The Securities Exchange Act of 1934 seeks to assure more or less continuous disclosure concerning securities being publicly traded. This is achieved through several techniques including registration of securities, periodic reporting, governance of proxies, and controls over insider trading (which go beyond simply disclosure). As originally enacted, the 1934 Act made it unlawful for a member of a securities exchange to effect a transaction in any nonexempt security on a national exchange "unless a registration is effective as to such security for such exchange." That is, the Act required the registration of only those securities listed on a national securities exchange. Flowing therefrom, investors in exchange listed securities were afforded various protections by the 1934 Act including the registration, reporting, proxy and insider trading requirements. However, for 30 years after the enactment of the Act, investors in securities in the over-the-counter (OTC) market were not afforded such protection since the Act’s various requirements applied only to listed securities. For the most part, securities sold in the OTC market (such as the stocks of most insurance companies), not being listed on exchanges, were free from such controls.

The application of the registration (Sec. 12), reporting (Sec. 13), proxy (Sec. 14) and insider trading (Sec. 16) requirements to only listed securities was not attributable to any conviction on the part of Congress that such safeguards were not essential to the OTC market as well. However, Congress had difficulty with the pragmatic problems of applying such requirements to the OTC market.

However, after a somewhat torturous history, finally, in 1964, the Exchange Act was amended to place OTC securities, that is, securities traded other than on a national exchange, on the same regulatory playing field as exchange listed securities with respect to registration, reporting, proxy and insider trading requirements. Sec. 12(g)(1) now provides that every issuer engaged in or affecting interstate commerce (or whose securities are traded by use of the mails or instrumentality of interstate commerce) and whose assets exceed $1 million and which has a class of equity securities held by 500 or more persons shall register the security within 120 days of the end of the fiscal year in which the issuer meets the asset standard. (Subsequently, in recognition of inflation, by its exemptive authority the SEC increased the $1 million standard to $5 million.) As a consequence, securities in the over-the-counter market are brought under the requirements and protections afforded registered securities listed on exchanges. The registration procedure is virtually identical for both exchange listed securities under Sec. 12(b) and OTC listed securities under Sec. 12(g)(1).

Sec. 12 now requires the registration of both listed and OTC market securities. This is achieved by filing an application with the SEC containing specified information. The information required for OTC and exchange securities is comparable. The contents of the registration statement are specified in Section 12(b). While not as detailed as Schedule A under the 1933 Act, the requirements of the two statutes are similar.

The periodic reporting requirements under Sec. 13(a) mandate every issuer of a security registered under the 1934 Act (whether listed on an exchange or traded in the OTC market) to file with the SEC (1) such information as the Commission by rule may require to keep reasonably current the information contained in the registration statement and (2) such annual and quarterly reports as the Commission by rule shall prescribe. The basic annual report is Form 10-K. Virtually every issuer required to file an annual Form 10-K is also required to file quarterly reports and a current report within 15 days after the occurrence of specified events of an extraordinary character (for example, change of control, acquisition or disposition of a significant amount of assets, receivership, directors resignation because of a policy dispute).

A proxy statement is primarily a solicitation of shareholder votes for use at the corporation’s annual meeting. The combination of the widespread distribution of corporate securities and the separation of corporate ownership from management places the concept of stockholder voting at the corporation’s annual meeting as the prime instrument of owner control over their company at the mercy of the proxy statement. As a consequence, the corporate proxy may serve as a fundamental source of good or bad in our economic scheme. Unregulated, the proxy mechanism would be an open invitation to management self-perpetuation and irresponsibility. Properly circumscribed, the proxy mechanism can serve as an important and beneficial tool in the modern corporate system.

Historically, stockholders typically would annually receive fine print proxy cards to sign and return. Commonly the card would authorize one or more persons to vote the stockholders’ shares to elect the board of directors and take any other action deemed desirable. Too often, the stockholders were given no assurance that the items on the card were the only items to be acted upon at the meeting nor were there any requirements that the stockholders be afforded information necessary to make intelligent decisions. Furthermore, management possessed every advantage if an insurgent group sought to wage a proxy fight, including possession of the stockholder list, stockholder inertia, and corporate funds to conduct proxy solicitations.

