The 'United States Securities and Exchange Commission' (commonly known as the 'SEC') is a
United States government agency having primary responsibility for enforcing the federal securities laws and regulating the
securities industry/stock market. The SEC was created by section 4 of the
Securities Exchange Act of 1934 (now codified as and commonly referred to as the 1934 Act). In addition to the 1934 Act that created it, the SEC enforces the
Securities Act of 1933, the
Trust Indenture Act of 1939, the
Investment Company Act of 1940, the
Investment Advisers Act of 1940, the
Sarbanes-Oxley Act of 2002 and other statutes.
Christopher Cox is the current chairman of the SEC. He was appointed by President
George W. Bush.
President
Franklin Delano Roosevelt appointed
Joseph P. Kennedy, Sr., father of President John F. Kennedy, to serve as the first Chairman of the SEC. For a full list of SEC chairs and commissioners, see:
Securities and Exchange Commission appointees.
Overview
The SEC was established by the
United States Congress in 1934 as an independent,
non-partisan,
quasi-judicial regulatory
agency following
years of depression caused by the
Great Crash of 1929. The main reason for the creation of the SEC was to regulate the
stock market and prevent corporate abuses relating to the offering and sale of securities and corporate reporting. The SEC was given the power to license and regulate stock exchanges.
Currently, the SEC is responsible for administering six major laws that govern the securities industry. They are: the
Securities Act of 1933, the
Securities Exchange Act of 1934, the
Trust Indenture Act of 1939, the
Investment Company Act of 1940, the
Investment Advisers Act of 1940 and, most recently, the
Sarbanes-Oxley Act of 2002.
The enforcement authority given by Congress allows the SEC to bring civil enforcement actions against individuals or
companies found to have committed accounting
fraud, provided false information, or engaged in
insider trading or other violations of the
securities law. The SEC also works with
criminal law enforcement agencies to prosecute individuals and companies alike for offenses which include a criminal violation.
To achieve its mandate, the SEC enforces the statutory requirement that
public companies submit quarterly and
annual reports, as well as other periodic reports. As part of the annual reporting requirement, the company's top management must provide a
narrative account in addition to the numbers called the "management discussion and analysis" which provides an overview of the previous year of operations and how the company fared in that time period. Management will usually also touch on the upcoming year, outlining future goals and approaches to new projects. In an attempt to level the playing field for all investors, the SEC maintains an online database called
EDGAR (the Electronic Data Gathering, Analysis, and Retrieval system)
online from which investors can access this and other information filed with the agency.
Quarterly and annual reports from public companies are crucial for investors to make sound decisions when investing in the capital markets. Unlike
banking,
investment in the capital markets is not
guaranteed by the federal government. The potential for big gains needs to be weighed against equally likely losses. Mandatory disclosure of financial and other information about the issuer and the security itself gives private individuals as well as large institutions the same basic facts about the public companies they invest in, thereby increasing public scrutiny while reducing insider trading and fraud.
The SEC makes reports available to the public via the EDGAR system. SEC also offers publications on investment-related topics for public education. The same online system also takes tips and complaints from investors to help the SEC track down violators of the securities laws.
Creation
Prior to the enactment of the federal securities laws and the creation of the SEC, there existed so-called
Blue Sky Laws, which were enacted and enforced at the state level.
[1] However, these laws were generally found lacking; the
Investment Bankers Association told its members as early as 1915 that they could "ignore" Blue Sky Laws by making securities offerings across state lines through the mail.
[2] After holding
hearings on abuses on interstate frauds (commonly known as the
Pecora Commission), Congress passed the
Securities Act of 1933 () which regulates interstate sales of securities (
original issues) at the federal level. The subsequent
Securities Exchange Act of 1934 () regulates sales of securities in the
secondary market. Section 4 of the 1934 Act created the U.S. Securities and Exchange Commission to enforce the federal securities laws. Both laws are considered part of Franklin Roosevelt's "
New Deal" raft of legislation.
The Securities Act of 1933 is also known as the "Truth in Securities Act" or the "Federal Securities Act” and is often shorted to the "1933 Act." Its goal is to increase public trust in the capital markets by requiring uniform disclosure of information about public securities offerings. The primary drafters of 1933 Act were Huston Thompson, a former
Federal Trade Commission chairman, and Walter Miller and Ollie Butler, two attorneys in the
Commerce Department's Foreign Service Division, with input from Supreme Court Justice
Louis Brandeis. For the first year of the law's enactment, the enforcement of the statute rested with the Federal Trade Commission, but this power was transferred to the SEC following its creation in 1934. (Interestingly, the first, rejected draft of the Securities Act written by
Samuel Untermyer vested these powers in the
U.S. Post Office, because Untermyer believed that only by vesting enforcement powers with the postal service could the constitutionality of the act be assured.
