Global Securities Markets: Navigating the World's Exchanges and OTC Markets

THE NEW DEAL AND GLASS-STEAGALL

The Banking Act of 1933 was not legislation in a vacuum; it was an integral part of revolutionary New Deal reform legislation. Although many states had earlier passed so-called blue sky laws to prevent fraud in connection with the sale of securities (so named because it was said that unscrupulous brokers would sell unsuspecting investors stock in so many feet of clear blue sky), the Congressional passage of the Securities Act of 1933 and its sister act, the Securities Exchange Act of 1934 (which created the SEC), did more than anything else to rid the securities business of fraud and manipulation. Although similar federal reform of the insurance industry was also contemplated, insurance regulation was decisively left to the states when Congress passed the McCarran-Ferguson Act of 1945. With federal legislation governing mutual funds companies and investment advisers, as well as thrifts and credit unions, all passed by 1940, the legal framework governing the financial services industry in the United States was largely in place for post–World War II expansion.

By the late 1980s, holes appeared in the patchwork quilt of financial regulation. The Federal Reserve Board took the lead in narrowing the reach of Glass-Steagall. A closely followed example of this was a board ruling that an affiliate of a bank could engage in the private placement of commercial paper. The decision was challenged by a securities industry trade group, but it was upheld.

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