In response to abuses and the need for better corporate governance, the Securities Exchange Act of 1934 dealt directly with the subject of proxies. Section 14(a) provides that it shall be unlawful for any person (through any means of interstate commerce or through the use of the mails or facilities of an exchange) to solicit any proxy with respect to any registered nonexempt security in contravention of rules prescribed by the SEC necessary or appropriate in the public interest or for the protection of investors. The SEC’s authority over proxy solicitation extends to securities listed on the exchanges, over-the-counter market equity securities, and securities of registered investment companies.

Although the SEC’s rule-making power is not limited to ensuring full disclosure, its basic philosophy with respect to proxies focuses primarily on disclosure. The proxy rules are akin to the disclosure requirements under the Securities Act of 1933. In regulating proxies, the SEC does not pass upon the fairness or the merits of plans presented to securityholders. Instead, it has designed the rules to make the proxy mechanism the closest practicable alternative for attendance at the meeting. Under the rules, the proxy literature gets into the hands of investors, it gets there in time and it gets to many people who never see a prospectus.

While the first rules adopted in 1935 were rudimentary compared with today, they established the basic three way approach which has been followed ever since. (1) The rules called for a brief description of the matters to be considered at the meeting as well as the action proposed to be taken by the person holding the proxy. (2) The registrant was required to mail to the proxy material of any securityholder upon his or her request at his or her expense. (3) A general antifraud rule prohibits the making of any materially false or misleading statements. Over time the proxy rules have been subject to frequent amendments. There are numerous rules together with Schedule 14A specifying numerous items of information required in the proxy statement. Schedule 14B specifies information to be included for each participant in a contested election.

Akin to requirements under the 1933 Act, the proxy rules contain, in effect, their own prospectus requirement, registration and waiting period. No solicitation for proxies may be made unless each person solicited is previously or concurrently furnished a written proxy statement containing information specified in Schedule 14A. Preliminary copies of the proxy statement and the form of the proxy, as well as any other soliciting material to be distributed, must be filed with the Commission at least 10 days prior to use.

The form of the proxy must show in boldface type whether or not the proxy is being solicited on behalf of the registrant. The form must also identify clearly each matter or group of related matters intended to be acted upon at the meeting. Most voting issues are standard items such as reappointing the company’s auditing firm and the election of directors. However, there may also be unusual issues and/or matters of some importance to shareholders including proposals which may detract from shareholder value (such as authorization to increase the number of shares, the adoption of antitakeover provisions, or a new form of management compensation). The form must permit the securityholder to choose between approval or disapproval as to each matter other than elections. (If a securityholder does not care for the nominees in an election, he or she can give his or her proxy to the opposition.)

Schedule 14A calls for the disclosure in the proxy statement of the time, date and place of the meeting; information as to the revocability of the proxy; dissenter appraisal rights; identity of who is soliciting the proxy; substantial interest of the solicitors; and the registrant’s voting securities. Considerable information must be set forth relevant to the election of the board of directors as well as to other matters to be considered (for example, selection of auditors, compensation plans, authorization to issue securities, mergers, acquisition or disposition of assets, reports of management committees and other material information). Information on management compensation must be included as are transactions between officers and directors which might be subject to potential abuse as well as pointing to hidden perks. The SEC now requires a 5-year chart of company performance in comparison with a broad market index such as the Standard & Poor 500 and an index covering the industry within which the company operates. Existing shareholders, as well as other potential investors in the company, can obtain a better understanding of those entrusted with the management of their company and can better exercise their right to vote on important issues through a careful reading of the proxy statement.

A major problem confronted by any system of proxy regulation is ensuring, to the extent feasible, a level playing field as to the rights of the registrant and those of opposing securityholders. The SEC approaches this problem in three ways. (1) If the registrant intends to solicit proxies, it must either furnish a list of securityholder names and addresses to any securityholder entitled to vote on the matter who requests such list in writing or mail the proxy materials for such securityholder at his or her expense. By virtue of this requirement, the SEC seeks to assure access to fellow securityholders. (2) The rules impose special requirements as to all participants in a contested election. And (3), subject to certain conditions, the SEC requires that a registrant must include in its own proxy statement any legitimate proposal of another securityholder.

