Table of Contents:
THE SECURITIES EXCHANGE ACT OF 1934
The Securities Exchange Act of 1934 was the second major piece of legislation that resulted from the market crash of 1929. The Securities Exchange Act regulates the secondary market that consists of investor-to-investor transactions. All transactions between two investors that are executed on any of the exchanges or in the over-the-counter (OTC) market are secondary market transactions. In a secondary market transaction, the selling security holder receives the money, not the issuing corporation. The Securities Exchange Act of 1934 also regulates all individuals and firms that conduct business in the securities industry. The Securities Exchange Act of 1934:
• Created the SEC.
• Requires registration of broker dealers and agents.
• Regulates the exchanges and FINRA.
• Requires net capital for broker dealers.
• Regulates short sales.
• Regulates insider transactions.
• Requires public companies to solicit proxies.
• Requires segregation of customer and firm assets.
• Authorizes the Federal Reserve Board to regulate the extension of credit for securities purchases under Regulation T.
• Regulates the handling of client accounts.
THE SECURITIES AND EXCHANGE COMMISSION (SEC)
One of the biggest components of the Securities Exchange Act of 1934 was the creation of the SEC. The SEC is the ultimate securities industry authority and is a direct government body. Five commissioners are appointed to five-year terms by the president, and each must be approved by the Senate. No more than three commissioners may be from any one political party. The SEC is not a self-regulatory organization (SRO) or a designated examining authority (DEA). An SRO is an organization that regulates its own members, such as the NYSE or FINRA. A DEA inspects a broker dealer's books and records and can also be the NYSE or FINRA. All broker dealers, exchanges, agents, and securities must register with the SEC. All exchanges are required to file a registration statement with the SEC that includes its articles of incorporation, bylaws, and constitution. All new rules and regulations adopted by the exchanges must be disclosed to the SEC as soon as they are enacted. Issuers of securities with more than 500 shareholders and with assets exceeding $5,000,000 must register with the SEC, file quarterly and annual reports, and solicit proxies from stockholders. A broker dealer that conducts business with the public must register with the SEC and maintain a certain level of financial solvency known as net capital. All broker dealers are required to forward a financial statement to all customers of the firm. Additionally, all employees of the broker dealer who are involved in securities sales, have access to cash and securities, or who supervise employees must be fingerprinted.
EXTENSION OF CREDIT
The Securities Act of 1934 gave the authority to the Federal Reserve Board (FRB) to regulate the extension of credit by broker dealers for the purchase of securities by their customers. The following is a list of the regulations of the different lenders and the regulation that gave the Federal Reserve Board the authority to govern their activities:
• Regulation T: Broker dealers
• Regulation U: Banks
• Regulation G: All other financial institutions