The trading of securities of companies under the then state law was not sufficient to ensure order and curb irregularities in the issuing and trading of securities. It was this dissatisfaction that made congress introduce a law on security. The result was then the enactment of the “security exchange act of 1934”. This paper intends to give an analysis of the US security and exchange act of 1934. The paper is going to describe the act, giving its history together with its current existence. The paper will also talk about the ethical issues surrounding the legislation; analyze its efficacy as well as its implementation. The paper will also carry out an evaluation analysis of the law and look into recommendations on the subject legislation.
The Us Securities and Exchange Act of 1934
The origin of the regulations on security trade can be attributed to the unfair conditions that the capitalist economies implied on their neighboring western nations. This instigated the need to organize the trade in securities into a regulated market. The trade-in securities were a venture of the earlier generations. The regulations on the trade are also a long-time venture almost like the security trade itself. It is noted that regulations on trade were observed in the US from as early as the nineteenth century. In a bid to control the security trade, Massachusetts had by the year 1852 enacted regulations that ensured registration of railroad securities.
More of the American states adopted similar regulations on securities during the interface of the nineteenth century and the twentieth century. The first significantly formal legislation on securities was in the United States established in Kansas. The subject law was established in 1911 to protect investors who were unknowingly being swayed into buying securities whose assets never existed in the actual sense.
Kansas required the registration of the shares as well as the people who traded the shares. The Kansas legislation was a major development that not only sought to mitigate fraud but also to regulate the general activities and conduct of firms that traded or wished to trade their securities. The regulation was achieved by baring the sales of securities whose owners engaged in unethical or unlawful conduct. The conduct could either be “unfair, unjust, inequitable or oppressive” (WDFI 1). Many states replicated the Kansas move of the securities’ legislation (WDFI 1).
The then state legislations were however not concrete and faced challenges in the federal laws. Moves were then made in 1929 to consolidate the state laws into a federal act. A stock market crisis occurred in the same year and gave rise to the senses that saw the establishment of the “securities act of 1933”. This particular act required the registration of newly introduced securities as well as the provision of full substantial information about the issuer of the security and to protect the security market from unfair competition within itself.
The security and exchange act was then enacted in 1934 to supplement the provisions of the act of 1933. It was in its compliment meant to subject the issuer of securities to continuously publicize material information regarding their institutions. It has since been followed by a series of acts to enhance it but its motive has remained the same. The act is currently effective under the 2002 uniform securities act that became operational in the year 2009 (WDFI 1; SEC 1).
The security and exchange act does not expressly indicate ethical issues. It however subjects a variety of its articles to a code of ethics. The implied code of ethics demanded that every security issuer has to adopt a code of conduct. The workers of the issuer, “directors, officers and employees” (WDFI 1) are to be subject to the code. The issuer’s adopted code has to be satisfactory and any provision for a waiver for the company’s directors or other officers must have the board’s approval and must immediately be reflected on the issuer’s disclosure.
It is also provided that general ethical conduct must be observed by the above-named parties whether or not a code has been established. It also provides for protection against over-reporting of unethical behavior, a provision meant to ensure observance of the general code. A code adopted by an issuer must satisfy the provisions of the “Sarbanes-Oxley” act and must involve measurements to solve conflicting interests ethically.
Also inclusive in the issuer’s code are material disclosures and adherence to the rules and regulations provided by the “Sarbanes-Oxley” act. The issuer’s waiver on its workers in the above-mentioned category is however limited by the above-mentioned act. The issuer’s code must therefore provide in its code the extent of limitations to such waives. The waivers on an issuer’s employees must upon necessity only be made by the board. This is to help ensure the investors’ interests are properly safeguarded (Nasdaq 2).
