Securities and Exchange Commission

The U.S. Securities and Exchange Commission (SEC) is an independent, nonpartisan, quasi-judicial regulatory agency that is responsible for administering federal securities laws. The main objective of these laws is to protect investors in securities markets in the United States from fraud and other dishonest activities. The laws are designed to ensure that securities markets operate fairly and that investors have access to disclosures of all material information concerning publicly traded securities.

The SEC regulates firms engaged in the purchase and sale of securities, people who provide investment advice, and investment companies. The SEC may also provide the means to enforce securities laws through the appropriate sanctions. The commission may also serve in an advisory capacity to the federal courts in Chapter 11 cases (e.g., corporate reorganization proceedings under Chapter 11 of the Bankruptcy Reform Act of 1978).

ORIGIN AND STRUCTURE

Prior to the creation of the SEC, there were no federal securities laws. The state securities laws that did exist, known as the Blue Sky laws, were easily ignored by securities companies simply by making securities offerings across state lines through the mail. Congressional investigations of the collapse of the stock market in 1929 and the subsequent Great Depression found that investors suffered heavy losses for two major reasons. First, many companies had failed to disclose relevant information. Second, many misrepresentations of financial information had been made to the investors. The SEC was established by Congress in 1934 under the Securities Exchange Act to provide oversight in an attempt to prevent such a situation from arising again.

The commission is headed by five commissioners appointed by the President of the United States with the advice and consent of the Senate. Each commissioner is appointed to a fixed five-year term; terms are staggered so that one expires on June 5 of every year. One of the commissioners is designated as chair by the president. As a matter of policy, no more than three of the five commissioners may be from the same political party. The commission employs financial analysts and examiners,

accountants, lawyers, economists, investigators, and other professionals to carry on its responsibilities.

The SEC employs around 4,000 people in eighteen offices, with headquarters in Washington, D.C., and eleven regional offices throughout the United States. The commission consists of four main divisions—Corporation Finance, Trading and Markets, Investment Management, and Enforcement—as well as other commission offices.

Division of Corporation Finance. Corporation Finance has the overall responsibility of ensuring that disclosure requirements are met by publicly held companies registered with the SEC. Its responsibilities include reviewing registration statements for publicly traded corporate securities, as well as documents concerning proxies, mergers and acquisitions, tender offers, and solicitations.

Division of Investment Management. This division has the responsibility of administering 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 Investment Management ensures compliance with regulations regarding the registration, financial responsibility, sale practices, and advertising of investment companies and investment advisers. New products offered by these entities are also reviewed by the staff in this division. The staff reviews and processes investment company registration statements, proxy statements, and periodic reports as per the laws specified under the Securities Act.

Division of Trading and Markets. This division is responsible for overseeing the securities markets and their self-regulatory organizations (SROs), such as the nation's stock exchanges, Financial Industry Regulatory Authority (FINRA), and the Municipal Securities Rulemaking Board. This division is empowered to interpret proposed changes to regulations. This division also registers and regulates trading firms not regulated by an SRO, and it oversees other market participants, such as transfer agents and clearing organizations.

Division of Enforcement. The Enforcement Division has the responsibility of investigating violations of the securities laws and regulations and bringing actions against alleged violators. This division works with the other three divisions, and other SEC offices, to enforce federal securities laws. The SEC is empowered to bring civil actions to a U.S. District Court or to engage in administrative proceedings heard by an independent administrative law judge. While the SEC does not have the authority to bring criminal charges, it may refer its cases to state and federal prosecutors. The SEC typically brings between 400 and 500 civil enforcement actions per year against companies and individuals that it suspects of breaking securities laws.

Office of Compliance Inspections and Examinations. This office conducts and coordinates all compliance inspection programs of brokers, dealers, self-regulatory organizations, investment companies and advisers, clearing agencies, and transfer agents. It determines whether these entities are in compliance with the federal securities laws, with the goal of protecting investors.

SECURITIES LAWS ADMINISTERED BY THE SEC

The Securities and Exchange Commission is responsible for enforcing a wide range of laws passed since the 1930s. The seven major acts enforced by the SEC are the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Act of 1935, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, and the Sarbanes-Oxley Act of 2002. The SEC also enforces the Securities Disclosure Act of 1968, the Depository Institutions and Deregulation Money Control Act of 1980, the Insider Trading Sanctions Act of 1984, and the Commodity Futures Modernization Act of 2000, among others.

Securities Act of 1933. The Securities Act imposes mandatory disclosure requirements on companies that sell their new securities through the securities markets. The act's base philosophy is to let the issuer disclose and to let the investor beware. This act is often referred to as the “truth in securities” law. The act requires that investors receive financial and other significant information concerning securities being offered for public sale. The act also prohibits deceit, misrepresentations, and other fraud in the sale of securities.

