The Investors Advocate:
Introduction The SEC:
The world of investing is fascinating, complex, and can be very fruitful. But unlike the banking world, where deposits are guaranteed by the federal government, stocks, bonds and other securities can lose value. There are no guarantees. That's why investing should not be a spectator sport; indeed, the principal way for investors to protect the money they put into the securities markets is to do research and ask questions.
The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public, which provides a common pool of knowledge for all investors to use to judge for themselves if a company's securities are a good investment. Only through the steady flow of timely, comprehensive and accurate information can people make sound investment decisions.
The SEC also oversees other key participants in the securities world, including stock exchanges, broker-dealers, investment advisors, mutual funds, and public utility holding companies. Here again, the SEC is concerned primarily with promoting disclosure of important information, enforcing the securities laws, and protecting investors who interact with these various organizations and individuals.
Crucial to the SEC's effectiveness is its enforcement authority. Each year the SEC brings between 400-500 civil enforcement actions against individuals and companies that break the securities laws. Typical infractions include insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them.
Fighting securities fraud, however, requires teamwork. At the heart of effective investor protection is an educated and careful investor. The SEC offers the public a wealth of educational information on its Internet website at www.sec.gov. The website also includes the EDGAR database of disclosure documents that public companies are required to file with the Commission.
Though it is the primary overseer and regulator of the U.S. securities markets, the SEC works closely with many other institutions, including Congress, other federal departments and agencies, the self-regulatory organizations (e.g. the stock exchanges), state securities regulators, and various private sector organizations.
This article is an overview of the SEC's history, responsibilities, activities, organization, and operation. More detailed information about many of these topics is available on the SEC website.
The SEC's foundation was laid in an era that was ripe for reform. Before the Great Crash of 1929, there was little support for federal regulation of the securities markets. This was particularly true during the post-World War I surge of securities activity. Proposals that the federal government require financial disclosure and prevent the fraudulent sale of stock were never seriously pursued.
Tempted by promises of "rags to riches" transformations and easy credit, most investors gave little thought to the dangers inherent in uncontrolled market operation. During the 1920s, approximately 20 million large and small shareholders took advantage of post-war prosperity and set out to make their fortunes in the stock market. It is estimated that of the $50 billion in new securities offered during this period, half became worthless.
When the stock market crashed in October 1929, the fortunes of countless investors were lost. Banks also lost great sums of money in the Crash because they had invested heavily in the markets. When people feared their banks might not be able to pay back the money that depositors had in their accounts, a "run" on the banking system caused many bank failures.
With the Crash and ensuing depression, public confidence in the markets plummeted. There was a consensus that for the economy to recover, the public's faith in the capital markets needed to be restored. Congress held hearings to identify the problems and search for solutions.
Based on the findings in these hearings, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws were designed to restore investor confidence in our capital markets by providing more structure and government oversight. The main purposes of these laws can be reduced to two common-sense notions:
Monitoring the securities industry requires a highly coordinated effort. Congress established the Securities and Exchange Commission in 1934 to enforce the newly-passed securities laws, to promote stability in the markets and, most importantly, to protect investors. President Franklin Delano Roosevelt appointed Joseph P. Kennedy, President John F. Kennedy's father, to serve as the first Chairman of the SEC.
The SEC is comprised of five presidentially-appointed Commissioners, four Divisions and 18 Offices. With approximately 2,900 staff, the SEC is small by federal agency standards. Headquartered in Washington, DC, the SEC has 11 regional and district Offices throughout the country.
The Securities and Exchange Commission has five Commissioners who are 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 Commission 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.
The Commissioners meet to discuss and resolve a variety of issues the staff brings to their attention. At these meetings the Commissioners:
These meetings are open to the public and the news media unless the discussion pertains to confidential subjects, such as whether to begin an enforcement investigation.