The ethical issues of the securities and exchange act also require organizations to set up mechanisms of ensuring self-regulation. The mechanisms set by an organization must include the purpose for the establishment as well as the legal basis of the proposed regulatory mechanism. An organization’s self-regulatory mechanism must also contain a “statement on the burden on competition, statements on comments members and other participants over the proposed changes brought by the new regulations time” (Nasdaq 5). An organization’s self-regulatory provision must also include a statement of the duration put for the commission to the proposed regulation, how effectiveness will be summarized, interdependency with other self-regulatory organizations as well as exhibits (Nasdaq 5; Schapiro 1).
Efficacy of the Securities and Exchange Act 1934
Efficacy is the capacity to achieve objectives. The securities and exchange act of 1934 was a result of inefficiencies in the securities markets that saw the exploitation of investors either by issuer’s malice or by brokers’ frauds. Its objective to put an order in the securities market together with the changes experienced thereafter can be a basis for measuring the efficacy of the act. Charles on recounting achievements noted that the act of 1934 made progress in the stability of financial institutions and markets. One of the achievements of the act involves the issuer’s disclosure of information to potential investors.
The provisions of the act have ensured that any company that trades its securities in the stock exchange market discloses the true information surrounding the company. The mandatory disclosure includes the financial accounts of the issuer, information on the securities being offered as well as the risks involved in being a party to the particular shares. It was formerly the duty of an investor to look for information about both the company issuing the shares and particular shares. This did not only subject the investors to insufficient information but exposed them to the manipulation of the issuing company who could provide a false implication about its shares to lure investors into buying them.
Furthermore, the companies could withhold substantial information that could be critical to investors’ decision-making. The act however reversed the informative role to the issuers of the securities by stipulating that they must publicize all material information before their being enlisted in the stock market and continuously submit emerging necessary details of their companies and the shares. The provision has expressly put the liability on the issuer if an investor makes a decision and buys a company’s share only to realize that there existed information that could have otherwise affected his or her decision and that particular information was not available to the investor in the legally necessary way.
This has since stopped the exploitation of investors by the issuers based on misinformation and or lack of information that is deemed material in the investor’s decision making. The act also puts the responsibility on the individuals involved in the trading of stock to accord investors a just, fair, and ethical treatment. The act regards to conflict of interest as a disadvantage to the investors and provides that such conflict should not arise in the stock market. The act prohibits a broker from using information about price changes of various securities to benefit themselves. The brokers could formerly use their information on the stock market prices, influence the prices, and then take advantage of the buying and selling of the shares to profit themselves (Light 148).
The act has also ensured efficacy by giving the securities exchange commission the powers to instigate prosecutions of both issuing companies and individuals in the stock markets who break the provisions of the acts. Numerous prosecutions have been successfully made to curb insider trading and fraud and the results have immensely helped in reducing irregularities as prescribed by the act. The securities exchange commission (SEC) under the act has also ensured that investors have sufficient information that they need. Apart from SEC ensuring that all issuers publicize the material information about their companies as well as their shares, it also provides education on securities investments. This is achieved through its publications on the internet and other media (Light 149).
Ramirez also cites the efficacy of the securities and exchange act as a positive experience that the act has brought since congress passed it in 1934. He argues that the act has enabled securities traders to make informed decisions while investing in securities. The disclosure of information by the issuers as provided by the act provides an analytical ground for the investors to determine the particular securities that best fit their investment needs. The act as well provided the courts with a basis for investor protection. The courts applied the provisions of the act to the extent of all unfair treatments of the investor by brokers and any unjustified act that breaches the investors’ confidence in the brokers. These moves have played an integral part in achieving the act’s role of protecting the securities investors (Ramirez 1).
The act’s inclusion of the “proxy” solicitation has also succeeded in safeguarding the investors in the listed companies. This protects the shareholders from the managements’ imposition of opinions and decisions. It provides that before shareholders’ meetings; the shareholders must be given statements of information regarding matters that will require the shareholder’s opinions during the meetings.
