Although the SEC's views regarding foreign issuers, investors and exchanges exhibited significant tenets of isolationism, as Hitler's army marched through Europe, the SEC became deeply cognizant of the interconnectedness of the U.S. markets to the European markets. As early as 1938, when Germany annexed Austria, the SEC established various mechanisms to monitor how events in Europe affected the securities markets abroad and domestically.
The SEC also conducted a number of studies to try to anticipate what impact war in Europe would have on the markets. Such close examination of the movement on European exchanges was far from idle curiosity. The 1934 Act gave the SEC power, with the approval of the President, to suspend all trading on national securities exchanges for up to ninety days, and the Commission stood ready to use such power.
In 1939, as Germany conducted its campaign of conquest, the SEC established a communication system to be continually aware of the volume and types of orders being placed with brokerage firms, before such orders reached the U.S. exchanges. The SEC also closely monitored the European exchanges. It was concerned that European governments would liquidate their holdings in U.S. securities to pay for the cost of war, sending U.S. markets into a downward spiral.
The markets did not go into a free fall in 1939 but did decline, with sellers outnumbering buyers, when Germany invaded the Low Countries and France in 1940. After France's surrender to Germany, the SEC engaged in serious discussions with President Roosevelt on suspending all trading. While ultimately deciding not to suspend trading, the Commissioners approved, but did not issue, a resolution closing the markets for fifteen days. The Commission continued to maintain "constant minute to minute scrutiny" of the markets and engaged in on-going conversations with the President.(22)
Events in Europe proved the SEC both right and wrong regarding its understanding of foreign markets. It was correct in its belief that U.S. markets would be negatively affected by events in Europe and by European markets. It was incorrect in believing that European governments would rush to sell U.S. securities. More significantly, it was wrong in thinking that U.S. markets could possibly be cordoned off from the rest of the world.
(22) 1940 U.S. Securities and Exchange Commission Annual Report (Government Records)
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