President Franklin Delano Roosevelt enacted the Securities Exchange Act of 1934 this week on June 6th.

A companion piece to a series of legislative actions signed into law the prior year; “Act 34” was designed to regulate securities trading. It created the Securities and Exchange Commission (SEC) to monitor and enforce the law that now required Exchanges to register, and companies to issue stocks with “fair, complete, and adequate” disclosures.

Additionally, companies now had to periodically file financial, publicly available reports with the agency. Consequently, Wall Street’s laissez-faire, caveat emptor methodologies were somewhat reined in while the free wheeling, speculative bucket shops, pools, and market riggers were completely outlawed.

Naturally, Act 34 contained elements that annoyed everyone. The financial industry resisted and resented the new restrictions that New Dealers felt were necessary to prevent another market collapse. However, the latter group was horrified by FDR’s appointment of Democratic big bucks donor Joseph P. Kennedy- who had made his fortune as a bootlegger during prohibition by masterfully skirting Federal Laws-as SEC Chairman.

Just prior to his appointment, Kennedy had participated in an important pool that ‘operated’ the stock of Libbey-Owens-Ford Glass Company (1933) that lured a naïve public into the hot ‘repeal’ stock, playing up the thirsty need for glass bottles when prohibition ended. That Libbey-Owens made glass plates, not bottles (Owens Illinois Glass Company did) was not a concern of the pool- they started the trading frenzy anyway. That pool and the market riggers soon cashed out on the rapid 50% run up in Libbey-Owens price.

Nevertheless, FDR felt confident in Kennedy’s role, as the nation’s chief securities’ regulator - reasoning that Kennedy had made enough money to stay out of the game, was hated by the Wall Street establishment, and knew all of the tricks of the trade.

Solid reasoning-surely.

This Week in Wall Street History

6/2/08