Congress established the Securities and Exchange Commission via the Securities Exchange Act of 1934. The Act provides the SEC with wide authority over all areas of the securities sector. This means the SEC can register, regulate, and supervise transfer agents, clearing agencies, self regulatory organizations (SROs), and brokerage firms. The NASDAQ Stock Market and the New York Stock Exchange are both SROs, along with the Chicago Board of Options and the Financial Industry Regulatory Authority (FINRA).
The Act also names and bans certain kinds of market behavior and provides the Commission disciplinary authority above regulated entities and everyone who is associated with them.
In addition, the Act gives the SEC power to require regular reports from companies having publicly traded securities.
Companies whose assets exceed $10 million and securities are held by more 500 owners are to file reports every year and other necessary periodic reports. Such reports are open to the public through the SEC’s EDGAR database.
The Securities Exchange Act also controls the disclosure in materials that are used to get shareholders’ votes in yearly or special meetings conducted to elect directors and approve other corporate action. This information, which is found in proxy materials, need to be filed with the Commission before any solicitation so that disclosure rules are complied with. Whether by management or shareholder groups, solicitations should express all key facts that concern the issues that holders are to vote on.
According to the Securities Exchange Act, anyone who wants more than 5 percent of a company’s securities, either by tender offer or direct purchase, should disclose all pertinent information. In most cases, such an offer is made in order to acquire control over the company. Like the proxy rules, this lets shareholders make educated decisions on such major corporate developments.
The securities laws extensively disallow illegal activities of any nature as per the offer, purchase, or sale of securities. These provisions are the foundation for several types of disciplinary sanctions, including those against devious insider trading.
Registration of Exchanges, Associations, and Others
The Act dictates that a range of market participants register with the Commission, from exchanges, to transfer agents to clearing agencies and more. Registration for these organizations means filing of regularly updated disclosure documents.
As mentioned, the exchanges and the Financial Industry Regulatory Authority (FINRA) are both self-regulatory organizations (SROs). SROs should establish rules on disciplining members for unacceptable conduct and on applying measures that uphold investor protection and market integrity. Proposed SRO rules have to be reviewed by the SEC and published for the public to provide their feedback.