Franklin D. Roosevelt was President when the Securities Exchange Commission (SEC) was created in 1934. The function of the SEC was to regulate the buying and selling of securities and to reform the stock exchanges. Its holy grail was to protect investors.
Prior to the stock market crash in 1929, there was no regulation of financial markets. A flower shop could sell stocks and bonds. The shoeshine boy gave hot stock tips. Unregulated Wall Street was deficient of accurate audited information regarding securities issued or sold. False information, fraudulent rumors, and get-rich-quick schemes abounded. Speculation, insider trading, manipulation, short selling, and buying on low margin credit was rampant. Prominent stock brokerage firms existed, but trustworthy information was out of the question for the average person.
Many believed that irresponsible market manipulations caused the crash, and America’s economic downfall. Roosevelt’s New Deal included the Securities Exchange Act of 1934, which governs securities transactions in the secondary market. All companies listed on a stock exchange are required to follow the requirements in the 1934 Act. The Securities and Exchange Commission (SEC) was created by the 1934 Act.
The SEC is the government’s enforcement arm. It has the authority to regulate all aspects of the securities industry. It can take civil or criminal legal action against individuals and corporations. Congress is exempted from regulations concerning insider trading, but Martha Stuart went to Federal Prison for insider trading, a violation of the 1934 Act.
Joseph P. Kennedy (Jack’s dad) was appointed by Roosevelt as the first Chairman of the SEC. Liberals hated Kennedy, who was a free-market capitalist. Kennedy’s career had included the unregulated Wall Street. He knew first-hand about manipulative practices and had profited substantially. These practices were not illegal until 1934. In 1929 Kennedy was worth about $60 million which eventually shot up to $180 million, which is about $3 billion in today’s dollars. Kennedy detractors said making him SEC Chair was “Setting a wolf to guard a flock of sheep.” Kennedy retorted: “The Federal government is the only power which can assure to the buyer that he is purchasing gold value and not gold bricks.”
Kennedy found the best lawyers and formed a team to clean up Wall Street. His legacy was solid as the SEC was plausibly the most respected of the New Deal agencies. In the Roosevelt Administration, the aspiration of the SEC was to ensure fairness and to protect the investor.
A new SEC task force was created in March. President Joe Biden’s Administration announced that the SEC Enforcement Division now includes Climate and Environment, Social Justice, and (corporate) Governance (ESG). Corporations will be rated on their WOKENESS, and face fines or legal action from the SEC if found wanting.
This new SEC Task Force will be led by Kelly Gibson. She will oversee members from headquarters, regional offices, and enforcement specialized units. Kelly will use sophisticated data analysis to mine and assess information to identify potential violations. The stated goal of this SEC Task Force is to address ESG risks to investors. The specifics defining what an ESG risk might be, are left untold. Eagerly jumping on the WOKE bus are Major League Baseball, Coca-Cola, JP Morgan, Viacom, CBS, Citigroup, Cisco, UPS, Merck, and Delta Airlines.
WOKE standards are hazy at best. For example, Social Justice is associated with socialism, and often means redistribution of wealth; it advocates that some groups are oppressors and some are oppressed. Violations could span everything from climate change, to workplace diversity, and cybersecurity.
Traditional rating services for stocks and bonds considered factors such as a corporation’s ability to pay dividends, bond interest, and be competitive in the marketplace. Ethnic diversity in the workplace may now become a factor. Historically shareholders (owners of the company) have been a corporate concern; now “stakeholders” (who are they?) are included in the dialogue. Rating companies such as Bloomberg are now providing ESG Data Services.
Milton Friedman, who received a Nobel Prize in Economics, argued that shareholders' money should not be spent for anything that does not directly contribute to increasing shareholder wealth. He wrote that the social responsibility of business is to increase profit. Friedman and many free-market economists and scholars would scoff at ESG ratings. However, Joe Biden has put a legal framework into the mix with the new SEC Task Force. This is a step in the wrong direction for government intrusion into internal corporate policies.