The Securities and Exchange Commission

Morgan Bennett

Mr. Harris

History Honors- Per 5

April 2001

The Securities and Exchange Commission

In 1934 the Securities Exchange Act created the SEC (Securities and Exchange Commission) in response to the stock market crash of 1929 and the Great Depression of the 1930s. It was created to protect U.S. investors against malpractice in securities and financial markets. The purpose of the SEC was and still is to carry out the mandates of the Securities Act of 1933: To protect investors and maintain the integrity of the securities market by amending the current laws, creating new laws and seeing to it that those laws are enforced.

During the 1920s, approximately 20 million Americans took advantage of post-war prosperity by purchasing shares of stock in various securities exchanges. When the stock market crashed in 1929, the fortunes of many investors were lost. In addition, banks lost great sums of money in the Crash because they had invested heavily in the markets. When people feared their banks might not be able to pay back the money that depositors had in their accounts, a "run" on the banking system caused many bank failures. After the crash, public confidence in the market and the economy fell sharply. In response, Congress held hearings to identify the problems and look for solutions; the answer was found in the new SEC. The Commission was established in 1934 to enforce new securities laws that were passed with the Securities Act of 1933 and the Securities Exchange Act of 1934. The two new laws stated that "Companies publicly offering securities must tell the public the truth about their businesses, the securities they are selling and the risks involved in the investing." Secondly, "People who sell and trade securities must treat investors fairly and honestly, putting investors' interests first."2

Franklin Delano Roosevelt defeated Herbert Hoover in a landslide in the 1932 election and began to work on his "New Deal". In the New Deal four key regulatory bodies were established: The National Labor Relations Board, Civil Aeronautics Authority, Federal Communications Commission, and the Securities and Exchange Commission.

Wall Street was not enamored with the coming regulation, but Congress was confident that the Street was seen as an easy target for the Crash and the Depression that followed. In response, the SEC was created by Congress on June 6, 1934 for the purpose of protecting the public and the individual investors against malpractice in the financial markets. Commenting on the creation of the SEC, Texas Congressman and future Speaker Sam Rayburn admitted3 "he didn't know whether the legislation passed so readily because it was so good or so incomprehensible." However, historian David Kennedy viewed the SEC as "ingeniously simple". In his book Freedom From Fear he states that "For all the complexity of its enabling legislation, the power of the SEC resided principally in just two provisions, both of them ingeniously simple. The first mandated detailed information, such as balance sheets, profit and loss statements, and the names and compensation of corporate officers, about firms whose securities were publicly traded." The second "required verification of that information by independent auditors using standardized accounting procedures." These two simple concepts ended the monopoly enjoyed by the House of Morgan and their like on investment information. Wall Street was saturated with data that was relevant, accessible, and comparable across firms and transactions. "The SEC's regulations unarguably imposed new reporting requirements on businesses. They also gave a huge boost to the status of the accounting profession. But they hardly constituted a wholesale assault on the theory or practice of free- market capitalism. The SEC's regulations dramatically improved the economic efficiency of the financial markets by making buy and sell decisions well-informed decisions, provided that the contracting parties consulted the data that was then so copiously available. It was less reform than it was the rationalization of capitalism."5

The SEC prohibited the "pools" and other devices used by the likes of Joseph Kennedy to amass their fortunes. While manipulation of the markets was still possible, there were now risks. FDR decided that instead of naming Kennedy Secretary of Treasury, he would name him the first commissioner of the SEC. Thus, Joseph Kennedy was appointed to oversee the very activities he had participated in. A position appointed from FDR that was long overdue after the contributions of over $250,000 to FDR's convention campaigns. However, this resulted in FDR initially being accused of selling out to Wall Street. However, Kennedy was the right choice since he was the only one with the intimate knowledge of the very acts that the SEC was set up to prevent. It was a classic case of "the fox guarding the henhouse."

Joseph Kennedy proved to be a highly effective leader of the SEC. As one of his first official duties he delivered a national radio address: "We of the SEC do not regard ourselves as coroners sitting on the corpse of financial enterprise...We do not start with the belief that every enterprise is crooked and that those behind it are crooks." At this Wall Street realized that regulation didn't necessarily mean persecution. Although Kennedy only stayed one year as commissioner, he was most effective in establishing the credibility of the organization. Historian John Steele Gordon described his time in office: "Kennedy knew where the bodies were buried. But he regarded his job to be not only to restore the confidence of the country in Wall Street, but, equally important, to restore the confidence of Wall Street in the American economy and government."

In addition to the importance of the commissioner's personality there were also the laws that governed the commission. There are six main laws that govern the Securities Industry, but only four that are relevant to the majority of people. The first law is the Securities Act of 1933, which is often referred to as the "truth in securities". The Security Act of 1933 has two basic objectives: to require investors to receive significant information concerning securities being offered for public sale; and to prohibit deceit, misrepresentation, and other fraud in the sale of securities. These two objectives are accomplished primarily by registration which discloses important financial information. While the SEC requires this information to be accurate, there is no guarantee that it will be. However,