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Fair To All People: The SEC and the Regulation of Insider Trading

Foundations of Fairness: The SEC Develops Theories and Rules on Corporate Disclosure

Before 1940, the SEC was primarily concerned with regulating holding companies and asserting itself over the national stock exchanges. The agency spent much of its time and energy building the administrative capacity to regulate the national markets in order to build investor confidence. Yet partly due to the budget cuts during the Eisenhower Administration, the SEC faced growing pressures to maintain its disclosure and antifraud enforcement programs to sustain market confidence.

The SEC's goals clashed with the Eisenhower Administration's desire to cut federal budget expenses, which caused severe cuts in the agency's staffing. In 1941, the SEC employed 1723 persons; by 1953, the SEC staff had been reduced to 773. Throughout the early 1950s, the SEC struggled to administer the increasing volume of filings required by the law. At the same time, the stock markets rebounded; mutual funds values increased eighteen fold from 1945 to 1961. SEC Commissioner Richard McEntire openly questioned whether the Commission could "adequately administer the seven statutes entrusted to it."(11)

The SEC's role in the enforcement of rules against insider trading was sporadic and limited to those cases falling under Section 16(c) and enforcing the reporting provisions of Section 16(a). While active enforcement of insider trading cases by the SEC was minimal throughout the 1940s and early 1950s, the SEC developed rules on corporate proxy solicitation and stock trading that constantly promoted broad values of informational disclosure as the best way to insure investor confidence in the markets.(12) Providing information to investors about company assets, director and officers' compensation; setting procedures for accounting practices; and promoting stockholder rights to company information remained part of the SEC agenda, as they had from the passage of the Exchange Act.

But the investment climate was changing and the late 1950s bull market was driven by a speculative climate in which securities fraud thrived. In its report on stock market activities, the Senate Banking Committee criticized the administrative effectiveness of the SEC. The report decried the lax regulations on floor trading, the lack of division between broker-dealer functions, and an increase in insider trading.(13) With the election of President John F. Kennedy and his 1961 appointment of SEC Chairman William L. Cary, the SEC boldly stepped into that breach.

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Footnotes:

(11) Joel Seligman, The Transformation of Wall Street (Aspen Publishers: 2003), 266-7.

(12)"Company Regains Schulte's Profits," New York Times, August 31, 1944, 22.

(13) "Text of the Senate Banking Committee's Report on Its Stock Market Survey," The New York Times, May 27, 1955, 8-9