The Division of Corporation Finance oversees corporate disclosure of important information to the investing public. Corporations are required to comply with regulations pertaining to disclosure that must be made when stock is initially sold and then on a continuing and periodic basis. The Division's staff routinely reviews the disclosure documents filed by companies. The staff also provides companies with assistance interpreting the Commission's rules and recommends to the Commission new rules for adoption.
The Division of Corporation Finance reviews documents that publicly-held companies are required to file with the Commission. The documents include:
These documents disclose information about the companies' financial condition and business practices to help investors make informed investment decisions. Through the Division's review process, the staff checks to see if publicly-held companies are meeting their disclosure requirements and seeks to improve the quality of the disclosure. To meet the SEC's requirements for disclosure, a company issuing securities or whose securities are publicly traded must make available all information, whether it is positive or negative, that might be relevant to an investor's decision to buy, sell, or hold the security.
Corporation Finance provides administrative interpretations of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Trust Indenture Act of 1939, and recommends regulations to implement these statutes. Working closely with the Office of the Chief Accountant, the Division monitors the activities of the accounting profession, particularly the Financial Accounting Standards Board (FASB), that result in the formulation of generally accepted accounting principles (GAAP).
The Division's staff provides guidance and counseling to registrants, prospective registrants, and the public to help them comply with the law. For example, a company might ask whether the offering of a particular security requires registration with the SEC. Corporation Finance would share its interpretation of the relevant securities regulations with the company and give it advice on compliance with the appropriate disclosure requirement.
The Division uses no-action letters to issue guidance in a more formal manner. A company seeks a no-action letter from the staff of the SEC when it plans to enter uncharted legal territory in the securities industry. For example, if a company wants to try a new marketing or financial technique, it can ask the staff to write a letter indicating whether it would or would not recommend that the Commission take action against the company for engaging in its new practice.
Division of Market Regulation
The Division of Market Regulation establishes and maintains standards for fair, orderly, and efficient markets. It does this primarily by regulating the major securities market participants: broker-dealer firms; self-regulatory organizations (SROs), which include the stock exchanges and the National Association of Securities Dealers (NASD), Municipal Securities Rulemaking Board (MSRB), and clearing agencies (SROs that help facilitate trade settlement); transfer agents (parties that maintain records of stock and bond owners); and securities information processors. (A self-regulatory organization is a member organization that creates and enforces rules for its members based on the federal securities laws. SROs, which are overseen by the SEC, are the front line in regulating broker-dealers.)
The Division also oversees the Securities Investor Protection Corporation (SIPC), which is a private, non-profit corporation that insures the securities and cash in the customer accounts of member brokerage firms against the failure of those firms. It is important to remember that SIPC insurance does not cover investor losses arising from market declines or fraud.
Market Regulation's responsibilities include:
The Division of Investment Management oversees and regulates the $15 trillion investment management industry and administers the securities laws affecting investment companies (including mutual funds) and investment advisers. In applying the federal securities laws to this industry, the Division works to improve disclosure and minimize risk for investors without imposing undue costs on regulated entities. The Division:
As the utility industry evolves from a regulated monopoly to a competitive, market-driven industry, the Division also exercises oversight of registered and exempt utility holding companies under the Public Utility Holding Company Act of 1935. In this area, the Division:
Division of Enforcement
The Division of Enforcement investigates possible violations of securities laws, recommends Commission action when appropriate, either in a federal court or before an administrative law judge, and negotiates settlements on behalf of the Commission. While the SEC has civil enforcement authority only, it works closely with various criminal law enforcement agencies throughout the country to develop and bring criminal cases when the misconduct warrants more severe action.
The Division obtains evidence of possible violations of the securities laws from many sources, including its own surveillance activities, other Divisions of the SEC, the self-regulatory organizations and other securities industry sources, press reports, and investor complaints.
