Securities Exchange Act of 1934

The Securities Exchange Act of 1934 is a federal law regulating the trading of securities. This includes stocks and bonds in the secondary market. The secondary market is the market for securities after an issuer makes them available. The primary market is the market for newly issued securities. The Securities Act of 1933 regulates newly issued securities.

This article has information about the main provisions of the Securities Exchange Act of 1934, enforcement actions, and what to do if you need help with a securities matter.

The act governs how U.S. securities markets and its broker-dealers operate. You can read the full text of the amended act here. You can find more articles and resources in FindLaw's Securities Law section.

Background of the Act

Congress passed the Securities Exchange Act of 1934 and the Securities Act of 1933 mainly in response to the stock market crash of 1929. The crash happened partly because of a lack of transparency in the sale of securities. Before the passage of federal securities laws, a patchwork of state laws regulated the securities industry with varying degrees of success.

The 1934 act established the Securities and Exchange Commission (SEC). The 1934 act gave the SEC broad power to regulate the secondary U.S. securities market.

Main Provisions of the Securities Exchange Act of 1934

The Securities Exchange Act of 1934 gives the SEC broad authority over the securities industry. It's designed to protect personal assets and allow investors to make informed investment decisions, among other goals.

The SEC has the power to regulate, register, and oversee:

• Brokerage firms
• Transfer agents
• Clearing agencies
• The nation's securities self-regulatory organizations (SROs)

SROs include the New York Stock Exchange, the NASDAQ Stock Market, and the Chicago Board of Options. The Financial Industry Regulatory Authority (FINRA) is also an SRO.

The 1934 act regulates the following aspects of the securities industry.

Fraud and Insider Trading

The act prohibits fraud and misrepresentation related to securities transactions. For example, it is unlawful to manipulate stock prices by spreading false or misleading information about a company.

One key aspect of the act's anti-securities fraud component is regulating insider trading. Insider trading can be legal or illegal. Legal insider trading includes corporate officers and employees trading the stock of their own companies. The SEC regulates this sort of trading by imposing disclosure requirements. The SEC requires officers and employees to report these transactions.

Illegal insider trading includes buying or selling securities and breaching a fiduciary duty. It also includes buying or using nonpublic information to make investment decisions. For example, a corporate officer who trades company stock after learning confidential information, such as a planned merger, may be guilty of illegal insider trading.

Tender Offers

A tender offer is an offer to buy a large percentage of a target company's stock. The goal of a tender offer is typically an attempt to take over ownership of that company. Tender offers are usually open for a specified time.

Under the act, a bidder that will own more than 5% of a class of the target company's stock if the tender offer gets accepted must do the following:

• Publicize the bidder's identity
• Submit a summary of the tender offer's terms in plain language
• Provide a record of the bidder's history with the target company

With a tender offer, the price offered per share is usually higher than the market price. The higher prices can entice market participants to sell their company stock. The required disclosure of information in connection with a tender offer allows shareholders to make informed decisions on key corporate events.

Corporate Reporting

Companies with over $10 million in assets and over 500 shareholders must file annual and other periodic reports with the SEC. This requirement to file periodic reports applies to a public company and companies with privately traded stock. These reports must be available to shareholders. The report must disclose the following:

• Certain types of financial information
• Lawsuits involving the company and the financial history of the company's stock over the past five fiscal years
• Statements from management discussing the company's outlook
• Income and expenditures
• Stock values

EDGAR, a database maintained by the SEC, makes these reports available to the public.

Proxy Solicitations

The act governs the disclosure of materials used to solicit shareholders' votes. The information in proxy materials must get filed with the SEC before any solicitation to ensure compliance with disclosure rules. The information must disclose all relevant facts about proposed issues on which a shareholder votes.

Registration Statements

Companies listing securities on an exchange must submit forms relating to securities registration, proxy statements, and disclosures. One such form is Form 8-A. The act of 1934 requires the Registration for Listing of a Security on a National Exchange form. It's a registration statement filed with the SEC.

The registration statement registers an issuer's class of securities. It covers an initial public offering or a direct public offering.

Broker Registration

Most securities brokers and dealers must follow SEC broker-dealer registration requirements. They must register with the SEC under the act. A broker is anyone who facilitates securities transactions for another person. A dealer is any person who buys or sells securities on their account.

A broker is an agent, and a dealer is a principal. Determining whether one is a broker or a dealer under the act is critical. The act requires people with these designations to register with the SEC.

Most brokers and dealers must register with the SEC and join a SRO. There are exemptions to registration as a broker-dealer. For example, a casual trader is not a dealer because securities transactions are separate from the trader's business.

Security or commodity futures, which are contracts of sale for future delivery of a single security, are regulated as securities by the SEC and as futures by the Commodity Futures Trading Commission (CFTC). The CFTC's mission is to promote integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation.

Penalties for Violating the Act

Federal securities laws seek to ensure investor protection, maintain efficient markets, and ease capital formation. The SEC has disciplinary powers over regulated entities and persons associated with them. If a company raises capital without complying with federal securities laws, it may face penalties and other consequences.

Money ordered in SEC actions totaled $6.439 billion in fiscal year 2022. The money ordered in such actions stems from the following:

• Civil penalties
• Disgorgement
• Pre-judgment interest

The SEC can only seek civil penalties such as fines and injunctions. It can also bar someone from serving as a corporate officer or director.

The Department of Justice can file criminal charges for alleged violations of the act. Some crimes are specific to securities transactions, such as willfully failing to file required reports or making false or misleading statements to an auditor. General crimes for violating the act include mail fraud and conspiracy.

Other Federal Laws Governing the Securities Industry

Besides the Securities Exchange Act of 1934, several other federal laws govern national securities and financial services in the United States. These include the following:

• Securities Act of 1933
• Trust Indenture Act of 1939
• Investment Company Act of 1940
• Investment Advisers Act of 1940
• Sarbanes-Oxley Act of 2002
• Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

The SEC provides a compilation of these laws, summarizing their main provisions.

Get Help With Federal Securities Law

The Securities Exchange Act of 1934 is a long and complex law. The above list is only a summary of the act's provisions. FindLaw's Securities Law Basics section offers more information on securities.

Do you have specific questions about the act or other federal securities laws? Do you need help with a potential securities litigation matter? If so, contact an attorney who can explain your legal options. An experienced securities law attorney can answer other questions and give helpful guidance.