Trillionaire Term of the Day - February 10, 2009 - SEC

Securities & Exchange Commission (SEC)

In reaction to the Crash of 1929 and the Great Depression, Congress passed the Securities Act of 1933.  Many people believed that a lack of regulation was the main cause for the crash that led the Depression, and the Securities Act of 1933 was made to cure this issue. In 1934, Congress also passed the Securities Exchange Act, which created the Securities and Exchange Commission (SEC) to enforce the rules of the Securities Act of 1933.

The responsibilities of the Securities and Exchange Commission are diverse and numerous. Every security that is traded on any stock market must be registered with the SEC. If you want to your company to become a publicly traded company, the SEC is responsible for analyzing and permitting an Initial Public Offering (see Trillionaire Term of the Day for IPO’s). If you ever purchase over 5% of a company’s shares, you would also have to report the transaction to the SEC.

The Securities and Exchange Commission’s main purpose is to regulate the securities markets and prevent companies from committing fraud and manipulation. The SEC requires publicly traded companies to submit quarterly and annual reports that contain financial statements. The publication of financial statements prevents fraud: having millions of eyes inspecting them makes it much harder to lie. These reports allow common and institutional investors alike to gain insight on the inner workings of a company.

Interestingly, the SEC requires publicly traded companies to publish a management discussion and analysis (MD&A) each year. In these statements, a selected executive will discuss the events of the year leading up to the report. The best part about these statements is that the executive usually explains the tough process behind major decisions. These statements are available to everyone (that means you), and they are a great way of understanding how a company does business and how it reacts to specific events.

The recent economic crisis has put the SEC in the public spotlight. The SEC has the power to bring civil enforcement actions against individuals and corporations that commit fraud. In the aftermath of the crash of the housing market they used this power to bring over $51 billion in settlements to individuals and institutions that bought auction rate securities from banks including Merrill Lynch, Bank of America, and Citigroup. Recently, the failure to discover Bernard Madoff’s $50 billion Ponzi scheme has been attributed to the SEC. Congress and the SEC are looking to change the rules that govern the Commission to prevent more fraudulent activity from occurring.

As a future investor and market player, you will constantly be dealing with the actions and regulations of the SEC. The legitimacy of the markets and investments lies in the Commision’s hands. It’s important to learn about the SEC because to play by the rules, you must first know them.

 

-Matt Schwartz

College Trillionaire