Securities and Exchange Commission: Responsibilities

The SEC administers a number of the most important reform measures of the New Deal: the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, the Trust Indenture Act of 1939, the Investment Company Act of 1940, and the Investment Advisers Act of 1940. In addition it may act as a participant in corporate reorganizations in the federal courts under the National Bankruptcy Act.

The first three of these statutes were passed in response to the pressure for greater protection of investors that developed as a result of the drastic decline in values of securities after Oct., 1929, the revelation of fraudulent and unfair practices in the sale of stocks and bonds, and the widespread belief that such practices had contributed to the severity of the Great Depression of the 1930s.

The Securities Act of 1933 is intended to compel full disclosure to investors of material facts about securities offered and sold in interstate commerce or through the mails. It requires that before an issue of securities may be offered for public sale the issuer must file with the SEC a registration statement giving complete information on such securities and on the issuing company. Dealers in securities must provide their customers with a condensation of the data in the statement. The SEC examines the statement and may refuse registration if it appears to be misleading, inaccurate, or incomplete. If registration is denied, the securities may not be offered for sale. However, an approval of the statement is not a finding by the SEC that the securities have investment value, or even a guarantee that the disclosures are accurate.

The Securities Exchange Act of 1934 is designed to increase the information available to investors and to prevent unfair practices in U.S. stock exchanges. It requires that certain current information be made public on the financial and managerial condition of corporations whose securities are traded in the exchanges. A registration statement containing such data for each listed security must be submitted to the SEC. The act also places the stock exchanges and over-the-counter markets under the SEC's supervision. Stock exchanges, brokers, and dealers must file information about themselves with the commission. Manipulative practices and false and misleading statements are prohibited. Other practices, such as short sales and market pegging, are regulated. Officers, directors, and principal stockholders of corporations whose securities are registered must report all their transactions in equity securities of their companies. The Board of Governors of the Federal Reserve System is responsible for regulating by means of margin requirements the use of bank credit to finance trading in securities.

The Public Utility Holding Company Act regulates the financial practices of holding-company systems controlling electric and gas utilities. It provides for registration of holding companies, elimination of uneconomic holding-company structures, and supervision of their transactions in securities and of certain of their financial practices. The SEC must pass upon all plans for reorganization of such companies or their subsidiaries and must require the corporate simplification and geographic integration of holding-company systems. However, it does not regulate public-utility rates. This act was upheld by the Supreme Court in 1946.

The Trust Indenture Act requires that securities of trustees meet satisfactory standards, and it also sets up qualifications for trustees. The Investment Company and Investment Advisers acts provide for registration and regulation of investment trusts, investment companies, and investment advisers.

The various laws administered by the SEC are intended to give investors a greater degree of safety in entrusting their money to enterprises than was previously afforded them. With these laws the emphasis in determining responsibility for the quality and condition of goods sold has shifted from the buyer to the seller. However, the statutes do not guarantee investors against loss. It is perhaps no more difficult for them to lose their money than before. The regulatory measures were at first bitterly opposed by the financial community, on the ground that they imposed such severe limitations and liabilities on security issuers and dealers as to impede the financing of industry. Persons aggrieved by the decisions of the SEC have a right of review by a U.S. circuit court of appeals. The original penalties of the Securities Act of 1933 were softened in 1934.

Sections in this article:

• Introduction
• Responsibilities
• Bibliography

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