Securities Regulation

    The selling and trading of securities is a business that trades upon the hopes of its customers. This creates serious moral and legal problems.

     Securities markets are among the most important means of allocating resources among competing companies, and have been throughout this century. they found it difficult to regulate themselves, however. One of the results was the Great Depression, which eventually caused public opinion to turn in favor of Federal regulation. The first federal law in this area was the Securities Act of 1933, Which regulates the way new securities are offered to the public. The 1933 Act attempted to ensure that any investor would have access to full and accurate information about all securities sold in interstate commerce. It was meant to help individual investors make rational choices and thus to make financial markets more efficient.

     The Securities Exchange Act of 1934 was mainly intended to regulate secondary distribution. To that end, the 1934 Act created the SEC, which also enforces other securities laws. The 1934 Act provides for registration of the securities exchanges, stock brokers, and dealers involved in interstate commerce, and of fairly large companies involved in interstate commerce. The 1934 Act also requires companies that fall under its authority to file regular reports with the SEC.

     In addition, the 1934 Act prohibits the use of insider information. Since the early 198Os, however, mere possession of insider information has not required those who possess it to disclose the information or to refrain from trading securities whose value might be affected by it. These obligations exist only for persons who have a fiduciary relationship with the party that might be injured by a failure to "abstain or disclose. "

     Section 16b deals with corporate officers, directors, and 10% shareholders who have insider information by virtue of their positions. This section, which prohibits such people from making "short-swing" profits, is today regarded as old-fashioned.

     The regulation of securities markets attracted little interest in the 1940s and 1950s. But during the 1960s, American industry's need for new capital boomed and, along with it, the volume of the securities business. In 1963, the SEC asked Congress for a number of new powers, especially over OTC trading. Congress agreed in 1964. Five years later, Congress amended the 1934 Act so that anyone who now attempts to take over a company must make his intentions public. During the next decade, new rules began the process of tying all of this country's securities exchanges and markets into a single system.