Chapter One
Supervision of Registration of the Broker-Dealer and Personnel Management Activities
(9 questions on the exam)
Prior to the Great Depression, people who invested in securities often did so with little knowledge of the market. This wasn’t because investors didn’t want more information. It was because securities markets were largely unregulated and public information was scarce. The little information that was available to investors was often untrue. The situation was made worse by the common practice of buying on margin, often by investors who couldn’t afford to take large losses. Uninformed investing and speculation built a house of cards that came crashing down in 1929. In the 1930s, the Roosevelt administration and a reform-minded Congress responded with a wave of legislation to regulate the financial industries. Two major pieces of legislation would change the securities markets forever.
The Securities Act of 1933 was enacted to regulate how securities are registered, issued, and distributed to the public for the first time. The main thrust of the act is to make sure that companies publicly disclose all relevant information about their securities to the public before they are issued. This act is often referred to as the Paper Act because this disclosure is done on paper through a registration statement. Because the ’33 Act regulates how securities are sold to the public for the first time, it is said to regulate the primary market.
A year later, Congress followed up with the Securities Exchange Act of 1934, which regulates broker-dealers and how existing securities are tra