Anglo-American Securities Regulation
---Cultural and Political Roots, 1690-1860
Washington University School of La
Cambridge University Press 1998
Selected statutes and cases Page vii
Notes and dates xvii
1 English Attitudes toward securities trading at its inception, 1690-1720 14
2 The South Sea Bubble and English Law, 1720-1722 41
3 English securities regulation in the eighteenth century 88
4 The development of American attitudes toward securities trading, 1720-1792 122
5 American securities regulation, 1789-1800 161
6 American attitudes toward securities trading, 1792-1860 190
7 American securities regulation, 1800-1860 222
8 Self-regulation by the New York brokers, 1791-1860 250
2. The South Sea Bubble and English Law, 1720-1722
Criticism of the market and the stockjobbers took four main lines of argument. All had been present in rudimentary form in pre-Bubble English thought (South Sea Bubble-1720), but all became more detailed in 1720 and 1721. These four types of criticism would become long-running motifs in English and American culture. Securities markets and securities traders were criticized for (a) giving rise to deceit, particularly by permitting new forms of predatory behavior; (b) constituting a non-productive sphere of the economy, and diverting resources from more productive pursuits; (c) creating a subtle political threat to the nation's well being; and (d) undermining the social order, in a few different ways. Those modes of thought obviously overlap, and can often be found intermingled in the views of a given individual.
3. English securities regulation in the eighteenth century
The bill received the assent of the House of Lords, ad become law in April 1734. The resulting statute-entitled "An act to prevent the infamous practice of stock-jobbing", but know as Sir John Barnard's Act.
Securities were more likely than most items to be bought and sold by agents rather than actual owners, which meant that transactions frequently raised agency-related legal issues. Here too the courts policed the securities market as if it were any other market. ……Cases were not conceptualized as belonging to a category called "securities law", but they did not need to be. Familiar bodies lf law-the law of trusts, the law of wills, the law-governing principal and agent-were available to be used. The relatively new institution of securities trading was easily assimilated into the older legal categories whenever a securities transaction became the subject of litigation. Although stock was, as Mansfield put it, "a new species of property, arisen within the compass of a few years" (and thus it could not be the subject of an action for money had and received, since it was not money), it was a form of property all the same, and could be governed by the same judge-made law applicable to other types of property. (Nightingal v. Devisme, 5 Burr. 2589, 98 Eng. Rep. 361 (K.B 1770)).
Eighteenth-century English courts thus facilitated the establishment of the securities by tending to enforce contracts, even the most speculative contracts, as written; by narrowly construing potential statutory limits on trading; and by policing misbehavior falling under familiar legal headings. This pattern of decisions was the product of a handful of characteristics of the English judicial system in the eighteenth century, including (1) its general tendency to permit whatever behavior had not been expressly prohibited by statute or common law, (2) the capacity of the common law to absorb new institutions and new institutions and new types of behavior into older legal categories, and (3) the terse manner in which judicial decisions were general reported, which prevented the judges' own views of disputed matters of policy from becoming widely known. These characteristics had nothing directly to do with securities trading or with economic matters. It is likely that any new institution or pattern of behavior, economic or otherwise, planted in England in the eighteenth century, would have received the dame treatment in the courts. The outcomes of all these cases thus cannot be understood to mean that the English legal system as a whole was particularly conductive to the development of a securities market, except in the most obvious sense that a legal system highly protective of property rights will be a comfortable home for any institution devoted to transferring property from one person to another. Nor can all these decisions necessarily be taken as representative of the judges' personal opinions of securities trading or stockjobbers.
On the other hand, eighteenth- and nineteenth-century English judges often invested their capital in government securities. That the judges considered the public debts a prudent investment may be inferred from the frequency with which they provided in their wills for the purchase of government securities with their residuary personal estates, as a means of supporting their widows and children. Judges less often invested in shares of business enterprises, but such investments were not uncommon; the limited available evidence suggests that judges owned shares of railroads, canals, turnpikes, insurances companies, and even the South Sea Company. To most of the judges deciding cases involving securities, the market was a familiar institution and one in which they held a small stake. The judges thus stood to gain from a course of decision facilitating the markets. One can never be certain of the unstated motives of appellate judges, but here one can at least say that the judges' personal interests and the cumulative effect of their decisions on the development of the market were in alignment.
