Security & Exchange Commission Rules & Regulations
- Discover steps that the Securities and Exchange Commission takes to protect investors.stock exchange image by Christopher Walker from Fotolia.com
The Securities and Exchange Commission was established in 1933 with the passing of the Securities Act. The purpose of the SEC is to ensure that publicly owned companies disclose facts and figures to current and prospective shareholders in order to allow the shareholders to make informed decisions on whether or not they want to invest in the companies. SEC rules and regulations cover a range of activities. Failure by a company or its employees to comply with the laws could result in fines, penalties and jail time. - Employees of publicly owned companies whose stock is traded on exchanges are prohibited from trading on a security of which they have inside knowledge--it is not publicly known. Insider trading can cause the stock market to rise or lower in ways that benefit the inside trader financially and, in turn, cause other unsuspecting investors to lose money. For example, if a broker has lunch with a CEO and from that lunch the broker discovers that the CEO is in discussions to sell his firm, the broker cannot sell his and his clients' stock in the CEO's firm unless knowledge of the company sell is publicly known--has been reported to regulating agencies like the SEC. An insider trading conviction could result in individual employee and/or company fines, penalties, and jail or prison time.
- All securities that are traded in the United States require registration with the SEC. Securities registrations must include a description of the company, its properties, and other businesses that the company owns. Names and titles of senior management at the company are also reported. Financial statements that the company files with the SEC must be audited by an independent auditing agency. The SEC is legally responsible to disclose these company reports to the public. A company that has at least 500 shareholders or that reports more than $10 in assets is required to file an annual report with the SEC. They are also required to file periodic reports should they experience a significant company change such as an acquisition.
- Employees who have direct contact with shareholders in order to sell securities, such as brokers, financial advisers, dealers and transfer agents, are required to register with the SEC. Employers must ensure that brokers, dealers, financial advisers and transfer agent are licensed by the National Association of Securities Dealers before they sell securities to customers. If the employee sells securities prior to receiving their license, the employer could be assessed a fine or penalty.
- The SEC mandates that company proxy statements or reports are filed with the SEC. Proxy statements must be filed with the SEC before they are distributed to shareholders for voting purposes, e.g. on whether to buy another firm. Facts, figures, and findings regarding the item voted on must be disclosed in the proxy statement.
