Securities Exchange Act of 1934 (2024)

The Securities and Exchange Act of 1934 ("1934 Act," or "Exchange Act") primarily regulates transactions of securities in the secondary market. As such, the 1934 Act typically governs transactions which take place between parties which are not the original issuer, such as trades that retail investors execute through brokerage companies. In contrast, the Securities Act of 1933 prior to the Exchange Act established regulations for issuers and listings on the primary market.

Disclosures

To protect investors, Congress crafted a mandatory disclosure process designed to force companies to disclose information that investors would find pertinent to making investment decisions. In addition, the Exchange Act regulates the exchanges on which securities are sold. Regulation FD is the primary section of the Exchange Act which discusses disclosures.

Reporting Requirements

The required disclosures and forms of disclosure vary depending on the situation and the registrant. In general, under Section 13(a) of the Exchange Act (codified in 15 U.S.C. § 78m), companies with registered publicly held securities and companies of a certain size are called "reporting companies," meaning that they must make periodic disclosures by filing annual reports (called a Form 10-K) and quarterly reports (called a Form 10-Q). Reporting companies must also promptly disclose certain important events (called a Form 8-K). These periodic reports include or incorporate by reference types of information that would help investors decide whether a company's security is a good investment. Information in these reports includes information about the company's officers and directors, the company's line of business, audited financial statements, and the management discussion and analysis section.

The Exchange Act also mandates disclosure at certain crucial points so that investors can make an informed decision before purchasing stock. Sections 14(a)-(c) (codified in 15 U.S.C. § 78n(a)-(c)) govern disclosure during proxy contests, when various parties might solicit an investor's vote on a corporate action, or to vote for certain board members. All disclosure materials must be filed with the SEC.

Tender Offers

The Securities Exchange Act requires disclosure of important information by anyone seeking to acquire more than 5 percent of a company's securities by direct purchase or tender offer. Such an offer often is extended in an effort to gain control of the company. If a party makes a tender offer, the Williams Act governs (codified as 15 U.S.C. § 78m(d)-(e)). A tender offeror must also file disclosure documents with the SEC that disclose its future plans relating to its holdings in the company. This information allows investors to decide whether to sell or not.

Securities and Exchange Commission

Section 4 of the Exchange Act established the Securities and Exchange Commission (SEC), which is the federal agency responsible for enforcing securities laws.

SEC Required Disclosures

One important function of the SEC is to ensure that companies meet the Exchange Act's disclosure requirements. Companies with more than $10 million in assets whose securities are held by more than 500 owners must file annual and other periodic reports with the SEC. The Commission makes this information available to all investors through EDGAR, its online filing system. The SEC enforces statutory disclosure requirements bringing enforcement actions against companies that disseminate fraudulent or incomplete information in violation of federal securities laws.

SEC's Regulatory Responsibilities

The SEC is also responsible for registering and establishing rules regulating the conduct of market participants, stock exchanges, and self-regulatory organizations (SROs). Under the Exchange Act, the SEC can sanction, fine, or otherwise discipline market participants who violate federal securities laws. The SEC can also issue rules pursuant to specific statutory provisions, to help effectuate those provisions.

Under the Exchange Act, market participants are subject to direct SEC regulation. Securities exchanges, such as the New York Stock Exchange and NASDAQ, must register with the SEC under Section 5 (codified in 15 U.S.C. § 78e) and Section 6 (codified in 15 U.S.C. § 78f).

These registration documents help the SEC monitor the markets for trading activity that might indicate that market participants are violating securities laws (such as insider trading). To further this goal, all securities traded on the securities exchanges must be registered under Sections 12(a) and 12(b) of the Exchange Act (codified in 15 U.S.C. § 78l(a)-(b)), with the issuers of the securities disclosing comprehensive information about themselves in the registration process.

Self-Regulatory Organizations

In addition to directly regulating the markets, the SEC oversees SROs, which in turn exercise independent oversight over the markets. Nearly all broker-dealers must register with FINRA, the most prevalent SRO (responsible for the regulation of broker-dealer firms and securities brokers). The SEC also directly regulates SROs, requiring that SROs develop specified rules and standards of good practice for their members, pursuant to SEC directives. This joint supervision of broker-dealers and their employees is extremely important to investors, because it ensures that broker-dealers and their employees are sufficiently qualified and that firms keep accurate, truthful records. Broker-dealer firms and employees who violate the FINRA standards of conduct are subject to disciplinary action by FINRA.

Some Prohibitions On Fraud

The Exchange Act also protects investors by prohibiting fraud and establishing severe penalties for those who defraud investors, as well as those who engage in some trading practices that take advantage of information most investors do not have (such as insider trading). When market participants violate federal securities laws, the SEC can bring a civil enforcement action. The SEC or Department of Justice can also bring criminal actions for particularly serious violations. The Exchange Act also allows investors to sue market participants who have defrauded them.

Section 10(b)

Section 10(b) (codified in 15 U.S.C. § 78j) is the primary anti-fraud statutory provision. The SEC primarily enforced this anti-fraud provision under Rule 10b-5, which prohibits the use of any "device, scheme, or artifice to defraud." Rule 10b-5 also imposes liability for any misstatement or omission of a material fact, or one that investors would think was important to their decision to buy or sell a security.

The U.S. Supreme Court recently expounded on 10(b) in a pair of cases. In 2007 determined the requisite specificity when alleging fraud. With Congress requiring enough facts from which "to draw a strong inference that the defendant acted with the required state of mind," the Supreme Court determined that a "strong inference" means a showing of "cogent and compelling evidence." In the 2007-2008 term, the Supreme Court determined that 10(b) does not provide non-government plaintiffs with a private cause of action against aiders and abettors in securities fraud cases, either explicitly or implicitly (see Stoneridge v. Scientific-Atlanta (06-43) (2008)).

