Federal securities laws regulate the disclosure of information on publicly held corporations. These laws were originally enacted in response to the “financial traumas” of the Wall Street crash of October 1929 (Millstein and Katsh, 1981). The number of traded shares on the New York Stock Exchange (NYSE) dramatically diminished from 1.125 billion shares in 1929 to 425 million shares in 1932. The NYSE market capitalization dropped from approximately USD 89 billion in 1929 to about USD 15 billion in 1932 (Khademian, 1992; Afterman, 1995). To protect the interest of investors from further financial tragedies, Congress enacted the Securities Act of 1933. Initially, the enforcement of this Act fell under the jurisdiction of the Federal Trade Commission (FTC). To further extend the protection of investors, Congress also passed the Securities Exchange Act of 1934. The 1934 Act created the Securities Exchange Commission (SEC). The SEC is an independent regulatory agency in Washington D.C., mandated to administer several federal securities laws, including the 1933 Act.
The following six laws were enacted between 1933 and 1940:
- Securities Act of 1933;
- Securities Exchange Act of 1934;
- Public Utility Holding Company Act of 1935;
- Trust Indenture Act of 1939;
- Investment Company Act of 1940;
- Investment Advisers Act of 1940.
Source: Afterman (1995).
Of particular interest to this study are the Securities Act of 1933 and the Securities Exchange Act of 1934. The 1933 and 1934 Acts are based on the philosophy that investors can be protected by a regulatory framework that provides full disclosure of information related to the distribution and trading of securities. The 1933 Act mainly concentrates on initial public offerings (IPOs) and secondary offerings of previously unregistered securities. The 1934 Act focuses on the trading of issued securities. This Act provides an elaborated regulatory framework to control the disclosure of information on boards in publicly held corporations that are registered under the rules of the 1933 Act. Besides the regulation of proxy solicitation, the 1934 Act also provides continuous reporting schemes. These currently require corporations to file annual Forms 10-K and quarterly Forms 10-Q. In addition, the 1934 Act concentrates on the:
- regulation and registration of activities of securities brokers, dealers, investment advisers, thirteen national and regional securities exchanges and over-the-counter (OTC) markets;
- prevention of securities fraud and market manipulation;
- recommendation of administrative sanctions, injunctive remedies, and criminal prosecution against those who violate securities laws;
- control of credit for the purchase of securities;
- regulation of insider trading.
Sources: Clarkson et al. (1989); Afterman (1995).
Proxy Rules Under the 1934 Securities Exchange Act
Proxy solicitation is also regulated by the 1934 Act. Proxy solicitation enables shareholders - also those with very small holdings - to submit proposals to shareholders and to vote for resolutions at the corporations’ annual meetings. These proposals deal with a vast variety of matters that are increasingly concerned with corporate governance (ICMG, 1995). The election of directors is often a primary aim of the proxy solicitation process.
To secure the position of shareholders, the 1934 Act also rules that publicly held corporations are required to file proxy statements with the SEC for a formal review of its contents. Besides the annual report, proxy statements inform shareholders on the following matters:
- election and appointment of directors;
- appointment of auditors;
- adoption of executive retirement and remuneration plans;
- issuance of new securities;
- amendment of articles of incorporation and by-laws;
- adoption of anti-takeover measures.
Source: Afterman (1995).
Proxy statements also furnish information on the names and the age of directors, the background of directors, the possible criminal records of directors, the family-relationships among directors, executives and board nominees, and the names of directors who failed to attend 25 percent or more of board meetings and/or committee meetings. In addition, proxy statements provide detailed information on the remuneration of executive and non-executive directors. The SEC revised and extended its disclosure requirements on executive compensation in 1992. As part of new disclosure regulations, corporations subject to the rules of the 1934 Act have to disclose the existence and the composition of a remuneration committee in reporting titles.
State Securities Laws
Like federal securities laws, state securities laws or “blue-sky” laws focus on the protection of investors during offerings (IPOs) and the distribution and sales of securities (Clarkson et al., 1989; Khademian, 1992). The regulation by means of blue-sky laws is to a large extent similar to federal SEC regulations. Blue-sky laws - for example - provide antifraud provisions and rule the regulation of financial markets and the registration of securities. Similar to federal securities laws, state securities laws seek to protect investors by means of the disclosure of detailed information on the governance structure of corporations. Yet, both federal and state securities laws have not much to say about the structure and the composition of corporate boards.
According to the ICMG, “The underlying and pervasive premise of the federal (and state, eds.) regulation of securities matters is that government should not generally determine whether securities may be offered and sold, but should only be concerned with whether there is adequate disclosure with respect to offerings, secondary market transactions, and the solicitation and voting of proxies in connection with shareholder meetings” (ICMG, 1995:52). As such, securities laws generally focus on the disclosure of relevant information related to the issuance of securities. These laws do not regulate the governance structure of corporations. The SEC, for example, does not require audit and remuneration committees. The SEC only seeks full disclosure of the activities and the composition of these standing oversight board committees when they are established by corporations.
- in response to financial traumas in the 1930s, Congress enacted federal securities laws that provide an elaborated system of supervised disclosure in the US. The rules of these laws are expanded through state securities legislation;
- the SEC regulates the disclosure of information on board practices through the Securities Act of 1933 and the Securities Exchange Act of 1934;
- the cornerstone of the securities laws is the full disclosure of issuers registered under the 1933 and 1934 Acts;
- the 1934 Act provides detailed information on board practices in annual Forms 10-K, quarterly Forms 10-Q, proxy statements and other reporting titles;
- securities laws do not regulate the governance structure of corporations which are predominantly regulated by state corporation laws (see the next paragraph).
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- 6.5 Summary
- 6.4 Facts About Changing One-Tier Board Attributes
- 6.3 State Level: The Attributes of One-Tier Boards Under State Corporation Laws