From Wall Street Chaos to Investor Protection

Adam English, MBA, AIF, CRPC

The stock market crash of 1929 and the Great Depression left lasting scars on America. Families lost their savings, businesses failed, unemployment soared, and confidence in the nation’s financial system was severely damaged.

Washington’s challenge was no longer simply dealing with the aftermath. The bigger question was: What could be done to make America’s financial markets safer, fairer, and more trustworthy going forward?

That effort led to a series of major financial reforms, including the Securities Exchange Act of 1934, which created the Securities and Exchange Commission, better known as the SEC.

The SEC was given the responsibility of overseeing the securities markets and enforcing federal securities laws designed to protect investors and promote fair, orderly, and transparent markets.

In Plain English: Congress established the rules of the road, and the SEC became the cop on the beat responsible for helping enforce them.

Why Was the SEC Created?

To understand why the SEC was created, we first must go back to the 1920s.

During the Roaring Twenties, the stock market captured the imagination of millions of Americans. Investing became increasingly popular, and stock prices climbed dramatically. But the financial markets of the 1920s did not have many of the investor protections and disclosure requirements we take for granted today.

Some companies and insiders provided misleading information, manipulated stock prices, and engaged in questionable trading practices. Investors often had limited reliable information about the companies in which they were putting their money.

Then came the stock market crash of 1929. The crash destroyed enormous amounts of wealth and further damaged the public’s confidence in the financial system. The Great Depression that followed created tremendous economic hardship throughout the country. Americans increasingly demanded greater transparency, accountability, and protection in the financial markets.

The federal government responded by creating a new framework for regulating the securities markets.

What Does the SEC Actually Do?

The SEC’s mission centers on protecting investors, maintaining fair and orderly markets, and overseeing important parts of the securities industry.

One of the basic ideas behind our modern securities laws is surprisingly simple: Investors should have access to important and truthful information before putting their money at risk.

Public companies that offer securities to investors are generally required to provide financial disclosures and other material information about their businesses, financial condition, operations, and risks. These disclosures give investors an opportunity to evaluate a company based on information that is available to the public rather than information known only to company insiders.

The SEC also oversees important participants in our financial markets, including securities exchanges, brokerage firms, investment advisers, and other regulated entities.

Federal securities laws and regulations are intended to combat practices such as securities fraud, market manipulation, and illegal insider trading. In simple terms, the goal is to create rules for the marketplace and a system for enforcing those rules.

What Does This Mean for Investors?

I believe there are times when government can become too large and regulation can become excessive or unnecessarily complicated. But there are also times when reasonable rules are necessary for a marketplace to function properly.

In my opinion, the reforms that followed the Great Depression, including the creation of the SEC, were an important step toward rebuilding confidence in America’s financial system.

Think about what these rules mean for an everyday investor. If you are considering an investment through a financial professional or brokerage firm, you should have access to relevant information about the investment, including material risks. Financial professionals and firms also operate within a legal and regulatory framework that establishes standards for how investments are offered, recommended, bought, and sold.

The objective is not to eliminate investment risk. The SEC cannot guarantee that an investment will make money or protect an investor from every loss.

Instead, securities regulation is designed to help provide transparency, discourage fraud and manipulation, and establish standards for the people and institutions participating in our financial markets.

That is an important distinction. The SEC does not make investing risk-free. It helps establish the rules under which investing takes place.

The SEC Is Only Part of the Picture

The SEC is not the only organization involved in overseeing America’s financial industry.

FINRA, the Financial Industry Regulatory Authority, is a self-regulatory organization that oversees member broker-dealers and their associated professionals. State securities regulators also play an important role in regulating certain investment professionals and securities activities.

Insurance products generally fall under a different regulatory structure, with state insurance departments and commissioners playing an important role in their oversight.

Together, these organizations form different layers of the regulatory system surrounding America’s financial markets.

In Plain English

Before the reforms of the 1930s, America’s securities markets operated with far fewer federal guardrails than investors have today. The crash of 1929 and the Great Depression demonstrated what could happen when speculation, inadequate disclosure, questionable practices, and collapsing confidence came together.

The SEC was created as part of the government’s response. It cannot prevent markets from falling. It cannot guarantee an investment will succeed. And it cannot remove risk from investing.

What it can do is help enforce the rules, require greater transparency, pursue violations of federal securities laws, and give investors greater access to information when making financial decisions.

This article provided by Adam C. English, Director, Private Wealth Advisor of Raymond James & Associates, 606 Bald Eagle Dr., Suite 401, Marco Island, FL 34145. He may be reached at (239)513-6510. email adam.english@raymondjames.com

Website: https:/www.raymondjames.com/querinenglishwm/

Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. Private Wealth Advisor is a designation awarded by Raymond James to financial advisors who have demonstrated mastery in anticipating and managing the expansive financial needs of high-net-worth individuals, families, and organizations.