The Securities Exchange Act
Congress enacted the Securities Exchange Act in 1934 in order to regulate purchase and sale of securities already circulating in the markets. The act created reporting requirements for publicly traded companies and sought to curtail insider trading. Interested individuals with specific questions on securities law should seek the advice of an attorney.
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History
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After the financial collapse that spawned the Great Depression, Congress decided that the securities markets needed more stringent regulation to restore public faith in Wall Street. In 1933, Congress enacted the Securities Act, which regulated public offerings of securities. However, the Securities Act did not address securities that had already been offered and that had entered into circulation. So in 1934 Congress enacted the Securities Exchange Act (SEA) as a companion statute to the Securities Act so as to cover all securities in circulation.
Securities and Exchange Commission
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The Securities Exchange Act created the Securities and Exchange Commission (SEC), an independent regulatory body empowered to make rules governing securities issuance and trading. The commission consists of five members chosen by the president. The SEC oversees corporate financial disclosure and investment companies, and it can bring enforcement actions against violators of the Securities Act or Securities Exchange Act. The commission's broad mandates include market stability and protection of investors.
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Financial Reporting Requirements
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The SEA called for periodic disclosure, meaning that public companies must keep the SEC (and thus the investing public) conrinuously apprised of the financial state of the company. The SEA imposes periodic financial reporting on all companies with publicly traded securities. Among the most common required forms are the 10-K, which the company must submit annually to its investors; the 10-Q, which the company must submit to the SEC at the end of each of the first three financial quarters; and the 8-K, which must be submitted to the SEC any time an event occurs that constitutes a material change to the corporation (meaning, a change that may impact shareholders' investments.)
Antifraud Liability
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One of the most powerful (and often used) provisions of the Securities Exchange Act is Rule 10b-5. Rule 10b-5 allows the SEC to prohibit "any manipulative or deceptive device or contrivance" in securities by making rules designed to counter such manipulative action. Rule 10b-5 is part of Section 10(b), which creates broad liability for public security issuers who make fraudulent statements of material fact (or omit information with the same result) in connection with security purchases or sales.
Federal vs. State
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The Securities Exchange Act is a federal law, and therefore applies only to securities issued, purchased and sold in interstate markets. Each individual state has its own securities laws, known informally as "blue sky laws." However, blue sky laws cover only situations in which securities do not circulate beyond state laws. Most public securities sales will fall under the purview of the Securities Exchange Act and regulation by the SEC.
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- Photo Credit new york stock exchange image by Gary from Fotolia.com