Related Museum Resources

Papers

February 13, 1942: Memo from Raymond Vernon to James A. Treanor, Jr. on summary of transactions in American Telephone and Telegraph Co. common stock in selected periods
transcript pdf (Courtesy of the National Archives and Records Administration)
August 11, 1942: Memo from Woolvin Patten to James A. Treanor, Jr. on insider trades
transcript pdf (Courtesy of the National Archives and Records Administration)
August 14, 1942: Memo from Mr. Keenan to Mr. Treanor, Miss Stieg, Mr. Knudsen and Mr. Vernon on market disclosure rule
transcript pdf (Courtesy of the National Archives and Records Administration)
September 2, 1942: Letter from Henry R. Stern to SEC on proxy rules
transcript pdf (Courtesy of the National Archives and Records Administration)
September 9, 1942: Letter from M.J. Keena, New York Curb Exchange, to Milton V. Freeman, SEC, regarding suggested amendments to proxy rules (Regulation X-14)
image pdf (Courtesy of the National Archives and Records Administration)
September 12, 1942: Letter from Milton V. Freeman to M.J. Keena, New York Curb Exchange
transcript pdf (Courtesy of the National Archives and Records Administration)
September 14, 1942: Letter from Edward A. LeRoy, Jr., Phoenix Securities Corporation, to Milton V. Freeman on proxy rules
transcript pdf (Courtesy of the National Archives and Records Administration)
September 14, 1942: Letter from Edward B. Twombly, Putney Twombly & Hall, to SEC General Counsel regarding amendments to proxy rules
image pdf (Courtesy of the National Archives and Records Administration)
September 14, 1942: Letter from Overseas Securities Co., Inc. to SEC, attention of Milton V. Freeman, regarding proposed draft of amendments to SEC proxy rules
image pdf (Courtesy of the National Archives and Records Administration)
September 14, 1942: Letter from Pullman Incorporated to Milton V. Freeman, SEC, regarding proposed draft of amendments to SEC proxy rules
image pdf (Courtesy of the National Archives and Records Administration)
September 21, 1942: Letter from Harry M. Wolfe to SEC, supporting amendments to SEC proxy rules
image pdf (Courtesy of the National Archives and Records Administration)
September 23, 1942: Letter from Calvin Philips, Jr. to SEC on proxy rules
transcript pdf (Courtesy of the National Archives and Records Administration)
September 23, 1942: Letter from U.S. Representative Lyle H. Boren to SEC Chairman Ganson Purcell on proposed Rule X-15C1-10
image pdf (Courtesy of the National Archives and Records Administration)
October 1, 1942: Letter from James A. Treanor, Jr. to Senator Tom Connolly
transcript pdf (Courtesy of the National Archives and Records Administration)
October 2, 1942: Telegram from SEC Chairman Ganson Purcell to Emil Schram, New York Stock Exchange
image pdf (Courtesy of the National Archives and Records Administration)
October 10, 1942: Letter from Emil Schram, President, New York Stock Exchange, to SEC Chairman Ganson Purcell regarding proposed changes to proxy rules
image pdf (Courtesy of the National Archives and Records Administration)
October 15, 1942: Letter from SEC Chairman Ganson Purcell to Emil Schram, New York Stock Exchange
transcript pdf (Courtesy of the National Archives and Records Administration)
November 10, 1942: Letter from SEC Chairman Ganson Purcell to U.S. Representative Lyle Boren on SEC jurisdiction to regulate fraudulent trades
transcript pdf (Courtesy of the National Archives and Records Administration)
December 12, 1942: Letter from U.S. Representative Lyle H. Boren to SEC Chairman Ganson Purcell on proposed Rule X-15C1-10
image pdf (Courtesy of the National Archives and Records Administration)
December 18, 1942: SEC Release on Adoption of Revisions to Proxy Rules
image pdf (Courtesy of the National Archives and Records Administration)
March 2, 1943: Letter from Sidney L. Schwartz, San Francisco Stock Exchange, to SEC Chairman Ganson Purcell regarding proxy regulation
image pdf (Courtesy of the National Archives and Records Administration)
March 13, 1943: Telegram to SEC Chairman Ganson Purcell
image pdf (Courtesy of the National Archives and Records Administration)
May 20, 1947: Letter from SEC Chairman James J. Caffrey to Senator Charles W. Tobey on S.1099 revisions
transcript pdf (Courtesy of the National Archives and Records Administration)
February 4, 1948: Memo from Gerald W. Siegel to Louis Loss regarding legislative history of subsection 17(b), Securities Act of 1933
image pdf (Courtesy of the National Archives and Records Administration)
February 23, 1950: Letter from Baldwin B. Bane to Charles J. Odenweller, Jr. regarding David Colby v. Raymond Klune and 20th Century Fox Film Corporation
transcript pdf (Courtesy of the National Archives and Records Administration)
May 1, 1950: Letter from Richard B. McEntire, SEC Acting Chairman, to Senator Burnet R. Maybank regarding S.2765
transcript pdf (Courtesy of the National Archives and Records Administration)
March 30, 1951: Letter from Richard B. McEntire to John T. Callahan, with March 22, 1951 article from "The Northern Miner"
transcript pdf (Courtesy of the National Archives and Records Administration)
July 10, 1952: Letter from SEC Chairman Donald C. Cook to Joseph P. McMurray, Senate Committee on Banking and Currency, regarding S.3427
transcript pdf (Courtesy of the National Archives and Records Administration)
February 21, 1955: S.Res. 59 - Resolution to make a study of the issuance of uranium mining stocks, by Mr. Chavez, to the U.S. Senate, 84th Congress, 1st Session
image pdf (Courtesy of the National Archives and Records Administration)
April 26, 1955: Letter from Senator Dennis Chavez to SEC Chairman Ralph Demmler for information for Senate Resolution 59
transcript pdf (Courtesy of the National Archives and Records Administration)
March 26, 1956: Letter from Lewis L. Baxter to SEC regarding solicitation of proxies by corporation management
transcript pdf (Courtesy of the National Archives and Records Administration)
December 19, 1957: Letter from Philip E. Kendrick to Philip A. Loomis, Jr. regarding Rule 10b-6
image pdf (Courtesy of the National Archives and Records Administration)
January 3, 1958: Letter from Philip A. Loomis, Jr. to Philip E. Kendrick
transcript pdf (Courtesy of the National Archives and Records Administration)
October 15, 1958: Memo from Thomas Meeker to SEC Chairman Edward Gadsby on Commission endorsement of the Uniform Securities Act
transcript pdf (Courtesy of the National Archives and Records Administration)
March 18, 1959: Letter from Henry H. Pierce, Jr., Connecticut Bank Commissioner, to Paul Windels, Jr. regarding Connecticut Bill No. 2715
image pdf (Courtesy of the National Archives and Records Administration)
March 28, 1959: Letter from Thomas Meeker to Henry H. Pierce, Jr., Connecticut Bank Commissioner
transcript pdf (Courtesy of the National Archives and Records Administration)
September 21, 1959: Memo of Closed "SEC" Session at the Convention of the North American Securities Administrators
transcript pdf (Courtesy of the National Archives and Records Administration)

Photos

March 24, 1942: SEC Staff in Philadelphia

(With permission of AP/Wide World Photos )
April 5, 1942: SEC Headquarters in Philadelphia

(With permission of AP/Wide World Photos )
1947: SEC Commission

Edmond M. Hanrahan, Robert K. McConnaughey, James J. Caffrey, Richard B. McEntire and Harry A. McDonald