In the one reported case in which a judge permitted himself to express his own view of the matter, Lord Eldon (who left 96,000 Pound Sterling in government securities in his will) admitted in 1800 that his impression had been "that a jobber or dealer in the funds was always to be considered as a culpable person." This impression had been "removed from my mind" by one of his colleagues, who showed Eldon "the necessity of such persons for the accommodation of the market." The market was good; its permanent inhabitants were not, but were a necessary evil, because the market could not exist without them. There, in a nutshell, was the conventional wisdom at the end of the eighteenth century
To the eighteenth-century English legal system, stock was indeed "a new species of property," and this was true in two senses. Stock was property; it was thus conventionally understood to be governed by the various doctrines regulating the interaction of people with respect to other kinds of property. In this sense, the new institution of organized securities trading required no explicit response from the legal system. The law, like a gas, was capable of expanding to fill available space. A new institution could easily be assimilated into the older legal categories simply by analogizing the institution's attributes to those of the most homologous institutions already in existence. And those analogies would have been so self-evident to English lawyers and judges that they would not have seemed analogies at all. The law had never before encountered time bargains for the dale of stock, for instance, but lawyers hardly needed to make any explicit analogies between time bargains and more familiar kinds of transactions, or between stock and more familiar kinds of property. A time bargain self-evidently fell within the established legal category of agreements for the sale of an item, and stock self-evidently fell within the established legal category of property. Once those classifications had been subconsciously made, the rest was easy, because the legal system already included well-worn rules for regulating the sales of property.
But stock was also a new species of property, one with certain attributes not possessed by the older species, particularly its amenability to speculative transactions. In the sense, the new institution demanded, in the view of many, an explicit response from the legal system, directed at suppressing precisely those characteristics that differentiated securities from other kinds of property. Given the conventional division of labor in the common law system between Parliament (the maker of new law) and the courts (the finder of older law), the location of this response had to be Parliament. The stockjobbing debates in Parliament over the course of the eighteenth century are best understood as the manifestations of a deeper disagreement over a simple question: Was stock or was it sufficiently different from older kinds of the century, when the more different. But as the market aged, and as more and more people began investing in it, the emphasis in Mansfield's phrase gradually changed; stock became less of a new species of property, and more of a new species of property. As that happened, new law treating securities differently from other sorts of property became more difficult to obtain.
5. American securities regulation, 1789-1800
The crash of 1792 sparked two types of reactions in the states with active securities: "evils resulting from…speculations in the public securities…will cure themselves"; "checks against wrong doers". In the after math of the crash, the legislatures of the two leading commercial states, Pennsylvania and New York, considered for the first time legislation to curb securities trading.
In late march, a bill "to prevent the practice of stockjobbing" was introduced in the lower house of the Pennsylvania legislature. The bill was modeled on sections 1 and 8 of Sir John Barnard's Act, the English statute of 1734. Like Section 1 of Barnard's Act, it would have voided all "wagers" on stock prices, an ambiguous ban that might plausibly have been construed to encompass the sale of options, or possibly just options to buy stock which the seller did not own. Like section 8 of Barnard's Act, it would have voided all contracts for the sale of stock which the seller did not possess at the time of the sale, and would have accordingly made it impossible to use the Pennsylvania court system to enforce speculative time bargains. The bill provided that all-contracts, written or verbal, public or private, made after the passing of this act, for the sale and transfer, and all wagers concerning the prices, present or future, of any certificate, or evidence of debt, or any proportion of sum of the debt, due by, or from the United States, or any separate state, or any share or shares of the stock of the Bank of the United states, or any other bank, or any share or shares of any company, established, or to be established by law of the United States, or any separate state, shall be, and all such contracts are hereby declared to be absolutely bull, void and of no effect; and both parties are hereby discharged from the lien and obligation of such contract, or wager, unless the party contracting to sell and transfer the same, shall at the time of making such contract, be in the actual possession of the certificates, or other evidence of such debt or debts, share or shares, or be otherwise entitled in his own right, or duly authorized and empowered by some person, so entitled, to transfer the said certificate, evidence, debt or debts, share or shares.--(Philadelphia) General Adviser, March 29, 1792, 3.
