Securities and Exchange Commission
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Securities and Exchange Commission
The Securities and Exchange Commission (SEC) is the federal agency primarily responsible for administering and enforcing federal Securities laws. The SEC strives to protect investors by ensuring that the securities markets are honest and fair. When necessary, the SEC enforces securities laws through a variety of means, including fines, referral for criminal prosecution, revocation or suspension of licenses, and injunctions.
Headquartered in Washington, D.C., the commission itself is comprised of five members appointed by the president; one position expires each year. No more than three members may be from one political party. With more than 900 employees, the agency has five regional and six district offices throughout the country and enjoys a generally favorable reputation.
Before the October 29, 1929, Stock Market crash on Wall Street, a company could issue stock without disclosing its financial status. Many bogus or severely undercapitalized corporations sold stock, eventually leading to the disastrous plunge in the market and an ensuing panic. From the havoc wreaked by the crash came the first major piece of federal securities legislation, the Securities Act of 1933 (15 U.S.C.A. § 77a et seq.). The act regulates the primary, or new issue, market. The following year, Congress provided for the creation of the Securities and Exchange Commission when it enacted far-reaching securities legislation in the Securities Exchange Act of 1934 (15 U.S.C.A. § 78a et seq.). These two laws, along with the Trust Indenture Act of 1939 (15a U.S.C.A. §§ 77aaa–77bbbb), the Investment Company Act of 1940 (15 U.S.C.A. §§ 80-1–80a-64), the Investment Advisers Act of 1940 (15 U.S.C.A. §§ 80b-1–80b-21), and the Public Utility Holding Company Act of 1935 (15 U.S.C.A. §§ 79a–79z-6) make up the bulk of federal securities laws under the jurisdiction of the SEC.
In addition to federal statutory authority, the SEC has broad rule-making authority. It has used this power to fashion procedural and technical rules, define terms used in the laws, and make substantive rules implementing the laws. The SEC also devises forms that must be used to fulfill various requirements in the statutes and rules. Moreover, the SEC engages in a significant amount of informal lawmaking through the distribution of SEC releases containing its opinions on questions of current concern. These releases are disseminated to the press, companies and firms registered with the SEC, and other interested persons. In addition to these general public statements of policy, the SEC also responds to individual private inquiries.
Securities Act of 1933 The Securities Act of 1933 regulates the Public Offering of new issues. All public offerings of securities in inter-state commerce or through the mails must be registered with the SEC before they can be offered and sold, subject to exemptions for specifically enumerated types of securities, such as government securities, nonpublic offerings, offerings below a certain dollar amount, and intrastate offerings. The registration provisions apply to issuers of securities or others acting on their behalf. Issuers must file a registration statement with the SEC containing financial and other pertinent data about the issuer and the securities that are being offered. The Securities Act of 1933 also prohibits fraudulent or deceptive practices in the offer or sale of securities, whether or not the securities are required to be registered.
A major part of the SEC work is to review the registration documents required by the 1933 act and determine when registration is required. Registration with the SEC is intended to allow potential investors to make an informed evaluation regarding the worth of securities. Registration does not mean that the commission approves of the issue or that the disclosures in the registration are accurate, nor does it insure an investor against loss in the purchase.
Registration requires extensive disclosure on behalf of a corporation. For example, full disclosure includes management's aims and goals; the number of shares the company is selling; what the issuer intends to do with the money; the company's tax status; contingent plans if problems arise; legal standing, such as pending lawsuits; income and expenses; and inherent risks of the enterprise. Registration consists of two parts: a prospectus, which must be furnished to every purchaser of the security, and other information and attachments that need not be furnished to purchasers but are available in SEC files for public inspection. A registration statement is generally effective 20 days after filing, but the SEC has the power to delay or suspend the effectiveness of the registration statement. When a disclosure or registration statement becomes effective, it is called a prospectus and is used to solicit orders for the security.
Securities Exchange Act of 1934 The Securities Exchange Act of 1934 transferred responsibility for administration of the 1933 act from the Federal Trade Commission to the newly created SEC. The 1934 act also provided for federal regulation of trading in already issued and outstanding securities. Other provisions include disclosure requirements for publicly held corporations; prohibitions on various manipulative or deceptive devices or contrivances; SEC registration and regulation of brokers and dealers; and registration, oversight, and regulation of national securities exchanges, associations, clearing agencies, transfer agents, and securities information processors.
The SEC has broad oversight responsibilities for the self-regulatory organizations within the securities industry. For approximately 140 years prior to 1934, stock exchanges regulated their own members. Self-regulation continues to be an important component of the industry, but as of 2003 the SEC provides additional regulation, including authority to review disciplinary actions taken by a self-regulatory organization. The 1934 act also established the Municipal Securities Rulemaking Board and conferred oversight power upon the commission. The Municipal Securities Rulemaking Board formulates rules for the municipal securities industry. The commission has the authority to approve or disapprove most proposed rules of the board.