The provision ensures that the shareholders are accorded enough time to deliberate and make informed decisions that pertain to their contributions in the meetings. It is important to note that if a company’s management was to introduce an issue to be deliberated immediately, then the shareholders will not have sufficient opportunity to look into the issue and the management would have the advantage to influence the shareholders into a decision that is not of the shareholder’s interest. The act has therefore in this aspect succeeded in protecting the investors from the managements’ self-interests. The protection is further extended to investors among themselves. It protects investors with minor influence in terms of shareholding from major investors of a particular company.
The proxy statements just like the other material information are submitted to the Securities and Exchange Commission and any breach or misinformation arising from the proxy is treated just like a breach in the general material information provisions. The act also governs take-over bids to ensure that no single shareholder is taken advantage of in the process of the takeovers. The act as well requires that the shareholders of the affected company be given a prospectus in due time.
The Securities and Exchange Commission has since the enactment and under the provision of the act made laws that protect investors from security price manipulations. In general, the act has been efficiently implemented to effectively protect the securities investors in many of the aspects that were formerly used to exploit them through theft and manipulation (Law 1).
Implementation of the Act
The Securities and Exchange Commission is a body that was established by legislation to look into federal laws that pertain to securities. The body is charged with the responsibility of implementing legislation that falls under securities. In its mandate, the Securities and Exchange Commission is responsible for the administration of the legislation dealing with the securities market. In this view of its mandate, the commission is seen as the implementing body and its processes therefore deemed implementation process for the regulations that fall under it. The securities and exchange act was therefore legislation for the commission.
The implementation of this subject act can therefore be identified as the processes and procedures that have since been undertaken by the commission to meet its intentions. The commission’s final verdicts over the act can range from seeking an injunction over activities that contravene the securities and exchange act, “suspending or even revoking” certificates of operation of parties to the stock market like “brokers, dealers, companies, and advisers” (SEC 1) when they contravene the act. The commission may also recommend a case to the criminal court for a formal hearing. The first step in implementation by the commission is the investigative step.
At this stage, the commission will seek and interrogate witnesses to establish if an aspect of the act has been contravened. The process can at times call for the need to compel a witness to testify. Upon instigation of violation of the act, the commission establishes a hearing upon which a directive will be given. The hearings at this level are presided over by a judge who in this circumstance is independently employed by the commission for the purpose.
The judge will then give a ruling which upon appeal by either of the parties to the conflict, or at the discretion, may be reviewed by the commission. It has been noted that cases relating to “suspension, revocation or denial” of registration are subject to be reviewed by the commission. The commission currently has powers to impose fines and other sentences of civil nature. The decision by the commission is however subject to reviews by appeal courts upon appeals made by parties to its hearings (legal 1).
According to SEC, there exists a department of enforcement that is charged with the responsibility of enforcing laws related to violation of securities provisions. The department, on behalf of the commission, can either instigate the proceedings in a legal court system or before an “administrative law judge”. In either case, the enforcement department will in conjunction and consultation with the federal law enforcement bodies, prosecute the cases. The department privately carries out investigations using mechanisms, some of which are internally instituted within itself, before presenting the results of investigations to the commission.
The commission will then decide as to whether the case should adopt a formal court hearing or if it is to be taken before an administrative judge. This is only done if the parties at this level have not reached a consensus over the dispute. There are cases when the parties can agree on settlements and in such cases trials are not instigated. Cases are majorly referred to the federal courts when injunctions by court order are sought.
The injunctions may involve barring or suspending activities or personalities from activities or offices. Penalties involving monetary implications can also be referred to the courts. Proceedings are taken to an administrative judge if the penalty sought is only restricted to sanctions. The judge makes recommendations to the commission which can either be upheld or be reviewed by the commission upon an appeal of either of the parties or if the commission deems it necessary (SEC 1).
Evaluation refers to an analysis of a subject to draw out perceptions or predictions on the particular subject. The analysis looks at the achievements and failures that can be attributed to a particular issue to aid in determining whether the advantages outweigh the disadvantages or the other way round. It is first of all important to note that the securities and exchange act was overwhelmingly passed by both of the legislative houses.
