The Securities And Exchange Commission Essay

This essay has a total of 2231 words and 12 pages.

The Securities And Exchange Commission

Morgan Bennett
Mr. Harris
History Honors- Per 5
April 2001
The Securities and Exchange Commission

In 1934 the Securities Exchange Act created the SEC (Securities and Exchange Commission)
in response to the stock market crash of 1929 and the Great Depression of the 1930s. It
was created to protect U.S. investors against malpractice in securities and financial
markets. The purpose of the SEC was and still is to carry out the mandates of the
Securities Act of 1933: To protect investors and maintain the integrity of the securities
market by amending the current laws, creating new laws and seeing to it that those laws
are enforced.

During the 1920s, approximately 20 million Americans took advantage of post-war prosperity
by purchasing shares of stock in various securities exchanges. When the stock market
crashed in 1929, the fortunes of many investors were lost. In addition, banks lost great
sums of money in the Crash because they had invested heavily in the markets. When people
feared their banks might not be able to pay back the money that depositors had in their
accounts, a "run" on the banking system caused many bank failures. After the crash, public
confidence in the market and the economy fell sharply. In response, Congress held hearings
to identify the problems and look for solutions; the answer was found in the new SEC. The
Commission was established in 1934 to enforce new securities laws that were passed with
the Securities Act of 1933 and the Securities Exchange Act of 1934. The two new laws
stated that "Companies publicly offering securities must tell the public the truth about
their businesses, the securities they are selling and the risks involved in the
investing." Secondly, "People who sell and trade securities must treat investors fairly
and honestly, putting investors' interests first."2

Franklin Delano Roosevelt defeated Herbert Hoover in a landslide in the 1932 election and
began to work on his "New Deal". In the New Deal four key regulatory bodies were
established: The National Labor Relations Board, Civil Aeronautics Authority, Federal
Communications Commission, and the Securities and Exchange Commission.

Wall Street was not enamored with the coming regulation, but Congress was confident that
the Street was seen as an easy target for the Crash and the Depression that followed. In
response, the SEC was created by Congress on June 6, 1934 for the purpose of protecting
the public and the individual investors against malpractice in the financial markets.
Commenting on the creation of the SEC, Texas Congressman and future Speaker Sam Rayburn
admitted3 "he didn't know whether the legislation passed so readily because it was so good
or so incomprehensible." However, historian David Kennedy viewed the SEC as "ingeniously
simple". In his book Freedom From Fear he states that "For all the complexity of its
enabling legislation, the power of the SEC resided principally in just two provisions,
both of them ingeniously simple. The first mandated detailed information, such as balance
sheets, profit and loss statements, and the names and compensation of corporate officers,
about firms whose securities were publicly traded." The second "required verification of
that information by independent auditors using standardized accounting procedures." These
two simple concepts ended the monopoly enjoyed by the House of Morgan and their like on
investment information. Wall Street was saturated with data that was relevant, accessible,
and comparable across firms and transactions. "The SEC's regulations unarguably imposed
new reporting requirements on businesses. They also gave a huge boost to the status of the
accounting profession. But they hardly constituted a wholesale assault on the theory or
practice of free- market capitalism. The SEC's regulations dramatically improved the
economic efficiency of the financial markets by making buy and sell decisions
well-informed decisions, provided that the contracting parties consulted the data that was
then so copiously available. It was less reform than it was the rationalization of

The SEC prohibited the "pools" and other devices used by the likes of Joseph Kennedy to
amass their fortunes. While manipulation of the markets was still possible, there were now
risks. FDR decided that instead of naming Kennedy Secretary of Treasury, he would name him
the first commissioner of the SEC. Thus, Joseph Kennedy was appointed to oversee the very
activities he had participated in. A position appointed from FDR that was long overdue
after the contributions of over $250,000 to FDR's convention campaigns. However, this
resulted in FDR initially being accused of selling out to Wall Street. However, Kennedy
was the right choice since he was the only one with the intimate knowledge of the very
acts that the SEC was set up to prevent. It was a classic case of "the fox guarding the

Joseph Kennedy proved to be a highly effective leader of the SEC. As one of his first
official duties he delivered a national radio address: "We of the SEC do not regard
ourselves as coroners sitting on the corpse of financial enterprise…We do not start with
the belief that every enterprise is crooked and that those behind it are crooks." At this
Wall Street realized that regulation didn't necessarily mean persecution. Although Kennedy
only stayed one year as commissioner, he was most effective in establishing the
credibility of the organization. Historian John Steele Gordon described his time in
office: "Kennedy knew where the bodies were buried. But he regarded his job to be not only
to restore the confidence of the country in Wall Street, but, equally important, to
restore the confidence of Wall Street in the American economy and government."

In addition to the importance of the commissioner's personality there were also the laws
that governed the commission. There are six main laws that govern the Securities Industry,
but only four that are relevant to the majority of people. The first law is the Securities
Act of 1933, which is often referred to as the "truth in securities". The Security Act of
1933 has two basic objectives: to require investors to receive significant information
concerning securities being offered for public sale; and to prohibit deceit,
misrepresentation, and other fraud in the sale of securities. These two objectives are
accomplished primarily by registration which discloses important financial information.
While the SEC requires this information to be accurate, there is no guarantee that it will
be. However, if investors purchase securities and suffer losses due to the fact that the
information given was incomplete or inaccurate they have recovery rights. The registration
process requires corporations to supply the essential facts while minimizing the burden
and expense of complying with the law. These requirements include a description of the
company's properties and the security to be offered for sale, information about the
management of the company and financial statements certified by independent accountants.
If U.S. domestic companies file this information, the statements are available on the
EDGAR database. (Electronic Data Gathering, Analysis, and Retrieval system) "Its primary
purpose is to increase the efficiency and fairness of the securities market for the
benefit of investors, corporations, and the economy by accelerating the receipt,
acceptance, distribution, and analysis of time-sensitive corporate information filed with
the agency."

The second law, the Securities and Exchange Act of 1934, created the SEC. The Act grants
the SEC authority over the securities industry, including the power to register, regulate,
and oversee brokerage firms, transfer agents, and clearing agencies. The Act also
prohibits dishonorable conduct in the market and gives the Commission the disciplinary
power to regulate all companies and individuals associated. The Act also allows the SEC to
require periodic reporting of information by companies with publicly traded securities.
Under this Act corporations are required to file additional periodic reports that are
available to the public through the SEC's EDGAR database. Companies required to file
Corporate Reporting are those having more than $10 million in assets and whose securities
are held by more than 500 owners. One of the most important parts of this Act is the
disallowance of any kind of fraudulent behavior including any kind of connection with the
offer, purchase, or sale of securities. "These provisions are the basis for many types of
disciplinary action, including actions against fraudulent insider trading. Insider trading
is illegal when a person trades a security while in possession of material nonpublic
information in violation of a duty to withhold the information or refrain from trading."

The Investment Company Act of 1940 regulates the organization of companies, including
mutual funds, that engage primarily in investing, reinvesting, and trading in securities,
and whose own securities are offered to the investing public. This was designed to
minimize conflicts of interest that arise in these complex operations by requiring these
companies to disclose their financial condition and investment policies to investors when
stock is initially sold and periodically afterwards. The Act focuses on the disclosure of
information to the investing public about the funds and its investment objectives as well
as the investment companies' structure and operations.

The law that regulated investment advisors is the Investment Advisers Act of 1940. This
Act requires that firms or sole practitioners compensated for advising others about
securities investments must register with the SEC and conform to regulations designed to
protect investors. (When the Act was amended in 1996, only advisors with at least $25
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