In a bank that is a member of the Federal Deposit Insurance Corporation (F.D.I.C.), a depositor has a flat guarantee from the U.S. Government that he can always get his money back, and promptly. But in corporate stocks and bonds, the government guarantees nothing. The main effort of the S.E.C. is in the direction that anyone selling stocks or bonds must not conceal or omit important facts; he must make "full disclosure."
Of course, this regulation can be far more effective on printed matter than on a salesman's words. The practical effect of the regulation is that a cautious buyer can obtain a good deal of information about an American corporation before he acts much more than is usually furnished by Western European corporations. But there is nothing in S.E.C. regulations to prevent a careless American from buying a stock that is no better than a gold brick.
One way to fool the public is by price manipulation. A speculator arranges for some shares of a stock to be bought for him, paying prices higher than necessary. He also starts rumors that the price is going still higher. Then he sells out to gullible speculators. The S.E.C. tries to stop any organized price manipulation, on the grounds that it is an attempt to deceive the public.
Here is part of an item from the New York Times of Oct. 25, 1956, written by Burton Crane, whose reports on Wall Street often reveal an unusual and welcome sense of humor.
Each new stock fraud brings new demands that the public be given more protection. Why isn't it possible, the public wants to know, to wipe out stock frauds entirely?
It is possible. One easy method would be to abolish all stocks. A second, presenting some technical difficulties, would be to abolish money. A third, tinder which complete effectiveness could not be guaranteed, would be to have every stock sale supervised by a government official.
Some seem to feel that a government official should be watching each deal, ready to blow the whistle whenever a citizen shows a tendency to make a fool of himself. There is no understanding that the entire staff of the Securities and Exchange Commission ranks in size between the Police Departments of Kansas City, Mo., and Atlanta, Ga.
No member of the public has lost money through the insolvency of a member of the New York Stock Exchange since 1934. Other exchanges boast similar records.
Like the Big Board, they have systems for mediating disputes between the public and their members.
The National Association of Securities Dealers also mediates between the members and the public. Most firms in the over-the-counter marketthat is, the market outside the registered exchangesbelong to the N.A.S.D. They do not, however, have to belong.
The exchanges and the N.A.S.D. can mediate between the customers and the broker or dealer. The S.E.C. and the various state securities commissioners cannot. Generally speaking, they must wait until a fraud has been committed. Then they step in and try for a conviction or an injunction, but they seldom can save anybody any money.
If you are looking for a guaranteed return on your investment, the stock market might not be for you. As we have shown, although there are safeguards in place to regulate fradulent sellers of stock, they cannot act until after a crime has been committed, and rarely can the government recover individual investments.