All That You Wanted To Know About the Securities and Exchange Commission

The SEC is an independent regulatory agency of the U.S. government, created by the Securities and Exchange Act of 1934. It administers the following statutes:

• Securities Act of 1933;
  
• Securities Exchange Act of 1934;
  
• Public Utility Holding Act of 1935;
  
  
  
• Trust Indenture Act of 1939;
  
• Investment Company Act of 1940;
  
• Investment Advisers Act of 1940;
  
• Chapter X of the Bankruptcy Act; and
  
• Functions under the Securities Investor Protection Act of 1970.
  

Its role in terms of these statutes is described briefly as follows:

1. Securities Act of 1933: Requires a registration statement with the Commission on the part of those who intend to issue securities to the public. Exemptions include federal and local agencies, certain common carriers such as interstate railroads, and offerings not exceeding $500,000 which comply with the Commission's Regulations A and E.
   
   
2. Securities Exchange Act of 1934: Requires the filing of registration statements, annual financial statements, and other reports for companies whose securities are listed on the exchanges. Over-the-counter securities are included where the company has $1,000,000 in assets and 500 or more shareholders.
   
   
3. Public Utility Holding Act of 1935: Requires regulation by the Commission of the purchase and sale of securities, properties and other assets by holding companies in the utility system. The authority extends to distribution of voting power and to reorganizations, mergers, and consolidations of public utility holding companies.
   
   
4. Trust Indenture Act of 1939: Requires compliance with SEC regulations pertaining publicly offered debt securities issued under trust indentures. The Act also provides for the independence of indenture trustees.
   
   
5. Investment Company Act of 1940: Provides for the registration of investment companies and subjects their activities to regulation in accordance with standards prescribed to protect investors. It may file court actions to enjoin acts and practices of management officials involving gross misconduct or abuse of trust and to disqualify such persons from holding office.
   
   
6. Investment Advisers Act of 1940: Requires that persons who, for compensation, engage in the business of advising others with respect to their security transactions to register with the Commission. This requirement extends to security brokers and dealers, as well as to accountants who practice before the SEC.
   
   
7. Bankruptcy Act: Provides that the Commission advise the federal courts regarding the reorganization of insolvent corporations.
   
   
8. Securities Investor Protection Act of 1970: Prescribes a role for the Commission in guarding investors against losses of cash and securities where brokerage firms fail or merge. This Act followed in the wake of the widespread financial instability among brokerage houses in the period 1969-1971, in which period 110 firms either failed or merged.

The Commission comprises five members appointed by the President with the consent of the Senate. One member is designated by the President to serve as chairman. Generally, commissioners are appointed for five-year terms, and not more than three commissioners can belong to the same political party.

The Office of the Chief Accountant is of particular interest to us. The Chief Accountant is the principal adviser to the Commission on all matters relating to accounting and auditing. He is also responsible for executing Commission policy with respect to accounting principles, auditing practices, the form and content of financial statements filed with the Commission, uniform systems of accounts, and the interpretation and application of accounting principles in unusual situations.

He initiates and supervises research and studies, drafts policies and regulations, answers questions from registrants or their public accountants dealing with matters affecting the SEC, and publishes his opinions in what is known as the "Accounting Series Releases."

An important part of the Chief Accountant's job is liaison with other policy and enforcement groups, together with judicious prodding where these groups fail to make adequate progress in resolving matters which require definitive action. Also, he is responsible for dealing with questions of independence, qualifications, and malpractice of public accountants who perform services for clients who are registered with the SEC.

The role of governmental agencies in promulgating accounting policy cannot be minimized. The Securities and Exchange Act of 1934 empowered the SEC "to prescribe the form and content of financial statements filed by reporting companies, and to specify the methods to be followed in their preparation." However, in carrying out its functions over the years, the SEC has sought to work closely with the accounting profession in setting accounting policy. In reporting to a Congressional committee in 1964, the SEC stated: "Much improvement in financial reporting practices has occurred since the enactment of the first Federal securities law in 1933. The Commission believes that its policy of working with and supporting the accounting profession in the development of accounting principles has directly influenced this progress and is the best means for assuring continuing improvement of accounting practices."

At the annual meeting of the American Institute of Certified Public Accountants which convened in Atlanta, October 16, 1973, Ray Garrett, Jr., the current chairman of the Securities and Exchange Commission, reaffirmed the Commission's "historical policy of reliance on the private sector for solving financial measurement problems." He noted that the SEC and the Financial Accounting Standards Board can meet the needs of investors by bringing their cumulative expertise to bear on the problems.

In more cases than not, policy generated in the private sector becomes embodied in the policy of the SEC, thereby giving it the status of federal law. SEC policy is exhibited in a series of regulations, rules, and releases. Regulation S-X is the principal administrative document of the SEC and is updated periodically. This regulation (together with the Accounting Series Releases [ASR] ) states the requirements applicable to the form and content of all financial statements required to be filed under the various acts which the SEC administers.

The Ash Report (after its chairman Roy L. Ash) was issued in January 1971 and dealt with problems facing several independent agencies of the federal government, including the SEC. The Report noted major changes in the nature of the securities markets since the 1930's, including these items: (a) in the period 1962-1968, trading volume on the New York Stock Exchange quadrupled, and in 1970 reached the staggering volume of 2.937 billion shares (or 11.7 million shares daily); (b) the excessive trading volume in late 1968, for example, caused the brokerage industry to default on the delivery of $4.1 billion of securities by the settlement date; (c) 110 brokerage firms, as noted earlier, failed or merged in the two-year period, 1969-1971; (d) institutional investors now dominate the markets, representing 62% of the volume on the New York Stock Exchange, and registered investment companies (including mutuals) have grown from $2.5 billion in assets and 400,000 shareholders in 1940 to $70 billion in assets and 8 million shareholders in 1969; and (e) despite the rapidly expanding workload, the SEC's budget has remained essentially unchanged since 1965, and the number of personnel has actually declined. The Ash Report concluded with the recommendation that a new Securities and Exchange Agency replace the existing Commission, but at the time this is written no action has been taken to effect this change.