Securities and Exchange Commission - Research Paper Example

Securities and Exchange Commission Background history The Securities and Exchange Commission (SEC) is a body that was established with the purpose of protecting investors and maintaining fair and efficient capital markets. SEC rules are set to preside over the activities of individuals and organizations involved in the sale of securities, including exchanges, brokers, dealers, investment advisers, and mutual funds. The SEC has set rules that govern its operation at a high platform, and in the most professional way. Unfortunately, it does not recoup losses for individual investors (Banner 126). SEC was established in 1934 to regulate and oversee the commerce in stocks, bonds, and other securities. It however crashed just after the October 29, 1929, stock market. When the stock market crashed in October 1929, public confidence in the markets plunged and many investors, large and small, as well as the banks who had loaned them, lost large sums of money in the subsequent great depression. There was an agreement that for the economy to recover, the publics faith in the capital markets needed to be restored. Congress held hearings to identify the problems that might have caused the collapse and begun to search for solutions. Several researches and hearings were conducted to reveal the possible causes of the crash, and recommendations for its revival fallowed straight away. The research revealed that controls on the issuing and trading of securities were practically not existing, giving room for a large number of frauds and other schemes to take place (Banner 140). Besides, the unmentioned report had revealed that the concentration of controlling stock interests, in a very few hands led to the misuse of power that the free exchange of stock purportedly ended. The research therefore recommended that thorough reforms to be made upon its revival, especially in the rules that governs SEC, and that the issuing and trading of securities must be effectively monitored. Based on the findings in these researches and hearings, Congress during the peak year of the depression, passed the Securities Act of 1933. This law, together with the Securities Exchange Act of 1934, which created the SEC, was intended to restore investors’ confidence in the capital markets, by providing investors and the markets with more reliable information and clear rules of honest dealings (Smith 44). The main purposes of these laws can be attached to these two ideas i.e. Companies which are publicly offering securities for investment, must tell the public the truth and the nature of their businesses, the securities they are selling, and the risks involved in investment. Secondly, People who sell and trade in securities, brokers and dealers, must treat investors reasonably and honestly, putting investors interests a priority. Congress therefore passed three major acts that created once again SEC and defined its responsibilities and powers (Blume et al. 33). The Securities Act of 1933, required public corporations to register their stock sales and distribution and to make regular financial disclosures. This could help eradicate frauds and other dangerous schemes. For instance, The Securities Exchange Act of 1934 had created the SEC to regulate exchanges, brokers, as well as to keep an eye on the required financial disclosures. The 1935 Public Utility Holding Company Act, however, did away with holding companies many times, removing from the utilities the companies whose stocks they held. This move was actually meant to eliminate the concentration of controlling stock interests in a few hands. This formidable move stopped the issue of using holding companies to obscure the entangled ownership of public utility companies. Further, the act authorized the SEC to break up any unnecessary large utility groupings into smaller, geographically based companies and to set up federal commissions to regulate utility rates and financial practices. How the SEC was organized. The SEC is made up of five presidentially appointed Commissioners, with a five year term in the office. One of them is nominated by the President as the Chairman of the Commission, that is, the agencys chief executive. By law, not more than three of the Commissioners are allowed to be members of the same political party, this was meant to ensure that political leanings become a forgotten story. The agencys functional responsibilities are structured into five Divisions and 18 Offices, each of which has its headquarters in Washington, DC. The Commission has about 3,500 staffs that are located in Washington and in 11 regional offices throughout the country. The Commission regularly hold meetings that are open to the public and the news media, unless the discussion pertains to top secret subjects, such as whether to begin a lawful enforcement investigation or not. Securities and Exchange Commission case laws Securities and Exchange Commission v. Ralston Purina Company. In this case, United States court held that any corporation offering major employee’s stock share, was still subject to section 4(1) of the securities Act of 1933. It was ruled that Section 4(1), which is now Section 4(2) of the Securities Act, exempts transactions, by an issuer not involving any public offering from the registration requirements of Section 5. The issue here was whether offering stock to key employees would exempt Ralston Purina from filing a registration statement, under Section 4(1), which is now Section 4(2) of the Securities Act of 1933. Ralston Purina supplied feed and cereal products throughout the U.S. and some parts Canada. This company hired about 7,000 employees with which Ralston had a policy of encouraging stock ownership. Between 1947 and 1951, Ralston Purina sold almost $2 million of stock to employees without registration. In each of these years, Ralston Purina authorized the sale of common stock to employees without solicitation by the Company (Malkiel 118). A memorandum sent to branch and store managers, advised that only employees to whom this stock will be available, will be those who shall take the initiative and interested in buying stock at present market prices. The Supreme Court therefore laid down the critical tests for the availability of the private offering exemption, under what is now Section 4(2) of the 1933 Act. SEC v. Chenery Corporation. During the approval of the plans to reorganize the holding companies, under the Public Utility