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The Securities Exchange Act of 1934 is a law governing the secondary trading of securities (stocks, bonds, and debentures) in the United States of America. The Act, 48 Stat. 881 (enacted June 6, 1934), codified at 15 U.S.C. § 78a et seq., was a sweeping piece of legislation. The Act and related statutes form the basis of regulation of the financial markets and their participants in the United States. It is commonly referred to as the "Exchange Act", the "'34 Act", and the "Act of '34".

Companies raise billions of dollars by issuing securities in what is known as the primary market. Contrasted with the Securities Act of 1933, which regulates these original issues, the Securities Exchange Act of 1934 regulates the secondary trading of those securities between persons often unrelated to the issuer. Trillions of dollars are made and lost each year through trading in the secondary market.

Contents

Securities exchanges

One area subject to 34 Act regulation is the actual securities exchange -- the physical place where people purchase and sell securities (stocks, bonds, notes of debenture). Some of the more well known exchanges include the New York Stock Exchange, the American Stock Exchange, and regional exchanges like the Cincinnati Stock Exchange, Philadelphia Stock Exchange and Pacific Stock Exchange. At those places, agents of the exchange, or specialists, act as middlemen for the competing interests to buy and sell apples. An important function of the specialist is to inject liquidity and price continuity into the market. Given that people come to the exchange to easily acquire securities or to easily dispose of a portfolio of securities, the specialist's role is important to the exchange.

Securities associations

The '34 Act also regulates broker-dealers without a status for trading securities. A telecommunications infrastructure has developed to provide for trading without a physical location. Previously these brokers would find stock prices through newspaper printings and conduct trades verbally by telephone. Today, a digital information network connects these brokers. This system is called NASDAQ, standing for the National Association of Securities Dealers Automated Quotation System.

Self-regulatory organizations (SRO)

In 1938 the Exchange Act was amended by the Maloney Act, which authorized the formation and registration of national securities associations, which would supervise the conduct of their members subject to the oversight of the SEC. That amendment led to the creation of the National Association of Securities Dealers, Inc. - the NASD, which is a Self-Regulatory Organization (or SRO). The NASD had primary responsibility for oversight of brokers and brokerage firms, and later, the NASDAQ stock market. In 1996 the SEC criticized the NASD for putting its interests as the operator of Nasdaq ahead of its responsibilities as the regulator, and the organization was split in two, one entity regulating the brokers and firms, the other regulating the NASDAQ market. In 2007 the NASD merged with the NYSE (which had already taken over the AMEX) and FINRA was created, which is now the only SRO.

Other trading platforms

In the last 30 years, brokers have created two additional systems for trading securities. The alternative trading system, or ATS, is a quasi exchange where stocks are commonly purchased and sold through a smaller, private network of brokers, dealers, and other market participants. The ATS is distinguished from exchanges and associations in that the volumes for ATS trades are comparatively low, and the trades tend to be controlled by a small number of brokers or dealers. ATS acts as a niche market, a private pool of liquidity. Reg ATS, an SEC regulation issued in the late 1990s, requires these small markets to 1) register as a broker with the NASD, 2) register as an exchange, or 3) operate as an unregulated ATS, staying under low trading caps.

A specialized form of ATS, the Electronic Communications Network (or ECN), has been described as the "black box" of securities trading. The ECN is a completely automated network, anonymously matching buy and sell orders. Many traders use one or more trading mechanisms (the exchanges, NASDAQ, and the ECN or ATS) to effect large buy or sell orders -- conscious of the fact that overreliance on one market for a large trade is likely to unfavorably alter the trading price of the target security.

Issuers

While the '33 Act recognizes that timely information about the issuer is vital to effective pricing of securities, the '33 Act's disclosure requirement (the registration statement and prospectus) is a one-time affair. The '34 Act extends this requirement to securities traded in the secondary market. Provided that the company has more than a certain number of shareholders and has a certain amount of assets (500 shareholders, above $10 million in assets, per Act sections 12, 13, and 15), the '34 Act requires that issuers regularly file company information with the SEC on certain forms (the annual 10-K filing and the quarterly 10-Q filing). The filed reports are available to the public via EDGAR. If something material happens with the company (change of CEO, change of auditing firm, destruction of a significant number of company assets), the SEC requires that the company soon issue an 8-K filing that reflects these changed conditions (see Regulation FD). With these regularly required filings, buyers are better able to assess the worth of the company, and buy and sell the stock according to that information.

Antifraud provisions

While the '33 Act contains an antifraud provision (Section 17), when the '34 Act was enacted, questions remained about the reach of that antifraud provision and whether a private right of action—that is, the right of an individual private citizen to sue an issuer of stock or related market actor, as opposed to government suits—existed for purchasers. As it developed, section 10(b) of the 1934 Act and corresponding SEC Rule 10b-5 have sweeping antifraud language. Section 10(b) of the Act (as amended) provides (in pertinent part):

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange [. . .]
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act), any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

Section 10(b) is codified at 15 U.S.C. § 78j(b).

The breadth and utility of section 10(b) and Rule 10b-5 in the pursuit of securities litigation are significant. Rule 10b-5 has been employed to cover insider trading cases, but has also been used against companies for price fixing (artificially inflating or depressing stock prices through stock manipulation), bogus company sales to increase stock price, and even a company's failure to communicate relevant information to investors. Many plaintiffs in the securities litigation field plead violations of section 10(b) and Rule 10b-5 as a "catchall" allegation, in addition to violations of the more specific antifraud provisions in the '34 Act.