An opinion poll in line with the voting that passed the act would indicate the popularity of the bill. If other factors like party politics were to be eliminated then one would by then present the view that the established act could help in its area of jurisdiction. The acknowledgment of the strength of the securities market in 1995 as the best globally was an indication of how effective the market was being managed. The fact that the security market is structurally under the supervision of the securities and exchange commission which monitors the market to enforce the provisions of the securities and exchange act brings the act into perspective.
The establishment of the act laid down a foundation upon which theft and mistrust would be eliminated. An evaluation of the act would entail an analysis of every one of its aspects and the effects that they brought henceforth.
The security and exchange act played an important role in creating confidence among investors. This confidence encouraged people to invest as fears of losing money to brokers and dishonest companies were stopped. The confidence together with informed choices that the investors could make as a result of disclosure enhanced economic growth. A detailed analysis of the act in terms of its clauses would therefore be appropriate but a summary would suffice.
The regulations of the Securities and Exchange Commission have been a key to the progressed investment. The commission’s origin of mandate and authority is a product of the securities and exchange act, therefore, renders the due credit to the act. It can therefore be taken by implication that the provisions of the act that required full disclosure of material information about an issuer helped the investors in arriving at the good investment decisions that have been witnessed in the economy. Formerly, the brokers and issuers of securities would provide misleading information to the investors who would then lose their money in theft or nonprofit-making companies.
The result was investments in unproductive grounds that led to a slow to the almost stagnating economy. The result of the act on disclosure brought the fairground that enabled the investors to identify the most productive securities to invest in. This led to more profitability in the issuer companies who were able to consolidate more capital for investment. The investors on the other hand had increased income from the interest accumulated from the securities. The net effect on the economy was increased per capita income and eventually a larger gross domestic product. The increased protection of investors as provided by the act was also a major contribution.
The element of the act laid full responsibility on the part of the broker or the issuer whenever the investor could point out that material information was not provided. The further restitution that an investor is compensated by the offender or a stiffer penalty ensured that ethics prevailed in the stock market. This also boosted investor confidence by reducing malpractices in the security market.
The implementation of the act has however to date faced criticism from a range of people and entities. Picard reports that there have been protests over some of the legislative exemptions offered to the Securities and Exchange Commission. The critics for example claim that the protection act that exempts the commission from disclosing information to the public is a dangerous clause. There have even been legislative attempts to repeal the clause.
This is just but one of the many moves that have in the time that have been seen as skeptical of the commission’s mandate and authority. Opposing views are however normally received in democratic environments and should never be used to conclude negativity on the side of the commission or the securities and exchange act, one of the legislation that the commission implements. It is however evident that the security act of 1934 and its implementing body, the securities and exchange commission have been effective in positively transforming the security market and the American economy at large (Picard 1).
The securities and exchange act has proved to be effective legislation that has greatly developed the securities market through the implementing body, Securities and Exchange Commission. The act together with the implementing commission should therefore be upheld to ensure that the attained integrity in the securities market is not lost. Further developments can also still be made on the act in terms of amendments as only the sky is considered as the limit.
The implementation commission can also still be enhanced by for example making it independent from the federal courts. This can be achieved by structuring the commission to have the criminal prosecution jurisdiction within its self. Owing to the great achievements of the commission in implementing the securities and exchange act, it can be recommended further that similar commissions be formed to oversee the implementation of various specialized acts and legislations (US SEC 1).
The securities and exchange act was a responsive move to mitigate a vice that had been undermining investment in the security market. The act comes just a few years after a financial crisis appeared to have been long-awaited legislation as it attracted the support of legislatures in both houses and across the political divides. The act was solely enacted to instill ethics in the securities market by protecting investors from exploitative securities issuers and brokers.
The act was also meant to provide investors with sufficient information on the traded securities as well as the situations surrounding the issuers of various securities in the market at a given time. A commission was then formed to oversee the enforcement of the act and in the long run, after over seventy years, it can be concluded that the act brought great success in the securities market and the economy in general.
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