Securities Exchange Act is a law passed by the United States Congress in 1934 to protect people from buying unsafe securities. A security is an investment that can be bought and sold in a financial market. Securities include stocks, bonds, and options. Stocks are secured (backed) by ownership in a company. Bonds are secured by the promise of a borrower to pay a debt in the future. Options represent a choice to buy or sell something at a future date. The Securities Exchange Act was part of President Franklin D. Roosevelt’s New Deal program. The New Deal was his response to the Great Depression, a worldwide economic slump of the 1930’s. Many people blamed the Depression on dishonest financial practices.
Congress had passed the Securities Act of 1933 requiring financial statements from firms issuing new securities. The Federal Trade Commission (FTC) administered the law. However, many people in government felt that the Securities Act of 1933 did not place enough federal control over the purchase and sale of securities. The 1934 act transferred enforcement of securities laws to a new agency, the Securities and Exchange Commission (SEC). The SEC regulates securities and exchanges. Stockbrokers and most firms that issue securities must register with the SEC. People who own more than 10 percent of a company’s stock must file regular reports with the agency.
The Securities Exchange Act also gives the Board of Governors of the Federal Reserve System the authority to set margin requirements. Margin is the amount of money stock purchasers must deposit with brokers. Before the Depression, many investors bought large amounts of stock on credit.
