“I favor any public policy to make it as difficult as possible to concentrate control of American industry in the hands of a few for purposes of financial exploitation.”
January 15, 1938 Your Business and Your Government – Address by Robert Jackson
By the winter of 1932-33, the economic collapse had evolved into a crisis about the future of American capitalism. Restoring public faith and credibility in the market system and the paper economy became a fundamental goal of the incoming administration. While New York Governor Franklin D. Roosevelt promised a “New Deal for Americans,” there were few specifics about his proposals. But he understood broadly what ailed the national markets. Roosevelt wanted to reform the securities system in order to preserve it, and promoted legislative alternatives only “when evils are not eradicated by people in the business in which the evil exists.”22
By the time of Roosevelt’s inauguration in March 1933, the country was in economic collapse. With little time or inclination to study proposed reforms, Roosevelt turned to a cadre of academic and political experts to draft legislation that would reform the industry by empowering the national government to regulate the securities markets through executive administrative agencies. Harvard Law School Professor Felix Frankfurter, Yale Law School Professor William Douglas, James Landis, Benjamin Cohen and Thomas Corcoran all worked with White House advisor and former Columbia professor Raymond Moley on legislation that would become the Securities Act of 1933.23 Wiley Rutledge and Robert Jackson would work with the administration to defend the law in court.
These experts had studied and analyzed the ills that led to the collapse of the stock market. They had proposals ready for quick implementation, and while they differed in approach, their proposals followed the earlier model of the blue sky laws by advocating the creation of an administrative agency with authority to regulate the issuance and sale of stocks. As these experts saw it, the problem was not one that individual states could solve. The national market demanded a national solution. The regulation of securities sold in interstate commerce required rules mandating disclosure necessary to inform potential purchasers. The passage of the Securities Act of 1933 was the initial step in achieving that solution.24
Yet, even as the ink was drying on the act, securities industry representatives argued that the act was an overreach of federal power. Some securities regulation proponents, including Frankfurter and Douglas, countered that the act was too weak to be truly effective. Both sides jockeyed for amendments to the Exchange Act in 1934. The stunning revelations of the Pecora Committee investigation into the causes of the stock market crash provided added impetus to the proponents of more expansive reform. House Majority Leader Sam Rayburn approached Landis, who had played a major role in drafting the 1933 Act, asking him for help in defending the amendments to the law, which became the Securities Exchange Act of 1934.25
The Securities Exchange Act was the first federal legislative initiative specifically intended to regulate stock exchanges and publicly-held companies that distributed securities (i.e., stocks and bonds) to the public. The act requires publicly held companies to make periodic public disclosures, and disclosures in connection with proxy solicitations. The act also mandates certain disclosures in connection with tender offers for the shares of publicly held companies. Finally, the act regulates trading by certain company insiders and broadly prohibits all fraud in connection with the sale of securities.26
With the creation of the U.S. Securities and Exchange Commission, President Roosevelt appointed many of those same academics to the new agency to enforce its administrative regulations. Landis was an important supporter of both acts and the SEC’s second Chairman. Douglas eventually left his Yale professorship to join the SEC Commission.27 Hugo Black, junior U.S. Senator from Alabama, became one of the administration’s strongest advocates in Congress. Robert Jackson worked inside the U.S. Department of Justice and eventually as U.S. Attorney and Solicitor General, arguing the administration’s positions before the courts. Stanley Reed served as Solicitor General before his appointment to the Supreme Court. In 1939, Wiley Rutledge, a strong critic of the anti-New Deal court decisions, left his Iowa Law School deanship to become a judge on the U.S. District Court of Appeals of the D.C. Circuit, where his decisions consistently supported the New Deal. This coterie of professors and politicians would rise to become Supreme Court Justices responsible for the next four decades of securities law jurisprudence.
(22) FDR to Fred I. Kent, March 27, 1934, Franklin D. Roosevelt Papers FDR Presidential Library, Hyde Park, NY.
(23) As noted below:
(24) Joel Seligman, The Transformation of Wall Street (Aspen Publishers: New York, 2003), 40-70; A. C. Pritchard and Robert B. Thompson, “Securities Law and the New Deal Justices,” 95 Va. Law Review (June 2009): 841-862.
(25) Seligman, 84-85.
(26) With respect to stock exchanges including the National Association of Securities Dealers, which operates the NASDAQ market, or the New York Stock Exchange, the act requires registration and adherence to certain principles of self-regulation to ensure that exchanges operate transparently and fairly. Every securities broker and every securities dealer must be a member of a so-called self-regulatory organization. If either a securities firm or an individual affiliated with a securities firm violates the rules or regulations of the exchange, or the federal securities laws, or just and equitable principles of trade, the law permits the government to impose sanctions. These sanctions can range from fines to censures to permanent barring from the securities industry. The act also includes civil and criminal penalties against those who violate its provisions. The U.S. Securities and Exchange Commission is the primary regulatory agency that enforces the federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934.
