What is the Securities Exchange Act of 1934?

M. McGee

The Securities Exchange Act of 1934 is both a piece of American business legislation and a series of clarifications and fixes to the Securities Exchange Act of 1933. The updated act contained two main points; it regulated secondary trading of securities, and it founded the Securities Exchange Commission (SEC). These acts were both created is hopes of preventing another stock market crash like the one that triggered the Great Depression.

Woman posing
Woman posing

A security is usually a stock, bond or debt note. These securities are issued to allow companies to make money or mitigate debt. There are two main methods for securities exchange; the primary and the secondary market. In the primary market, the issuer sells the securities. In the secondary market, the securities are traded between parties that are unconnected to the issuer. The Securities Exchange Act of 1934 was created to regulate these secondary trades.

These secondary trades are big business for the securities exchange. While the primary issuer may only issue a specific security once, it may be traded back and forth between others parties as often as they want. In order for a primary issuer to recover the security, it must buy it from the current party holding it, often on the secondary market.

The Securities Exchange Act of 1934 regulated the market through enforced disclosure and the removal of marginal practices. Parties involved in the secondary market were required to submit periodic financial information that showed how and when they made money. This would prevent certain insider practices and create a level playing field for investors. The act also changed the voting rights of shareholders and removed some of the more dangerous margin practices.

The other main aspect of the Securities Exchange Act of 1934 was the formation of SEC. The SEC would watch over the stock system and prevent illegal activities. It would also regulate certain practices in both the primary and secondary stock markets. Both the Securities Exchange Act of 1934 and the Act of 1933 had several statements of what was and was not allowed in the two markets, and the SEC was given the right to police those requirements.

One of the other important points in the Securities Exchange Act of 1934 was a clarification of the Act of 1933. The 1933 document contains several anti-fraud statements, but the actual methods of those statements are unclear. The Act of 1934 attempts to clear up those statements and fold them in with the new SEC oversight.

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