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Market Regulation

Market Regulation

Author: Sophia Media

Differentiate between the Securities Act of 1933, the Securities Exchange Act of 1934, the Securities Act Amendments of 1975, and the Sarbanes-Oxley Act of 2002.

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[MUSIC PLAYING] This is Dr. Bob Nolley. In having taken a look at the securities markets, let's examine how they are regulated.

The first major securities act was the Securities Act of 1933. This was largely focused on consumer protection. This could be expected because the country coming out of the depths of the Great Depression.

The objective of the '33 Act was to provide investors with material, financial, and other information about corporations who are issuing public securities, and to prevent fraud in the offering of those securities. The Act was meant to ensure that buyers receive complete and accurate information before they invest.

It also required that securities being offered or sold to the public in the United States be registered with the Securities Exchange Commission, the SEC. It also required that the seller of securities in the primary and secondary market file registration statements.

It is also called a prospectus. You recall, this is the document that the issuer has to market its securities to investors. It describes the offering that is up for sale, provides information about management, and it provides financial statements audited by public accountants.

A year later, the Securities Exchange Act of 1934 was passed. It governs the secondary trading of stocks and bonds in the United States. The Act was substantial in scope because it formed the basis for the regulations of markets in the US. And it also established the SEC, the primary enforcement agency of securities law.

Amendments to the Securities Exchange Act were passed in 1975. And they were also known as the National Exchange Market System Act. This directed the Securities and Exchange Commission to work with the industry toward establishing a National Market System along with a nationwide clearance of settlement and securities transactions.

The National Market System plan, or the NMS, sought to transmit transaction information in real-time, supported by the then current improvements in technology and communication. The transactions were sent to the Securities Industry Automation Corporation, the SIAC, where data is compiled and distributed.

The new marketing system plan was regulated by Regulation NMS. It was a sequence of steps to modernize and strengthen the system for trading equity securities. Until this time, different regional markets were very fragmented, and dealers could not compare prices of stocks in each of those markets.

Congress authorized the SEC to facilitate this. Provisions include order protection, priority for quotes that are immediately accessible, an access rule, and requiring access to market data such as quotes, the sub-penny rule, and setting minimum price requirements.

As technology and the speed of market transactions rapidly increased, there became greater opportunities and more frequent occurrences of fraudulent activities. This reached a peak with the passage of the Sarbanes-Oxley Act of 2002. This was a federal law that set new standards for companies and accounting firms. Also known as SOX, the law provided for much more severe penalties and increased oversight. And since then, other countries have been forced to imply stricter financial government laws as well.

SOX provisions included independent oversight of accounting firms providing their services, standards for auditor independence, including assignment rotation for reporting requirements. Corporate executives had to take individual responsibility for the accuracy of its financial reports. And there were improved financial reporting requirements requiring security analysts to report any potential conflicts of interest.

And it provided provisions to restore investor confidence by providing the SEC authority to bar individuals from practice, including brokers and dealers, and heightening the penalties for fraud, and increasing the penalties for white collar crimes, and requiring the CEO to sign the company tax return.

A review of key market regulations starts with the Securities Act of 1933 coming out of the Depression, it focused on buyer protection and ensured that investors had good information on potential investments.

One year later, the Securities Exchange Act of 1934 was put into force, governing the secondary trading of securities.

Advances in technology allowed for the development of a National Market System through which securities transactions could be transmitted real-time. It's transaction speed and technology advanced there. And there were more occurrences for fraud. This led to the passage of Sarbanes-Oxley, which heightened penalties for fraudulent activities by independent auditors and accountants, and assigned personal responsibility to senior management for financial reporting.

This is Bob Nolley. And I'll see you in the next lesson.


Terms to Know
National Exchange Market System Act

Amendments that established a national market system for the nationwide clearance and settlement of securities transactions.

National Market System (NMS)

The national system for trading equities in the United States.

Sarbanes-Oxley Act of 2002

A federal law that set new or enhanced standards for all public company boards, management, and public accounting firms in the United States.

Securities Act of 1933

A consumer protection law to ensure that buyers of securities receive complete and accurate information before they invest.

Securities Exchange Act of 1934

A law governing the secondary trading of securities, financial markets, and their participants.

U.S. Securities and Exchange Commission (SEC)

A federal agency that holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation’s stock and options exchanges, and other electronic securities markets in the United States.