Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION

The U.S. Securities and Exchange Commission (SEC) is a regulatory agency responsible for administering U.S. securities laws. The purpose of these laws is to ensure fair markets and to provide accurate information to investors. The major securities laws were enacted in the 1930s after the 1929 stock market crash and the anemic performance of the market in the early 1930s.

The U.S. Congress passed the Securities Act of 1933 (sometimes referred to as the "truth in issuance act") to regulate the primary market—the market for new securities. The act's dual primary purposes related to the sale of securities required companies to submit independently verified financial information, a registration statement, and a prospectus to the Federal Trade Commission to ensure that investors receive credible financial information about companies being offered for public sale, as well as to prohibit fraud and misrepresentation in the sale of securities. Since May 6, 1996, individuals have been able to readily access these statements using the SEC's Electronic Data Gathering, Analysis, and Retrieval System and learn about companies to help them make informed investment decisions.

The Securities Exchange Act of 1934 provided more SEC control, giving it the power to regulate the stock exchanges and the trading practices of the secondary market (a market for currently traded shares). In 1935 the Public Utility Holding Company Act was enacted to regulate all interstate holding companies (a holding company controls other companies by owning their stock) in the utility business. Further, the Trust Indenture Act of 1939 was enacted to allow the SEC oversight in the issuance of bonds, notes, and debentures offered for public sale.

In 1940 Congress passed two laws covering the people working in the security business. The Investment Company Act of 1940 was developed to minimize conflicts of interest by regulating investment companies, including those involved with mutual funds. It focuses on disclosing investment company operations and structure, as well as fund information to the investing public. The Investment Advisers Act of 1940 established regulation of investment advisers and their activities. In 1974 the Employee Retirement Income Security Act gave the SEC jurisdiction over pension funds; and the Sarbanes-Oxley Act of 2002 mandated reforms relating to public accounting fraud and created oversight of the auditing profession through the Public Company Accounting Oversight Board. Other legislation addressed foreign activities, insider trading, and further clarification of existing legislation.

The SEC consists of five presidentially appointed commissioners, only three of whom can be from the same political party. Terms are staggered; thus, each June 5, a person rotates off the commission. To accomplish their duties, the commissioners have office staffs of accountants and lawyers and regional offices in eleven cities.

The organizational structure of the SEC includes four divisions. The Division of Corporation Finance reviews registration statements, tender offers, and mergers and acquisitions. The Division of Market Regulation oversees markets and market participants. The Division of Investment Management is responsible for the enforcement of three statutes: the Investment Company Act of 1940, the Investment Advisers Act of 1940, and the Public Utility Holding Company Act of 1935. The Division of Enforcement is the SEC's investigative arm. After conducting private investigations of possible violations, the Division of Enforcement recommends appropriate commission action either before an administrative law judge or in federal court, and then negotiates settlements.

The commission also has fifteen offices performing duties defined by their titles. For instance, the Office of Compliance, Inspections, and Examinations determines whether all investment organizations are in compliance with federal securities laws.

In enforcing the securities laws, the SEC acts as a guide and adviser whose actions are largely remedial. One common activity of each division is rule making. New rules and rule modifications are usually accomplished in open meetings. Those industries or parties affected by rule changes are allowed to present their positions and make comments in an open meeting. Any SEC investigations are conducted by the Division of Enforcement and the field offices. If the evidence indicates a violation, the SEC can take administrative action (such as suspension) or instigate a civil action in a U.S. district court. If evidence indicates a criminal action, the SEC turns the case over to the U.S. Department of Justice.

More information is available from the Securities and Exchange Commission, 450 Fifth Street NW, Washington, DC 20549; 202-942-7114; or http://www.sec.gov.

see also Securities Acts: Requirements for Accounting

bibliography

Hirt, Geoffrey A., and Block, Stanley B. (2006). Fundamentals of investment management (8th ed.). Boston: McGraw-Hill/Irwin.

Levy, Haim (1999). Introduction to investments (2nd ed.). Cincinnati: South-Western College.

Securities and Exchange Commission. (2004). Securities and Exchange Act of 1934. Retrieved December 9, 2005, from http://www.sec.gov/about/laws/sea34.pdf

Securities and Exchange Commission. (2004). Trust Indenture Act of 1939. Retrieved December 9, 2005, from http://www.sec.gov/about/laws/tia39.pdf

Mary Jean Lush

Val Hinton