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Stock Market Regulations

Stock markets in the United States are regulated on a federal level, and on state level. On a federal level, they are enforced by the U.S. Securities and Exchange Commission (SEC). The U.S. Securities and Exchange Commission, commonly referred to as the SEC, is the United States governing body which has primary responsibility for overseeing the regulation of the securities industry. It enforces, among other acts, the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940 and the Investment Advisors Act of 1940. It removed regulatory authority from the Federal Trade Commission.

Blue-sky laws are regulations enforced by state governments. These laws govern the sales of securities in the geographic region, as well as the registration of stock brokers and investment advisors. Each state of the United States has a securities law division. The regulatory boards go by various titles, for example, California has the Department of Corporations and Texas has the State Securities Board.

The SEC has five Commissioners who are appointed by the President of the United States with the advice and consent of the United States Senate. Their terms last five years and are staggered so that one Commissioner's term ends on June 5 of each year. To ensure that the SEC remains non-partisan, no more than three Commissioners may belong to the same political party. The President also designates one of the Commissioners as Chairman, the SEC's top executive.

President Franklin D. Roosevelt appointed Joseph P. Kennedy, Sr, father of future President John F. Kennedy, to serve as the first Chairman of the SEC. For a list of other appointees, see: Securities and Exchange Commission appointees.

Before 1929, there were few regulations governing trading in securities. In the 1920s there were many abuses in the sale and trading of securities. State Blue Sky Laws were easy to evade by making security sales across state lines. After holding hearings on the abuses Congress passed The Securities Act of 1933. It regulates the interstate sales of securities and made it illegal to sell securities into a state without complying with the state law. It requires companies which want to sell securities publicly to file a registration statement with the U.S. Securities and Exchange Commission. The registration statement provides a lot of information about the company and is a matter of public record. The SEC does not approve or disapprove the issue, but lets the statement "become effective" if sufficient required detail is provided, including risk factors. Then the company can begin selling the stock issue, usually through investment bankers.

The next year Congress passed the Securities Exchange Act of 1934 which regulates the secondary market (general-public) trading of securities. Initially it applied only to stock exchanges and their listed companies (as the word "Exchange" in the act's name implies). In the late 1930s it was amended to provide regulation of the over-the-counter (OTC) market (i.e., trades between individuals with no stock exchange involved). In 1964 it was amended to apply to companies traded in the OTC market.

In October 2000, the Securities and Exchange Commission ratified Regulation Fair Disclosure, which required publicly traded companies to disclose material information to all investors at the same time. Reg FD helped level the playing field for all investors by helping to reduce the problem of selective disclosure. The U.S. Securities and Exchange Commission's (SEC's) Regulation Fair Disclosure, also commonly referred to as Regulation FD or Reg FD was an SEC ruling implemented in October 2000 ([1]). It mandated that all publicly traded companies must disclose material information to all investors at the same time.

The regulation sought to stamp out selective disclosure, in which some investors (often large institutional investors) received market moving information before others (often smaller, individual investors).

Regulation FD changed fundamentally how companies communicate with investors, by bringing better transparency and more frequent and timely communications, perhaps more than any other regulation in the history of the SEC.

Security is a type of transferrable interest representing financial value. Traditionally, securities have been categorized into debt and equity securities, and between bearer and registered securities.

The uses that are made of securities have changed over time, both for the issuer and for the holder. Though the purpose of capital raising has sometimes been taken to be a defining characteristic of securities, its uses have expanded greatly in modern times.

They are often represented by a certificate. They include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, other derivatives, limited partnership units, and various other formal "investment instruments." Banknotes, checks, and some bills of exchange do not fall into this category. Transferable interest in commodities like oil, food grains or metals can also be referred to as securities. One can enter into contracts to buy or sell various quantities of commodities in various commodity exchanges. These become transferrable interest in the particular commodity.


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