The 1934 act seeks to provide the public with adequate information about companies with publicly traded securities. Subject to certain exemptions, disclosure requirements apply not only to companies with securities listed on national securities exchanges but to all companies with more than 500 shareholders and more than $5,000,000 in assets. Companies must file detailed statements with the SEC when first registering under the 1934 act and must provide periodic reports as prescribed by the commission.
Under the 1934 act, the SEC also regulates the solicitation of proxies. Proxies are voting solicitations allowing stockholders to participate in the annual or special meetings of stockholders without actually attending the meeting; the proxy empowers someone else to vote on behalf of the shareholder. Detailed SEC regulations delineate the form of proxies and the information that must be furnished to stockholders. A registered company must furnish each stockolder, before every stockholder meeting, a proxy statement and a proxy form on which he or she can indicate approval or disapproval of each proposal expected to be introduced at the meeting. Companies must file with the commission copies of the proxy statement and the proxy form. The SEC may comment on the proxy statement and insist on changes before it is mailed to security holders.
The Williams Act of 1968 (Pub. L. No. 90-439, 82 Stat. 454) amended the 1934 act to address recurring problems arising in tender offers and corporate takeovers. A tender offer is a formal request that stockholders sell their shares in response to a large purchase bid; the buyer reserves the right to accept all, none, or a certain number of shares tendered for sale. A takeover occurs when a corporation assumes control of another corporation through an acquisition or merger. Pursuant to the law as amended, any person or group that takes ownership of more than 5 percent of any class of specific registered securities must file a statement within 10 days with the issuer of the security and with the SEC. This statement provides the background of the purchaser, the source of funds used in the purchase, the purpose of the purchase, the number of shares owned, and any relevant contracts, arrangements, or understandings. In addition, no person may make a tender offer unless he or she has first filed with the SEC and provided certain specific information to each offeree. A tender offer must remain open for a minimum of 20 days and at least 10 days after any change in the terms of the offer.
The Securities Act of 1934 also requires any person who beneficially owns, whether directly or indirectly, more than 10 percent of a class of certain registered securities and every officer or director of every company with specific registered securities to report to the SEC. Reports must be filed at the time the status is acquired and at the end of any month in which such a person acquires or disposes of any Equity securities of that company. This provision is designed to discourage short-term trading by preventing corporate insiders from unfairly using nonpublic information.
Investment Company Act of 1940 Pursuant to the Investment Company Act of 1940, investment companies must register with the SEC. Investment companies are companies engaged primarily in the business of investing, reinvesting, or trading in securities. They may also be companies with more than 40 percent of their assets consisting of investment securities, that is, securities other than those of majority-owned subsidiaries and government securities. Among other types of companies, this act covers "openend companies," commonly known as mutual funds. The SEC regulatory responsibilities under this act encompass sales load, management contracts, the composition of boards of directors, capital structure of investment companies, approval of adviser contracts, and changes in investment policy. In addition, a 1970 amendment imposed restrictions on management compensation and sales charges.
The act prohibits various transactions by investment companies, unless the commission has first made a determination that the transaction is fair. Moreover, the act permits the SEC to bring a court action to enjoin the execution of mergers and other reorganization plans of investment companies if the plans are unfair to security holders. The SEC also has the power to impose sanctions pursuant to administrative proceedings for violation of this act and may file suit to enjoin the acts of management officials involving breaches of fiduciary duties or personal misconduct and may bar such officials from office.
Investment Advisers Act of 1940 This act provides for SEC regulation and registration of investment advisers. The act is comparable to provisions of the 1934 act with respect to broker-dealers but is not as comprehensive. Generally speaking, an investment adviser is a person who engages in the business of advising others with respect to securities and does so for compensation. Certain fee arrangements are prohibited; adverse personal interests in a transaction must be disclosed. Moreover, the SEC may define and prohibit certain fraudulent and deceptive practices.
Other Securities Laws The Trust Indenture Act of 1939 applies to public issues of debt securities in excess of a certain amount. This law prescribes requirements to ensure the independence of indenture trustees. It also requires the exclusion of certain types of exculpatory clauses and the inclusion of certain protective clauses in indentures. In addition, the Public Utility Holding Company Act of 1935 (15 U.S.C.A. §§ 79a–79z-6) was enacted to correct abuses in the financing and operation of electric and gas public utility holding companies; SEC functions under these provisions were substantially completed by the 1950s.
