What is the Securities Exchange Act of 1934?

Rules and regulations are two pillars of the smooth management of any function. It eliminates mishaps and promotes the seamless performance of an activity. Every human, organization, state, or country is governed or managed by certain kinds of regulators. Such bodies understand the behavior of the entities and set guidelines that aid in the day-to-day operations.

Similarly, with the stock market, multiple stakeholders are directly or indirectly involved. If a single powerful entity or a group of people decides to control and manipulate the market, the other parties may face consequences. It may result in losses and distrust amongst the investors. Additionally, the stock market also has witnessed some of the biggest scams of all time. Keeping all of this in mind the FED created the Securities Exchange Act of 1934.

What is the Securities Exchange Act of 1934?

The Securities Exchange Act of 1934 is a law in the USA through which a securities exchange commission was formed. Famously known as SEC, it is the market watchdog of the US stock market. The Securities Exchange Act of 1934 gives SEC the power to keep control of all the secondary activities in the market. The term secondary activities mean all the activities that occur between entities that exclude the primary issuer of the securities.

Under the permission of this act, SEC has the authority to register, regulate, and monitor all the entities of the market. It includes brokerage houses, transfer agents, clearinghouses, and self-regulatory organizations (SRO).

Who is a part of SRO and the work of SROs?

New York Stock Exchange (NYSE), NASDAQ, Financial Industry Regulatory Authority (FINRA), and Chicago Board of Options are part of SROs. They develop regulations that allow members to be disciplined for unlawful behavior, as well as steps to preserve market integrity and the protection of investors. SRO proposed regulations are reviewed by the SEC and publicized for public comment. While many SRO proposed regulations take effect immediately after filing, others must first be approved by the SEC.

Moreover, the Securities Exchange Act of 1934 allows SEC to identify and also have restrictions on certain types of activities in the market. It provides SEC with the disciplinary power on people associated with regulated entities and the entities themselves. There are certain general disclosures of the Securities Exchange Act of 1934.

General Disclosure

Under this disclosure, the Securities Exchange Act of 1934 specifies that all companies must furnish the information that an investor will need to take investment decisions. A detailed list of all the disclosures is mentioned in the regulation FD, a primary section of the exchange act.

Corporate Reporting

Companies with more than $10 million in assets and securities held by more than 500 shareholders must follow this guideline. Such companies are called reporting companies. According to this disclosure, companies have to file annual reports and other periodic reports for the shareholders. These reports should include information about the company’s financials, important announcements, management decisions, and various information that allows investors to make investing decisions. The general public can avail and read such reports through the SEC’s EDGAR database.

Proxy Solicitations

The Securities Exchange Act of 1934 governs information disclosure too. Such information upon which the shareholders are required to vote and make the decision. Companies need to disclose such information before asking for votes from the shareholders. Such disclosures are required to meet the compliance requirements. The management of the company should furnish all the important information upon which the shareholders need to vote and make decisions.

Tender Offers

Anyone who is seeking to acquire a 5% or more stake in the company through direct purchase or tender offer needs to file the disclosure of all the important information as per the Securities Exchange Act of 1934. The party offering the tender will have to furnish all the important information and the future steps planned regarding their holdings in the company. Such disclosures allow the investors to make wise investment decisions, and decide whether to buy, sell or hold their investment.

Insider Trading

The Securities Exchange Act of 1934 is strictly against any kind of fraudulent activities that misguides the purchase or sale of securities in the market. Insider trading is one such action. Insider trading means taking a position in the market to gain profits based on the information which is soon to hit the market that may broadly affect the market movement. Such actions strictly invite certain disciplinary action against the party.

Other trading platforms

Brokers have also created a system to trade the securities in the market. This platform is known as an alternative trading system. Abbreviately is known as ATS, the alternative trading system is a quasi exchange. Under this exchange, the stocks are commonly traded through a smaller private network of traders and dealers. The overall volume traded in ATS is also less as compared to the larger market and is distinguished from the larger exchanges. It serves a very niche market and is generally controlled by a group of brokers in the network.

An SEC regulation was passed in the late 1990s, under which these smaller markets where required to do a few things. They had to register as a broker with NASD or register as an exchange or keep the operations ongoing as an unregulated ATS, but by staying under the lower trading caps.

Electronic Communications Network (ECN) is a specialized form of ATS which is described as a “black box” of securities trading. It is an automatic system that takes trade orders automatically in large quantities. Some traders also use multiple trading mechanisms to affect the huge quantity of buying and selling. They bear such risks even after being aware of the fact that relying on a single market is unfavorable.

Some prohibitions on the fraud

The Securities Exchange Act of 1934 also laid down the rules for those who defraud the investors. Various penalties and other punishments are decided based upon the quantum and modus operandi of the fraud.

There is also a provision where the securities exchange commission (SEC) can allow civil enforcement action in cases of violation of laws by the market participants. The SEC can also file a criminal case for a serious act of law violation. Moreover, it also allows the investors to sue the market participants who are involved in the activity of fraud.

The Securities Exchange Act of 1934 has laid down the anti-fraud provision under Section 10(b). There are many sub-rules under the section which enforce multiple anti-fraud provisions. One such rule is the rule 10b-5. It prohibits the use of any device, scheme, or artifice to commit fraud. Additionally, it also states the liability in case of any omission of any information or misstatement that may affect the investment decision of an investor.

There can be certain trading patterns in the market that makes investors think otherwise of the regular pattern of trading in the market. It can be patterns that misrepresent a stock to be performing better or worse than it actually should be. Additionally, it can be the volume of a particular stock that might shoot up suddenly which otherwise is not usually the case. Such patterns disguise the price stability or volatility of certain stocks. In all such incidences, the investors are misled regarding the fair prices of the investment and can sue these activities or patterns as per Section 9 of the Securities Exchange Act of 1934. Section 9(e) allows investors to explicitly sue the operators who have manipulated the prices of the stocks.

There is also a provision of joint or liability in Section 20 of the Securities Exchange Act of 1934. It allows punishing the people who control or abet the lawbreaker. Thus, the investor can get awarded the consolation against damages in a realistic manner. To explain it simply, if an employee of the organization violates any rules, the employer could also be held liable in certain cases.

Frequently Asked Questions Expand All

The Securities Exchange Act of 1934 takes care of the regulation of primary securities issues while the later act acts as a watchdog rule book for all the securities traded in the secondary market.

The Securities Exchange Act of 1933 is famously known as the “truth in securities” law. It is an act that protects the investors' interest by taking care of the true representation of all the information before the securities are offered for sale to the public. It prohibits misrepresentation, fraud, or any other activities that are against investors participating in the primary sale of securities.

The Securities Exchange Act of 1934 empowers the securities exchange commission to regulate the secondary market in all capacities and it applies to companies with more than $10 million in assets and more than 500 shareholders.

The security laws govern the market activities and reduce the chances of fraud in the market. The regulatory body empowers the smooth functioning of the market and eliminates the flaws that can affect the investors. Thus, when the investors' money is safe and the market is stable, it reduces the chances of panic in the market, which can cause losses. To avoid unnecessary movements that affect the economy, security laws are important.