Academic journal article Review of Business & Finance Studies

Legislation of Ethics in the Early Years of the Securities and Exchange Commission

Academic journal article Review of Business & Finance Studies

Legislation of Ethics in the Early Years of the Securities and Exchange Commission

Article excerpt


Enforcement action by the Securities and Exchange Commission in the years following its formation and prior to the beginning of World War II created reporting sanctions viewed as symbolic by much of corporate America. That is, powerful chief executive officers of many of America's giant publicly held corporations believed these sanctions were instituted only to placate a worried investing public and would not be enforced with rigor. These managers, therefore, believed they could either ignore the Securities and Exchange Commission pronouncements or implement them only superficially. I submit the result has been many continual challenges of authority and corporate disregard of ethical behavior throughout the remainder of the 20th century. This paper will explore the history of the early part of the 20th century to determine reasons why these symbolic pronouncements may have been perceived by the Securities and Exchange Commission as a necessity for its continued existence.

JEL: M49

KEYWORDS: Symbolism, Power, Ethics, Fraud, Acquiescence, Conciliation


Ethics may be generally thought of as actions that are in accord with right or moral conduct. The American Bar Association (ABA) equates ethical conduct in business with proper corporate responsibility and morality, which they define as "behavior by the executive officers and directors of the corporation that. . . results from the proper exercise of the fiduciary duties of care and loyalty to the corporation and its shareholders . . . [well] beyond that demanded by minimum legal standards" (ABA, 2003, p. 4).

The Securities and Exchange Commission (SEC) was formed as a result of the passage of the Securities Exchange Act of 1934 (SEC, 2011). It was a direct response by the newly elected American government to restore public confidence in the U.S. capitalistic system that had been severely eroded by the stock market crash of 1929 (the "Crash") and the subsequent Great Depression of the 1930s.

Determining how and why the SEC responded to corporate abuses of ethical behavior during its first six years of existence is the research topic of this paper. More specifically, this paper explains why the SEC functioned symbolically - enforcing the new securities laws by using symbolic pronouncements - in the face of extenuating circumstances over which it had only partial control.

I submit, however, such symbolic solution to fraudulent corporate activity not only emboldened those corporate managers bent on a disregard for ethical behavior, but also created an atmosphere of acceptable disregard throughout the remainder of the 20th century. Regulatory attempts to strengthen corporate governance, particularly in the last half of the prior millennium, finally culminated in the swift passage of the Public Company Accounting Reform and Investor Protection Act of 2002, better known as the Sarbanes-Oxley Act of 2002 (SOX).

Examination of the history of the SEC's early years and of the economic situation leading to its formation is important. It points out problems that continue to exist in our capitalistic system today. Examination of the history of the American capitalistic system and of early attempts to mitigate bad corporate governance may therefore prove fruitful in examining current day problems and regulatory attempts. Indeed, parallels between the exuberance and subsequent sharp economic decline of two periods - the 1920s and the 1930s and the final decade of the 20th century and the first of the 21st century - are striking. Both periods had similar scenarios that lead to financial difficulties. Both had extended periods of prosperity that seemed to be without an end. Both periods were characterized by a headlong participation in the market, and both were governed to a large extent with a laissez faire governmental attitude. This was especially true of the 1920s. Both had subsequent periods of corporate crisis that created anger and resentment; both created outcries for strong governmental oversight; and, perhaps most importantly, both postured the accounting profession in a defensive position which was only partially of its own making. …

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