Recovering From The Crash

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The road back to recovery from the great stock crash was long and hard. Principal steps toward recovery were the Securities Acts of 1933 and 1934, and the establishment of the Securities and Exchange Commission, a government agency, to administer them.

Financial experts can see loopholes and deficiencies in the acts and some Wall Streeters squirm under the onus of Federal regulation, but it is generally acknowledged that tighter control of the securities market was essential, if only to restore public confidence after the debacle. Actually, the provisions of the acts can also be viewed as not stringent enough.

They require, first, that all new securities offered to the public, with some exceptions (Federal and municipal bonds, national and state bank stocks, and, in some cases, issues under $300,000, to name a few), be registered with the Securities and Exchange Commission (SEC). Registration, it should be noted, does not make the SEC an arbiter of a security's worth, and does not in any way constitute an endorsement. It is merely a procedure to place on the public record a full and fair account of the financial, technical, commercial, and legal condition of the issuing company. Capitalization, earnings, compensation of officers, stockholdings of officers or options and other benefits available to them —all this and more must be disclosed. As anyone who has ever plowed through a stock prospectus knows, the material is often difficult to digest, but it is complete, and no one need feel he is buying a pig in a poke. The SEC's only responsibility is to see that the information submitted is adequate and not misleading.

The acts also prohibit all manipulations, such as pools, fake sales, or any artificial trading which, by creating the appearance of activity, stimulates buying or selling by others.

And finally, they control, through the Federal Reserve Board, the flow of credit into the securities market. The Board must approve the source from which a broker borrows, and it is responsible for setting margin rates.

There are other powers that the SEC may exercise "in the public interest," but by and large the registration procedure, the ban on manipulation, and the control of credit have been the principal areas of government intervention to assure an orderly market.

At the same time, the exchanges—the New York Stock Exchange in particular—have undertaken to police themselves more rigorously. Requirements for listing a stock on the Exchange have tightened up. Listed corporations must make frequent earnings reports and provide other information enabling the public to make its investment decisions intelligently. Failure to do so may result in suspension from the list.

The Exchange also checks its member firms closely. Brokerage houses must maintain minimum capital requirements, and must answer questionnaires on their financial condition three times a year, one of which follows a surprise audit by independent public accountants. They are subject to spot checks of their books by Exchange examiners, and must disclose weekly the positions they hold as underwriters of securities. Borrowings or loans by the firms, or their partners, must be reported.

The Exchange is extremely proud of the fact that the solvency record of its members has exceeded even that of the nation's banks. In the past 50 years, an average of 99.8 percent of its member firms have stayed solvent—have not failed. Since 1939, the record has been 100 percent.

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