BUS202: Principles of Finance

The Securities Exchange Act of 1934 is a law governing the secondary trading of securities, financial markets and their participants.

TERM

• NASDAQ

  The National Association of Securities Dealers Automated Quotations; this is an electronic stock market.

The Securities Exchange Act of 1934 (also called the Exchange Act, '34 Act, or Act of '34) is a law governing the secondary trading of securities, including stocks, bonds, and debentures, in the United States of America. It was a sweeping piece of legislation. The Act and related statutes form the basis for the regulation of the financial markets and their participants in the United States. The 1934 Act also established the Securities and Exchange Commission (SEC), the agency primarily responsible for enforcement of United States federal securities law.

Securities Exchange Act of 1934 governs the secondary trading of securities.

While the Securities Act is very limited in scope, the Securities Exchange Act (also known as the Exchange Act or 1934 Act) is much broader. It regulates stock exchanges, brokers, dealers, and even private traders.

Companies raise billions of dollars by issuing securities in what is known as the primary market. In contrast 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, in most cases through brokers or dealers. Trillions of dollars are made and lost each year through trading in the secondary market.

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 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 securities. 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 was developed and allows for 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 to 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 the oversight of brokers and brokerage firms, and later, the NASDAQ stock market.

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 different 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.

Issuers

While the '33 Act recognizes that timely information about the issuer is vital to effective pricing of securities, the 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 sections 12, 13, and 15 of the Act), 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).

Anti-fraud provisions

While the '33 Act contains an anti-fraud provision (Section 17), when the '34 Act was enacted, questions remained about the reach of that anti-fraud provision and whether a private right of action - that is, the right of an individual citizen to sue an issuer of stock or related market actor, as opposed to government suits - existed for purchasers.