New York's securities market, the nation's largest, was thus from 1792 to 1836 the only market in the country where speculators could not, in theory, agree to sell stock they did not own…
7. American securities regulation, 1800-1860
Securities transactions raised many of the legal issues raised by transactions in other kinds of property. The ordinary doctrines governing commercial contracts, for example, had to be applied when those contracts involved stock, and could generally be applied without a second thought (See, e.g., Alexander v. Macauley's Administrators, 6 Md. 359 (1854)). When P.T. Barnum refused to pay damages on the ground that the stock had never been delivered to him, the courts had little difficulty in holding Barnum liable. It made no difference that stock, rather than some other item, was the subject of the contract. (Munn v. Barnum, 24 Barb. 283 (N.Y. App. Div. 1857)) These cases were not conceptualized as belonging to any single category. Where they involved trusts, they belonged to the law of trusts; where they involved bankruptcy, they belonged to the law of bankruptcy; where they involved stock held by married women, they belonged to the law of covertures; where they involved stock sold to or by an agent, they belonged to the law of agency; and so on. As English judges had done in the previous century, American judges could simply apply older bodies of property-related law to a new kind of property.
(To the extent that anyone thought of the law regulating securities transactions as an entity in itself, apart from the law governing transactions generally, it would have been a subset of this larger field.)…
One recurring question specific to securities transactions, however, did require special consideration in New York. It was a question that cut across doctrinal lines: To what extent should courts recognize the customs of professional stock traders as a source of law? On one hand, the conventions of mercantile communities had long furnished the legal system with rules capable of resolving disputes brought to the official court system. On the other, there was something a little unsettling about adopting the practices of the stockjobbers, a group not quite as reputable as other kinds of merchants. …The majority rested its decision largely on what it perceived to be the useful custom of New York securities traders; the dissent complained strenuously that Wall Street customs should not be permitted to override positive law. (Commercial Bank of Buffalo v. Kortright, 22 Wend. 348, 352-53, 362-63 (N.Y. 1839)…
By 1860, the use of stock customs as rules of law was well established in New York.) "The plaintiff dealt with the defendants as stock-brokers," one lower court judge explained, "and was bound by those customs which prevailed in relation to that species of business."…
8. Self-regulation by the New York brokers, 1791-1860
By the 1820s, the New York Stock and Exchange Board encompassed a miniature private legal system, which formulated rules governing the market and resolved disputes involving members. Because most of the time bargains were unenforceable in the New York Court until 1858, this dispute resolution mechanism was the only one available for the enforcement of such transactions, a circumstance which made membership in the Board more attractive, and strengthened the Board's position as a market regulator generally. …
Under a rule, brokers defaulting on contracts were to be barred from participating in any transactions thereafter. The establishment of a non-government method of enforcing contracts would also be an important component of self-regulation in the nineteenth century.
The value to a broker of the Board's ability to enforce contracts and discipline defaulters was made up of two components. For some contracts-time bargains in which the seller did not own the stock as of the contract date-the Board had an effective monopoly on the resolution of disputes. For all other contracts, the Board represented an alternative to the official legal system that was probably faster and less costly, and in which one was assured of more knowledgeable decision-makers. The first of these components was a direct result of the 1792 stockjobbing act; to that extent, the legislature's attempt to suppress stockjobbing during the crash of 1792 had the unintended and ironic consequence of facilitating the formation and the growth of the Stock and Exchange Board in the first half of the nineteenth century.
