The SEC: A Comprehensive Review of Financial Regulation History
The realm of investing, particularly individual trading of stocks, comes with a sense of security. The mechanisms in place today offer avenues for recompense in instances where a corporation deceives its investors. However, this hasn’t always been the case. Let’s take a journey through the history of financial regulation, with a specific focus on the Sarbanes-Oxley Act of 2002 and its implications.
The Birth of Regulation
Historically, investing was a game played amongst the wealthy, those who could afford to buy into joint-stock companies or purchase debt in the form of bank bonds. Given their substantial wealth base—comprising land holdings, industry, or patents—these individuals were assumed to bear the risk that came with investing. Fraud was prevalent in the early financial system, often deterring casual investors.
Blue Sky Laws and Their Limitations
The significance of the stock market in the US economy brought it under the government’s scrutiny. With increased disposable incomes across all classes, investing became a national pastime. Blue Sky Laws—first enacted in Kansas in 1911—were designed to protect these new investors. They required companies to provide a prospectus with full disclosure from the promoters about their interest and justifications.
Despite being helpful to investors, Blue Sky Laws were weak in terms of enforcement and coverage. Companies seeking to dodge full disclosure would often sell shares by mail to out-of-state investors. State regulators seldom checked the validity of in-state disclosures.
Black Tuesday and the Onset of the Great Depression
The unregulated frenzy in the market set the stage for manipulation. On Oct. 29, 1929, the Great Depression made its debut with Black Tuesday. This collapse had devastating global effects since banks had been playing the market with their clients’ deposits, and the US was on the cusp of becoming the world’s most significant international creditor.
Response to the Great Depression: Glass-Steagall and the Securities and Exchange Act
The aftermath of the Great Depression saw the establishment of the Glass-Steagall Act to prevent banks from excessive entanglement with the stock market. The Securities Act aimed to create a more robust version of the state Blue Sky Laws at the federal level. This legislation was later reinforced by the Securities Exchange Act of 1934.
Establishment of the SEC
The Securities Exchange Act of 1934 led to the creation of the Securities and Exchange Commission (SEC). The SEC was tasked with the enforcement of various Acts, such as the Public Utility Holding Company Act (1935), the Trust Indenture Act (1939), the Investment Advisers Act (1940), and the Investment Company Act (1940).
Evolution of the SEC and Return of the Investors
The SEC used its power to demand more disclosure, set strict reporting schedules, and pave the way for civil charges against companies and individuals guilty of fraud and other security violations. This approach improved investors’ confidence after World War II, leading to better access to financials and the development of means to retaliate against fraud.
Congress continues to empower the SEC to make the market safer for individual investors, learning from, and adapting to, the scandals and crises that occur. A prime example of this is the Sarbanes-Oxley Act of 2002. Enacted after scandals involving companies like Enron, WorldCom, and Tyco International, the SEC was given the responsibility to prevent similar situations in the future.
While the SEC has been vital in protecting investors, concerns persist that its power and love of tighter regulations could potentially harm the market. The challenge for the SEC lies in balancing the need to protect investors from bad investments by ensuring they have accurate information.
Further Resources for Understanding Financial Regulation and the SEC
Explore the following resources to delve deeper into the realm of financial regulation, the Securities and Exchange Commission (SEC), and the Sarbanes-Oxley Act:
Websites and Online Resources:
- Securities and Exchange Commission (SEC): The official website of the SEC provides a wealth of information on regulations, enforcement actions, investor education, and financial filings.
- Investopedia – Understanding the SEC: This comprehensive guide on Investopedia offers insights into the role and functions of the SEC, its regulatory framework, and investor protection.
- “The Rise of the SEC: A Century of the Securities and Exchange Commission” by Joel Seligman: This book provides a detailed historical account of the SEC’s evolution and its impact on the US financial system.
- “The End of Normal: The Great Crisis and the Future of Growth” by James K. Galbraith: While not solely focused on the SEC, this book offers valuable insights into the regulatory response to the financial crisis and its implications for the future.
Academic Journals and Research Papers:
- “The Impact of the Sarbanes-Oxley Act on Corporate Innovation” (Journal of Accounting Research): This research paper examines the effects of the Sarbanes-Oxley Act on corporate innovation and provides insights into its implications.
- “The SEC’s Shift Toward a ‘Broken Windows’ Enforcement Strategy” (Journal of Financial Economics): This study analyzes the SEC’s enforcement strategy and its focus on addressing minor violations as a deterrent for larger infractions.
Reports and Studies:
- “Assessing the Regulatory Impact of the Sarbanes-Oxley Act” (SEC Study): This SEC study evaluates the regulatory impact of the Sarbanes-Oxley Act and its effectiveness in improving financial reporting and corporate governance.
- “The Role and Impact of the U.S. Securities and Exchange Commission in the U.S. Capital Markets” (SEC Report): This report provides an overview of the SEC’s role in the US capital markets, its regulatory activities, and its impact on market participants.
Professional Organizations and Associations:
- American Bar Association – Section of Business Law: This section of the American Bar Association offers resources, publications, and events related to business law, including financial regulation and securities laws.
- Financial Industry Regulatory Authority (FINRA): FINRA is a self-regulatory organization that oversees brokerage firms and securities industry professionals, providing investor protection and promoting market integrity.
Please note that some resources may require subscriptions or fees to access full articles or reports.