State-by-State, Financial Fraud Laws Coincide with the Beginnings of the Industrial Age
Securities laws first appeared in the United States in the 1850’s when, in response to the growing trade of railroad stocks, Massachusetts began regulating these sales in an attempt to protect investors from financial fraud. Kansas followed suit in 1911, by which time securities fraud had become a very real danger.
Many investors, hoping to cash in on the gold mining industry, had instead been taken by dishonest salesmen offering interests in dubious and sometimes nonexistent interests. These new laws required all securities and securities salesman to be registered with the state. As other states began enacting laws of their own, businesses started to challenge these new investment fraud protections.
The matter eventually ended up in the Supreme Court in 1917, where justices upheld the laws on the grounds that honest businesses would not be affected by the restrictions.
At the beginning of the Great Depression, financial fraud comes to the forefront of the nation’s consciousness
Laws prohibiting securities fraud eventually gained nationwide prevalence during the Great Depression.
The stock market crash of 1929 brought issues of stockbroker fraud to the forefront of America’s consciousness, resulting in the passage of the Securities Act of 1933. Known as the ‘33 Act, the legislation both protected investors from misrepresentation and supported the interests of honest companies whose livelihood was threatened by competition from businesses engaging in fraudulent practices.
Affected entities were defined in the ‘33 Act as any “broker, dealer, investment adviser, investment company, municipal securities dealer, government securities broker, government securities dealer, or transfer agent.” These entities were required to both register with the government and fully disclose all financial documents, as well as other information about the nature of the security being traded and the management of those offerings.
Limited, private and intrastate offerings, as well as trading within government entities, were exempt from registration under the ‘33 Act provided certain conditions were met.
The following year brought new legislation in the form of the Securities Exchange Act of 1934, which created Securities and Exchange Commission and empowered this new body to oversee the securities industry and enforce regulations created under the ‘33 Act.
Securities/Financial Fraud Laws in the Digital Age
Over the next decades laws to prevent financial fraud were further expanded and defined, but the next major leap in prevention of stockbroker malpractice was the Sarbanes-Oxley Act of 2002. Signed into law by President Bush, this act sought to reform the securities industry by establishing the Public Company Accounting Oversight Board (PCAOB), a nonprofit entity separate from the U.S. government responsible for registration and oversight of public accounting firms.
Firms must not only obtain registration from the PCAOB, but must also provide annual reports and other internal documents at the Board’s request. They are further required to publicly disclose any changes in financial status or operations. Accounting firms found in violation of any part of the Sarbanes-Oxley Act are subject to strict penalties, and any individual accountant who knowingly commits investment fraud by destroying or falsifying records faces up to 20 years imprisonment.
Failure to properly maintain records also classifies as stockbroker malpractice under the Act, and carries penalties including a maximum 10-year prison sentence.
Financial and stockbroker fraud continue to be major issues affecting the United States. In response to the financial crisis of 2008, the U.S. Government has pursued several avenues to expand regulation of securities and investors in an attempt to prevent a similar crisis in the future.
Many of these debates are ongoing so check back with us again soon or see our financial fraud blog for regular updates on these issues and more.