Roosevelt’s Truth Telling Law
By Gerald Rome, Colorado Securities Commissioner ~
These days there is a lot of talk about regulation of the financial sector. Is the system rigged in favor of “Wall Street,” requiring a makeover of regulations to rein them back in. Or is there bureaucratic overreach, too much government regulation that stifles job creation. In light of this on-going back-and-forth, I think a brief history of securities regulation is timely and interesting.
Before the turn of the century, not the last one, but 1900, there really were no securities laws. What brought about the change was the development of the telephone and telegraph. All of a sudden, someone in New York could sell securities to someone in Colorado or Kansas. As consumers, usually it is our job to make sure what we are paying for something is worth it. That makes some sense. For instance, if you bought a used car, you get to “kick the tires” on the car, test it out, see whether it is worth what the asking price is. But what do you get when you buy stock – a stock certificate. It is hard to kick the tires on a piece of paper. Given human nature, it is easy to see how fraudsters started selling phony stock to people half way across the country. We want people to invest, as investments are a good way to grow the economy. But they won’t invest if they don’t trust those selling the investments. In 1911, the Kansas banking commissioner, Joseph Dolley, addressed this problem by passing the first state securities laws. It was the first step in a process to require the sellers of securities, not the buyers, to provide full information about the investments. Following Kansas’ lead, over the next 18 years, almost every state in the country had passed some form of securities laws.
But there was still the problem of how does a state like Kansas go after a fraudster in New York, especially in the 1910’s and 1920’s. Everything came to head in 1929 with the market crash and resulting Great Depression. Many analysts of the crash, during which countless Americans lost their savings and livelihood, saw the lack of effective national securities regulation as a key factor. Among such critics of current laws was New York Governor, and candidate for President of the United States, Franklin Roosevelt.
Roosevelt believed the federal government needed to have a role in requiring companies selling investments to the public to provide honest disclosure, both in offering securities, and in how they reported on their successes or failures. As part of his platform for the presidency, Roosevelt promised to seek to prevent the sale of “unnecessary securities of all kinds,” brought on only for “enriching those who handle their sale to the public.” When he won the presidency, Roosevelt made good on that promise in March of 1933 with the establishment of federal securities regulation as a cornerstone of the “New Deal.” The law used the doctrine of caveat emptor, or “let the seller beware,” placing the burden of telling the whole truth on the seller. As Roosevelt put it, the law required that “definite and accurate statements be made to buyers in respect to the bonuses and commissions the sellers are to receive; and furthermore, true information as to the investment of principal, as to the true earnings, true liabilities and true assets of the corporation itself.” This made up what has been described as Roosevelt’s “truth telling” regulation.
State and federal securities laws requiring full disclosure by the sellers of securities became an integral feature of creating the world’s strongest securities markets. I believe that without the continuing vigilance and regulation on the part of the government – both federal and state – the United States would risk losing that standing.