“Artificial prices of securities were the rule rather than the exception.… The result was vast economic power,
with all that implies in a democracy, in the hand of men whose ethical standards were substantially those of
gangsters.”
Roosevelt wanted to enact legislature to try to prevent this wild speculation in securities from happening again
and to restore the public’s faith. He recognized that stock market crashes would not only destroy wealth in
securities markets, but they were also instrumental to the financial security of the nation as a whole. The
passing of the Security Exchange Act of 1934 was not only a reaction to the market crash, but it also
represented a broad shift in the social and economic paradigms and legal frameworks of the United States.
Previously, the United States had largely followed a laissez-faire economic policy. Laissez faire, as popularized
by Scottish economist Adam Smith and British philosopher Herbert Spencer, describes an economic
philosophy that markets function best when left to their own devices, i.e., without, or with minimal,
government involvement or regulations. The rejection of laissez faire was part of a larger social shift that
opposed the long hours, unsafe working conditions, and child labor that had become commonplace as a result
of the Industrial Revolution.
The SEC
Section 4 of the Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC) to
enforce its ongoing mission. The SEC is an independent agency of the United States federal government. It
regulates securities laws and regulations. The first chairperson of the SEC was Joseph P. Kennedy, the father of
President John F. Kennedy. The SEC is led by five presidentially appointed commissioners and has five
divisions: Division of Corporation Finance, Division of Investment Management, Division of Trading and
Markets, Division of Enforcement, and Division of Economic and Risk Analysis.
The SEC also oversees self-regulatory organizations (SROs), or private organizations that create and enforce
industry standards. These organizations are allowed to “police” themselves, but are subject to compliance
with SEC regulations. The various well-known securities exchanges such as the New York Stock Exchange
(NYSE), the National Association of Securities Dealers Automated Quotation System (NASDAQ), and the
Chicago Board of Options are SROs. Per Section 12(g), companies with total assets exceeding $10 million and
with 500 or more owners of any class of securities must register with the SEC unless they meets exemption
requirements.
The SEC makes new laws in response to emerging technologies. For example, Title III of the Jumpstart Our
Business Startups (JOBS) Act of 2012 was added, and in it, Section 4(a)(6) allows crowdfunding, or raising
small amounts of money from many people to fund a venture or project, usually over the internet.
Crowdfunding transactions are exempt from registration as long as the amount raised does not exceed
$1,070,000 in a 12-month period.
Secondary Markets
The Securities Exchange Act of 1934 governs secondary markets, or what is typically referred to as the “stock
market.” In contrast to the primary market, which involves the initial sale of a security, such as through an
initial public offering (IPO), secondary markets involve subsequent buyers and sellers of securities. One key
difference is that primary market prices are set in advance, while secondary market prices are subject to
constantly changing market valuations, as determined by supply and demand and investor expectations. For
example, when Facebook initiated its IPO in May of 2012, the price was $38 per share, and technical issues on
the NASDAQ complicated the offering. After the IPO, the stock traded sideways, meaning that it stayed within
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Chapter 14 Securities Regulation
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