The Beginnings of Securities Regulation in the U.S.

By Thomas Abrahamson, Spring 2014 Student Intern

flagSecurities regulation can be difficult to navigate given that it is heavily regulated. To truly understand securities regulation it helps to first understand the history of how these rules were formed. Knowing the history of when and why these regulations were crafted helps put them in better context in today’s world.

According to an excellent article drafted by the State of Wisconsin Department of Financial Institutions, most of federal securities regulations came about around 70 to 80 years ago, but there’s also a long history of securities regulation going all the way back to King Edward in the 13th Century. In the late 1800’s and early 1900’s various states in the U.S. passed laws relating to securities. These laws came mostly out of the midwestern and western states in response to investors being taken advantage of by salesmen selling worthless securities. However, it was not until 1911 that the first comprehensive securities law was enacted in the United States. This Kansas law required registration of both securities and their salesman. Within two years of the enactment of this Kansas law twenty-three states had passed some form of securities legislation. These early statutes created the starting point for future regulations. These state level regulations were continually challenged on various constitutional grounds, but they continued to gain momentum. Then in 1929 the first Uniform Securities Act was adopted in an effort to bring uniformity to the state regulatory scheme, but it was eventually repealed in 1944.

As described in another great article, drafted by the Cornell Securities Law Clinic, it was not until 1929, when the greatest stock market crash of date occurred, that the first major federal securities regulation system was enacted. This legislation was the Securities Act of 1933 (the “33 Act”). The 33 Act was administered by the newly created Securities & Exchange Commission (SEC), which provided for the registration and initial distribution of most securities. Congress’ purpose for the 33 Act was to restore investors’ faith in the market by informing them of the facts concerning securities offered for sale and by protecting them against fraud and misrepresentation. Over the next seven years, Congress passed several more acts pertaining to securities regulation including the Securities and Exchange Act of 1934, Public Utility Holding Act of 1935, Trust Indenture Act of 1939, Investment Company Act of 1940, and Investment Advisors Act of 1940.

During the 1930s and 1940s the majority of the framework for federal securities regulation in the U.S. was created. While Congress still continues to add and change legislation regarding securities, the basis for these new regulations stems directly from the past.

To view a detailed history of significant developments in financial regulation in the U.S. check out this timeline. With the timeline you will be able to break down and visualize how U.S. and world events have played a role in the development of financial regulation. You will also be given a brief description of each of these important regulatory events helping create a deeper understanding of how and why securities regulation is the way it is today.