Securities Exchange Act of 1934

One area regulated under the Securities Exchange Act of 1934 is securities exchanges, where financial instruments such as stocks, bonds, and debentures are traded. On these exchanges, market intermediaries, including specialists, help match buyers and sellers. Specialists have historically helped provide liquidity and support more orderly price movement. Major U.S. exchanges include the New York Stock Exchange, the NASDAQ and the NYSE American.

The Securities Exchange Act of 1934 also regulates broker-dealers that trade securities outside traditional exchange floors. Over time, trading in these markets shifted from telephone-based quotation and order handling to electronic networks. One of the best-known systems is Nasdaq, originally the National Association of Securities Dealers Automated Quotations system.

In 1938, Congress amended the Securities Exchange Act through the Maloney Act, which authorized the registration of national securities associations. These associations were designed to supervise the conduct of their members, subject to SEC oversight. The law led to the creation of the National Association of Securities Dealers (NASD), a self-regulatory organization (SRO) with primary responsibility for regulating broker-dealers and brokerage firms. The NASD later also created the Nasdaq stock market.

In 1996, the SEC criticized the NASD for favoring its interests as the operator of Nasdaq over its regulatory responsibilities. The NASD then reorganized, separating its regulatory functions from Nasdaq’s market operations. In 2007, the NASD merged with the member-regulation, enforcement, and arbitration functions of the New York Stock Exchange to form the Financial Industry Regulatory Authority (FINRA).

In recent decades, additional trading venues have developed alongside traditional securities exchanges. One such venue is the alternative trading system (ATS), a trading platform that matches buyers and sellers outside a registered national securities exchange. ATSs typically operate through broker-dealer networks and are subject to a different regulatory framework than exchanges.

ATSs are generally used by institutional and other market participants seeking trading venues outside public exchanges. Many operate as private sources of liquidity, including so-called dark pools. Under Regulation ATS, adopted by the SEC in 1998, an ATS must generally register as a broker-dealer and comply with specific reporting, recordkeeping, and operational requirements unless it registers as a national securities exchange.

A specialized type of ATS is the electronic communication network (ECN), an automated system that electronically matches buy and sell orders. Market participants may use exchanges, Nasdaq, ECNs, and other ATSs to execute trades, especially large orders, in order to reduce market impact and obtain more favorable execution.

While the 1933 Act recognizes that timely information about the issuer is vital to effective pricing of securities, the 1933 Act's disclosure requirement (the registration statement and prospectus) is a one-time affair. The 1934 Act extends this requirement to securities traded in the secondary market. Provided that the company has more than a certain number of shareholders and has a certain amount of assets (500 shareholders, above $10 million in assets, per Act sections 12, 13, and 15), the 1934 Act requires that issuers regularly file company information with the SEC on certain forms (the annual 10-K filing and the quarterly 10-Q filing). The filed reports are available to the public via EDGAR.^[3] If something material happens with the company (change of CEO, change of auditing firm, destruction of a significant number of company assets), the SEC requires that the company issue within 4 business days an 8-K filing that reflects these changed conditions (see Regulation FD). With these regularly required filings, buyers are better able to assess the worth of the company, and buy and sell the stock according to that information.

While the 1933 Act contains an antifraud provision (Section 17^[4]), when the 1934 Act was enacted, questions remained about the reach of that antifraud provision and whether a private right of action—that is, the right of an individual private citizen to sue an issuer of stock or related market actor, as opposed to government suits—existed for purchasers. As it developed, section 10(b) of the 1934 Act and corresponding SEC Rule 10b-5 have sweeping antifraud language. Section 10(b) of the Act (as amended) provides (in pertinent part):

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).

The breadth and utility of section 10(b) and Rule 10b-5 in the pursuit of securities litigation are significant. Rule 10b-5 has been employed to cover insider trading cases, but has also been used against companies for price fixing (artificially inflating or depressing stock prices through stock manipulation), bogus company sales to increase stock price, and even a company's failure to communicate relevant information to investors. Many plaintiffs in the securities litigation field plead violations of section 10(b) and Rule 10b-5 as a "catch-all" allegation, in addition to violations of the more specific antifraud provisions in the 1934 Act.

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 Business Week that they believe this is the first time a President has ever delegated the authority to someone outside the Oval Office.^[5]