The Board performed three other important functions for its members. These were probably not significant components for the value of membership, however, because with respect to all three it would have been impossible to prevent non-members from free-riding on the Board's efforts, by obtaining all of the benefits of those efforts without paying a membership fee.
First, the Board attempted to ensure the quality of the securities its members bought and sold, by allowing trading only in the shares of legitimate enterprises. …
Second, the Board organized brokers into a classic cartel with respect to brokerage commissions. …
A third function performed by the Board for its members, from the benefits of which it would have been impossible to exclude non-member brokers, was lobbying….
Such "private" (i.e., non-governmental) law often plays a larger role in the lives of group members than the official law backed by the force of the government, because the penalty of expulsion is often perceived by members as a greater detriment than whatever penalties the government might impose. …(但立法完全可以采取同样的办法，如SOX禁止违规者承销的新规定，此为衡平法之救济，可以说是相互借鉴，一旦SRO的功能被取代，或者自律者多为其成员这个小团体谋取利益者、最终损害保护投资者利益和公共利益，包括市场效率和公平目标煞笔，也就是地位下降的日子。英国自律组织最近的逐渐式微就是很好的例子。但理想世界中的法最终消亡，人类必然借助自律之类的规则，借助于伦理道德。这时的自律其内容有质的飞跃，必然是全新的，包含的是信义责任和义务。)
This miniature legal system filed the void created by the stockjobbing act. "The fact well known, that many of the transactions of the Board are not protected by law,' one Board member observed, "would seem to indicate the propriety of a tribunal to arbitrate upon disputed points, more especially as their fulfillment was entirely upon the honorable principles and mutual good faith of the buyer and seller, and can only be enforced beyond this by the action of this tribunal."-----An Examination of he indication of the Award Between Boorman, Johnston & Co. and Jacob Little & Co., (New York: J. Elliot, 1842), 4…
The Board proclaimed that its own rules and practices, which had been "suggested and approved by long experience and as best adapted to the cases which arise in their business," should have governed. After many years of being shut out of the official legal system, members had grown accustomed to resolving their own disputes.
The stockjobbing act did not just create an adjudicative void; it created a regulatory as well. Because most time bargains were not enforceable in the official courts between 1792 and 1858, the New York legislature had no occasion to enact any statutes in that period specifying how time bargains were or were not to be entered into or performed. The Stock and Exchange Board stepped into this gap, by promulgating rules governing various aspects of the relationship between parties to a time bargain. …
Many of the rules adopted by the Board to govern time bargain were default rules; that is, they would apply only where the parties to a contract had not specified alternative rules of their own. …
When regulating themselves, the members of the Board were thus indirectly constrained by the tension in popular thought with respect to securities trading. Most of the time, the Board could regulate so as to advance the interests of its own members without explicit regard for the anti-market thought discussed in chapter 6. But the Board's long-term self-interest required it to act strategically on occasion. Too much speculation or too much price manipulation in the short run might cause government to step in and impose broad limits on trading, as it periodically threatened to do, and might result in losses in the long run. The Board had to keep an eye on public opinion. The tradition of Anglo-American though suspicious of securities trading thus filtered through even to Wall Street, and to the laws the stockjobbers enacted for themselves.
…By successfully regulating themselves in the first half of the nineteenth century, for the sole purpose of increasing their own wealth, the stockjobbers facilitated the growth of the market.
…The belief that the sellers of securities were more likely to be deceitful than the sellers of other kinds of property, and that the sale of securities accordingly needed to be more closely supervised by government than the sale of other things, was widely held as early as the 1690s, and had never disappeared. The associated opinion that the securities market was unusually susceptible to domination by insiders, who could control prices by controlling the flow of information, was equally old. …It was a very old background of anti-market thought that gave rise to the idea that the securities market should be more closely regulated than most other markets, and it was that idea in turn that gave rise to our current system of securities regulation. …