Exemptions from reporting because of national security

Section 13(b)(3)(A) of the Securities Exchange Act of 1934 provides that "with respect to matters concerning the national security of the United States," the President or the head of an Executive Branch agency may exempt companies from certain critical legal obligations. These obligations include keeping accurate "books, records, and accounts" and maintaining "a system of internal accounting controls sufficient" to ensure the propriety of financial transactions and the preparation of financial statements in compliance with "generally accepted accounting principles."

On May 5, 2006, in a notice in the Federal Register, President Bush delegated authority under this section to John Negroponte, the Director of National Intelligence. Administration officials told Business Week that they believe this is the first time a President has ever delegated the authority to someone outside the Oval Office.[1]

See also

External links

References

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Source material

Up to date as of January 22, 2010

From Wikisource

United States Code
by the United States Government
Title 15, Chapter 2B. Securities Exchanges
See the current codification for Title 15, Chapter 2B in the Cornell Law School U.S. Code Collection
Chapter 2B—Securities Exchanges
This chapter may be cited as the “Securities Exchange Act of 1934”.
  • § 78b. Necessity for regulation
  • § 78c. Definitions and application
  • § 78c-1. Swap agreements
  • § 78d. Securities and Exchange Commission
  • § 78d-1. Delegation of functions by Commission
  • § 78d-2. Transfer of functions with respect to assignment of personnel to chairman
  • § 78d-3. Appearance and practice before the Commission
  • § 78e. Transactions on unregistered exchanges
  • § 78f. National securities exchanges
  • § 78g. Margin requirements
  • § 78h. Restrictions on borrowing and lending by members, brokers, and dealers
  • § 78i. Manipulation of security prices
  • § 78j. Manipulative and deceptive devices
  • § 78j-1. Audit requirements
  • § 78k. Trading by members of exchanges, brokers, and dealers
  • § 78k-1. National market system for securities; securities information processors
  • § 78l. Registration requirements for securities
  • § 78l-1. Applications for unlisted trading privileges deemed filed under section 78l of this title
  • § 78m. Periodical and other reports
  • § 78n. Proxies
  • § 78o. Registration and regulation of brokers and dealers
  • § 78o-1. Brokers deemed to be registered
  • § 78o-2. Liabilities arising prior to amendment unaffected
  • § 78o-3. Registered securities associations
  • § 78o-4. Municipal securities
  • § 78o-5. Government securities brokers and dealers
  • § 78o-6. Securities analysts and research reports
  • § 78o-7. Registration of nationally recognized statistical rating organizations
  • § 78p. Directors, officers, and principal stockholders
  • § 78q. Records and reports
  • § 78q-1. National system for clearance and settlement of securities transactions
  • § 78q-2. Automated quotation systems for penny stocks
  • § 78r. Liability for misleading statements
  • § 78s. Registration, responsibilities, and oversight of self-regulatory organizations
  • § 78t. Liability of controlling persons and persons who aid and abet violations
  • § 78t-1. Liability to contemporaneous traders for insider trading
  • § 78u. Investigations and actions
  • § 78u-1. Civil penalties for insider trading
  • § 78u-2. Civil remedies in administrative proceedings
  • § 78u-3. Cease-and-desist proceedings
  • § 78u-4. Private securities litigation
  • § 78u-5. Application of safe harbor for forward-looking statements
  • § 78v. Hearings by Commission
  • § 78w. Rules, regulations, and orders; annual reports
  • § 78x. Public availability of information
  • § 78y. Court review of orders and rules
  • § 78z. Unlawful representations
  • § 78aa. Jurisdiction of offenses and suits
  • § 78aa-1. Special provision relating to statute of limitations on private causes of action
  • § 78bb. Effect on existing law
  • § 78cc. Validity of contracts
  • § 78dd. Foreign securities exchanges
  • § 78dd-1. Prohibited foreign trade practices by issuers
  • § 78dd-2. Prohibited foreign trade practices by domestic concerns
  • § 78dd-3. Prohibited foreign trade practices by persons other than issuers or domestic concerns
  • § 78ee. Transaction fees
  • § 78ff. Penalties
  • § 78gg. Separability
  • § 78hh. Effective date
  • § 78hh-1. Effective date of certain sections
  • § 78ii. Omitted
  • § 78jj. Repealed.]
  • § 78kk. Authorization of appropriations
  • § 78ll. Requirements for the EDGAR system
  • § 78mm. General exemptive authority
  • § 78nn. Tennessee Valley Authority

Note

References
This chapter, referred to in text [§ 78a], was in the original “This Act” meaning the ``Securities Exchange Act of 1934´´, act June 6, 1934, ch. 404. The act was divided into two titles as follows:
“Title I - Regulation of Securities Exchanges”; and
“Title II - Amendments to Securities Act of 1933”.
This section was section 1 of title I of the Act, which title, as amended, is set out as sections 78a to 78l, 78m to 78o, 78o-3 to 78dd-1, 78ee to 78hh, and 78mm of this title. Sections 78kk, 78ll, and 78nn of this title, which were directed to be added at the end of the Securities Exchange Act of 1934, have been treated in the Code as added to title I of the Act to reflect the probable intent of Congress. See Codification notes set out under those sections.
Title II of the act amended or repealed sections 77b to 77e, 77j, 77k, 77m, 77o, and 77s, and added former sections 78ii and 78jj of this title. For complete classification of this Act to the Code, see Tables.

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