All SEC investigations are conducted privately. Facts are developed to the fullest extent possible through informal inquiry, interviewing witnesses, examining brokerage records, reviewing trading data, and other methods. Once the Commission issues a formal order of investigation, the Division's staff may compel witnesses by subpoena to testify and produce books, records, and other relevant documents. Following an investigation, SEC staff present their findings to the Commission for its review. The Commission can authorize the staff to file a case in federal court or bring an administrative action. Individuals and companies charged sometimes choose to settle the case, while others contest the charges.
Under the securities laws the Commission can bring enforcement actions either in the federal courts or internally before an administrative law judge. The factors considered by the Commission in deciding how to proceed include: the seriousness of the wrongdoing, the technical nature of the matter, tactical considerations, and the type of sanction or relief to obtain. For example, the Commission may bar someone from the brokerage industry in an administrative proceeding, but an order barring someone from acting as a corporate officer or director must be obtained in federal court. Often, when the misconduct warrants it, the Commission will bring both proceedings.
Administrative law judges conduct hearings and rule on allegations of securities law violations brought by the SEC staff. After cases are referred to them by the Commission, the judges conduct hearings in a manner similar to non-jury trials in the federal district courts. Among other actions, administrative law judges issue subpoenas, rule on motions, and rule on the admissibility of evidence. At the conclusion of hearings, the parties involved submit proposed findings of fact and conclusions of law. The administrative law judges prepare and file initial decisions including factual findings and legal conclusions. Parties may appeal decisions to the Commission, which can affirm or deny the administrative law judges' rulings or remand the case back for additional hearings.
Office of Administrative and
The Office of Administrative and Personnel Management develops, implements and evaluates the Commission's programs for human resource and personnel management, such as position management and pay administration; recruitment, placement, and staffing; payroll; performance management and awards; employee training and career development; employee relations; personnel management evaluation; employee benefits and counseling; the processing and maintenance of employee records; and ethics and financial disclosure. The Office develops and executes programs for office services, such as telecommunications; procurement and contracting; property management; contract and lease administration; space acquisition and management; management of official vehicles; safety programs; emergency preparedness programs; physical security; mail receipt and distribution; and publications, printing and desktop publishing.
Office of the Chief Accountant
The Chief Accountant is the principal adviser to the Commission on accounting and auditing matters. An audit is an examination of a company's financial books and records done to ensure that it keeps fair, consistent documents in accordance with SEC regulations. The Office of the Chief Accountant also works closely with domestic and international private-sector accounting and auditing standards-setting bodies (e.g. the Financial Accounting Standards Board, the International Accounting Standards Committee, the American Institute of Certified Public Accountants, and the International Accounting Standards Committee), consults with registrants, auditors, and other Commission staff regarding the application of accounting standards and financial disclosure requirements, and assists in addressing problems that may warrant enforcement actions.
Office of Compliance Inspections
The Office of Compliance Inspections and Examinations administers the SEC's nationwide examination and inspection program for registered self-regulatory organizations, broker-dealers, transfer agents, clearing agencies, investment companies, and investment advisers. The Office conducts inspections to foster compliance with the securities laws, to detect violations of the law, and to keep the Commission informed of developments in the regulated community. Among the more important goals of the examination program is the quick and informal correction of compliance problems. When the Office finds deficiencies, it issues a "deficiency letter" identifying the problems that need to be rectified and monitor the situation until compliance is achieved. Violations that appear too serious for informal correction are referred to the Division of Enforcement.
Office of the Comptroller
The Office of the Comptroller administers the financial management and budget functions of the SEC. The Office assists the Executive Director in formulating budget and authorization requests, monitors the utilization of agency resources, and develops, oversees, and maintains SEC financial systems. These activities include cash management, accounting, fee collections, travel policy development, and oversight and budget justification and execution.
Office of Economic Analysis
The Office of Economic Analysis advises the Commission and its staff on the economic issues associated with the SEC's regulatory and policy activities. The Office analyzes the potential impacts and benefits of proposed regulations, conducts studies on specific rules, and engages in long-term research and policy planning. The Office also analyzes data on a wide range of market activities that may require attention by the SEC. The Office is staffed by financial economists, statisticians, analysts, and computer programmers.
