Economics Essay: Regulation of financial markets

Regulation Of Financial Markets - US and UK

In the UK, early forms of securities regulation date back to at least the 13th Century when securities brokers were required to be licensed in London.

Nevertheless, it was not until the 17th Century that stock exchange dealings and speculation became more commonplace in the marketplace, largely owing to the speculation in, and deriving from the inflated interest in the South Sea Bubble Company.

Thereafter, the city came to adopt an attitude of early self-regulation in form of what was known as “self-regulation”. The focus, therefore, was not on the ‘financial services industry’ but rather on individual sectors such as banking, insurance and investment management.

There were clear distinctions between retail banks, insurance companies, investment banks, building societies and securities firms with each sector regulated by a Self Regulating Organisation (“SRO”) that promulgated its own rules and regulations.

In the US on the other hand, it was not until the Securities Act of 1933 that the first federal securities regulation was enacted.

Congress passed this Act following the great stock-market crash of 1929 in a bid to regulate a market which had been replete with unsupervised securities transactions and often unscrupulous securities promoters and which later came to be known as the “Truth in Securities” Act.

The 1933 Act was heavily influenced by English legislation as well as state securities laws such as the Kansas securities law of 1911, (often referred to as “blue-sky laws” ).

The Securities Act 1933 (“SA 1933”) together with the Securities Exchange Act 1934 (“SEA 1934”) make up the bulk of the US securities laws.

The Securities Act 1933 regulates the initial public offerings of securities. It has two main objectives. Firstly, it requires that all investors receive ‘accurate and timely’ financial and other significant information concerning securities being offered to the public for sale.

It also aims to prohibit deceit, misrepresentations and other frauds in the sale of securities. It is for this reason that the US imposes high standards of financial disclosure of securities. As a general rule, under Section 5 of the SA 1933, all offers and sales of securities in the US must be either pursuant to a registration statement filed with the SEC or in a transaction exempt from the registration requirements.

Sales found to have been made in violation of this general prohibition are subject to a right of recession by the purchaser and can also be fined up to $10,000 and five years imprisonment.

The 1934 Act requires registration with the SEC of National securities exchanges; Brokers and dealers who conduct securities business in interstate commerce; Transfer agents; Clearing agencies; Government and municipal brokers and dealers; and Securities information processors.

The 1934 Act regulates broker-dealers and secondary dealings in securities. Under Section 15(a)(1) of the SEA 1934, any broker-dealer dealing in securities to the public is thus obliged to register with the SEC. All brokers who thus register with the SEC are then also required to join the NASD.