Securities Exchange Act of 1934

The Securities Exchange Act of 1934 (also called the Exchange Act, the 1934 Act, or the ''34 Act) (Pub. L. 73–291, 48 Stat. 881, enacted June 6, 1934, codified at 15 U.S.C. § 78a et seq.) is a United States law that governs much of the secondary trading of securities, including stocks, bonds, and debentures.^[1][2] Enacted during the Great Depression after the stock market crash of 1929, it became one of the main federal laws governing U.S. securities markets and market participants.^[1][3]

The Act established the Securities and Exchange Commission (SEC) and created a federal framework for ongoing corporate disclosure, the registration and oversight of securities exchanges, the regulation of brokers and dealers, and the policing of market manipulation and other securities fraud.^[1][4][5] It is commonly read alongside the Securities Act of 1933, which mainly governs the original offer and sale of securities, while the 1934 Act mainly governs later trading in those securities and the markets and intermediaries through which that trading occurs.^[2][6]

The Securities Exchange Act of 1934 created five parts of the federal securities system that became lasting features of U.S. securities regulation. First, it established the Securities and Exchange Commission (SEC) as the federal agency responsible for administering and enforcing the securities laws. Second, it created an ongoing disclosure system for many public companies, extending federal disclosure beyond an initial securities offering and into the later trading life of the security. Third, it required securities exchanges to register with the SEC and operate under federal oversight. Fourth, it created a broad federal antifraud framework through Section 10(b), under which the SEC later adopted Rule 10b-5. Fifth, it required the federal registration and supervision of brokers and dealers and gave the Federal Reserve authority over margin credit used to purchase securities.^[1][7][8]

Under the Act's disclosure provisions, companies subject to its reporting requirements generally file annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. The exchange provisions brought organized securities markets under a federal registration and supervisory framework, while the broker-dealer provisions extended federal oversight to major intermediaries in the secondary market. In the antifraud area, Section 10(b) and later Rule 10b-5 became central federal provisions in cases involving market manipulation, material misstatements or omissions, and insider trading. Together, these provisions helped move securities regulation toward a more durable federal structure for disclosure, market oversight, and enforcement.^[9][10][5]

The 1934 Act's key provision was the creation of the Securities and Exchange Commission (SEC) as the federal agency responsible for administering and enforcing the federal securities laws.^[3][1][11] Section 4 established the SEC as an independent agency composed of five commissioners appointed by the President of the United States with the advice and consent of the United States Senate, with no more than three commissioners from the same political party.^[11] Legal and historical accounts describe that structure as an important part of the agency's independence within the federal regulatory system.^[3]

The Act also gave the new Commission broad authority over securities markets and market participants. Under the 1934 Act, the SEC was authorized to issue rules and orders under the federal securities laws, require registration and reporting by covered issuers, oversee the registration and regulation of national securities exchanges, supervise a system of self-regulation in the securities industry, regulate the registration and conduct of brokers and dealers, investigate possible violations, and bring enforcement actions in administrative proceedings and in federal court.^[12][11] Later amendments expanded the Commission's powers, but the 1934 Act placed a permanent federal commission at the center of national securities disclosure, market oversight, and enforcement.^[11][1]

The Act also created a system of continuing disclosure for many public companies. The Securities Act of 1933 mainly focused on disclosure when securities were first offered to the public. The 1934 Act extended federal disclosure beyond that initial sale by requiring many companies whose securities traded in public markets to keep filing information after the offering had ended.^[13][14]

Under this reporting system, companies subject to the Act generally file annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K when specified events occur. Later scholarship has described this as part of the federal securities laws' broader mandatory disclosure system, designed to reduce information gaps between companies, investors, and the market by requiring disclosure on an ongoing basis rather than only at the time of an offering. Through this system, information that once would have appeared mainly at the time of a public offering became part of a continuing reporting regime for companies already trading in the public markets.^[13][9][15]

Section 13(b)(3)(A) of the Securities Exchange Act of 1934 provides that "with respect to matters concerning the national security of the United States", the President or the head of an Executive Branch agency may exempt companies from certain critical legal obligations. These obligations include keeping accurate "books, records, and accounts" and maintaining "a system of internal accounting controls sufficient" to ensure the propriety of financial transactions and the preparation of financial statements in compliance with "generally accepted accounting principles".