Office of Equal Employment
The Office of Equal Employment Opportunity (EEO) develops and recommends policies designed to promote equal opportunity in all aspects of the agency's recruitment, selection, training, advancement, compensation, and supervision of employees. In particular, the Office develops the agency's affirmative employment practices and procedures; ensures agency compliance with EEO regulatory requirements affecting all employees and applicants; administers the agency's EEO complaint processing, investigative, and alternative dispute resolution procedures; and disseminates information on EEO-related policies and procedures. In its capacity as liaison between the Commission and the securities industry on diversity issues, the Office sponsors diversity roundtables and minority symposiums to encourage greater diversity in the securities industry.
Office of the Executive Director
The Office of the Executive Director develops and executes the management policies of the SEC. The Office formulates budget and authorization strategies, supervises the allocation and use of SEC resources, promotes management controls and financial integrity, manages the administrative support offices, and oversees the development and implementation of the SEC's automated information systems.
Office of Filings and Information
The Office of Filings and Information Services receives and initially handles all public documents filed with the SEC. The Office is also responsible for custody and control of the SEC's official records, development and implementation of the records management program, and authentication of all documents produced for administrative or judicial proceedings. Through the Office's Public Reference Branch, the public may obtain a wide range of information from quarterly and annual reports, registration statements, proxy materials, and other reports submitted by SEC filers. All public documents are available for inspection in the Public Reference Room in Washington, DC. Copies of documents may be obtained for a fee. Most corporate disclosure documents filed since May 1996, are available on the SEC Internet website at www.sec.gov and on the terminals located in the public reference rooms in the Commission's Offices in New York and Chicago.
Office of the General Counsel
The General Counsel is the chief legal officer of the Commission. Primary duties of the Office include representing the SEC in certain civil, private, or appellate proceedings, preparing legislative material, and providing independent advice and assistance to the Commission, the Divisions, and the Offices. Through its amicus curiae program, the Office often intervenes in private appellate litigation involving novel or important interpretations of the securities laws.
Office of Information Technology
The Office of Information Technology is responsible for organizing and implementing an integrated program designed to support the Commission and staff of the SEC in all aspects of information technology. The Office has overall management responsibility for the Commission's IT program including headquarters and regional/district operations support, applications development, IT program management, network engineering, security, and enterprise IT architecture. The Office operates the Electronic Data Gathering Analysis and Retrieval (EDGAR) system, which electronically receives, processes, and disseminates more than 500,000 financial statements every year. The Office also maintains a very active website that contains a wealth of information about the Commission, the securities industry, and also hosts the entire EDGAR financial database for free public access.
Office of the Inspector General
The Office of the Inspector General conducts internal audits and investigations of SEC programs and operations. Through these audits and investigations, the Inspector General seeks to identify and mitigate operational risks, enhance government integrity, and improve the efficiency and effectiveness of SEC programs.
Office of International Affairs
The SEC works extensively in the international arena to promote cooperation and assistance and to encourage the adoption of high regulatory standards worldwide. The Office of International Affairs plays a key role in the development and implementation of the SEC's international enforcement and regulatory initiatives. The Office negotiates and oversees the implementation of information-sharing arrangements for enforcement and regulatory matters, conducts a technical-assistance program for countries with emerging securities markets, and ensures that the SEC's interests are furthered through participation in international meetings and organizations.
Office of Investor Education and
The Office of Investor Education and Assistance serves individual investors, ensuring that their problems and concerns are known throughout the SEC and considered when the agency takes action. Investor assistance specialists answer questions, analyze complaints, and seek informal resolutions.
In addition to handling questions and complaints, the Office organizes Investors' Town Meetings in cities throughout the country to help Americans learn how to save and invest wisely, prepare for retirement, and achieve financial security. The Office also publishes free brochures and other educational materials on numerous investing topics. For more information about investor education, visit www.sec.gov or call (800) 732-0330.