In 1975, Congress amended the Securities Act of 1933. The major focus of the amendment was the requirement that the SEC move towards establishing a single nationwide securities market. The law did not specify the structure of a national securities market, but it is assumed that any national market would make extensive use of computers and electronic communication devices.

Securities Exchange Act of 1934. The Securities Exchange Act of 1934 extends the disclosure concepts to securities already outstanding. The major provisions of the Securities Exchange Act of 1934 are as follows:

1. The act created the Securities and Exchange Commission as a watchdog for the securities business.
2. It required listed companies to file registration statements and periodic financial reports with both the SEC and the exchange.
3. It gave the SEC the power to prohibit market manipulation, misrepresentation, and other unfair practices.
4. It required all national securities exchanges to register with the SEC and to be under its effective supervision and regulation.
5. It gave the Board of Governors of the Federal Reserve System the authority to control margin requirements.
6. It granted the SEC the power to control short selling, trading techniques, and the procedures of the exchanges.
7. It required officers, directors, and major stockholders to file monthly reports of any changes in their stockholdings.

Public Utility Holding Act of 1935. Interstate holding companies engaged, through subsidiaries, in the electric utility business or in the retail distribution of natural or manufactured gas are subject to regulation under this act. These companies, unless specifically exempted, are required to submit reports providing detailed information concerning the organization, financial structure, and operations of the holding company and its subsidiaries. Holding companies are subject to SEC regulations on such matters as system structure, acquisitions, combinations, and issue and sale of securities.

The Trust Indenture Act of 1939. Under the scrutiny of the SEC, this act applies to debt securities, including bonds, debentures and notes, and similar debt instruments offered for public sale and issued under trust indentures with more than $7.5 million in securities outstanding at any one time. Even though such securities may be registered under the Securities Act, they may not be offered for sale to the public unless a formal agreement between the issuer of bonds and bondholder, known as the trust indenture, conforms to the statutory standards of this act.

Investment Company Act of 1940. Under this act, activities of companies—including mutual funds—engaged primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public, are subject to certain statutory prohibitions and to Securities and Exchange Commission regulation. Public offerings of investment companies' securities must also be registered under the Securities Act of 1933. In this context, it should be noted that although the SEC serves as a regulatory agency in these cases, the SEC does not supervise the company's investment activities. The mere presence of the SEC as a regulatory agency does not in itself guarantee a safe investment for potential investors.

Investment Advisers Act of 1940. The Investment Advisers Act of 1940 establishes a pattern of regulating investment advisers. The main purpose of this act is to ensure that all persons, or firms, that are compensated for providing advising services to anyone about securities investments are registered with the SEC and conform to the established standards designed to protect investors. The SEC has the authority to strip an investment adviser of his or her registration should he or she be found guilty of committing a statutory violation or securities fraud.

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act (commonly called SOX), signed into law by President George W. Bush on July 30, 2002, marked the first significant reform of American business practices in decades. High-profile cases of insider trading and fraud at such companies as Enron and WorldCom—which took place either under the noses or with the implicit approval of the major public accounting firms hired to audit them—led to a movement to increase the power of the SEC. The act was intended to enhance corporate responsibility, combat accounting fraud, and clarify financial disclosures. It also created the Public Company Accounting Oversight Board (PCAOB) to guarantee that the auditing profession remained unbiased in performing its vital role of ensuring corporate compliance with financial reporting standards.

Proponents of the Sarbanes-Oxley Act hoped that its passage would serve to clean up American capital markets, improve corporate governance, and restore investor confidence. A number of critics claim that the act is an unnecessary government intrusion and that the costs associated with compliance put American firms at a competitive disadvantage. One study estimates that Sarbanes-Oxley cost Fortune 500 companies an average of $5.1 million in compliance expenses in 2004, while another study found that the act increased costs associated with being a publicly held company by 130 percent. Whether the critics are correct or not, this act has increased the power of the SEC and has succeeded at least in part in reducing the number of corporate scandals seen during the early-2000s.

SEE ALSO Due Diligence; Ethics; Financial Issues for Managers; Financial Ratios

BIBLIOGRAPHY

Aspatore Books Staff. Understanding the Laws Behind Securities Transactions. Boston, MA: Aspatore Books, 2006.

Barber, Marc. “U.S. Clean-Up Operation: Regulators in the U.S. Are as Determined as Ever to Restore Faith after the Series of Accounting Scandals in Recent Years.” Accountant May 2004.

Garg, Ramesh, et al. Basics of Financial Management. 2nd ed. Acton, Massachusetts: Copley Publishing Group, 2002.

“The Investor's Advocate.” U.S. Securities and Exchange Commission. Available from: http://www.sec.gov/about/whatwedo.shtml.

U.S. Securities and Exchange Commission Handbook. International Business Publications, 2008.