The 1934 Act established the Securities and Exchange Commission to administer the provisions of the 1933 Act. It also extended the disclosure principle of the 1933 Act by requiring periodic disclosure of relevant financial information by firms with already-issued securities on secondary exchanges. Of course, disclosure is valuable only if the information disclosed faithfully represents the condition of the firm; in the wake of the corporate reporting scandals of 2001 and 2002, confidence in such reports justifiably waned. Under legislation passed in 2002, CEOs and chief financial officers of public firms will be required to swear to the accuracy and completeness of the major financial statements filed by their firms.
The 1934 Act also empowers the SEC to register and regulate securities exchanges, OTC trading, brokers, and dealers. While the SEC is the administrative agency responsible for broad oversight of the securities markets, it shares responsibility with other regulatory agencies. The Commodity Futures Trading Commission (CFTC) regulates trading in futures markets, while the Federal Reserve has broad responsibility for the health of the U.S. financial system. In this role, the Fed sets margin requirements on stocks and stock options and regulates bank lending to securities markets participants.
The Securities Investor Protection Act of 1970 established the Securities Investor Protection Corporation (SIPC) to protect investors from losses if their brokerage firms fail. Just as the Federal Deposit Insurance Corporation provides depositors with federal protection against bank failure, the SIPC ensures that investors will receive securities held for their account in street name by a failed brokerage firm up to a limit of $500,000 per customer. The SIPC is financed by levying an “insurance premium” on its participating, or member, brokerage firms. It also may borrow money from the SEC if its own funds are insufficient to meet its obligations.
In addition to federal regulations, security trading is subject to state laws, known generally as blue sky laws because they are intended to give investors a clearer view of investment prospects. State laws to outlaw fraud in security sales existed before the Securities Act of 1933. Varying state laws were somewhat unified when many states adopted portions of the Uniform Securities Act, which was enacted in 1956.
Trading in securities markets in the United States is regulated by a myriad of laws. The major governing legislation includes the Securities Act of 1933 and the Securities Exchange Act of 1934. The 1933 Act requires full disclosure of relevant information relating to the issue of new securities. This is the act that requires registration of new securities and issuance of a prospectus that details the financial prospects of the firm. SEC approval of a prospectus or financial report is not an endorsement of the security as a good investment. The SEC cares only that the relevant facts are disclosed; investors must make their own evaluation of the security’s value.
The 1934 Act established the Securities and Exchange Commission to administer the provisions of the 1933 Act. It also extended the disclosure principle of the 1933 Act by requiring periodic disclosure of relevant financial information by firms with already-issued securities on secondary exchanges. Of course, disclosure is valuable only if the information disclosed faithfully represents the condition of the firm; in the wake of the corporate reporting scandals of 2001 and 2002, confidence in such reports justifiably waned. Under legislation passed in 2002, CEOs and chief financial officers of public firms will be required to swear to the accuracy and completeness of the major financial statements filed by their firms.
The 1934 Act also empowers the SEC to register and regulate securities exchanges, OTC trading, brokers, and dealers. While the SEC is the administrative agency responsible for broad oversight of the securities markets, it shares responsibility with other regulatory agencies. The Commodity Futures Trading Commission (CFTC) regulates trading in futures markets, while the Federal Reserve has broad responsibility for the health of the U.S. financial system. In this role, the Fed sets margin requirements on stocks and stock options and regulates bank lending to securities markets participants.
The Securities Investor Protection Act of 1970 established the Securities Investor Protection Corporation (SIPC) to protect investors from losses if their brokerage firms fail. Just as the Federal Deposit Insurance Corporation provides depositors with federal protection against bank failure, the SIPC ensures that investors will receive securities held for their account in street name by a failed brokerage firm up to a limit of $500,000 per customer. The SIPC is financed by levying an “insurance premium” on its participating, or member, brokerage firms. It also may borrow money from the SEC if its own funds are insufficient to meet its obligations.
In addition to federal regulations, security trading is subject to state laws, known generally as blue sky laws because they are intended to give investors a clearer view of investment prospects. State laws to outlaw fraud in security sales existed before the Securities Act of 1933. Varying state laws were somewhat unified when many states adopted portions of the Uniform Securities Act, which was enacted in 1956.
the drop occurs between 2:00 and 2:30, but not at all if the drop occurs after 2:30. If the Dow falls by 20%, trading will be halted for two hours if the drop occurs before 1:00 P.M., for one hour if the drop occurs between 1:00 and 2:00, and for the rest of the day if the drop occurs after 2:00. A 30% drop in the Dow would close the market for the rest of the day, regardless of the time.
Collars. When the Dow moves about two percentage points6 in either direction from the previous day’s close, Rule 80A of the NYSE requires that index arbitrage orders pass a “tick test.” In a falling market, sell orders may be executed only at a plus tick or zero-plus tick, meaning that the trade may be done at a higher price than the last trade (a plus tick) or at the last price if the last recorded change in the stock price is positive (a zero-plus tick). The rule remains in effect for the rest of the day unless the Dow returns to within one percentage point of the previous day’s close.
The idea behind circuit breakers is that a temporary halt in trading during periods of very high volatility can help mitigate informational problems that might contribute to excessive price swings. For example, even if a trader is unaware of any specific adverse economic news, if he sees the market plummeting, he will suspect that there might be a good reason for the price drop and will become unwilling to buy shares. In fact, he might decide to sell shares to avoid losses. Thus, feedback from price swings to trading behavior can exacerbate market movements. Circuit breakers give participants a chance to assess market fundamentals while prices are temporarily frozen. In this way, they have a chance to decide whether price movements are warranted while the market is closed.
Of course, circuit breakers have no bearing on trading in non-U.S. markets. It is quite possible that they simply have induced those who engage in program trading to move their operations into foreign exchanges.
Read More: Regulation Of Securities Markets