The Office, and the Commission in general, cannot act as a personal lawyer to members of the public engaged in private disputes with the securities industry. It also cannot force a broker to settle or resolve a private dispute. The Office can assist an investor by explaining how these disputes can be resolved through binding arbitration, mediation, or private litigation.
Office of Legislative Affairs
The Office of Legislative Affairs serves as the principal liaison between the SEC and Members of Congress and their staffs. The Office advises the Commission on legislative strategy, responds to congressional requests, and provides information about SEC actions to Congress. In addition, the Office organizes briefings given to Congress by SEC staff and coordinates the testimony of Commission officials before congressional committees. The Office works closely with other government agencies regarding legislation that might affect the SEC.
Office of Municipal Securities
The Office of Municipal Securities coordinates the SEC's municipal securities activities and advises the Commission on policy matters relating to the municipal securities market. States, cities, and other political subdivisions, such as school districts, issue municipal securities to raise money. The Office assists the Division of Enforcement and other Divisions on municipal securities matters. The Office also provides technical assistance in the development and implementation of major SEC initiatives in the municipal securities area, including the coordination of municipal enforcement actions. The Office works closely with the municipal securities industry to educate state and local officials about risk management issues and foster a thorough understanding of the Commission's policies.
Office of Public Affairs, Policy
Evaluation and Research
The Office of Public Affairs, Policy Evaluation, and Research coordinates SEC media relations and monitors media coverage of issues related to the SEC and the securities industry. The Office also administers internal and external SEC information programs and manages the foreign visitors program. In addition, the Office provides research support in regulatory and enforcement policy areas, supplies information for speeches for the Chairman and Commissioners, and assists in planning and coordinating special initiatives of the SEC.
Office of the Secretary
The Office of the Secretary schedules Commission meetings, administers the Commission's seriatim the process by which the Commission takes collective action without convening a meeting of the Commissioners and duty-officer process, and prepares and maintains records of Commission actions. The Office reviews all SEC documents submitted to and approved by the Commission. These include rulemaking releases, SEC enforcement orders and litigation releases, SRO rulemaking notices and orders, as well as other actions taken by SEC staff pursuant to delegated authority. The Office also provides advice to the Commission and the staff on questions of practice and procedure. In addition, it receives and tracks documents filed in administrative proceedings, requests for confidential treatment, and comment letters on rule proposals. The Office is responsible for publishing official documents and releases of Commission actions in the Federal Register and the SEC Docket, and it posts them on the SEC Internet website, www.sec.gov. The Office also monitors compliance with the Government in the Sunshine Act, and maintains records of financial judgments imposed in enforcement proceedings.
Securities Act of 1933
Often referred to as the "truth in securities" law, the Securities Act of 1933 has two basic objectives:
The full text of this Act is available at: http://www.law.uc.edu/CCL/sldtoc.html. (The SEC does not control or maintain this site.)
Purpose of Registration
A primary means of accomplishing these goals is the disclosure of important financial information through the registration of securities. This information enables investors, not the government, to make informed judgments about whether to purchase a company's securities. While the SEC requires that the information provided be accurate, it does not guarantee it. Investors who purchase securities and suffer losses have important recovery rights if they can prove that there was incomplete or inaccurate disclosure of important information.
The Registration Process
In general, securities sold in the U.S. must be registered. The registration forms companies file provide essential facts while minimizing the burden and expense of complying with the law. In general, registration forms call for:
Registration statements and prospectuses become public shortly after filing with the SEC. If filed by U.S. domestic companies, the statements are available on the EDGAR database accessible at www.sec.gov. Registration statements are subject to examination for compliance with disclosure requirements.
Not all offerings of securities must be registered with the Commission. Some exemptions from the registration requirement include:
By exempting many small offerings from the registration process, the SEC seeks to foster capital formation by lowering the cost of offering securities to the public.
