The U.S. Securities and Exchange Commission (SEC) is responsible for administering federal securities laws written to provide protection for investors. The SEC also ensures that securities markets are fair and honest, and if necessary, the SEC ma provide for the means to enforce securities laws through the appropriate sanctions. The SEC may further serve as adviser to the federal courts in Chapter 11 cases (corporate reorganization proceedings under Chapter 11 of the Bankruptcy Reform Act of 1978
The SEC was created by Congress in 1934, under the Securities Exchange Act, as an independent, nonpartisan, quasi-judicial regulatory agency. At first, its main function was to revive public confidence in the securities markets, which had been destroyed by the 1929 stock market crash that triggered the Great Depression. The commission is made up of five members: one chairman and four commissioners. Each member is appointed to by the president to a five-year term. These terms are staggered such that each June 5th an appointed member's term expires. It is a policy that no more than three of the commissioners may be of the same political party.
The chairman and commissioners are responsible for ensuring that publicly held entities, broker-dealers in securities, investment companies and advisers, and other participants in the securities markets comply with federal securities law. These securities laws were designed to provide for informed investment analysis and decision making by the public investors—principally by ensuring adequate disclosure of material information (as directed in the Securities Act of 1933).
The commission's staff is made up of lawyers, accountants, financial analysts, engineers, investigators, economists, and other professionals. The SEC staff is divided into divisions and offices, which includes 12 regional and branch offices, each directed by officials appointed by the SEC chairman.
There are six major laws that the SEC is responsible for administering:
The Securities Act of 1933, also known as the "truth in securities" law, has two primary objectives, both of which the SEC must ensure occurs: (1) to require that investors be provided with material information concerning securities offered for public sale; and (2) To prevent misrepresentation, deceit, and other fraud in the sale of securities.
In 1934 the U.S. Congress enacted the Securities Exchange Act in which the "disclosure" doctrine (from the Securities Act of 1933) was extended to securities listed and registered for public trading on the U.S. securities exchanges. In 1964, the Securities Act Amendments extended disclosure and reporting provisions to equity securities in the over the-counter market. The act seeks to ensure (through the SEC) fair and orderly securities markets by prohibiting certain types of activities and by setting forth rules regarding the operation of the markets and participants.
The SEC also administers the Public Utility Holding Company Act of 1935. Subject to regulation under this act are interstate holding companies engaged in the electric utility business or in the retail distribution of natural or manufactured gas. Reports to be filed with the SEC by these holding companies include detailed information concerning the organization, financial structure, and operations of the holding company and its subsidiaries. Holding companies are subject to SEC regulation in areas such as structure of the system, acquisitions, combinations, and issue and sale of securities.
The Trust Indenture Act of 1939, under the watchful eye of the SEC, applies to bonds, debentures, notes, and similar debt securities offered for public sale and issued under trust indentures with more than $7.5 million of securities outstanding at any one time. Other provisions of the act include prohibiting the indenture trustee from conflicting interest; requiring the trustee to be a corporation with minimal combined capital and surplus; and imposing high standards of conduct and responsibility on the trustee.
The SEC must ensure that the intentions of the Investment Company Act of 1940 are followed. The Investment Company Act seeks to regulate the activities of companies engaged primarily in investing, reinvesting, and trading in securities, and whose own securities are publicly offered. It is important for potential investors to understand that although the SEC serves as a regulatory agency in these cases, the SEC does not supervise the company's investment activities, and the mere presence of the SEC as a regulatory agency does not guarantee a safe investment.
The Investment Advisers Act of 1940 establishes a style, or a system, of regulating investment advisers (for the SEC). The main thrust of this act is simply its requirement that all persons, or firms, that are compensated for advising anyone about securities investment opportunities be registered with the SEC and conform to the established standards of investor protection. The SEC has the power and ability to strip an investment adviser of his or her registration if a statutory violation has occurred.
Finally, the SEC is given some responsibility connected with corporate reorganizations, commonly referred to as Chapter 11 proceedings. Chapter 11 of the Bankruptcy Code in the U.S. grants the SEC permission to become involved in any proceedings, but the SEC is primarily concerned with proceedings directly involving a large portion of public investor interest.
The main thrust of the SEC's activities is its disclosure-enforcement duties. This framework developed over the course of many years since, at its inception, the Commission simply lacked the muscle and resources to directly oversee industry activities. The disclosure of financial records thus became the bedrock of the SEC's attempt to secure investments and maintain investor confidence and economic stability.
The prominence of the SEC on the national economic scene has also grown over time. In particular, the merger- and takeover-intensive 1980s brought the SEC into the limelight at an unprecedented level. Long admired as one of the most efficient and respectable of government agencies, the SEC stepped up its enforcement priorities by waging a crusade against insider trading. Moreover, the Reagan administration recommended that the commission's role be expanded to include the direct encouragement of capital investment and accumulation. Amidst all this, and while facing down such sensational cases as the Ivan Boesky scandal, in which investors were taken for millions of dollars as a result of unsavory trading on non-disclosed information, the commission's primary duties centered on disclosure enforcement, a pattern that continued into the 1990s.
At the end of the 1990s, these duties underwent a severe escalation in order to safeguard investor knowledge regarding the infamous Y2K problem. In 1998, President Clinton signed the Year 2000 Information and Readiness disclosure Act. At issue is the protection of investors' capital and whether it could be materially affected by a lack of companies' preparedness for the Year 2000 computer crisis.
Years of labor by various business interests finally paid off in 1995 when the Private Securities Litigation Reform Act was passed over President Clinton's veto. This legislation severely limited private litigation brought under the Securities Exchange Act. The business community had lobbied for such reforms since the early 1990s, in large part to curtail what they saw as "frivolous" private securities lawsuits. The reforms grant large shareholders greater leverage in class action lawsuits and requires more detailed information about settlements to be disclosed to them. The provisions do not, however, apply to actions brought by the SEC. The law expands the commission's authority to provide exemptions from provisions of the Securities Exchange Act, and to modify accepted auditing standards.
[ Art DuRivage ]
Hall, Billy Ray. A Legal Solution to Government Gridlock: The Enforcement Strategy of the Securities and Exchange Commission. New York: Garland Publishing, 1998.
Hamilton, James. Year 2000: SEC Disclosure. Chicago: CCH, Inc., 1998.
Practicing Law Institute. Sweeping Reform: Litigating and Bespeaking Caution Under the New Securities Law. New York: Practicing Law Institute, 1996.