How the SEC, Glass-Steagall Act, and Dodd-Frank Act have effected Investors and Funds

I’m a big college football guy and I won’t lie to you that for the longest time I had a real hard time sorting out how Alabama and LSU had anything to do with finance…

Like I said, that was a long time ago haha. (Side note, how about Texas and Oklahoma joining the SEC, pretty nuts)

The Securities and Exchange Commission on the other hand is entirely different ball game, no pun intended.

The SEC is essentially the governing body that oversees all of the transactions of securities in the United States.

Today we’re going to try and build a base knowledge of understanding on why the SEC was created, what it’s goals are, and how can we best work in compliance with current SEC regulation.

Let’s get to it!

History of the SEC

The SEC was created in 1934 as part of the SEC and Exchange Act.

Technically, there were actually two acts, one in 1933 and one in 1934, but that was just due to timing of the year when the process of passing bill took place in December and January.

This commission was put together to prevent and hinder insider trading, accounting fraud, and false or misleading statements.

The first Chairman of the SEC was Joseph Kennedy, who was the father of the late President John F. Kennedy.

Interestingly enough, Joseph was selected because of his prowess in the Stock Market.

He had a unique understanding of different aspects of the regulations at the time and knew how to work the system in a sense.

For that precise reason the president at the time wanted him to be in charge of the SEC, to regulate and monitor the very strategies that Kennedy had utilized himself.

There are five different commissioners on the SEC and they actually rotate from the five position up to the one spot, which is the head chairman.

Right about the same time the Glass-Steagall Act was happened, which separated securities from commercial banking.

This legislation stood for nearly 70 years until it was repealed in 1999… And a major crash took place just under a decade later.


Glass-Steagall Act

The Glass-Steagall Act was so important because it was directly correlated with the crash of 1929.

Commercial banks had been utilizing customers funds to invest in what we would call today “high risk assets“, which include most alternative assets.

This led the collapse of these different banks and chaos ensued.

To prevent such an event from happening again, they took away the investment arm of commercial banks and designated that only for “investors”.

This was a great move until 1999, when the Act was repealed.

And that’s when we got into trouble… Ala Crash of 2008.

Let me illustrate (in an extremely basic way) why there were some negative consequences to repealing Glass-Steagall.

Let’s say any time under the Glass-Steagall Act a small bank had $5 million dollars in deposits.

They go out and start advertising that they want to do some mortgages with the idea of selling these loans down the road to bigger banks.

Well in order for them to even offer any of the loans that they generate to larger banks they have to prove the validity and integrity of the loans.

Meaning the small bank is only going to want to process very conserative loans.

Which means a sizable downpayment and several successful installments on the loan.

Call it six months of on time payments.

Then, and only then, will the small bank be able to attempt to sell the loan to the bigger banks

Okay, you with me?

Now, let’s fast forward to 1999 when the Act was repealed.

All of the sudden you’re playing with a whole new set of rules.

Banks starting rolling out high risk loans left and right.

A popular nickname for these high risk loans stuck called “Ninja“, which is an acronym for “No Income No Job“.

This meant people could walk into a bank, say they wanted to take out a mortage, sign their name and qualify.

Then even with $0 down, and 0 installments, the bank could turn around and flip that loan to a bigger bank the next day.

You see where this was going?

These high risk loans failed and the economy tanked.

Surprisingly, the Glass-Steagall Act was never reinstated, even after the enormous hit the market took.

However, in 2010 the Dodd-Frank Act was passed in reaction to the crash.

Dodd-Frank Act

Per Forbes

Dodd-Frank keeps consumers and the economy safe from risky behavior by insurance companies and banks.


Dodd-Frank was a massive bill that was proposed by the Obama admistration.

It tightened up regulations and licenses for all risky investments, especially on banks.

The idea was to try and prevent such an economic recession from happening again, and the bill did pass.

However, it did so with almost no Republican support and critics of the bill say it is basically the “Obamacare” of the economy.

Critics say “it leaves Americans with fewer choices, higher costs, and less freedom

Watch this video to learn more.


Well hopefully now you understand that the SEC is designed to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation (Per SEC)

You now know what legislation was passed at the the same time the SEC was formed, and how they are undeniably intertwined.

You’ve seen how the removal of the Glass-Steagall Act led to a domino effect that resulted in the market crash of 2008 in the same manner that the market crashed in 1929.

And you’re aware of how the Dodd-Frank Act was passed in an effort to restore balance and regulation.

All that in a pretty short article is rather impressive if I do say so myself.

Thanks for joining me today and best of luck.

Bridger Pennington

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DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.

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