Securities Exchange Act of 1934
With this Act, Congress created the Securities and Exchange Commission. The Act empowers the SEC with broad authority over all aspects of the securities industry. This includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies as well as the nation's securities self regulatory organizations (SROs). The various stock exchanges, such as the New York Stock Exchange, and American Stock Exchange are SROs. The National Association of Securities Dealers, which operates the NASDAQ system, is also an SRO.
The Act also identifies and prohibits certain types of conduct in the markets and provides the Commission with disciplinary powers over regulated entities and persons associated with them.
The Act also empowers the SEC to require periodic reporting of information by companies with publicly traded securities.
Companies with more than $10 million in assets whose securities are held by more than 500 owners must file annual and other periodic reports. These reports are available to the public through the SEC's EDGAR database.
The Securities Exchange Act also governs the disclosure in materials used to solicit shareholders' votes in annual or special meetings held for the election of directors and the approval of other corporate action. This information, contained in proxy materials, must be filed with the Commission in advance of any solicitation to ensure compliance with the disclosure rules. Solicitations, whether by management or shareholder groups, must disclose all important facts concerning the issues on which holders are asked to vote.
The Securities Exchange Act requires disclosure of important information by anyone seeking to acquire more than 5 percent of a company's securities by direct purchase or tender offer. Such an offer often is extended in an effort to gain control of the company. As with the proxy rules, this allows shareholders to make informed decisions on these critical corporate events.
The securities laws broadly prohibit fraudulent activities of any kind in connection with the offer, purchase, or sale of securities. These provisions are the basis for many types of disciplinary actions, including actions against fraudulent insider trading. Insider trading is illegal when a person trades a security while in possession of material nonpublic information in violation of a duty to withhold the information or refrain from trading.
The Act requires a variety of market participants to register with the Commission, including exchanges, brokers and dealers, transfer agents, and clearing agencies. Registration for these organizations involves filing disclosure documents that are updated on a regular basis.
The exchanges and the National Association of Securities Dealers (NASD) are identified as self-regulatory organizations (SRO). SROs must create rules that allow for disciplining members for improper conduct and for establishing measures to ensure market integrity and investor protection. SRO proposed rules are published for comment before final SEC review and approval.
The full text of this Act can be read online at: http://www.law.uc.edu/CCL/sldtoc.html. (The SEC does not control or maintain this site.)
Trust Indenture Act of 1939
This Act applies to debt securities such as bonds, debentures, and notes that are offered for public sale. 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 the bondholder, known as the trust indenture, conforms to the standards of this Act.
Investment Company Act of 1940
This Act regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. The regulation is designed to minimize conflicts of interest that arise in these complex operations. The Act requires these companies to disclose their financial condition and investment policies to investors when stock is initially sold and, subsequently, on a regular basis. The focus of this Act is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations. It is important to remember that the Act does not permit the SEC to directly supervise the investment decisions or activities of these companies or judge the merits of their investments. The text of the Investment Company Act of 1940 is part of the Internet web page located at: http://www.law.uc.edu/CCL/sldtoc.html. (The SEC does not control or maintain this site.)
Investment Advisers Act of 1940
This law regulates investment advisers. With certain exceptions, this Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors. Since the Act was amended in 1996, generally only advisers who have at least $25 million of assets under management or advise a registered investment company must register with the Commission. The text of this Act is part of the Internet web page located at: http://www.sec.gov/rules/extra/ia1940.htm
Public Utility Holding Company 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 matters such as structure of their utility systems, transactions among companies that are part of the holding company utility system, acquisitions, business combinations, the issue and sale of securities, and financing transactions. The full text of this Act is available online at: http://www.law.cornell.edu/uscode/15/ch2C.html (The SEC does not control or maintain this site.)
Last update: 02/14/2000
Return to previous screen (About the SEC)
Return to SEC Home Page