This regulatory pattern for proxy statements is complemented by an antifraud component. SEC Rule 14a-9(a) provides that no solicitation of proxies subject to the regulations shall be made by any communication containing any statement which is false or misleading as to any material fact or which omits to state any material fact necessary to render the statements therein not false or misleading.

The last of the provisions activated by registration under the 1934 Act is Section 16 dealing with insider trading. Prior to the Act’s enactment, the SEC found that profits from "sure thing" speculation in stocks of one’s own company were generally accepted by the financial community as part of the emolument for serving as a corporate officer or director. In the Commission’s view, such practices constituted flagrant betrayal of fiduciary duties by corporate officers and directors when they used their position of trust and confidential information to aid in their personal market activities. Similarly, the use of insider information by large stockholders, who obtained such information not available to others, was also perceived to be an abuse.

Federal efforts to prevent insider trading have been predicated on the concept that insider trading in securities is a threat to the fairness and integrity of the capital markets. The ability of the securities markets to effectively allocate resources depends upon (1) the establishment and preservation of a fair market system in which investors are willing to trade securities and (2) the assurance that securities market participants are appropriately rewarded for identifying good investment opportunities. To bring insider trade practices into disrepute, to encourage meeting one’s fiduciary obligations and to govern such practices, Congress enacted Sec. 16.

Following a review of Sec. 16 in 1987, an American Bar Association Task Force concluded that this Section remains a useful tool in deterring speculative abuses by insiders, in focusing insiders’ attention on their fiduciary duty, and in deterring insiders from being obsessed with trading in their company’s securities in conflict with their management responsibilities. Furthermore, it penalizes unfair use of information by insiders and reduces the temptation for insiders to manipulate corporate events to maximize their own short-term trading profit.

Sec. 16 consists of three major components: insider reports, recapture of short-term profits, and prohibition against short selling.

Sec. 16(a) requires that every person who is a beneficial owner of more than 10 percent of any class of equity security registered pursuant to Sec. 12 of the 1934 Act or who is an officer or director of the issuer of such security shall file within 10 days after he or she becomes such beneficial owner, officer or director a statement with the SEC as to the amount of all equity securities of such issuer of which he or she is the beneficial owner. Furthermore, to keep information up to date, he or she shall, within 10 days after the close of each month thereafter if there has been a change in such ownership, file the changes in ownership which have occurred. Unless the person is an exchange member or a registered broker-dealer, the only enforcement against noncompliance is either injunction or criminal prosecution.

These reports are public information available at the Commission. In addition, the Government Printing Office publishes the information contained in these insider reports on a monthly basis. Such publication is widely distributed.

Because compliance with Sec. 16(a) insider reporting requirements has proven to be a long-standing problem, in 1991 the SEC adopted the requirement that a registrant must disclose in its proxy statements and annual reports the names of those persons who are delinquent in their reporting along with the number of transactions and number of delinquent filings of each person.

Sec. 16(b) states that for the purpose of preventing unfair use of information obtained by such beneficial owner, officer or director (that is, an insider), any profit realized from the purchase or sale or sale or purchase of any equity security of the issuer within any period of less than six months shall be recoverable by the issuer or by any other securityholder of the issuer on behalf of the issuer. This is an absolute standard applicable irrespective of the intention of the insider engaging in such transactions. This section is designed to protect outside securityholders against short-swing speculation by insiders possessing advance information. Although Sec. 16(b) imposes a crude rule of thumb, it seeks to impose an objective standard. Its simplicity presumably has had significant deterrent effect against abusive use of inside information.

The third element of Sec. 16 is a prohibition against insiders selling short. Sec. 16(c) makes it unlawful for such beneficial owner, director or officer to sell any equity security of the issuer if the person selling the security does not own the security sold or if owning the security does not deliver it against such sale within 20 days thereafter or does not within five days after the sale deposit it in the mails or other channels of transportation. This component attempts to prevent the use of inside information in short-term speculation through the technique of selling short.