Holding Company Act of 1935, the Securities and Exchange Commission required that only the preferred stock purchased by the management, without fraud should not be converted into stock of the reorganized company, but rather should be surrendered at cost plus interest. In SEC v. Chenery Corporation, the Court held that this requirement could not be sustained on the sole ground upon which was based on by the Commission (Previts et al. 45). . On remand, the Commission reconsidered the problem and came up with the same result. However, based on this requirement, it would be inconsistent with the standards of the Act (Malkiel 67). The court ruled that the new order was sustainable. This Courts earlier decision held only that the requirement could not be supported on the ground stated by the Commission in its first order, and, on remand for such further proceedings as might be appropriate. The Commission was not prohibited from the performance of its administrative function and from reaching the same result on suitable and appropriate grounds. The Commissions conclusion in this case was the issue with administrative experience, appreciation of the technicality of the problem and understanding of the legal policies. Another issue was about and responsible handling of the unchallenged truths, and also to constitute an acceptable administrative judgment which could not be distressed on judicial review. What a business practitioner should know before picking an investment adviser Before a potential investor or any other business practitioner embark on trading in stock exchanges and selling of the securities, the potential investor should understand some important issues on the ground. To begin with, because there are so many investment advisers today, the potential investor ought to understand very well who the investment advisers are and the benefits derived from them. Just an overview, an investment adviser can be an individual or a firm that is in the business of giving pieces of advice concerning securities to clients. They give pieces of advice on how to invest in stocks, bonds, mutual funds, or exchange traded funds for a compensation (Previts et al. 45). The potential investor should also get to know the difference between an investment adviser and a financial planner. This is very crucial because most of the financial planners are investment advisers, but not all investment advisers are financial planners! Some financial planners evaluate every feature of your financial life including savings, investments, insurance, taxes, retirement, and estate planning and help you develop a detailed strategy or financial plan to meet all your financial objectives (Klein 25). Others call themselves financial planners, but in the real sense they are not, and may only be able to recommend that you invest in a constricted range of products, and sometimes products that are not secured, this is not healthy for an investor. Before the potential investor hire the services of any financial expert, he or she should know exactly what services they need, what services the professional can deliver, any limitations on what they can suggest, what services they are paying for, how much those services cost and finally how the adviser or planner gets paid. The potential investor should also get to know whether the investment advisers have to register with the SEC, this is very crucial. This is because depending on their size, investment advisers have to register with either the SEC or the state securities agency where they all shall do their business. In most of the cases, investment advisers who manage about $100 million or more in client assets must register with the SEC (Clarkson et al. 67). However, if they manage far much below $100 million, they are required to register with the state securities agency in the state where they shall do their business. Besides, it is also a requirement for the investment advisers to fill out a form known as ‘Form ADV’. Form ADV is a form used by investment advisers to register with either the SEC or state securities agency. The form consists of two parts. Part one requires detailed particulars concerning the investment adviser’s nature of the business, ownership, clients, employees, business practices, affiliations, and any other disciplinary actions of the investment adviser. Part one is structured in a check the box and fill in the blank format (Clarkson et al. 123). The SEC checks the information from this part of the form in order to process registrations and run its regulatory and examination programs. Even if it is intended for a regulatory purpose, investment adviser filings of Part 1 are made available to the public on the SEC’s Investment Adviser Public Disclosure (IAPD). Part two requires investment advisers to arrange narrative brochures written in plain English that contain information such as; types of advisory services being offered, the adviser’s fee plan, disciplinary information, conflicts of interest, the educational and business background and finally the major advisory personnel of the adviser (Gustavson 124). The brochures are the major disclosure documents that investment advisers are required to make available to their clients. In conclusions, all investment advisers must file the Form ADVs with either the SEC or the state securities agency in the state where they intend to do their business, considering the amount of assets they manage. This will really help the investor to know whether an investment adviser ever had problems with a government regulator or has a disciplinary history. Works cited Banner, Stuart. Anglo-American Securities Regulation: Cultural and Political Roots, New York: Cambridge University Press, 1998.Print. Blume, Jeremy S., and Dan Rottenberg. Revolution on Wall Street. New York: Norton & Company, 1993.Print. Clarkson, Miller R., and Frank Cross. Business Law: Text & Cases, 12th ed .New York: south-western, 2012.Print Gustavson, Thane. Capitalism Russian-Style. New York: Cambridge University Press, 1999.Print. Klein, Maury. Rainbow’s End: The Crash of 1929. New York: Oxford University Press, 2001. Print. Malkiel, Burton. A Random Walk Down Wall Street. New York: Norton & Company, 2011.Print. Previts, Gary J., and Alfred Roberts, ed. Federal Securities Law and Accounting, Selected Addresses. New York: Garland, 1986.Print. Smith, Barry. Toward Rational Exuberance: The Evolution of the Modern Stock Market. New York: Farrar, Straus and Giroux, 2001.Print. . Read More