuers provide information to the marketplace through both the required registration of certain securities and the filing of annual and quarterly reports. These reports are available to the public through the SEC's EDGAR database.
The 1934 Act requires the registration of all securities that are to be traded on a securities exchange and the registration of some equity securities regardless of where they trade. At the time of registration, an issuing company must provide detailed disclosures regarding both the company and the registered security. In addition to initial registration, the 1934 Act also requires continuous disclosure for publicly traded securities that are already issued and outstanding.
Anti-fraud Provisions
The 1934 Act affords investors broad protection through anti-fraud provisions. In particular, the 1934 Act and SEC rules prohibit fraudulent activities that defraud investors by any person, regardless of how clever or novel the scheme. These provisions are supplemented by prohibitions on certain types of trading. For example, a number of provisions of the federal securities laws prohibit insider trading and market manipulation. The SEC may bring cases against wrongdoers and investors may bring private suits under many provisions of the 1934 Act.