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SEC: Securities and Exchange Commission

December 5, 2019 in History

By History.com Editors

The Securities and Exchange Commission, or SEC, is an independent federal regulatory agency tasked with protecting investors and capital, overseeing the stock market and proposing and enforcing federal securities laws. Prior to the SEC’s creation, oversight of the trade in stocks, bonds and other securities was virtually nonexistent, which led to widespread fraud, insider trading and other abuses. The SEC was created in 1934 as one of President Franklin Roosevelt’s New Deal programs to help fight the devastating economic effects of the Great Depression and prevent any future market calamities.

Stock Market Crash Sparks Criticism

After World War I, during the “Roaring 20s,” there was an unprecedented economic boom, during which prosperity, consumerism, overproduction and debt increased. Hoping to strike it rich, people invested in the stock market and often bought stocks on margin at huge risk without federal oversight.

But on October 29, 1929 — “Black Tuesday” — the stock market crashed, along with public confidence as investors and banks lost billions of dollars in just one day. The stock market crash caused nearly 5,000 banks to close and led to bankruptcies, rampant unemployment, wage cuts and homelessness which triggered the Great Depression.

To help determine the cause of the Great Depression and prevent a future stock market crash, the U.S. Senate Banking Committee held hearings in 1932, known as the Pecora hearings, named for the committee’s lead counsel, Ferdinand Pecora. The hearings determined that numerous financial institutions had misled investors, acted irresponsibly and participated in widespread insider trading.

Securities Act of 1933

Prior to the creation of the SEC, so-called Blue Sky Laws were on the books at the state level to help regulate securities sales and prevent fraud; however, they were mostly ineffective. After the Pecora hearings, Congress passed the Securities Act of 1933, which required registration of most securities sales in the United States.

The Securities Act aimed to help prevent securities fraud and stated that investors must receive truthful financial data about public securities for sale. It also gave the Federal Trade Commission the power to block securities sales.

Glass-Steagall Act

The Pecora hearings also led to the passing of the Glass-Steagall Act in June 1933, which helped to restore the economy and public confidence by separating investment banking from commercial banking.

The Glass-Steagall Act created the Federal Deposit Insurance Corporation (FDIC) to oversee banks, protect consumers’ bank deposits and manage consumer complaints.

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