called many securities brokers "blue sky merchants", as many investors were victimized by the offering of securities backed by nothing but the “blue skies of Kansas." Kansas passed the first so called, “Blue Sky Laws” in 1911. It ordered that securities be registered and that brokers be licensed. Within two years twenty-three states had followed this lead and by 1933, all states except Nevada had adopted similar blue sky laws requiring the registration of securities and brokers. Despite the effort led by the states beginning in 1911 in passing these blue sky laws, brokers easily found ways around them. The problem was so acute that the New York Stock Exchange adopted registration provisions. Unscrupulous dealers circumvented even these efforts by selling "unlisted" securities "over-the-counter" or on the "curb exchange", and by crossing state lines. Following the 1929 market crash, the Senate Banking and Currency Committee called as its first witness in 1932, in hearings now referred to as the Pecora Hearings, the president of the New York Stock Exchange, Richard Whitney. He famously said to the Senators: "You gentlemen are making a great mistake. The Exchange is a perfect institution.". Obviously, the 72nd Congress, the 73rd Congress and President Franklin Delano Roosevelt took a different view, and passed the Securities Act of 1933, the Banking Act of 1933, and the Securities Exchange Act of 1934. "It puts the burden of telling the whole truth on the seller," as President Franklin Delano Roosevelt commented.
via a new federal agency called the Securities and Exchange Commission. However, the securities markets would only ever be as good as the people who regulated them in the SEC. For instance, if the regulators decided not to enforce the laws, what good would they be? This is still the case today with the SEC and FED not enforcing existing laws.
power to make law. Rather, it is the power to adopt regulations to carry into effect the will of Congress as expressed by the statutes. The SEC cannot use its authority to expand its own jurisdiction and to invade the jurisdiction of others, particularly where the agency interpretation is in direct conflict with the language of the federal statutes. One thing that the new Acts did not do was usurp the power and jurisdiction of the states over certain aspects of securities. To this day, in equity securities, the states rather than a federal agency, still have sole jurisdiction over: 1. The Definition of Securities 2. The Transfer of Securities 3. The Rights Securities Confer 4. Regulating Un-Covered Securities 5. State Blue Sky Laws 6. Responsibilities of Intermediaries 7. Rights of Account Holders 8. Rights of Securities Owners Thus, a unified national market regulatory scheme is only possible with the cooperation of all 50 states. That is why the Uniform Commercial Code (UCC) is an important part of the national regulatory scheme today, because that is where the states sign off and on what the equity market participants rely on for those areas of the law. From 1933 to about 1968 the settlement of securities transactions was accomplished through the physical delivery of stock certificates between brokers directly. Each broker had his own securities depository. It was customary for brokers to settle customer accounts and confirm trades only when the contracted for securities where received and obtained.
bogged down. With so many delivery people crisscrossing New York from one broker to another, delivering stock certificates to settle trades, brokers became inundated with paperwork. The brokers got so far behind in clearing and settlement paperwork that many trades needed to be marked with a “DK” notation, for “Don’t Know”. In addition, "fails-to-deliver" "securities" between brokers spiked to $4.1 Billion in value by the end of 1968. Due to the problems experienced in the paperwork and financial crisis of 1967-1970, 115 firms left the NYSE either by merger, resignation or liquidation. A structural change began around 1968 when the NYSE started their Central Certificate Service, which eventually morphed into the DTC. It was the hope of the industry that this new approach would solve most of the problems created by unprecedented trading volume. The Basic Solution to the Paperwork and Financial Crisis 1. Immobilize the securities in a central securities depository – now at the DTC 2. Clear trades via a central clearing agency – now mainly via the NSCC 3. Settle trades by moving securities only via book entry – Based on U.C.C. Section 8 The two main innovations are the immobilization of securities in a central securities depository (“CSD”), and the transfer and settlement of securities via book entry movements. The latter necessitated the amendment of the UCC, adding part 5 to Article 8, which all states adopted in 1994.
When a seller fails to adhere to the settlement date delivery requirement, the settlement cycle rule and fails to deliver as contracted when selling securities, a "fail to deliver" is issued to the failing seller and a "fail to receive" is issued to the non receiving buyer.
Erik Sirri, Director, Division of Trading and Markets, May 9, 2008, SIFMA conference: “The Exchange Act requires that the national securities exchanges operate in the public interest. In 1934, for example, Congress emphasized that the exchanges are "public institutions which the public is invited to use for the purchase and sale of securities," and are not "private clubs to be conducted only in accordance with the interests of their members." Clearly, this congressional imperative must be respected. To pass muster under the Exchange Act, an exchange initiative should not merely advantage its own competitive interests or those of its liquidity providers at the expense of public customers, in the absence of a good reason to believe that the public ultimately will benefit from more efficient trading.” Gary Aguirre, February 13, 2008:
transparent. The same legislation created the Securities and Exchange Commission. As money flows from the regulated market to the unregulated market, we are now recreating the conditions that existed immediately before the Great Crash. The investment banks and hedge funds have come up with a new principle for protecting the capital markets. It is called counterparty discipline. Translated, it means: "Trust us." The term is tossed around as if it were natural law in the financial markets, much like gravity in the physical world. In reality, counterparty discipline is a slogan, a myth, which has been sold to regulators by investment banks and hedge funds so they can operate in the shadows without regulation." In our words, the problem is the "trust Us" regulatory scheme, where good old boys let each other do whatever they want, which includes the regulators at the SEC and FED not enforcing the existing laws. All that is necessary is for existing laws to be enforced to bring order to the equity and bond securities markets. |
| Other Authorities (click to open) FDR Message to Congress SECURITIES ACT OF 1933 SECURITIES EXCHANGE ACT OF 1934 NASD (FINRA) Rule Manual NYSE Member Rules |
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