Securities and Exchange
Acts of 1933 and 1934
Georgia CTAE Resource Network
Curriculum Office, February 2009
To accompany curriculum for the Georgia
Peach State Career Pathways
February 2009, Philip Ledford & Dr. Frank
Flanders
Understanding and Essential
Questions
• Enduring Understanding
The Securities and Exchange Acts of 1933 and 1934
established the Securities and Exchange Commission. It
also required accountants to follow strict procedures called
standard accounting practices. Overall accounting is now
conducted more honestly since the acts were passed.
• Essential Questions
•How did the acts shape the future of accounting.
•Why is it important to accountants as professionals to
have these rules set in place.
Objectives
• Explain what securities are.
• Discuss why the Securities Acts were passed.
• Explain what the Securities Acts did.
• Discuss what the Securities Acts did for the future of
accounting.
• Identify and Explain the different types of fraudulent
activities.
A Quick Overview of Accounting
• Accounting is the system of records, reporting,
and verifying financial assets, income, and
expenses into ledgers.
• This financial information is used by lenders,
banks, investors, and many other financial and
business authorities to allocate finances,
expenses and to make informed financial
decisions for their companies and businesses.
The Future of Accounting
• The two acts shifted accountancy in a new direction by
passing laws that required accountants to record multiple
accounts and more detailed accounts for businesses and
investors.
• The Securities Act of 1933 and 1934 not only shifted the
way accountancy was done, but it also paved the way for a
better future for accountants as professionals.
The Future of Accounting (con’t)
• The two acts caused significant increase in the necessity of
accountants, and a variety of different types of accounting
including tax accounting, management accounting, financial
accounting and open-book accounting.
• After the passing of the two laws accounting as a
professional career has only since expanded and improved.
There are colleges all over the world that specialize in
accounting, and prepare students to take accounting skills
and make them highly profitable.
The Future of Accounting (con’t)
• Accountants are used by many different types of businesses
like law firms, hospitals, public services, small and large
businesses, and corporations.
• Accountants are even hired by high grossing individuals like
movie actors and athletes.
Securities and the Stock Market
•What are “securities”?
• Securities are negotiable investment having financial value. Any
note, stock, treasury stock, bond, debenture, certificate of
interest or participation in any profit-sharing agreement, are
all considered securities.
• The most common example of a security would be if an individual
bought a part of ownership (stock) in a company. Literally,
that part of ownership in the company that the individual
bought is a security. This ownership in a company or security
can then be sold willingly by the investor.
Securities and the Stock Market
(con’t)
• Where are securities bought
and sold?
•Securities are bought and sold in stock markets. Some of
the more popular markets are the New York Stock
Exchange and the American Stock Exchange.
Securities and the Stock Market
(con’t)
• Types of Stock Market
• The overall market is called the Capital Market. The Capital
Market includes the bond markets and the stock markets,
but consists of the Primary market and the Secondary
market.
Securities and the Stock Market
(con’t)
•
The Primary market is where new securities such
as brand new stocks and bonds are bought and
sold to investors.
• The Secondary market is where already issued
securities are bought and sold between investors.
This market is usually done on an exchange such
as the New York Stock Exchange.
The Stock Market Crash.
• Shortly after the 1929 stock market crash and
during the upcoming Great Depression the
Securities Act of 1933 was signed into law by
President Franklin D. Roosevelt.
• The Securities Act of 1933 as a part of the New
Deal, was the first major federal legislation to
regulate the offer and sale of securities.
Securities Act of 1933 (con’t)
• Two major objectives of the
1933 Securities Act.
• To require that investors receive significant information
handling securities being offered for public sale.
• To prohibit dishonest, misrepresentations, and other fraud
in the sale of securities to the public.
Securities Act of 1933 (con’t)
• The Ideas of the 1933
Securities Act.
• The underlying idea of the 1933 Act was that issuers (i.e., a
company) should provide investors with adequate
information about the issuer of the securities and the
securities itself. This allows the potential investor to make
an informed decision to invest in a companies securities.
Securities Act of 1933 (con’t)
• The Ideas of the 1933
Securities Act.
• Issuers must register securities with the Securities and
Exchange Commission. The SEC is a federal agency
overseeing the securities market and enforcing federal
securities laws.