Section 9

Section 9 (codified in 15 U.S.C. § 78i) allows investors to sue for trading activities and patterns of trading conduct that cause investors to think that a stock is doing better or worse than it actually is, or is traded more frequently than it actually is, or that create the appearance of a stable price. These activities mislead investors about the true value of a security, and thus induce the investors to trade. Section 9(e) gives investors an explicit cause of action to sue buyers or sellers who manipulate the price of any security traded on a stock exchange. Claims under Section 9, however, are difficult to prove, since investors must show that the price was actually affected by the manipulation, and that the defendant acted willfully.

Section 20

Section 20 (codified in 15 U.S.C. § 78t) provides for joint and several liability for people who control or abet violators of the Exchange act, thus increasing the chance that an investor will be able to collect any damages that are awarded. Thus, if an employee violates a provision of the Exchange Act, the employer could be held liable. Similarly, if an individual encourages another to violate a provision of the Exchange Act, that individual could be held liable.

Further Reading

For more on the Securities Exchange Act of 1934, see this St. John's Law Review article, this Fordham Law Review article, and this Columbia Undergraduate Law Review article.

[Last updated in October of 2023 by the Wex Definitions Team]

Securities Exchange Act of 1934 (2024)

FAQs

Securities Exchange Act of 1934? ›

The Securities Exchange Act requires disclosure of important information by anyone seeking to acquire more than 5 percent of a company's securities by direct purchase or tender offer. Such an offer often is extended in an effort to gain control of the company.

What did the Securities Exchange Act of 1934 do? ›

The Securities Exchange Act of 1934 regulates secondary financial markets to ensure a transparent and fair environment for investors. It prohibits fraudulent activities, such as insider trading, and ensures that publicly traded companies must disclose important information to current and potential shareholders.

What was the purpose of the Securities Exchange Act of 1933? ›

The Securities Act of 1933 (as amended, the “Securities Act”) was passed to ensure that investors have financial and other important information about securities that are being sold publicly. It also bans the use of fraud, deceit, and misrepresentation in the sales of securities.

What was the goal of the Securities Exchange Act? ›

The legislation had two main goals: to ensure more transparency in financial statements so investors could make informed decisions about investments; and to establish laws against misrepresentation and fraudulent activities in the securities markets.

What does the Securities Exchange Act of 1934 provide for the regulation of? ›

An act to provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes. 15 U.S.C. § 78a et seq.

What power did the Securities Exchange Act of 1934 gave the SEC? ›

Through the Exchange Act, the SEC gained the authority to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies.

What is the SEC and why was it created? ›

The SEC was established by the passage of the U.S. Securities Act of 1933 and the Securities and Exchange Act of 1934, largely in response to the stock market crash of 1929 that led to the Great Depression.

What is the difference between Securities Act of 1933 and 1934? ›

What is the difference between the 1933 Securities Act and the 1934 Securities Act? The key difference is that the SEC Act of 1933 focuses on guidance for newly issued securities while the SEC Act of 1934 provides guidance for actively traded securities.

What is the purpose of the Securities Exchange Act of 1934 quizlet? ›

The Securities Exchange Act of 1934 regulates the securities markets, with the main intent being to prevent fraud and manipulation. It also created the SEC as the regulatory authority over the markets and market participants.

Was the Securities Exchange Act of 1934 successful? ›

It proved to be beneficial for almost everyone, businesses and investors. It created better conditions for American businesses and a fairer market for American investors (The Best New Deal Agency). The only complaints came from the few businesses that had previously been benefiting from the system being fixed.

Does SEC still exist today? ›

Is the SEC Still Around Today? Established after the stock market crash of 1929 to restore public confidence in financial markets, the SEC has been operating for over 85 years. Today, it continues to carry out its original mission to protect investors through the regulation and enforcement of securities laws.

Did the Securities Exchange Act create the SEC? ›

The SEC is an independent federal agency, established pursuant to the Securities Exchange Act of 1934, headed by a five-member Commission. The Commissioners are appointed by the President and confirmed by the Senate.

How did the Securities Exchange Act regulate the stock market? ›

Securities and Exchange Act of 1934 -- The primary goal of the Act was to regulate the post-distribution trading of securities by providing continuing information about issuers whose securities are traded in public marketplaces, authorizing remedies for fraudulent actions in securities trading and manipulation of the ...

How does the Securities Exchange Act of 1934 address the issue of insider transactions? ›

The 1934 Act addressed insider trading directly through Section 16(b) and indirectly through Section 10(b). Section 16(b) prohibits short-swing profits (profits realized in any period less than six months) by corporate insiders in their own corporation's stock, except in very limited circ*mstance.

Does the Securities Exchange Act of 1934 regulate futures? ›

The CEA and the Securities Exchange Act of 1934 require that securities underlying security futures products must be common stock or other equity securities as the CFTC and the SEC jointly deem appropriate.

What did the Securities Exchange Act of 1934 focus on quizlet? ›

The Securities Act of 1934 focuses on the: secondary market. The Securities Act of 1934 regulates the sale of securities by investors after the investor has purchased it from an issuer.

What is the Securities Exchange Act of 1934 quizlet? ›

The Securities Exchange Act of 1934 governs the rules for agents, broker dealers and securities that trade on the secondary markets. In an attempt to provide a fair and orderly market for investors, the Act also determines the laws that regulate the exchanges and their participating broker-dealers.

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