What is the Securities Exchange Act of 1934?
The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC) and authorized it to govern the secondary market trading of company securities in the US. Secondary trading is the buying or selling of company securities (stock) typically through brokers or dealers. Often shortened to the Exchange Act of 1934 or the ‘34 Act, this landmark legislation laid the foundation for the financial regulation of public companies listed on stock markets including the New York Stock Exchange, American Stock Exchange and Pacific Stock Exchange.
President Franklin D. Roosevelt first signed the Securities Act of 1933 and the subsequent Securities Exchange Act of 1934 into law in the aftermath of the 1929 stock market crash. The Exchange Act of 1934 gives the SEC broad powers to enforce US federal securities law, but also investigate potential violations such as insider trading, the sale of unregistered stocks, manipulation of market prices and disclosure of fraudulent financial information. The SEC’s consumer protection powers extend to the organizations and individuals participating in the securities markets which would include securities exchanges, brokers and dealers, investment advisors and investment funds. By law and with SEC oversight, consumers and investors have access to public company registration statements, periodic reports among other securities forms through it’s Electronic Data Gathering Analysis and Retrieval database (EDGAR).
If a company has more than 500 shareholders and more than $10 million in assets, The Exchange Act of 1934 Act requires that it file annual company information with the SEC using Form 10-K as well as quarterly with Form 10-Q. If a company experiences a material event such as a change in leadership or structure, the SEC mandates the filing of Form 8-K to disclose these changes. Forms 10-K, 10-Q, and 8-K must be filed via the SEC’s EDGAR (Electronic Data Gathering, Analysis and Retrieval) system, where they are made publicly available on sec.gov. These periodic reports and annual statements are examined by the SEC to ensure that they are compliant with disclosure requirements and that the American public and investors can make informed decisions about their investment decisions.
The Exchange Act of 1934 also sets forth disclosure requirements in materials used to solicit shareholder votes in annual meetings held for approval of corporate action. The information is captured in proxy materials that must be filed with the SEC in advance of any solicitation. The SEC is charged with ensuring the company has provided all proper and accurate disclosures.
The Exchange Act of 1934 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 as such an offer could impact control of the public company.
The SEC is limited to seeking civil penalties such as fines and injunctions (barring a person from future roles such as a corporate officer). Depending on the severity or significance of the offense, the Department of Justice can file criminal charges for alleged violations of The Exchange Act of 1934.
The largest SEC fine to date was levied on JP Morgan Chase for the selling of mortgage securities by illegal means, leading to the 2012 financial crisis.