Editorial: History of securities law

Published: 6/27/2018 6:37:25 PM

Editor’s Note:This is the fourth in a series of guest editorials running between now and July 4, our nation’s Independence Day. These essays were solicited by the Franklin County League of Women Voters for the Athol Daily News from several especially knowledgeable and experienced members of our community, about issues as important to America today as they were when our country was born with our forefather’s Declaration of Independence nearly 250 years ago.

In 1910, Joseph Norman Dolley, the newly minted Kansas bank commissioner, complained about the “enormous amount of money the Kansas people are being swindled out of” by “fakers and ‘blue-sky’ merchants.” The latter referred to securities (stocks and other instruments) in supposed companies and mines with no real assets backing them up, like so much Kansas blue sky.

So began a 24-year effort to bring effective regulation to securities that culminated with federal passage of securities laws in 1933 and 1934. The latter created the U.S. Securities and Exchange Commission.

The Boston-born Dolley, a Republican, energetically campaigned for adoption of securities regulation at the state level. In 1911, Kansas became the first state to adopt a comprehensive securities law requiring registration of securities and of sellers of securities. While many states followed Kansas in adopting “blue-sky” laws, the 1929 stock market crash made clear that spotty and weak state laws were failing to prevent massive levels of fraud and excessive speculation. The crash and attendant Great Depression cost countless Americans their savings and livelihood, and critics of the administration of President Herbert Hoover saw the lack of effective national securities regulation as a key factor in the collapse of confidence.

New York Gov. Franklin Roosevelt laid out the case for federal securities regulation in his 1932 campaign for the presidency. In August 1932, in Columbus, Ohio, Roosevelt said the federal government has a role in requiring private organizations selling investments on public markets to provide honest information in offering securities, and in subsequent reporting. With reference to “the difficulty and often the impossibility under which state governments have labored in the regulation of holding companies that sell securities in interstate commerce,” Roosevelt said, “It is logical, it is necessary and it is right that Federal power be applied to such regulation.”

A.A. Berle Jr., (whose grandson Lloyd Crawford and family live in Hawley) who became a key architect of Roosevelt’s financial regulatory structure, noted following Roosevelt’s Columbus speech that “by far the greatest” form of savings for average Americans is in the large corporation, which has national scope, “making a country-wide plea for investment, operating through the national machinery of investment bankers.” Berle said that a federal approach was necessary to provide effective blue sky regulation of large securities issues.

To “inspire truth-telling” in public markets, Roosevelt said in Columbus that he would seek to prevent the sale of “unnecessary securities of all kinds” brought on only for “enriching those who handle their sale to the public,” and that with respect to “legitimate securities the sellers shall tell the uses to which the money is to be put.” The latter requires that “definite and accurate statements be made to buyers in respect to the bonuses and commissions the sellers are to receive; and, furthermore, true information as to the investment of principal, as to the true earnings, true liabilities and true assets of the corporation itself.”

On becoming president in March 1933, Roosevelt made the establishment of effective federal regulation of securities a cornerstone of his “New Deal.” The securities laws of 1933 and 1934 created an effective structure for regulation of securities, and for a strong system of required disclosures — Roosevelt’s “truth-telling” — by sellers of securities to the public and by publicly held companies, as well as legal accountability of directors of investment companies and publicly-traded operating companies for the truth of their filed statements.

Far from constraining economic growth, as Roosevelt’s critics feared, the securities laws were integral in creating the world’s strongest securities markets. It is true that periodic scandals have shaken the U.S. system — such as the Penn Central bankruptcy in 1983 and the collapses of Enron and Worldcom in 2002. But the national regulatory structure built by Roosevelt has proven amenable to successive waves of improvement, and the U.S. financial disclosure system remains a key to why the United States still has the strongest markets in the world.

Ken Bertch is the executive director of the Council of Institutional Investors whose office is in Washington, D.C., and he maintains a country home in Hawley.


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