The US Congress created the Securities and Exchange Commission through the Securities Exchange Act of 1934. This act empowers the Securities and Exchange Commission and grants it broad authority over all the aspects of the securities industry.
Securities Industry in the United States
Traditionally, three types of organizations have been a part of the securities industry. They include investment banks, brokerage firms, and exchanges. The investment banks carry out the services related to the public offering of the stocks and bonds of a corporation; brokerage firms manage the sale and purchase of securities and exchanges provide a means for setting prices and actually conducting transactions. In the United States, the Securities industry developed to help young American businesses receive financing from European investors. However, even now it continues to bring investors and those needing capital together. Several forces have together shaped the securities industry in the United States including user demands, national policy objectives related to the financial service industry, practical operational concerns, as well as competitive market forces. The basic role that the securities industry in the US fulfilled during the 1700s is still a major driving force behind its operations. It still fills the same intermediary role of bringing investors closer to the players needing capital.
Securities Exchange Act of 1934
Apart from giving the SEC the power to register, regulate and oversee the brokerage firms, transfer agents, and clearance agencies, the Act also gives SEC control over the nation’s securities Self Regulatory Organizations or the SROs. SROs include stock exchanges like the NewYork Stock exchange and the NASDAQ stock market as well as the Financial Industry Regulatory Authority (FINRA).
Certain types of actions and conduct are prohibited in the market under this act. The Securities Exchange Act of 1934 also offers the SEC the disciplinary powers in this regard over the regulated entities and persons associated with them. Under this Act, the companies with publicly traded securities are required to report information periodically to the SEC.
The act requires companies having more than $10 million in assets with more than a specified number of holders holding their equity securities to file annual and other periodic reports. The public can access these reports through the EDGAR database of the Securities and Exchange Commission.
(The full form of EDGAR is Electronic Data Gathering, Analysis, and Retrieval. It is the system that the Securities and Exchange Commission uses to receive submissions from companies and others that are required to file information with the SEC.)
Business entities use materials to solicit shareholders’ votes during the annual or special meetings that they hold for the election of the directors or for the approval of any other significant action. The disclosure in these materials is also governed by the Securities Exchange Act of 1934. Companies are required to remain compliant with the disclosure rules of the Commission. To stay compliant, the companies should file any information included in these proxy materials in advance with the commission. Apart from that, the solicitations whether made by the management or the shareholder groups should disclose all the important information related to the issues on which shareholders’ have been asked to vote.
If anyone seeks to acquire more than 5% of a company’s securities through direct purchase or tender offer, he is required to disclose important information under the Securities Exchange Act of 1934. Mostly people or companies make such offers in an effort to gain control of the company. Disclosure of information allows the shareholders to make well-informed decisions during such critical corporate events.
Under the Securities Exchange Act of 1934, any type of fraudulent activity related to the offer, sale or purchase of securities is prohibited. The act includes several provisions for disciplinary action including action against fraudulent inside trading. Insider trading is illegal if a person trades a security while having access to material nonpublic information, which is in violation of his duty to keep the information secret or to refrain from trading. The availability of material non-public information gives the trader in possession of that information an unfair advantage over the other traders. Most types of insider trading have been deemed illegal by securities law. So, the Securities and Exchange Commission with the required disciplinary powers regularly carries out investigations in this regard and prosecutes fraudulent action.
Registration of Exchanges, Associations and Others:
The Securities Exchange Act of 1934 requires the market participants including exchanges, brokers and dealers, transfer agents, and clearing agencies to register with the commission. As a part of their registration, the organizations should file disclosure documents that also need to be updated on a regular basis. The act also requires the SROs including FINRA and the exchanges to create rules to discipline members accused of improper conduct. The SROs are also required to establish measures that ensure market integrity and investor protection. The SROs propose rules which are first published for comment before they are reviewed by the Securities and Exchange Commission finally.