) The law requires that issuing companies register distributions of securities with the SEC prior to interstate sales of these securities, so that investors may have access to basic financial information about issuing companies and risks involved in investing in the securities in question. Since 1996, most registration statements (and associated materials) filed with the SEC can be accessed via the SEC’s online system,
EDGAR.
[3]
The Securities Exchange Act of 1934 is also known as “the Exchange Act” or "the 34 Act". This act regulates secondary trading between individuals and companies which are often unrelated to the original issuers of securities. Entities under the SEC’s authority include securities exchanges with physical trading floors such as the
New York Stock Exchange (NYSE), self-regulatory organizations such as the
National Association of Securities Dealers (NASD), the
Municipal Securities Rulemaking Board (MSRB), online trading platforms such as
NASDAQ and ATS, and any other persons (e.g., securities brokers) engaged in transactions for the accounts of others.
[4]
Structure
Headquartered in
Washington, D.C., the SEC consists of five Commissioners appointed by the
President of the United States with the advice and consent of the
United States Senate. Their terms last five years and are staggered so that one Commissioner's term ends on June 5 of each year. To ensure that the SEC remains
non-partisan, no more than three Commissioners may belong to the same political party. The President also designates one of the Commissioners as Chairman, the SEC's top executive.
Within the SEC, there are four divisions, 18 offices and approximately 3,100 staff. Beside its headquarters in Washington, D.C., the SEC has 11 regional offices throughout the United States.
The SEC's four main divisions are: Corporation Finance, Market Regulation, Investment Management, and Enforcement.
[5]
Corporation Finance is the division that oversees the disclosure made by public companies as well as the registration of transactions, such as mergers, made by companies. The division is also responsible for operating EDGAR.
The Market Regulation division oversees
self-regulatory organizations (SROs) such as
NYSE,
NASD and
MSRB, and all
broker-dealer firms and
investment houses. Market Regulation also interprets proposed changes to regulations and monitors operations of the industry. In practice, the SEC delegates most of its enforcement and rulemaking authority to NYSE and NASD. In fact, all trading firms not regulated by other SROs must register as a member of NASD. Individuals trading securities must pass exams administered by NASD to become ''
registered representatives''.
[6] [7]
The Investment Management Division oversees investment companies (commonly referred to as mutual funds) and their advisory professionals. This division administers federal securities laws, in particular the Investment Company Act of 1940 and Investment Advisers Act of 1940.
The Enforcement Division works with the other three divisions, and other Commission offices, to investigate violations of the securities laws and regulations and to bring actions against alleged violators. The SEC generally conducts investigations in private. The SEC's staff may seek voluntary production of documents and testimony, or may seek a formal order of investigation from the SEC, which allows the staff to compel the production of documents and witness testimony. The SEC can bring a
civil action in a
U.S. District Court or an
administrative proceeding which is heard by an independent
administrative law judge (ALJ). The SEC does not have criminal authority, but may refer matters to state and federal prosecutors.
Relationship to other agencies
In addition to working with various
SROs such as NYSE and NASD, the Securities and Exchange Commission also works with other
federal agencies, state securities regulators and law enforcement agencies.
[8]
In 1988
Executive Order 12631 established the President's
Working Group on Financial Markets. The Working Group is chaired by the
Secretary of the Treasury and includes the Chairman of the SEC, the Chairman of the
Federal Reserve and the Chairman of the
Commodity Futures Trading Commission. The goal of the Working Group is to enhance the integrity, efficiency, orderliness and competitiveness of the financial markets while maintaining investor confidence.
[9]
The
Securities Act of 1933 was originally administered by the
Federal Trade Commission (FTC). The
Securities Exchange Act of 1934 transferred this responsibility from FTC to the SEC. The main mission of the FTC is to promote consumer protection and to eradicate
anticompetitive business practices. The FTC regulates general business practices, while the SEC focuses on the securities markets.
The
Temporary National Economic Committee was established by joint resolution of Congress 52 Stat. 705 on June 16, 1938. It was tasked with reporting to the Congress on abuses of monopoly power. The committee was defunded in 1941, but its records are still under seal by order of the SEC.
[10]
The
Municipal Securities Rulemaking Board (MSRB) was established in 1975 by Congress to develop rules for companies involved in
underwriting and trading
municipal securities. The MSRB is monitored by the SEC, but the MSRB does not have the authority to enforce its rules.
While most violations of securities laws are enforced by the SEC and the various SROs it monitors, state securities regulators can also enforce state-wide securities laws known colloquially as ''
Blue sky laws''.
