The Securities And Exchange Commission

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THE SEC Introduction The U.S. Securities and Exchange Commission s (SEC s) primary duty is to protect investors and maintain the integrity of the securities markets. The laws and rules that govern the securities industry in the United States derive from a simple concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it. The SEC requires public companies to disclose meaningful financial and other information to the public. The SEC also oversees stock exchanges, brokers, investment advisors, mutual funds, and public utility holding companies. Their primary concern here is promoting disclosure of important information, enforcing the securities laws, and protecting investors. The effectiveness of the SEC hinges upon its enforcement authority. Each year the SEC brings between 400-500 civil enforcement actions against individuals and companies that break the securities laws. Some of the typical infractions include insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them. Creation Congress established the Securities and Exchange Commission in 1934. Its purpose was to enforce the newly-passed securities laws, to promote stability in the markets and, most importantly, to protect investors. Before the Great Crash of 1929, there was not much support for federal regulation of the securities markets. Proposals that the federal government require financial disclosure and prevent the fraudulent sale of stock were never seriously pursued. During the 1920s, post-war prosperity enveloped the nation. Approximately 20 million large and small investors took advantage of this fact 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. This all came to fruition when, in October 1929, the stock market crashed and the fortunes of countless investors were lost. Banks also lost great sums of money because they had invested in the markets. People feared that their banks might not be able to pay back the money they had in their accounts, and a run on the banking system caused many bank failures. The public soon lost confidence in the markets. There was a belief that for the economy to recover, the public s faith had to be restored. Congress had hearings to try to identify the problems and find an answer for them. They then passed the Securities Act of 1933 and the Securities Exchange Act of 1934. There were basically two main purposes for these laws. The first one was that companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing. The second premise was that people who sell and trade securities must treat investors fairly and honestly, putting investors interests first. The above-mentioned laws helped establish the SEC in 1934. At that time, President Franklin Delano Roosevelt appointed Joseph P. Kennedy, President John F. Kennedy s father, to serve as the first Chairman of the SEC. Organization The SEC consists of five presidentially-apointed Commissioners, four Divisions and 18 Offices. There are approximately 2,900 staff members, and the headquarters is in Washington, D.C. The SEC also has 11 regional and district Offices located throughout the country. As mentioned above, the SEC has five Commissioners who are appointed by the President of the United States with the advice and consent of the Senate. The term of a Commissioner lasts five years and is staggered so that one Commissioner s term ends on June 5 of each year. 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 hold meetings to discuss and resolve a variety of issues, including the following: to interpret federal securities laws, amend existing rules, propose new rules to address changing market conditions, and enforce rules and laws. The SEC also has four Divisions. They are the Division of Corporation Finance, the Division of Market Regulation, the Division of Investment Management, and the Division of Enforcement. The Division of Corporation Finance oversees corporate disclosure of important information to the investing public. It reviews documents that publicly-held companies are required to file with the Commission. Some of these documents are registration statements for newly-offered securities, annual and quarterly filings, proxy materials, annual reports, filings related to mergers and acquisitions, and documents concerning tender offers. The Division also 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. The Division s staff also provides guidance and counseling to registrants, prospective registrants, and the public to help them comply with the law. The Division of Market Regulation establishes and maintains standards for fair, orderly, and efficient markets. It regulates broker-dealer firms, self-regulatory organizations (SROs), transfer agents, and securities information processors. SROs include the stock exchanges and the National Association of Securities Dealers (NASD), Municipal Securities Rulemaking Board (MSRB), and clearing agencies. This shows the broad scope of this Division s regulatory power. The responsibilities of the Division include carrying out the Commission s financial integrity program for broker-dealers, reviewing and approving proposed new rules and proposed changes to existing rules filed by the SROs, establishing rules and issuing interpretations on matters affecting the operation of the securities markets, and surveying the markets. The Division of Investment Management oversees and regulates the $15 trillion investment management industry and administers the securities laws affecting investment companies and investment advisors. The Division interprets laws and regulations for the public and SEC inspection and enforcement staff, responds to no-action requests and requests for exemptive relief, reviews investment company and investment adviser filings, reviews enforcement matters involving investment companies and advisors, and develops new rules and amendments to adapt regulatory structures to new circumstances. The Division of Enforcement is the fourth Division of the SEC. It investigates possible violations of securities laws, recommends Commission action when appropriate, and negotiates settlements on behalf of the Commission. The Division works closely with various criminal law enforcement agencies 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. All SEC investigations are conducted privately. Once the Commission issues a formal order of investigation, the Division s staff may get witnesses by subpoena to testify and produce 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. 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. Often, the Commission will bring both proceedings. After the four Divisions of the SEC, there are 18 Offices. These offices all perform different functions, and help ensure that the SEC runs smoothly. The first one is the Office of Administrative Law Judges. Administrative law judges conduct hearings and rule on allegations of securities law violations brought by the SEC staff. 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. The Office of Admistrative and Personnel Management develops, implements and evaluates the Commission s programs for human resource and personnel management. Some functions include position management and pay administration, recruitment, placement, staffing, and payroll. The Office also develops and executes programs for office services, such as telecommunications, property management, and safety programs. The third one is the Office of the Chief Accountant. The Chief Accountant is the principal adviser to the Commission on accounting and auditing matters. The Office of the Chief Accountant also works closely with domestic and international private-sector accounting and auditing standards-setting bodies, 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. 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. If a violation is found to be too serious for informal correction, it may be referred to the Division of Enforcement. 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. 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 is staffed by financial economists, statisticians, analysts, and computer programmers. These personnel analyze the potential impacts and benefits of proposed regulations, conduct studies on specific rules, and engage in long-term research and policy planning. 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. It also sponsors diversity roundtables and minority symposiums to encourage greater diversity in the securities industry. The Office of the Executive Director develops and executes the management policies of the SEC. Among its duties are to formulate budget and authorization strategies, supervise the allocation and use of SEC resources, promote management controls and financial integrity, manage the administrative support offices, and oversee the development and implementation of the SEC s automated information systems. 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. The next one is the Office of the General Counsel. The General Counsel is the chief legal officer of the Commission. The main duties of the Office include representing the SEC in certain proceedings, preparing legislative material, and providing independent advice and assistance to the Commission, the Divisions, and the Offices. The Office of Information Techno

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