Chapter One
Investment Companies and Their Regulation
Prior to the Great Depression, the securities markets were largely unregulated. People who invested in securities generally did so with little knowledge of the market. Public information was scarce, and the information that was available to investors was often untrue. This situation was made worse by the common practice of buying on margin, often done 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. Four major pieces of legislation were enacted over a seven-year period that would change the securities markets forever.
The first of them was the Securities Act of 1933, which regulates how securities are issued and distributed to the public for the first time. The main thrust of the Act is to ensure that companies disclose all relevant information about their securities to the public before they are issued. This law is often referred to as the Paper Act, because its required disclosures are made on a written registration statement. Because the Securities 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