A federal GOVERNMENT regulatory agency created as part of the New Deal in June 1934 by the Securities and Exchange Act, the Securities and Exchange Commission (sec) enforced standards for securities markets and brought protection for individual investors. It did this by regulating securities trading practices and requiring the full disclosure and registration of information for securities traded on the nation’s exchanges.
Despite the disastrous stock market crash of 1929, Wall Street traders and investment bankers continued to claim that the American securities industry operated well. In fact, it had a number of legal and functional problems. Chief among these was that much trading was done in ignorance. Many companies issued no financial reports or published ones with information that was misleading or unaudited. Certain investment banks and firms held a near monopoly on reliable information concerning securities and the companies issuing them. This ignorance made individual investors and securities firms vulnerable to abuses such as misrepresentation, insider trading, and uncontrolled speculation. In 1933, the Senate’s Banking and Currency Committee, under the leadership of its chief counsel, Ferdinand Pecora, held hearings revealing criminal fraud and improper trading practices in securities markets that had contributed to the Crash. Calls for reforms of the securities industry followed the hearings.
The first step in regulating the securities industry came when Congress passed the Securities Act of 1933. The act mandated that all new securities offerings must be accompanied by accurate public information filed with the Federal Trade Commission. Then, in February 1934, President Franklin D. Roosevelt asked for legislation to take the next step and establish a regulatory agency to monitor the operations of the nation’s securities exchanges. The proposed securities and exchange bill provoked strong opposition from the securities industry, which claimed that the act would turn Wall Street into a “deserted village.” The New York Stock Exchange, said its president, Richard Whitney (later sent to prison for mishandling funds), “is a perfect institution.”
Though compromising on some of the bill’s more stringent proposals, FDR arrived at an understanding with moderates on Wall Street and the leaders of the country’s numerous regional exchanges, who were more sensitive to the need for regulation. This coalition eased the way for the passage of the Securities and Exchange Act on June 6, 1934. In addition to establishing the Securities and Exchange Commission to carry out the provisions of both the 1933 and 1934 securities legislation, the act mandated full disclosure of an issuing company’s financial information, required the verification of such data by independent auditors using accepted, standard accounting procedures, and established federal control of trading practices on the stock markets. The SEC thus had authority to regulate securities registration, exchanges, dealers, and trading. The Securities and Exchange Act also gave the Federal Reserve Board authority to regulate the sort of credit purchasing of stock that had fueled speculation leading to the 1929 Crash.
Roosevelt appointed JosEPH P. Kennedy, a wealthy businessman and Wall Street investor, as the first SEC chairman. This surprising appointment, at first likened by many observers to putting the fox in charge of the henhouse, worked well. Kennedy and his immediate successors, lawyers James M. Landis and William O. Douglas, proved effective administrators who helped ensure that securities markets operated along rational and legal lines so that investment decisions could be based upon reliable information. In the decade of the 1930s, the SEC prevented the issue of some $150 million of fraudulent securities, and by 1941 it operated 10 regional offices to oversee 20 stock exchanges and 7,000 brokers and dealers. Protecting purchasers, it also won the support of most of the financial community. The later study of government agencies by Herbert C. HooVER noted that the SEC was an “outstanding example of the independent commission at its best.”
Further reading: Michael E. Parrish, Securities Regulation and the New Deal (New Haven, Conn.: Yale University Press, 1970).
—Robert J. Hanyok
World History
