The Work of the SEC


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The Work of the SEC

A publication of the Office of Public Affairs, Policy Evaluation and Research
United States Securities and Exchange Commission

June 1997

Table of Contents

Introduction

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

Corporate Reorganization

Organization of the Commission

The Commissioners

The Commission Staff

The Divisions and Offices

General Information

Regional and District Offices


Introduction

This publication describes the work of the SEC by discussing the laws it administers, the organization of the agency, the ways in which it carries out its mission, and the sanctions it uses to enforce the federal securities laws.

Under the Securities Exchange Act of 1934, Congress created the Securities and Exchange Commission (SEC). The SEC is an independent, nonpartisan, quasi-judicial regulatory agency.

The SEC's mission is to administer federal securities laws and issue rules and regulations to provide protection for investors and to ensure that the securities markets are fair and honest. This is accomplished primarily by promoting adequate and effective disclosure of information to the investing public. The laws administered by the Commission are the:

  • 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; and
  • Investment Advisers Act of 1940.

The Commission also serves as adviser to federal courts in corporate reorganization proceedings under Chapter 11 of the Bankruptcy Reform Act of 1978. The Commission reports annually to Congress on administration of the securities laws.

The Commission is composed of five members appointed by the President, with the advice and consent of the Senate, for five-year terms. The Chairman is designated by the President. Terms are staggered; one expires on June 5 of every year. Not more than three members may be of the same political party.

Under the direction of the Commission, the staff ensures that publicly held companies, broker-dealers in securities, investment companies and advisers, and other participants in the securities markets comply with federal securities laws. (Ex. Among other things, the staff reviews registration statements and periodic reports, conducts examinations and inspections, makes rules and regulations, conducts investigations and brings enforcement actions against violators. The SEC does not guarantee the value or merit of a particular investment. The Commission cannot bar the sale of securities of questionable value. The investor must make the ultimate judgment of the worth of securities offered for sale.

The SEC's staff is composed of lawyers, accountants, financial analysts and examiners, engineers, investigators, economists, and other professionals. The staff is divided into divisions and offices (including 11 regional and district offices), each directed by officials appointed by the Chairman.


Securities Act of 1933

This "truth in securities" law has two basic objectives:

  • to require that investors are provided with material information concerning securities offered for public sale; and
  • to prevent misrepresentation, deceit, and other fraud in the sale of securities.

A primary means of accomplishing these objectives is disclosure of financial information by registering offers and sales of securities. Most offerings of debt and equity securities issued by corporations, limited partnerships, trusts, and other issuers must be registered. Federal and most other domestic government debt securities are exempt. Certain transactions qualify for exemptions from registration provisions; these exemptions are discussed below.

Purpose of Registration

Registration is intended to provide adequate and accurate disclosure of material facts concerning the company and the securities it proposes to sell. Thus, investors may make a realistic appraisal of the merits of the securities and then exercise informed judgment in determining whether to purchase them.

Registration requires, but does not guarantee, the accuracy of the facts represented in the registration statement and prospectus. However, the law does prohibit false and misleading statements under penalty of fine, imprisonment, or both. Investors who purchase securities and suffer losses have important recovery rights under the law if they can prove that there was incomplete or inaccurate disclosure of material facts in the registration statement or prospectus. If such misstatements are proven, the following could be liable: the issuing company, its responsible directors and officers, the underwriters, controlling interests, the sellers of the securities, and others. These rights must be asserted in an appropriate federal or state court (not before the Commission, which has no power to award damages).

Registration of securities does not preclude the sale of stock in risky, poorly managed, or unprofitable companies. In fact, it is unlawful to represent that the Commission approves or disapproves of securities on their merits. The only standard which must be met when registering securities is adequate and accurate disclosure of required material facts concerning the company and the securities it proposes to sell. The fairness of the terms, the issuing company's prospects for successful operation, and other factors affecting the merits of investing in the securities (whether price, promoters' or underwriters' profits, or otherwise) have no bearing on the question of whether or not securities may be registered.

The Registration Process

The Commission has registration forms for different types of companies. These provide essential facts while minimizing the burden and expense of complying with the law. In general, registration forms call for

  • a description of the company's properties and business;
  • a description of the security to be offered for sale and its relationship to the company's other capital securities;
  • information about the management of the company; and
  • financial statements certified by independent public accountants.

Registration statements and prospectuses on securities become public immediately after filing with the SEC. However, it is unlawful to sell the securities until the effective date. The act provides that most registration statements shall become effective on the 20th day after filing (or on the 20th day after filing the last amendment). At its discretion, the Commission may advance the effective date if it benefits the interests of investors and the public, the adequacy of publicly available information, and the ease with which the facts about the new offering can be disseminated and understood.

Registration statements are subject to examination for compliance with disclosure requirements. If a statement appears to be incomplete or inaccurate, the company usually is informed by letter and given an opportunity to file correcting or clarifying amendments. However, the Commission may conclude that material deficiencies in some registration statements appear to stem from a deliberate attempt to conceal or mislead, or that the deficiencies do not lend themselves to correction through the informal letter process. In these cases, the Commission may decide that it is in the public interest to conduct a hearing to develop the facts by evidence and determine if a "stop order" should be issued to refuse or suspend effectiveness of the statement. The Commission may issue stop orders after the sale of securities has been commenced or completed. A stop order is not a permanent bar to the effectiveness of the registration statement or to the sale of the securities. If amendments are filed correcting the statement in accordance with the stop order decision, the order must be lifted and the statement declared effective.

Although any losses suffered in the purchase of securities are not restored to investors by the stop order, the Commission's order precludes future public sales. Also, the decision and the evidence on which it is based may serve to notify investors of their rights and aid them in their own recovery suits.

Exemptions From Registration

In general, registration requirements apply to securities of both U.S. and foreign companies or governments sold in U.S. securities markets. There are, however, certain exemptions. Among these are:

  • private offerings to a limited number of persons or institutions who have access to the kind of information that registration would disclose and who do not plan to redistribute the securities;
  • offerings restricted to residents of the state in which the issuing company is organized and doing business;
  • securities of municipal, state, federal, and other domestic governmental instrumentalities as well as charitable institutions and banks;
  • "small issues" not exceeding certain specified amounts made in compliance with SEC regulations; and
  • offerings of "small business investment companies" made in accordance with SEC regulations.

Whether or not the securities are registered, antifraud provisions apply to all sales of securities involving interstate commerce or the mails.

The "small issue" exemption was adopted by Congress primarily as an aid to small business. The law provides that offerings of certain sizes may be exempt from full registration, subject to provisions designed to protect investors. The Commission's Regulation A permits certain U.S. and Canadian companies to make exempt offerings. A similar regulation is available for offerings under $5 million by small business investment companies licensed by the Small Business Administration. Regulation D permits certain companies to make exempt offerings under $1 million with only minimal federal restrictions; more extensive disclosure requirements and other conditions apply for offerings exceeding that amount.

Exemptions are available when certain specified conditions are met. These conditions include use of an offering circular containing certain basic information in the sale of the securities. For a more complete discussion of these and other special provisions adopted by the Commission to facilitate capital formation by small business, please request a copy of the small business packet from the SEC's Publication's Branch or consult the Small Business Information page on the SEC website <www.sec.gov>.

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