Source: Securities Exchange Act of 1934. Reproduced by the Center for Corporate Law, University of Cincinnati College of Law. Available online at http://www.law.uc.edu/CCL/34Act/index.html; website home page: http://www.law.uc.edu (accessed April 17, 2003).
The Stock Market Crash of 1929 and the growing uncertainty of the financial systems of the United States prompted critical examination of those systems. Spurred by the collapse of three thousand banks between 1930 and 1932 and by revelations of unscrupulous dealings by powerful financial leaders, greater regulatory control of key institutions seemed necessary.
Efforts to regulate financial institutions were helped by dramatic hearings of the Senate Banking Committee, which investigated Wall Street practices. The Pecora Committee (named for its chief counsel, Ferdinand Pecora) took on the leaders of Wall Street. He showed that they were motivated by self-interest and not inclined to operate in the best interests of the public.
The revelations of the Pecora Committee were instrumental in building support for the passage of the Glass-Steagall Banking Act of 1933 and the Securities Exchange Acts of 1933 and 1934. The Glass-Steagall Act separated investing from commercial banking. The second Securities and Exchange Act created the Federal Deposit Insurance Corporation (FDIC), which guaranteed that deposits made into member banks would be available for withdrawal.
Before commencing work on a regulatory bill, its sponsors, Samuel Rayburn (D-Tex.) and Duncan Fletcher (D-Fla.) established the constitutionality of federal regulation of the stock exchanges. The basis of consitutionality was grounded in the fiscal authority of the government, the impact of the stock market on the credit of the government, and the national scope of the companies traded on the exchanges and their investors.
The primary objectives of the Securities and Exchange Acts were to prevent manipulation of stock prices by insiders, place the margin buying of stocks under tighter restrictions, and end misrepresentation of stock values by requiring full disclosure of information related to the securities sold on the stock exchanges. It gave the federal government regulatory responsibility over what had been known as laissez-faire economics. Laissez-faire, a French expression that means letting people do what they choose, in this case means letting the economic system operate without government interference.
One of the critical provisions of the act was the creation of the Securities and Exchange Commission (SEC). Charged with enforcing the provisions of the act, the SEC was granted broad powers to establish specific rules and regulations to enforce the general provisions of the act. This flexibility allowed the SEC to respond to the rapidly changing business environment and avoid the slow and cumbersome legislative process that previously had been necessary to conduct regulatory actions.
The first chairman of the SEC was Joseph P. Kennedy, father of future president John F. Kennedy. Under Kennedy, the SEC got off to a strong beginning. In the first year of operation, the SEC registered twenty-four stock exchanges while closing down ten exchanges of dubious credibility. In addition, the SEC investigated more than two thousand cases of fraud.More than any other piece of New Deal legislation, the Securities and Exchange Acts turned business irrevocably against Roosevelt. Whatever hopes either side had of cooperating to combat the Depression ended with this legislation. Wrote the president of the New York Stock Exchange, Richard Whitney, "You gentlemen are making a great mistake. The Exchange is perfect." By tampering with this "perfect" institution, Roosevelt sent the clear message to business leaders that whatever they felt about so-called "natural laws" of economics, the financial institutions of this country must operate for the benefit of its citizens. (Note: In 1937, Richard Whitney's investment firm went bankrupt. Following an investigation, he pleaded guilty to grand larceny and was sentenced to ten years imprisonment.)
Primary Source: Securities Exchange Act of 1934 [excerpt]
SYNOPSIS: In this brief preamble to the 1934 Securities Act, the rationale and purposes of the bill are explained. The preamble is followed by excerpts that highlight the main functions of the law, which were to restrict buying on margin, ensure that information regarding listed companies was reported accurately, and prevent insiders from manipulating stock prices.
For the reasons hereinafter enumerated, transactions in securities as commonly conducted upon securities exchanges and over-the-counter markets are affected with a national public interest which makes it necessary to provide for regulation and control of such transactions and of practices and matters related thereto, including transactions by officers, directors, and principal security holders, to require appropriate reports, to remove impediments to and perfect the mechanisms of a national market system for securities and a national system for the clearance and settlementof securities transactions and the safeguarding of securities and funds related thereto, and to impose requirements necessary to make such regulation and control reasonably complete and effective, in order to protect interstate commerce, the national credit, the Federal taxing power, to protect and make more effective the national banking system and Federal Reserve System, and to insure the maintenance of fair and honest markets in such transactions:
- Such transactions (a) are carried on in large volume by the public generally and in large part originate outside the States in which the exchanges and over-the-counter markets are located and/or are effected by means of the mails and instrumentalities of interstate commerce; (b) constitute an important part of the current of interstate commerce; (c) involve in large part the securities of issuers engaged in interstate commerce; (d) involve the use of credit, directly affect the financing of trade, industry, and transportation in interstate commerce, and directly affect and influence the volume of interstate commerce; and affect the national credit.
- The prices established and offered in such transactions are generally disseminated and quoted throughout the United States and foreign countries and constitute a basis for determining and establishing the prices at which securities are bought and sold, the amount of certain taxes owing to the United States and to the several States by owners, buyers, and sellers of securities, and the value of collateral for bank loans.
- Frequently the prices of securities on such exchanges and markets are susceptible to manipulation and control, and the dissemination of such prices gives rise to excessive speculation, resulting in sudden and unreasonable fluctuations in the prices of securities which (a) cause alternately unreasonable expansion and unreasonable contraction of the volume of credit available for trade, transportation, and industry in interstate commerce, (b) hinder the proper appraisal of the value of securities and thus prevent a fair calculation of taxes owing to the United States and to the several States by owners, buyers, and sellers of securities, and (c) prevent the fair valuation of collateral for bank loans and/or obstruct the effective operation of the national banking system and Federal Reserve System.
- National emergencies, which produce widespread unemployment and the dislocation of trade, transportation, and industry, and which burden interstate commerce and adversely affect the general welfare, are precipitated, intensified, and prolonged by manipulation and sudden and unreasonable fluctuations of security prices and by excessive speculation on such exchanges and markets, and to meet such emergencies the Federal Government is put to such great expense as to burden the national credit.
De Bedts, Ralph F. The New Deal's SEC: The Formative Years. New York: Columbia University Press, 1965.
Koslow, Philip. The Securities and Exchange Commission. New York: Chelsea House Publishers, 1990.
Seligman, Joel. The Transformation of Wall Street: A History of the Securities and Exchange Commission. Boston: Houghton Mifflin, 1982.
Chen, Zhun Dean. "Securities & Exchange Commission." Available online at http://www.geocities.com/Colosseum/Field/1633/sec.html (accessed August 7, 2002).