Securities and Exchange Commission
Robert J. Sack
The SEC was established as part of the Roosevelt administration’s response to the crises of the 1929 depression. The commission is primarily responsible for administration of the laws governing the purchase and sale of securities in interstate commerce and the operation of securities exchanges in the United States.
When the securities laws were originally debated, some argued that the SEC should evaluate each security offered for sale and express an opinion as to its safety. However, Congress was evidently concerned that the power implied in that judgment might be abused, and so the federal securities laws – and the activities of the SEC – require only that investee companies provide full disclosure of relevant facts. Caveat emptor was retained as a bulwark of the market, but with the understanding that the buyer was entitled to full and fair information (Loss and Seligman, 1989: 171–80).
Even with that conceptual limitation, the SEC has considerable power. It exercises its authority in two primary ways (Phillips and Zecher, 1981: 9):
- Establishing standards for the disclosure documents which companies are required to file when they want their securities sold to the public.
- Initiating civil enforcement actions against companies and their officers, alleging either fraud or failure to comply with the laws and filing standards.
The SEC does not have authority to bring criminal charges, but may ask a civil court to bar individuals from acting as an officer of a publicly held company, and to assess fines and recover damages. More commonly, an enforcement action results in an injunction, which orders the defendant to comply with the law in the future, or an order to cease and desist from certain practices. The theory behind those apparently innocuous sanctions is that the financial community will be reluctant to do business with those who have been stigmatized by such a court order, and so the activities of those people will be circumscribed. That theory may work for those who stumble into trouble, but it appears to be less effective for those who intend to abuse the markets for their own benefit (see, for example, the front page article in the May 12, 1995 issue of the Wall Street Journal).
The SEC was established in part to correct abuses in the securities markets and in part to restore confidence in the market and thereby get the economy moving again. The dichotomy of that dual role – police chief/confidence builder – has plagued the SEC since its founding. It is apparent in the current controversy over the disclosures that should be re quired of foreign companies. Some foreign companies, especially from Germany, argue that because they comply with the disclosure requirements established by their own financial communities, the SEC ought to accept those disclosure documents as a basis for selling securities in the United States. The SEC is under considerable pressure to agree, because those international securities transactions would pro mote world trade, would enhance the United States as a world leader in capital formation, and would provide opportunities for US investors to diversify their portfolios. The SEC has so far insisted that foreign firms comply fully with the requirements imposed on domestic companies, arguing that the current disclosure system in the United States is the best in the world, and that protection of the US investor is the SEC’s first priority. However, in an increasingly global economy that is an increasingly difficult argument (AAA/SEC Liaison Committee, 1995: 82).
Some argue that the SEC is unnecessary because market forces will do a more efficient job of enforcing disclosure by companies who wish to sell securities (Kitch, 1994, explores this idea thoroughly). The theory behind that argument is that – in the long term – a company that provides above average disclosures will have below average costs of capital, because its shareholders will enjoy less information risk. That relationship has not been proven, how ever, at least in part because there are few companies who provide more than the required disclosures. In any event, those arguments have been largely academic: there seems to be an understanding in the securities industry (and in Congress) that the pressures of the market place will tempt some companies and managers beyond their ethics, and that a legitimized restraining authority serves the interests of all (Seligman, 1982, 563–8; Beatty and Hand, 1992).
Bibliography
AAA/SEC Liaison Committee (1995). Mountaintop issues from the SEC. Accounting Horizons, 9 (1), 79 86. Beatty, R. P. and Hand, J. R. M. (1992). The causes and effects of mandated accounting standards:
SFAS No. 94 as a test of the level playing field theory. Journal of Accounting, Auditing and Finance, 7 (4), 509 30.
Kitch, E. W. (1994). The Theory and Practice of Securities Disclosure. Working Paper, University of Virginia School of Law, Charlottesville.
Loss, L. and Seligman, J. (1989). Securities Regulation. Boston, MA: Little, Brown.
Phillips, S. M. and Zecher, J. R. (1981). The SEC and the Public Interest. Cambridge, MA: MIT Press.
Seligman, J. (1982). The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance. Boston, MA: Houghton Mifflin.
Skousen, K. F. (1983). An Introduction to the SEC. Cincinnati, OH: Southwestern Publishing.