Securities and Exchange Act of 1934
The Securities Exchange Act of 1934 is a federal law that regulates the secondary trading of securities such as stocks and bonds. The secondary market is the market for securities after they have been issued. The primary market is the market for newly-issued securities and is regulated by the Securities Act of 1933.
Read below for information about the Securities Exchange Act of 1934 and its main provisions. The full text of the amended Act can be read here. Additional articles and resources can be found in FindLaw's Securities Law section.
Background of the Act
The Securities Exchange Act of 1934 and the Securities Act of 1933 were enacted largely in response to the stock market crash of 1929, which occurred in part because of a lack of transparency in securities markets. The 1934 Act established the Securities and Exchange Commission (SEC), giving it broad power to regulate the secondary securities market in the U.S. For example, the SEC was given the authority to register and oversee brokerage firms and transfer agents.
Main Provisions of the Act
The Act regulates the following:
1. 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-fraud component is the regulation of insider trading, which can be either 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 requiring officers and employees to report these transactions. Illegal insider trading includes the buying or selling of securities in breach of a fiduciary duty and/or using material, nonpublic information. For example, a corporate officer who trades company stock after learning of confidential information such as a planned merger may be guilty of illegal insider trading.
2. Tender Offers
A tender offer is an offer to buy a substantial percentage of a target company's stock, typically in an attempt to take over ownership of that company. Tender offers are usually open for a specified period of time, and the price offered per share is usually higher than the market price, to entice current shareholders to sell. Under the Act, a bidder that will own more than 5% of a class of the target company's stock if the tender offer is accepted must publicize the bidder's identity, submit a summary of the tender offer's terms in plain language, and provide a record of the bidder's history with the target company.
3. Corporate Reporting
Companies with more than $10 million in assets and with more than 500 shareholders must file annual and other periodic reports, regardless whether the company's stock is publicly or privately traded. These reports must be made available to shareholders, and must disclose information such as any lawsuits involving the company and the financial history of the company's stock over the past five fiscal years. These reports also require statements from management discussing the company's outlook.
4. Broker Registration
Most stock brokers and dealers must register with the SEC under the Act. A "broker" is any person who facilitates securities transactions for another person, and a "dealer" is any person who buys or sells securities on his or her own account. Put another way, 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, as the Act requires people with these designations to register with the SEC. Notably, a casual trader is not considered a dealer, because securities transactions are not part of the trader's regular business.
Penalties for Violating the Act
The SEC is limited to seeking civil penalties such as fines and injunctions. In 2013, SEC fines for wrongdoing totaled $3.4 billion. The SEC can also bar a person from serving in positions such as 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 willful failure to file required reports or willfully making false or misleading statements to an auditor. General crimes for violating the Act include mail fraud and conspiracy.
The Securities Exchange Act of 1934 is a long and complex law. The above list is only a short summary of the Act's provisions. If you have questions about the Act such as whether it may apply to you or whether certain information may be considered confidential, you should consult with a lawyer who specializes in securities law.
Contact a securities lawyer to assist with any issues related to securities laws and financial instruments.