States may require securities to be registered in the state before they can be sold there. The
National Securities Markets Improvement Act of 1996 (NSMIA) addresses this dual system of federal-state regulation by amending Section 18 of the 1933 Act to exempt nationally traded securities from state registration, thereby pre-empting state law in this area. However, NSMIA preserves the states' anti-fraud authority over all securities traded in the state.
[11]
The SEC also works with federal and state law enforcement agencies to carry out actions against actors alleged to be in violation of the securities laws.
Related legislation
★ 1938 - Establishment of the
Temporary National Economic Committee 52 Stat. 705
★ 1964 -
Securities Act Amendments PL 88-467
★ 1968 -
Securities Disclosure Act PL 90-439
★ 1975 - 'Securities and Exchange Act' PL 94-29
★ 1980 -
Depository Institutions and Deregulation Money Control Act PL 96-221
★ 1982 -
Garn-St. Germain Depository Institutions Act PL 97-320
★ 1984 -
Insider Trading Sanctions Act PL 98-376
★ 1988 -
Insider Trading and Securities Fraud Enforcement Act PL 100-704
★ 1989 -
Financial Institutions Reform, Recovery, and Enforcement PL 101-73
★ 1999 -
Gramm-Leach-Bliley Act PL 106-102
★ 2000 -
Commodity Futures Modernization Act of 2000
★ 2002 -
Sarbanes-Oxley Act
★ 2007 -
Reg NMS
SEC communications
Comment letters
Comment letters are letters by the SEC to a public company raising issues and requested comments. For example, in October 2001, the SEC wrote to
Computer Associates (CA), covering fifteen items, mostly about CA's accounting, including five about revenue recognition. The
chief financial officer of CA, to whom the letter was addressed, plead guilty to fraud at CA in 2004.
In June 2004, the SEC announced that it would publicly post all comment letters, to give investors access to the information in them. In mid-2005, Allan Beller, former head of the SEC's Division of Corporation Finance, said that the SEC believed that "it is appropriate to expand the transparency of our comment process by making this information available to an unlimited audience."
An analysis in May 2006 of regulatory filings over the prior 12 months indicates, however, that the SEC has not accomplished what it said it would do. The analysis found 212 companies that had reported receiving comment letters from the SEC, but only 21 letters (for these companies) were posted on the SEC's website. John W. White, the current head of the Division of Corporation Finance, told the ''New York Times'': "We have now resolved the hurdles of posting the information.... We expect a significant number of new postings in the coming months."
[12]
No-action letters
No-action letters are letters by the SEC staff indicating that the staff will not recommend to the Commission that the SEC undertake enforcement action against a person or company if that entity engages in a particular action. These letters are sent in response to requests made when the legal status of an activity is not clear. These letters are publicly released and increase the body of knowledge on what exactly is and is not allowed. They represent the staff's intrepretations of the securities laws and, while persuasive, are not binding on the courts.
Forms
See
SEC filing or
SEC Forms List by category
★
SEC Form 4 (stock and stock options ownership and exercise disclosure)
★
SEC Form S-1 (IPO)
★
Form 8-K
★
SEC Form 10-K
SecuritiesLinks Links to commonly used SEC forms
Misc
President
Franklin D. Roosevelt appointed
Joseph P. Kennedy, Sr., father of President
John F. Kennedy, to serve as the first Chairman of the SEC. For a list of other appointees, see:
Securities and Exchange Commission appointees.
See also
★
Financial regulation
★
Regulation D
References
1. Blue Sky Laws
2. The Transformation of Wall Street, , Joel, Seligman, Aspen, 2003,
3. Securities Act of 1933
4. Securities Exchange Act of 1934
5. Policing The Securities Market: An Overview Of The SEC." Investopedia. Investopedia Inc., 21 Oct, 2005
6. National Association of Securities Dealers
7. "How does the NASD differ from the SEC?" Investopedia. Investopedia Inc.
8. Regulatory Structure
9. U.S. Treasury
10. National Archives
11. NSMIA
12. Gretchen Morgenson: "Deafened by the S.E.C.'s Silence, He Sued", ''New York Times'', May 28, 2006, section 3, p. 1
External links
★
U.S. Securities and Exchange Commission website
★
What the SEC does
★
SECLaw.com - The Securities Law Home Page
★
Introduction to the Federal Securities Laws
★
United States Securities Laws and Rules
★
Take a Look at the Securities and Exchange Commission
★
SEC Historical Society - Archive and Museum -- nonprofit and independent from the SEC
★
Association of Securities and Exchange Commission Alumni, Inc.
★
TheCorporateCounsel.net (USA)Home of popular securities law blog and related resources
★
''Understanding the Securities Exchange Commission''--About.com
★
SecuritiesLinks Links to U.S. securities laws, rules, forms and other resources
★
SEC Accounting Bulletins — United States
★
SEC Division of Corporate Finance — United States
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