An Introduction to the Securities Exchange Act of 1934

In response to the stock market crash of 1929, Congress enacted the Securities Act of 1933 and the Securities Exchange Act of 1934. While the Securities Act governed the issuance of securities, the Securities Exchange Act regulated trading in the securities.

Through the Securities Exchange Act of 1934, Congress created the Securities and Exchange Commission, which regulates the securities industry. The Securities Exchange Act also made several activities in connection with securities illegal and authorized the Commission to set rules barring those activities and to penalize violators of those rules. The Act also allowed the Commission to require informational reports from companies with publicly traded securities.

Regarding reporting requirements, the Securities Exchange Act requires filing of annual and other periodic reports by companies with more than $10 million in assets and with outstanding securities held by more than 500 owners. Solicitations by companies to their stockholders for proxies in electing directors and for voting on other important corporate action must be pre-filed with the Commission. That filing will be reviewed by the Commission to check for compliance with rules of disclosure set by the Commission. Those rules require disclosure of material or significant facts regarding the matters on which stockholders will be asked to vote.

Those who wish to make a tender offer for more than 5 percent of a company’s securities must first file a copy of the proposed tender offer with the Commission which in turn will review the tender offer for compliance with regulations designed to make sure that sellers of the stock will be provided with complete information.

The Securities Exchange Act also contains important provisions barring fraud or misrepresentation in connection with the offer, purchase, or sale of securities. Rule 10b-5 of the Commission is known as the anti-fraud rule. The Act also prohibits insider trading or the selling or purchase of securities based on knowledge not available to the public.

The Securities Exchange Act, as suggested by its name, also requires registration by securities market participants with the Securities and Exchange Commission. Thus, exchanges such as the New York and American Stock Exchanges must register with the Commission, and brokers, dealers, and other entities involved in the securities markets must register with the Commission and periodically update disclosure of their activities.

The National Association of Securities Dealers and the national stock exchanges are considered self-regulatory organizations that create their own rules for disciplining their members for improper conduct. Those rules, which also are designed to protect investors, are made available for public comment and then reviewed and approved by the Commission.