In the wake of major corporate scandals involving the Enron Corporation and the Arthur Andersen accounting firm, Congress enacted the Sarbanes-Oxley Act of 2002 (also known as the Public Company Accounting Reform and Investor Protection Act). The act imposes new disclosure requirements when companies file financial reports. It mandates that the SEC, by rule, requires the principal executive officer and principal financial officer to certify in each annual or quarterly report the accuracy and completeness of the information contained in the report. A knowing violation of this section is punishable by up to 10 years in jail and a $1 million fine. A willful violation is punishable by up to 20 years in jail and a $5 million fine. The act authorizes the establishment of a Public Company Accounting Oversight Board to oversee the accounting profession. The SEC appoints the five-person board. The board is charged with developing standards and enforcing them with appropriate sanctions. It must file an Annual Report with the SEC.
SEC Enforcement Authority
The commission enforces the myriad laws and regulations under its jurisdiction in a number of ways. The SEC may seek a court Injunction against acts and practices that deceive investors or otherwise violate securities laws; suspend or revoke the registration of brokers, dealers, investment companies, and advisers who have violated securities laws; refer persons to the Justice Department for criminal prosecution in situations involving criminal Fraud or other willful violation of securities laws; and bar attorneys, accountants, and other professionals from practicing before the commission.
The SEC may conduct investigations to determine whether a violation of federal securities laws has occurred. The SEC has the power to subpoena witnesses, administer oaths, and compel the production of records anywhere in the United States. Generally, the SEC initially conducts an informal inquiry, including interviewing witnesses. This stage does not usually involve sworn statements or compulsory testimony. If it appears that a violation has occurred, SEC staff members request an order from the commission delineating the scope of a formal inquiry.
Witnesses may be subpoenaed in a formal investigation. A witness compelled to testify or produce evidence is entitled to see a copy of the order of investigation and be accompanied, represented, and advised by counsel. A witness also has the absolute right to inspect the transcript of his or her testimony. Typically the same privileges one could assert in a judicial proceeding, such as the Constitution's Fourth Amendment prohibition against unreasonable searches and seizures and the Fifth Amendment's Privilege against Self-Incrimination, apply in an SEC investigation. Proceedings are usually conducted privately to protect all parties involved, but the commission may publish information regarding violations uncovered in the investigation. In a private investigation, a targeted person has no right to appear to rebut charges. In a public investigation, however, a person must be afforded a reasonable opportunity to cross-examine witnesses and to produce rebuttal testimony or evidence, if the record contains implications of wrongdoing.
When an SEC investigation unearths evidence of wrongdoing, the commission may order an administrative hearing to determine responsibility for the violation and impose sanctions. Administrative proceedings are only brought against a person or firm registered with the SEC, or with respect to a security registered with the commission. Offers of settlement are common. In these cases the commission often insists upon publishing its findings regarding violations.
An administrative hearing is held before an administrative law judge, who is actually an independent SEC employee. The hearing is similar to that of a nonjury trial and may be either public or private. After the hearing the judge makes an initial written decision containing findings of fact and conclusions of law. If either party requests, or if the commission itself chooses, the commission may review the decision. The SEC must review cases involving a suspension, denial, or revocation of registration. The commission may request oral argument, will study briefs, and may modify the decision, including increasing the sanctions imposed. Possible sanctions in administrative proceedings include censure, limitations on the registrant's activities, or revocation of registration. In 1990 SEC powers were expanded to include the authority to impose civil penalties of up to $500,000, to order disgorgement of profits, and to issue cease and desist orders against persons violating or about to violate securities laws, whether or not the persons are registered with the SEC.
The U.S. Court of Appeals for the District of Columbia or another applicable circuit court of appeals has jurisdiction to review most final orders from an SEC administrative proceeding. Certain actions by the commission are not reviewable.
The SEC may request an injunction from a federal district court if future securities law violations are likely or if a person poses a continuing menace to the public. An injunction may include a provision that any future violation of law constitutes Contempt of court.
The SEC may request further relief, such as turning over profits or making an offer to rescind the profits gained from an insider trading transaction. In cases of pervasive corporate mismanagement, the SEC may obtain appointment of a receiver or of independent directors and special counsel to pursue claims on behalf of the corporation.
Willful violations may be punished by fines and imprisonment. The SEC refers such cases to the Department of Justice for criminal prosecution. "Willfulness" means only that the defendant intended the act, not that he knew that it was a violation of securities laws.
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Securities and Exchange Commission. Available online at <www.sec.gov> (accessed August 11, 2003).
Seligman, Joel. 2003. The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance. 3d ed. New York: Aspen.
Winer, Kenneth B., and Samuel J. Winer. 2004. Securities Enforcement: Counseling & Defense. Newark, N.J.: Lexis Nexis.