Securities Regulation in The United States - History

History

Before the Wall Street Crash of 1929, there was little regulation of securities in the United States at the Federal level. The crash spurred the Congress to hold hearings, known as the Pecora Commission, after Ferdinand Pecora.

After holding hearings on the abuses, Congress passed the Securities Act of 1933. It regulates the interstate sales of securities and made it illegal to sell securities into a state without complying with that state's laws. It requires companies which want to sell securities publicly to file a registration statement with the U.S. Securities and Exchange Commission. The registration statement provides a broad range of information about the company and is a matter of public record. The SEC does not approve or disapprove the issue of securities, but rather permits the filing statement to "become effective" if sufficient required detail is provided, including risk factors. The company can then begin selling the stock issue, usually through investment bankers.

The following year, Congress passed the Securities Exchange Act of 1934, which regulates the secondary market (general-public) trading of securities. Initially, the 1934 Act applied only to stock exchanges and their listed companies (as the word "Exchange" in the Act's name implies). In the late 1930s, the Act was amended to provide regulation of the over-the-counter (OTC) market (i.e., trades between individuals with no stock exchange involved). In 1964, the Act was amended to apply to companies traded in the OTC market.

After these acts, courts interpreted the laws, assembling a body of United States securities case law. In 1988 the Supreme Court of the United States decided Basic Inc. v. Levinson, which allowed for class action lawsuits under SEC Rule 10b-5 and the "fraud-on-the-market" theory, which resulted in an increase in securities class actions. The Private Securities Litigation Reform Act and the state model law Securities Litigation Uniform Standards Act was a response to class actions.

In October 2000, the Securities and Exchange Commission ratified Regulation Fair Disclosure (Reg FD), which required publicly traded companies to disclose material information to all investors at the same time. Reg FD helped level the playing field for all investors by helping to reduce the problem of selective disclosure.

In 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was passed to reform securities law in the wake of the financial crisis of 2007–2008.