Question

Discuss some of the abuses in the market prior to the passage of the securities acts in 1933 and 1934.

Answer 1

The Securities and Exchange Commission or SEC is an independent federal regulating body. It works for protection of investors' interest and Capital, oversees the stock market and proposes and enforces federal Securities law.

Prior to the SEC's creation oversight of the trade in stocks, bonds and other securities was virtually non- existent which led to widespread fraud, insider trading and other abuses..

The SEC was created in 1934 as one of President Franklin Roosevelt's New Deal Program to help fight the devastating economic effects of the great depression and prevent any future market calamities.

After World War 1, there was an unprecedented economic boom during which prosperity, consumerism, overproduction and debt increased. Hoping to strike it rich , people invested in the stock market and often bought stocks in margin at huge risk without federal oversight.

But on Oct 29, 1929- The "Black Tuesday"- the Stock market crashed, along with public confirm as investors and banks lost billion of dollars in just one day. Due to stock market crash, nearly 5000 banks were about to close, led to bankruptcies rampant unemployment, wage cuts and homelessness which triggered the great Depression.

For determining the cause of Great Depression and preventing from future stock market crash the U.S. senate banking committee held hearings in 1932, named for the Committee's lead counsel, Ferdinand Pecora.

The hearing found that numerous financial institutions had misled investors, acted irresponsibly and participated in widespread insider trading.

After the Pecora hearing, congress passed the Securities Act 1933, which required registration of most security sales in US.

Securities Act also gave the Federal Trade Commission the power to black securities sales.

The Pecora hearing also led to the passing of the Glass- Steagall Act in June 1933, which helped to restore the economy and public confidence by seperating investment banking from Commercial banking.

On June 6, 1934, President Franklin D. Roosevelt signed the Securities Exchange Act, which created the SEC.This act gave the SEC extensive power to regulate the securities industry, including NYSE. It also allowed them to bring civil charges against individual and companies who violated Securities law.