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The Securities Exchange Act of 1934 was a sweeping piece of legislation in the United States regulating the participants in the financial markets. It along with the Securities Act of 1933 are still in force today and form the base of all other regulation of the financial markets and their participants in the US. Contrasted with the Securities Act of 1933, which regulates the issuance of securities (the primary market), the Securities Exchange Act of 1934 regulates the secondary trading of those securities between persons in many cases unrelated to the issuer. Companies raise billions of dollars through the issuance of securities in the primary market--conversely, trillions of dollars are made and lost through the trading of those same securities in the secondary market. In finance, financial markets facilitate: The raising of capital (in the capital markets); The transfer of risk (in the derivatives markets); and International trade (in the currency markets). ...
The Securities Act of 1933 has two basic objectives: require that investors receive financial and other significant information concerning securities being offered for public sale; and prohibit deceit, misrepresentations, and other fraud in the sale of securities. ...
The full text of the act is available at: http://www.law.uc.edu/CCL/34Act/
Main Elements The Securities Exchange Act of 1934 (commonly referred to as "the exchange act" or "the 34 act") is primarily concerned with the actors in the secondary trading of securities.
Securities Exchanges
One area ripe for 34 Act regulation is the actual securities exchanges, or places with a physical situs where people purchase and sell securities (stocks, bonds, notes of debenture). Some of the more well known exchanges include the New York Stock Exchange, the American Stock Exchange, and regional exchanges like the Philadelphia Stock Exchange and Pacific Stock Exchange. At those places, agents of the exchange, or specialists, act as middlemen for the competing interests to buy and sell securities. One of the most important functions of the specialist is to inject liquidity and price continuity into the market. Given that people come to the exchange looking to easily acquire securities or to easily unload their portfolio of securities, the specialist's role is uniquely important to the exchange. New York Stock Exchange (June 2003) The New York Stock Exchange (NYSE), known as the Big Board, is the largest stock exchange in the world, although its trading volume was exceeded by that of NASDAQ (historic comparison graph {pdf}) during the 1990s. ...
The American Stock Exchange (AMEX) is a stock exchange operated by American Stock Exchange LLC, a subsidiary of the National Association of Securities Dealers, in the United States of America. ...
The Philadelphia Stock Exchange (PHLX) is the oldest stock exchange in the United States. ...
The Pacific Exchange is a regional stock exchange located in San Francisco, California. ...
Securities Associations
The 34 act also imagines the creation of broker-dealers without a situs trading securities. This web of communication developed with the country's telecommuications infrastructure - previously these brokers would find stock prices through newspaper printings, call each other and trade. Presently, there is an digital information network connecting these brokers. This system is called NASDAQ, standing for the national association of securities dealers automated quotation system. NASDAQ MarketSite (Times Square, New York City) at night NASDAQ (originally an acronym for National Association of Securities Dealers Automated Quotations) is a U.S. electronic stock market. ...
Self Regulatory Organization (SRO)
The 34 Act regulates NASDAQ both through regulations that apply to the association, and by requiring that it have an independant oversight organization - a self regulatating organization (or SRO). The SRO for NASDAQ is the NASD, the national association of securities dealers. The 34 Act requires virtually all broker-dealers to be registered with NASD, placing brokers under the Securities and Exchange Commission's direct oversight and under the NASD's oversight. NASD executive office on K Street in downtown Washington, D.C. The NASD (formerly known as the National Association of Securities Dealers) is the primary SRO responsible for the regulation of persons involved in the securities industry in the United States. ...
Other Trading Platforms
In the last 30 years, brokers have created two additional systems for trading securities. The automatic trading system, or ATS, is a quasi exchange where stocks are commonly purchased and sold through a smaller, private network of brokers, dealers, and other market participants. It's distinguished from either an exchange or an association in that the volumes for these trades are low comparatively, and they tend to be controlled by a small number of brokers or dealers. They act as a niche market, a private pool of liquidity. Reg ATS, a SEC regulation issued in the late 90s, requires these small markets to 1) register as a broker with the NASD, 2) register as an exchange, or 3) operate as an unregulated ATS, staying under low trading caps.
A specialized form of ATS, the Electronic Communications Network (or ECN) has been described as the "black box" of securities trading. The ECN is a completely automated network, anonomously matching buy and sell orders. Many traders make use of one or more trading mechanism (the exchanges, NASDAQ, and the ECN or ATS) to effect large buy or sell orders -- conscious of the fact that overreliance on one market for a large trade is likely to alter the buying price or selling price of their target security for the worse.
Brokers
One of the central elements of the 34 Act is in its regulation of broker-dealers. It does so principally by making the definition of broker extremely broad (section 3(a)(4)), to include "any person engaged in the business of effecting transactions in securities for the account of others." Questionable areas in the definition of broker are people who refer buyers to a broker or issuer (finders or promoters). A body of caselaw, subsequent SEC regulation, and NASD oversight places tight restrictions on 1) the commissions that brokers can receive for their services, 2) the amount of notice that brokers must give their clients when trading in securities, 3) the broker's due dilligence requirements in finding securities that meet their clients needs, and 4) the broker's obligation not to compromise their clients by disclosing or trading on material nonpublic information. SEC is a TLA which can refer to: In general context, an abbreviation for second. ...
NASD executive office on K Street in downtown Washington, D.C. The NASD (formerly known as the National Association of Securities Dealers) is the primary SRO responsible for the regulation of persons involved in the securities industry in the United States. ...
Issuers
While the 33 Act recognizes that timely information about the issuer is vital to effective pricing of securities, the 33 Act's disclosure requirement (the registration statement and prospectus) are a one time affair. The 34 Act extends this requirement to securities traded in the secondary market. So - provided that the company is above a certain number of shareholders and has a certain amount of assets (500 shareholders, above 10 million in assets (see 34 Act, section 12, 13, and 15)) the 34 Act requires that issuers regularly file company information with the commission on certain forms (the annual 10k filing, and the quarterly 8k filing)--which it makes available to the public. If something dramatic happens with the company (change of CEO, change of auditing firm, destruction of a significant number of company assets) the commission requires that the company -- in short order -- issue an 8k filing that reflects these changed conditions (See Reg FD). With these regularly required filings, buyers are better able to assess the worth of the company, and buy and sell the stock according to that information.
Antifraud Provisions (Section 10b, 10b-5)
While the 33 Act maintained an antifraud provision (section 27) when the 34 act was promulgated, questions remained about the reach of that antifraud provision, and whether a private right of action existed for purchasers (meaning that ordinary people could sue the bad actor, rather than the government alone). As it developed, section 10(b) of the 34 Act and Rule 10b-5 have sweeping antifraud language ("To use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device") that has been used to penalize all patented and novel forms of self dealing and manipulation.
See also
The Securities Act of 1933 has two basic objectives: require that investors receive financial and other significant information concerning securities being offered for public sale; and prohibit deceit, misrepresentations, and other fraud in the sale of securities. ...
The U.S. Securities and Exchange Commission, commonly referred to as the SEC, is the United States governing body which has primary responsibility for overseeing the regulation of the securities industry. ...
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