On May 5, 2006, in a notice in the Federal Register, President Bush delegated authority under this section to John Negroponte, the Director of National Intelligence. Administration officials told BusinessWeek that they believed this was the first time a President had delegated the authority to someone outside the Oval Office.^[16]

The Act brought securities exchanges into a federal regulatory system. Before the Act, major exchanges largely operated under their own internal rules. The 1934 Act required a national securities exchange to register with the Securities and Exchange Commission (SEC), making continued operation on a national basis subject to federal law and SEC oversight.^[1][17][4]

Under Section 6 and related provisions, an exchange seeking registration had to file information with the SEC and adopt rules designed to prevent fraud and market manipulation, promote just and equitable principles of trade, and provide for the disciplining of members who violated federal securities laws or exchange rules. In that sense, the Act treated exchanges not only as trading venues but also as self-regulatory organizations with responsibilities to supervise trading and member conduct on their own markets.^[4][18]

This framework is often described as a system of supervised self-regulation. Exchanges continued to write and enforce many of their own trading, listing, and disciplinary rules, but the SEC gained authority to review exchange rule changes and certain disciplinary actions. That basic structure remained a central feature of U.S. market regulation even as exchange trading later moved away from older floor-based systems and became increasingly electronic.^[1][18]

In later decades, trading in U.S. securities markets spread beyond traditional exchanges into electronic communication networks and alternative trading systems (ATSs). Legal and market-structure scholarship has described this shift as part of the fragmentation and automation of modern equity markets.^[19][20]

ATSs are trading venues that match buyers and sellers outside a registered national securities exchange. Under Regulation ATS, adopted in 1998, an ATS generally operates under a framework different from that for a national securities exchange and typically registers as a broker-dealer rather than as an exchange. Many ATSs serve institutional and other market participants seeking venues outside public exchanges, including so-called dark pools.^[19][20]

A specialized form of ATS is the electronic communication network (ECN), an automated system that electronically matches buy and sell orders. ECNs and other ATSs became more important as securities markets became faster and more electronic, giving market participants additional ways to execute trades outside traditional exchange floors.^[20]

While the Securities Act of 1933 contained an antifraud provision in Section 17, questions remained after the enactment of the Securities Exchange Act of 1934 about the reach of that provision and whether courts would recognize an implied private right of action for purchasers, as distinct from government enforcement actions.^[21][22] Over time, Section 10(b) of the 1934 Act and the SEC's later Rule 10b-5 became the central federal antifraud provisions in securities litigation.^[5][23]

As it developed, Section 10(b) of the 1934 Act and corresponding Rule 10b-5 were written and interpreted in broad antifraud terms. Section 10(b), as amended, provides in part:^[5][24]

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange ...

(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement (as defined in section 206B of the Gramm–Leach–Bliley Act), any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

Section 10(b) is codified at 15 U.S.C. § 78j(b).

Rule 10b-5 later became the main implied private remedy for securities fraud under the 1934 Act, and courts and litigants used it across a wide range of cases. It has been used in actions involving insider trading, market manipulation, sham or deceptive transactions, and material misstatements or omissions, including failures to disclose information considered important to investors. Because of its breadth, plaintiffs have often pleaded Section 10(b) and Rule 10b-5 alongside more specific antifraud provisions in the federal securities laws as a broad, catch-all fraud claim.^[23][25]

The Securities Exchange Act of 1934 brought brokers and dealers under a federal registration and supervisory framework. Section 15 generally requires broker-dealers engaged in interstate securities business to register with the SEC, and the Act authorizes rules governing their financial responsibility, recordkeeping, supervision, and sales practices. In addition to direct SEC oversight, the Act developed a structure in which broker-dealers also became subject to rules of self-regulatory organizations.^[26]

In 1938, Congress amended the Securities Exchange Act through the Maloney Act, which authorized the registration of national securities associations. That change led to the creation of the National Association of Securities Dealers (NASD), which became the main self-regulatory body for broker-dealers and later created the Nasdaq market.^[26]

In 2007, NASD and NYSE Regulation consolidated their member-firm regulatory operations into the Financial Industry Regulatory Authority (FINRA), which assumed the self-regulatory functions previously carried out by those bodies for broker-dealers and member firms.^[19][27]

• Securities Exchange Act of 1934, as amended, in HTML/PDF/details in the GPO Statute Compilations collection
• United States Securities and Exchange Commission (SEC) – Official site
• Introduction to the Federal Securities Laws
• "Securities Lawyer's Deskbook – Securities Exchange Act of 1934". University of Cincinnati College of Law. Archived from the original on June 10, 2004.
• Public Law 73-291, 73d Congress, H.R. 9323: Securities Exchange Act of 1934