While we have referred to 1929 as one of the most devastating times in US history, it should be noted that quite a lot of good came out the other side when it come to governing the stock market and keeping consumers protected. Many of these are acts passed by Congress that are still applicable today. Since they were passed far before many of my readers can even remember, I thought it would be important and useful to introduce these acts that continue to keep investors safe, even 80 years later:
The Securities Act of 1933
As a direct result of the 1929 market crash, this was the first major legislation regarding the sale of securities. Prior to this legislation, the sales of securities were primarily governed by state laws. The legislation addressed the need for better disclosure by requiring companies to register with the Securities and Exchange Commission. Registration ensures companies provide the SEC and potential investors with all relevant information by means of the prospectus and registration statement.
The Securities Exchange Act of 1934
This act was created to govern securities transactions on the secondary market, after issue, ensuring greater financial transparency and accuracy and less fraud or manipulation. The SEA authorized the formation of the Securities Exchange Commission (SEC), the regulatory arm of the SEA. The SEC has the power to oversee securities, such as stocks, bonds and over-the-counter securities, markets and the conduct of financial professionals including brokers, dealers and investment advisers, and monitor the financial reports that publicly traded companies are required to disclose. All companies listed on stock exchanges must follow the requirements set forth in the Securities Exchange Act of 1934. Primary requirements include registration of any securities listed on stock exchanges, disclosure, proxy solicitations and margin and audit requirements. The purpose of these requirements is to ensure an environment of fairness and investor confidence.
The Investment Company Act of 1940
This piece of legislation clearly defines the responsibilities and limitations placed on open-end mutual funds, unit investment trusts and closed-end funds that offer investment products to the public. The Investment Company Act of 1940 grew out of the stock market crash of 1929 as an attempt to stabilize financial markets. It is enforced and regulated by the Securities and Exchange Commission. This act clearly sets out the limits regarding filings, service charges, financial disclosure and the fiduciary duties of fund companies.
This act applies to companies that primarily invest or trade in securities and/or offer their own securities to the public. Hedge funds sometimes fall under the act's definition of "investment company," but may be able to avoid the act's requirements by requesting an exemption under sections 3(c)(1) or 3(c)7.
The Investment Company Act of 1940 defines and classifies investment companies. It describes their functions, activities, size and structure; provides for exemptions from the act and election to be regulated as a business development company; regulates transactions of certain affiliated persons and underwriters; outlines accounting, record keeping and auditing requirements; and describes how securities may be distributed, redeemed and repurchased. It also explains how investment companies must handle changes in their investment policies and what will happen in the event of fraud or breach of fiduciary duty. Further, it sets forth specific guidelines for different types of investment companies, including unit investment trusts, periodic payment plans and face-amount certificate companies.
Specifically, the Investment Company Act requires funds to do the following:
Register with the SEC.
Have a board of directors , 75% of whom must be independent.
Limit their investment strategies, such as the use of leverage.
Maintain a certain percentage of their assets in cash for investors who might wish to sell.
Disclose their structure, financial condition, investment policies and objectives to investors.
The act's regulations are intended to minimize conflicts of interest and steer funds toward acting in their investors' best interests. The SEC does not directly supervise or judge the investment company's decisions.
The Investment Advisers Act of 1940
This act defined the role and responsibilities of an investment adviser. The Investment Advisers Act of 1940 was largely drafted as a response to the stock market crash 11 years earlier, as well as the subsequent depression. The Act originated from a report on investment trusts and investment companies that the Securities and Exchange Commission (SEC) prepared for Congress in 1935. The SEC report warned of the dangers posed by certain investment counselors and advocated the regulation of those who provided investment advice. Based on this recommendation, Congress began work on the bill that eventually became the Investment Advisers Act of 1940.
A subsequent amendment to the act further stipulated that individuals designated as investment advisers with more than $25 million under management are required to register with the SEC; lower, and advisers only have to register with their state. The act also states the liability of investment advisers have and provides guidelines regarding the fees and commissions they can collect.
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