Securities and Exchange Commission - Essay Example

Table of Contents Introduction 2 An overview of the Securities and Exchange Commission (SEC) 2 A historical background of the SEC 2 Functions of the SEC 3 Organization of the SEC 5 Accomplishments 6 Regulatory failures and critiques 7 Personal Critique and Recommendations 7 Introduction An administrative agency is a law making body with limited powers delegated to it by the Congress. Administrative agencies deal with specific issues that may require expertise. All existing administrative agencies are established by Article 1 Section 1 of the constitution which reads: “all legislative powers herein granted shall be vested in a Congress of the United States.” Another clause in the 8th section of the article 1 says that the Congress shall have power “to make all laws which shall be necessary and proper for carrying into execution the foregoing powers, and all other powers… in any department of officer thereof.” Examples of administrative agencies include Central Intelligence Agency, Environmental Protection Agency, Commodity Futures Trading Commission, Federal Election Commission, Federal Trade Commission, Securities and Exchange Commission. An overview of the Securities and Exchange Commission (SEC) The United States Securities and Exchange Commission (abbreviated SEC) is a federal agency whose primary role or responsibility is to enforce the federal securities laws and to regulate the securities industry, stock and options exchanges and other electronic securities markets in the U.S. It was created by section 4 of the Securities Exchange Act of 1934, commonly referred to as the 1934 Act. . The SEC also implements 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 statues. A historical background of the SEC Before the enactment of the SEC and other federal securities law, there existed the professed Blue Sky Laws, endorsed and enforced at the state level. They controlled the offer and sale of securities to protect the public from being defrauded. The provision varied across states, though all involved a compulsory registration of offerings and sales. Also, every US stockbroker and brokerage firm had to register. Despite their good intentions, Blue Sky Laws failed to achieve the effectiveness and efficacy that was needed. For instance as early as 1915, the Investment Bankers Association encouraged its members to make securities across state lines through the mail, thus effectively “ignoring” Blue Sky Laws. Through the Pecora Commission, hearing on abuses on interstate frauds took place. It was after that that Congress passed the Securities Act of 1933. Contrary to the Blue Sky Laws, this act regulates interstate sales of securities at the federal level. The successive Securities Exchange Act of 1934 regulates the secondary market. Functions of the SEC The main function of the SEC at its inception was to restore public confidence in the securities market, which had been wiped out by the Great Depression. This depression was as a result of the stock market crash in 1929. The agency, through its chairperson and commissioners also have to ensure that publicly held companies, investment companies and advisers, and other securities markets participants, comply with the federal laws on securities. In 1934, Congress enacted the Securities Exchange Act, and the "disclosure" doctrine (from the Securities Act of 1933) was extended to securities registered and listed 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 (Hamilton 149). The act aims to ensure (through the SEC) just and organized securities markets by barring certain types of activities and by formulating regulations regarding market operation and its participants. The SEC also oversees the Public Utility Holding Company Act of 1935. Interstate holding companies that engage in the electric utility business or in retail distribution of manufactured or natural gas are subject to this regulation. These holding companies have to file detailed reports with the SEC. The reports should contain succinct information regarding the organization, financial structure, and operations of the holding company and its subsidiary. The SEC can regulate the holding companies in areas such as structure of the system, mergers and acquisitions, combinations, and issue and sale of securities. Under the regulation of the SEC, the Trust Indenture Act of 1939 applies to debentures, notes, bonds and other similar debt securities that are offered for the public sale. Other necessities of the act include barring the indenture trustee from conflicting interest; requiring the trustee to be a company with minimal combined capital and surplus; and imposition of high standards of conduct and responsibility on the trustee. The SEC ensures that the intents of the Investment Company Act of 1940 are adhered to. The Investment Company Act seeks to regulate the activities of firms involved chiefly in investing, reinvesting, and trading in securities, and whose own securities are publicly offered (Investment Company Act 4). It is imperative for investors to understand that in spite of the SEC serving as a regulatory agency in these cases, it does not oversee a companys investment activities. Lastly, the SEC has some responsibility connected with corporate restructuring, normally known as Chapter 11 proceedings. Chapter 11 of the Bankruptcy Code in the U.S. gives the SEC permission to become involved in any proceedings, concerned with proceedings directly concerning a large fraction of public investor interest. Organization of the SEC The SEC comprises five commissioners appointed by the president for five-year terms. One is designated to be the chairperson of the commission, or rather the chief executive of the agency. According to the law, no more than 3 of the commissioners may belong to the same political party, thus ensuring non-partisanship. The responsibilities of the SEC are organized into five divisions and eighteen offices, all headquartered in Washington, DC. The agency has about 3500 staff spread across the 11 regional offices throughout the country. The SEC has the following main responsibilities: To interpret the federal securities laws; To issue new rules and amend existing rules; To supervise the inspection of securities firms, investment advisers, brokers and rating agencies; To supervise the private regulatory organizations in the securities, auditing and accounting fields; To harmonize the regulation of U.S securities with federal, state and foreign bodies. Shown below is an organizational chart of the Securities Exchange Commission. Source: SEC website Accomplishments The SEC overtime has been able to restore public confidence in the securities market and this has boosted investment and economic growth in the United States over time. The importance of the SEC on the national economic scene has also grown over time. The mergers and takeovers have particularly been one of the reasons of bringing the SEC to the limelight. 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 (Hall 125). Furthermore, the Reagan administration proposed that the role of the SEC be extended to include direct involvement in capital investment and accumulation. Amidst all this, and while facing down such sensational cases like the Ivan Boesky scandal, in which investors were swindled millions of dollars as a result of false trading on non-disclosed information, the commissions main duties revolved around disclosure enforcement, a pattern that continued into the 1990s. Regulatory failures and critiques Multiple failures on the part of the SEC, in relation to the Bernard Madoff fraud1 have been identified. Although investigated by SEC and found to be engaging in fishy deals in 1992, no action was undertaken until way later when the problem had been compounded. In 2009, Project on Government Oversight, a government watchdog group, submitted a letter to the congress detailing failure by the Inspector General of the SEC to implement more than half of the recommendations he had made to the group. Personal Critique and Recommendations In my view, the SEC has come a long way since its inception in 1934. It has performed well but its performance cannot be said to be exceptional. I would agree with the Congress’ recommendation that reform is necessary. The main thrust of the agency’s activities is its disclosure-enforcement duties. This structure developed over the course of many years since, at its inception, the Commission lacked the muscle and resources to openly supervise industry activities. Something needs to be done about this issue. Works Cited Corwin, S. (1978). The Constitution and What It Means Today. Princeton, N.J.: Princeton Univ. Press. Hall, B, R. (1978). A Legal Solution to Government Gridlock: The Enforcement Strategy of the Securities and Exchange Commission. New York: Garland Publishing. Hamilton, J. (1998). Year 2000: SEC Disclosure. Chicago: CCH, Inc. Practicing Law Institute. (1996). Sweeping Reform: Litigating and Bespeaking Caution under the New Securities Law. New York: Practicing Law Institute. Read More