Samuel H. Firke
Free Topic Spring Quarter Paper #1
Mr. Branham’s 3rd Period U.S. History
An Overview of the SEC for the Average Joe
Millions of pages have been written on the Securities and Exchange Commission
(SEC), and the SEC has published millions of pages itself. Most of this material is
heavily encoded in economic and legal jargon that renders it inaccessible to all but the
most learned economists. Some of these economists have attempted to translate and
simplify this information into short volumes that can be understood by the common
investor, e.g. you or me. An example of these “short” works is Understanding The
Securities Act and the S.E.C., which claims to be for “the novice in securities law, the
specialist, and the non-professional student of government and business.”1 This, suffice
to say, is not easy reading. Neither is An Introduction to the SEC, which looks to be
reasonably accessible but is “intended primarily as a supplement to intermediate
accounting, auditing, and accounting theory classes.”2 There is not, to my knowledge, an
understandable text on the history and purpose of the SEC. Most books, on the contrary,
are less readable than those previously mentioned; a highly-regarded, “accessible3” book
on the SEC is The Coopers & Lybrand SEC Manual4, which carries a list price of $225
and is 1,296 pages long. As there is not a text that explains the SEC for the common
man, I have set out to create it, and it follows below.
1
Edward T. McCormick, Understanding The Securities Act and the S.E.C., American Book Company,
New York, NY, 1948. [excerpt taken from Foreword p. iii]
2
Fred K. Skousen, An Introduction to the SEC, South-Western Publishing Co., Cincinnati, OH, 1991.
[excerpt taken from Preface p. vi]
3
Described twice in two paragraphs in the Amazon.com review as “highly readable.”
http://www.amazon.com/exec/obidos/ASIN/0471179612/ref=pd_sim_books/102-9685495-1542540
4
Robert H. Herz (ed.), The Coopers & Lybrand SEC Manual, John Wiley & Sons Press, June 1997
A “security” is “any note, stock, treasury stock, bond, debenture, evidence of
indebtedness, certificate of interest or participation in any profit-sharing agreement or a
transferable share”5 of a business enterprise. To the average American, a security is a
share of stock in a company or a bond that can be speculated on for money. The idea of
making fortunes by (in the eyes of the masses) betting on companies and the economy
has always fascinated people worldwide. Americans have long been fascinated with getvery-rich-quick tales such as that of Warren Buffet, who, using only an ordinary sum of
money that he had earned, became a billionaire off of his investments. In 1285, King
Edward I of England attempted to control growing capital markets in by licensing brokers
in London. The Bubble Act was passed in 1720 in England, after speculation pushed the
stock offerings above the value of all the land in Great Britain6. Securities legislation has
been around for a long time, but really came into effect in America in the early part of the
20th Century. Many pushes for state and federal regulations were made and the
movement gathered momentum7 as trading grew. It is often presumed that the Great
Crash of 1929 caused the government to create the SEC, but in fact the Crash was just
one event among many that finally caused the federal government to act. The first
federal security laws passed were the Securities Act of 1933 and the Securities Exchange
Act of 1934. The first act created guidelines for disclosure of information to investors
during Initial Public Offerings (IPOs). The second, more important act created the SEC.
The SEC “is an independent, bipartisan, quasi-judicial agency of the United States
5
Securities Act of 1933, United States of America.
Louis Loss, Securities Regulation, Little, Brown & co, Boston, 1961, p. 4
7
“By 1913, 23 sates had passed laws aimed at regulating the sales of securities.” J.K. Lasser, Federal
Securities Act Procedure, McGraw-Hill Book Co., New York, NY, 1934), p. 2
6
government” created “to help regulate the United States securities market.”8 During the
late 1920s, about 55% of all personal savings were invested in securities, and when the
Dow-Jones Industrial Average (DJIA, a measure of the stock market’s general
performance over a period of time, calculated by combining the trading prices of a set of
stocks chosen to represent the market) fell 89% in four years, America sunk into the
Great Depression.9 The SEC, in a nutshell, was created to help uninformed American
investors from falling into this trap.
The Commission is an independent organization in the same vein as the NSA,
CIA, EPA and many other acronym-bearing groups created by the U.S. government over
the years. It is run by five commissioners, one of whom is elected to be the Chairman of
the entire organization; each commissioner is appointed by the President to serve a five
year term, with each term staggered so that a new commissioner is chosen each year. The
position pays $10,000 a year and no more than three of the five commissioners can be of
the same party10. In this way, the agency manages to stay (compared to other similar
groups) out of party politics and is able to focus on regulating securities trading. Below
the five commissioners, the SEC is split into four divisions. The Division of Corporate
Finance aids in “assisting the Commission in establishing and requiring adherence to
standards to economics and financial reporting and disclosure by all companies under
SEC jurisdiction… reviewing selected registration statements” such as “prospectuses and
quarterly and annual reports.”11 That is, they make sure that companies aren’t lying. The
Division of Market Regulation “cooperates in investigating exchanges, brokers and
8
Skousen, p. 1
Edward R. Willet, Fundamentals of Securities Markets, Appleton-Century-Crofts, New York, NY, 1968,
p. 211
10
McCormick, p. 29
9
dealers.”12 All commercial trading houses must register with the SEC and are audited to
prevent illegal trading and fraud. This division also stops insider trading (laid out in the
Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud
Enforcement Acts of 1988). Insider trading is when a person with non-public knowledge
of how a stock price will act in the future exploits this unfair situation to profit off of the
uninformed. Before the act of 1988, the SEC could only recoup what the offender gained
or avoided losing; now, the SEC can seek $1 million or three times the sum gained,
whichever is greater, and can also pursue a jail term of up to 10 years for the offender.13
The other two divisions are the Division of Enforcement, who, as the name implies,
enforces the laws, and the Division of Investment Management. This division, the
smallest and most complex, regulates companies who primarily trade securities, including
mutual fund owners, hedge funds and retirement funds.14 The SEC is headquartered in
Washington, D.C., and has regional offices in New York, Boson, Atlanta, Cleveland,
Chicago, Denver, Fort Worth, Seattle, San Francisco, and Baltimore.15
In short, the SEC is an independent watchdog / enforcement agency created to
straighten out securities trading after the American public lost confidence in stocks
during the Depression. It regulates all aspects of trading and makes sure that everyone is
telling the truth. Investing is inherently dangerous, but thanks to the SEC, American
investors don’t have to worry that they are being lied to, and can focus on picking
securities and companies based on honest and certified information.
11
Skousen, p. 13-14
Skousen, p. 14-15
13
Skousen, p. 39
14
Skousen, p. 15
15
McCormick, p. 31
12