United States Securities and Exchange Commission

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. The SEC was created by section 4 of the Securities Exchange Act of 1934 (now codified as ). 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.

Overview

The SEC was established by the 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 charter of the SEC was to enforce newly enacted federal securities laws in order to restore and uphold public confidence in the capital markets. "Securities and Exchange Commission". West's Encyclopedia of American Law. The Gale Group, Inc, 1998.

Currently, SEC is responsible for administering seven major laws that governs the securities industry. They are: Securities Act of 1933, Securities Exchange Act of 1934, Public Utility Holding Company Act of 1935, Trust Indenture Act of 1939, Investment Company Act of 1940, Investment Advisers Act of 1940 and, most recently, Sarbanes-Oxley Act of 2002.

The enforcement authority given by Congress allows the SEC to bring civil enforcement against individuals or companies found to have committed accounting fraud, provided false information, engaged in insider trading or violations of other provision of the securities law. The SEC also works with criminal law enforcement agencies to prosecute individuals and companies alike for severe offenses.

To achieve its mandate, the SEC requires 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. The SEC has an online database called "EDGAR," from which investors can access this information - this helps to attempt to obtain a level-playing field for all investors.

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. Mandated disclosure of financial and other information gives private individuals as well as large institutions the same basic facts about public companies they invest in, increasing public scrutiny while reducing insider trading and fraud.

SEC makes reports available to the public via the EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system online. SEC also offers publications on investment-related topics for public education. The same online system also takes tips and complaints from investors to help SEC track down non-conforming companies.

Creation

Prior to the creation of the SEC, there existed so called Blue Sky Laws which were enacted and enforced at state-level. Blue Sky Laws These were found to be lacking during and after the Great Crash. After holding hearings on abuses on interstate frauds, Congress passed the Securities Act of 1933 () which regulates interstate sales of securities (original issues) at 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 federal securities laws.

The Securities Act of 1933 is also known as the "Truth in Securities Act" or the "Federal Securities Act”. Its goal is to increase public trust in the capital markets. The law requires that originating companies register securities with the SEC prior to interstate sales of these securities, so that investors have access to basic financial information about issuing companies and risks involved by investing on these securities. After 1996, most of these registered documents can be accessed via SEC’s online system, EDGAR. Securities Act of 1933

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 SEC’s authority include securities exchanges with physical trading floors such as the New York Stock Exchange (NYSE), other self-regulatory organizations such as the National Association of Securities Dealers (NASD), Municipal Securities Rulemaking Board (MSRB), online trading platforms such as NASDAQ and ATS, and any other persons (e.g. brokers) engaged in transactions for the accounts of others. Securities Exchange Act of 1934

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 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 and district Offices throughout the United States.

The SEC's four main divisions are: Corporation Finance, Market Regulation, Investment Management and Enforcement. Policing The Securities Market: An Overview Of The SEC." Investopedia. Investopedia Inc., 21 Oct, 2005

Corporation Finance is the division which oversees the disclosure made by public companies as well as the registration of transactions, such as mergers, made by companies. The same division is also responsible for operating EDGAR.

The Market Regulation division oversees Self-Regulatory Organizations (SROs) such as NYSE, NASD and MSRB, and all other broker-dealer firms and investment houses. Market Regulation also interprets proposed changes to regulations and monitor 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 examines administered by NASD to become registered representatives. National Association of Securities Dealers "How does the NASD differ from the SEC?" Investopedia. Investopedia Inc.

The Investment Management Division oversees investment companies and their advisory professionals. This division administers federal securities laws. The SEC can interpret such laws and make rules to improve disclosure of information and to minimize risk to investors, without imposing undue burden on regulated companies.

The Enforcement division works with the other three divisions to investigate violations of laws and rules, and to bring actions against violators. The SEC conducts investigation in private first, via information interviews. It then issues formal order of investigation and can compel witness to testify and companies to produce records for the investigation. 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). For criminal charges, the SEC must work with law enforcement offices to bring actions against violators.

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 regulator and law enforcement agencies. Regulatory Structure

Executive Order 12631 in 1988 established the President’s Working Group (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 integrity, efficiency, orderliness and competitiveness of the financial markets, and maintaining investor confidence. U.S. Treasury

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 Municipal Securities Rulemaking Board (MSRB) was established in 1975 by Congress to develop rules companies involved in underwriting and trading of 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 various SROs it monitors, state securities regulators can also enact and enforce state-wide securities laws which are known colloquially as Blue sky laws. States may require securities to be registered in the state before they can be sold. 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. The NSMIA, however, preserve state’s anti-fraud authorities over all securities traded in the state. NSMIA

The SEC also works with federal and state law enforcement agencies to carry out actions against companies found in violation of securities laws.

Related legislation

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

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, 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, pleaded 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 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 in the past 12 months indicates, however, that the SEC has not accomplished what it said it would do. The analysis found 212 companies who had reported receiving comment letters from the SEC, but only 21 letters (for these companies) posted on the SEC's website. John W. White, the current head of the corporation finance division, 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." Gretchen Morgenson: "Deafened by the S.E.C.'s Silence, He Sued", New York Times, May 28, 2006, section 3, p. 1

No-action letters

No-action letters are letters by the SEC indicating that no legal action will be taken against an individual engaging in a particular action. They are sent in response to requests made when the legal status of the activity is not clear. These letters are publicly released and increase the body of knowledge on what exactly is and is not allowed.