The Securities and Exchange Act of 1934 (Exchange Act) is United States legislation that regulates securities trading on the secondary market, stock exchange markets and the participants involved to protect investors. The secondary market is where sales of financial assets, such as stocks, bonds, stock options and stock futures, are made after a security or asset is initially issued by a company. Participants in this market, which include brokers, exchanges, clearing agencies and transfer agents, are required to comply with the Exchange Act.
The Securities and Exchange Commission (SEC), a U.S. federal agency that oversees securities transactions and enforces securities laws, was also formed under Section 4 of the Exchange Act. The SEC's enforcement domain encompasses the Exchange Act, the Securities Act of 1933 and the Sarbanes-Oxley (SOX) Act of 2002. Market participants are required to register with the SEC.
The Exchange Act also includes a mandatory disclosure system to ensure companies are publicizing information to help the investing public make informed decisions before they start making transactions. These requirements are enforced by the SEC: Companies with publicly traded securities and more than $10 million in assets are required to file various periodic reports with the agency, which the SEC then publicizes to all investors via its EDGAR online database.
The Securities Act of 1933 differs from the Exchange Act of 1934 in that the former focuses on governing securities issued by companies in what is known as the primary market, while the 1934 Act deals mainly with the regulation of secondary trading, which occurs between parties unrelated to the issuing companies, such as brokers and dealers.
The Securities and Exchange Act of 1934 covers several other areas of securities law, including the following:
- Antifraud. One driver for enacting the Exchange Act was the disruptions caused by pools, which are devices used to manipulate the market price of a security in an exchange so that once it reaches a high point, pool members could unload holdings right before the price dips. The 1934 Act contains specific antifraud provisions that prohibit such manipulation regarding exchange-listed securities.
- Insider trading. The 1934 Act contains provisions that prohibit fraudulent insider trading, which is when a person trades a security with the knowledge of material information not available to the public, including those with whom they are trading. These provisions cover anonymous stock exchange trading in addition to face-to-face transactions.
- Proxy solicitation. The Exchange Act regulates the disclosure of information, found in proxy materials, that are used to obtain votes in annual or special corporate shareholder meetings. These materials are filed with the SEC before any solicitation takes place and must include all germane facts holders need to know before they vote.
- Tender offers. The Securities and Exchange Act of 1934 also requires the disclosure of important information by anyone intending to either directly purchase or make a tender offer for more than 5% of a company's securities. Because these offers are typically made to gain control of the company, these rules are in place to provide shareholders with information so they can make informed decisions with regard to these corporate events.