Securities regulation in the United States
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Stock markets in the United States are regulated at the federal level and at the state level. At the federal level, they are enforced by the United States Securities and Exchange Commission (SEC). State laws governing issuance and trading of securities are referred to as blue sky laws.
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. Afterward, the company can begin selling the stock issue, usually through investment bankers.
The following year, Congress passed the Securities Exchange Act of 1934, which regulates the secondary market (general-public) trading of securities. Initially, the 1934 Act applied only to stock exchanges and their listed companies (as the word "Exchange" in the Act's name implies). In the late 1930s, the Act was amended to provide regulation of the over-the-counter (OTC) market (i.e., trades between individuals with no stock exchange involved). In 1964, the Act was amended to apply to companies traded in the OTC market.
In October 2000, the Securities and Exchange Commission ratified Regulation Fair Disclosure (Reg FD), 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.
