Regulations evolve for many reasons, whether their subject is securities, banking, insurance, or something as unrelated as intercollegiate athletics. Advances in technology may prompt new stock trading rules. International accords may require new accounting standards. In other cases, regulatory changes are a response to problems that have surfaced.
After a dramatic business failure or a series of unexpected events that reveal vulnerabilities in the existing system, the government, the public, and the industry itself push for change. In perhaps one of the clearest examples, it was the market crash of 1929 and the Great Depression in its aftermath that led federal legislators to lay down the laws that are the basis for the current system of regulating U.S. investment markets.
That system continues to evolve as the industry grows. In reaction to 2 subsequent market corrections, in 1987 and 2000, regulators made major changes designed to prevent a particular chain of events from recurring.
For example, after the 1987 market losses the
New York Stock Exchange (NYSE)
instituted shut-down mechanisms called
circuit breakers
to prevent potentially rapid sell-offs. When the air came out of the technology bubble in 2000, federal regulators focused on restricting investment analysts who hyped securities issued by their firms’ banking clients.
Contemplating the crashes
In 1929, the Dow Jones Industrial Average (DJIA) began its plummet from a high of 386 in September of 1929 to a low of 40.56 in July 1932, an 89% drop. Both the market boom and the spectacular crash that ended it have been blamed on the lack of coherent government regulation.
After a dramatic business failure or a series of unexpected events that reveal vulnerabilities in the existing system, the government, the public, and the industry itself push for change. In perhaps one of the clearest examples, it was the market crash of 1929 and the Great Depression in its aftermath that led federal legislators to lay down the laws that are the basis for the current system of regulating U.S. investment markets.
