Legal background to the Securities Act
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The legal background to the Securities Act of 1933 and the Securities Exchange Act of 1934 is somewhat unusual because there was very little federal regulation in this area prior to the enactment of these laws. As noted in the first chapter of this paper, Congress did not act to regulate corporations and banks during the Nineteenth Century. Even during the Constitutional Convention of 1787, proposals for empowering the federal government "to grant charters of incorporation in cases where the public good may require them, and the authority of a single state may be incompetent" were ignored. In 1902, the Industrial Commission (created by Congress in 1898) recommended that Congress enact a federal incorporation law in order to control the large corporations and trusts which were then being created. The Commission recommended that corporations be required to publish all material facts that might be of value to investors and the public. Such disclosure should include all of the details concerning the organization of the corporation. Any prospectus which did not include a full and accurate disclosure of these material facts would be considered fraudulent, exposing the responsible stock promoters to legal liability. In addition, the Commission recommended that corporations be required to send annual financial reports, certified by independent accountants, to shareholders, as well as grant shareholders access to records of directors' meetings. It should be recognized that
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of capital flight. The principal sponsor of the law, J. N. Dolley, was the president and/or director of a local bank in Maple Hill, Kansas, and was the bank commissioner. His position allowed him to garner the support of many state-chartered banks. As it was drafted, the law protected the secondary market in mortgage notes by exempting them from regulation. This bolstered the value of assets which comprised a significant portion of state bank portfolios. By regulating the activities of nonbank securities firms while exempting state-chartered banks, the law protected these banks from competition in the securities business. Finally, the law ensured that investors would keep their funds in banks, rather than investing them in higher-yield securities. Deeply concerned over the falling deposits, the Kansas Bankers' Association rejoiced over the enactment of the law, and wondered aloud whether the law could "be extended even more."
Bank Commissioner Dolley immediately began enforcing the new statute. In May 1912, he reported that of the eight hundred applications by nonbank firms for permission to conduct business in Kansas, he had approved only seventy. In September 1912, he declared that he had investigated almost fifteen
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Approximate Word count = 3210
Approximate Pages = 13 (250 words per page)
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