• Having issuers register information about themselves and
the securities discouraged bad behavior and regulated deals
fairly.
Securities Exchange Act of 1934
• Why another securities act?
• Following the 1933 act, the 1934 act required issuers to
follow similar procedures as the 1933 act but for the
secondary market instead of the primary market. The 1934
act gave a large amount of power to the Securities and
Exchange Commission to over see a all aspects of security
industry, which included the secondary market.
Securities Exchange Act of 1934
(con’t)
• Two major objectives of
the 1934 Securities Act.
• The Securities Exchange Act of 1934 was passed regulating
and overseeing the secondary market where already issued
securities are bought and sold.
• The 1934 act also gives power the SEC to require periodic
reporting of information by companies with publicly traded
securities.
Securities Exchange Act of 1934
(con’t)
• The Ideas of the 1934
Securities Act.
• The underlying idea of the 1934 act is closely similar to that
of the 1933 act. The difference is that the ’34 act regulates
the secondary market instead of the primary.
• The secondary market consists of already issued securities.
The secondary market refers to assets that have been
recently used. Alternative uses for existing products are
also included in the secondary market.
Securities Exchange Act of 1934
(con’t)
•The Ideas of the 1934
Securities Act.
• A main area in the 1934 act was the regulation of the actual
places where securities are bought and sold (e.g., New York
Stock Exchange). At these places agents of exchange work
as “middlemen” for competing interests. The job of the
agent is to keep price continuity and liquidity (how quickly
and cheaply an asset can be converted into cash) in the
market.
Securities Exchange Act of 1934
(con’t)
• Fraud Protection and Sarbanes-Oxley
•Another important section of the Securities and Exchange Acts was
to make the conduct of the securities industry as transparent
(truthful) as possible. The fact that public entities could archive
and review almost all actions taken place in the market lowered
criminal and fraudulent activities.
•In 2002 after the Arthur Anderson, Enron and WorldCom scandal,
another securities act was put into place called Sarbanes-Oxley.
This act would restore confidence in public accounting and
securities management and increase executive awareness and
accountability. More details on this act is explained in a different
lesson.
Types of Fraud
• Security Fraud – Security fraud is when investors are deceived by
untrue statements on any form of securities. Usually resulting in a
loss of money on the investors half. Basically, investors that have
lost investments due to false statements regarding their securities
have been victims of security fraud. Among other fraudulent
security activities are corporate fraud, accountant fraud, and
mutual fund fraud.
- Insider Trading – The trading of a corporations securities by
individuals with access to non-public information pertaining the
securities or the company.
Types of Fraud (con’t)
• Bank Fraud – Bank fraud is when money is fraudulently received from a
financial institute (bank). Credit card fraud, check-kiting, check forging,
non-disclosure on loan applications, and unauthorized use of automatic
teller machines (ATMs) among other frauds are all considered bank frauds.
• Money Laundering – Engaging in financial transactions to hide the identity,
or source of illegally obtained money. In earlier years this method was
used mostly by organized crime groups.
• Embezzlement – The act of untruthfully, and secretly taking assets (usually
financial) from whom ever said assets are entitled to.
Types of Fraud (con’t)
• Ponzi Scheme – A scheme named after Charles Ponzi who used a
scheme that made him millions in 1920. A Ponzi scheme is when
an individual entices an investor with an extraordinary return rate
on some sort of investment they make. The trick is to get the
investor to keep investing his profit further into the investment.
Over time more investors come, and only a fraction of the profit is
given back, the rest is kept
Types of Fraud (con’t)
• Making False Statements – Making untrue statements to or
concealing information from the federal government is legally
considered “making false statements”. Companies that hide
records of losses in money or other financial assets would be tried
for making false statements. Companies that record a gain of
more money than what was actually gained would be considered
making false statements.
Securities Acts Summary
• What did the Two Securities Acts basically
do?
• Set up a required registration of securities of all kinds.
• Required all information on securities to be transparent (honest and
publicly available).
• Required mandatory periodical reporting of information by companies with
publicly traded securities.
• Identified and prohibited certain types of conduct within the markets.
• Granted the SEC with the power to discipline any company or person
associated with prohibited conduct.