Before 1940, the SEC was primarily concerned with regulating holding companies and asserting itself over the national stock exchanges. The agency spent much of its time and energy building the administrative capacity to regulate the national markets in order to build investor confidence. Yet partly due to the budget cuts during the Eisenhower Administration, the SEC faced growing pressures to maintain its disclosure and antifraud enforcement programs to sustain market confidence.
The SEC's goals clashed with the Eisenhower Administration's desire to cut federal budget expenses, which caused severe cuts in the agency's staffing. In 1941, the SEC employed 1723 persons; by 1953, the SEC staff had been reduced to 773. Throughout the early 1950s, the SEC struggled to administer the increasing volume of filings required by the law. At the same time, the stock markets rebounded; mutual funds values increased eighteen fold from 1945 to 1961. SEC Commissioner Richard McEntire openly questioned whether the Commission could "adequately administer the seven statutes entrusted to it."(11)
The SEC's role in the enforcement of rules against insider trading was sporadic and limited to those cases falling under Section 16(c) and enforcing the reporting provisions of Section 16(a). While active enforcement of insider trading cases by the SEC was minimal throughout the 1940s and early 1950s, the SEC developed rules on corporate proxy solicitation and stock trading that constantly promoted broad values of informational disclosure as the best way to insure investor confidence in the markets.(12) Providing information to investors about company assets, director and officers' compensation; setting procedures for accounting practices; and promoting stockholder rights to company information remained part of the SEC agenda, as they had from the passage of the Exchange Act.
But the investment climate was changing and the late 1950s bull market was driven by a speculative climate in which securities fraud thrived. In its report on stock market activities, the Senate Banking Committee criticized the administrative effectiveness of the SEC. The report decried the lax regulations on floor trading, the lack of division between broker-dealer functions, and an increase in insider trading.(13) With the election of President John F. Kennedy and his 1961 appointment of SEC Chairman William L. Cary, the SEC boldly stepped into that breach.
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