The Securities and Exchange Commission is instrumental in helping the general public maintain confidence in the investment process. As the first part of this article discussed, the SEC plays a pivotal role in gathering and disseminating information when companies offer securities to investors. However, the Securities Exchange Act of 1934 regulates all sorts of other activities related to the financial industry and securities trading. From mandating company reporting methods to overseeing stock exchanges, brokerage firms, and professionals in the securities industry, the SEC maintains a firm grip on the way Wall Street deals with the investing public.
Reporting requirements
Most companies whose securities trade on public markets are required to file reports on a quarterly basis, along with an annual report that includes some additional information. These reports include information on a variety of important financial topics. Companies must provide substantial amounts of financial information, including financial statements, a discussion from company management of the company's financial condition and the results of its recent business activity, and disclosures about the market risk that the company's investors face. In addition, if any unusual events have occurred, such as legal proceedings, unregistered offerings of equity securities, bond defaults, or a call for a shareholder vote on some corporate action, then the company must disclose information about them in their reports.
You can see one measure of the value of these reports in the way financial specialists use them. As soon a company releases its quarterly results, financial analysts immediately go through the numbers to look for any surprising departures from the results of their own analysis. Without the SEC's reporting guidelines, companies could potentially withhold negative information in a way that would mislead and harm investors. Furthermore, when companies have to delay releasing all or part of this information, as circuit-board maker Jabil Circuit (NYSE:JBL) and education provider Corinthian Colleges (NASDAQ:COCO) did to address issues related to options, analysts and investors often get nervous.
Regulation of corporate activities
In addition to ongoing reports from companies, the securities laws also impose responsibilities when certain events occur. For example, at least once each year, corporations hold annual meetings of shareholders to vote on certain corporate matters, such as electing directors to the corporate board. Because the vast majority of shareholders choose not to attend these annual meetings in person, corporations send proxy statements to shareholders that allow their votes to be counted. To ensure that corporations don't take advantage of their shareholders when they aren't physically present at such a meeting, the SEC reviews the proxy statements that will be sent to shareholders to make sure they disclose enough relevant information to allow voters to make an informed choice.
Insider trading has always been a major danger in securities trading. Despite the requirements for companies to disclose important information about their business operations, there are always a large number of people who have access to non-public information. Because the integrity of the markets is based on the premise that equal information is necessary to prevent abuse, insider trading threatens fair trading practices in the financial markets. The SEC monitors such activity and imposes disciplinary actions when appropriate. Those who remember Martha Stewart's experience with ImClone (NASDAQ:IMCL) know that these investigations sometimes lead to criminal trials and prison time.
One particular situation in which unequal amounts of information are involved is in merger and acquisition activity. The fact that someone intends to take control of a company is itself a material piece of information for investors. To force potential acquirers to declare publicly their interest in taking over a company, anyone who intends to acquire more than 5% of the stock of a company must file with the SEC and make disclosures of information. This prevents individuals from quietly buying enough shares on the open market to take majority control of a company. Furthermore, because mergers and acquisitions often require shareholder approval, the information disclosed by a potential acquirer gives shareholders insight into the pros and cons of the transaction.
Exchange, brokerage, and professional oversight
The SEC's regulatory power extends beyond companies and investors. The securities laws also give the SEC oversight over the other participants involved in financial transactions, including stock exchanges, brokers and dealers, transfer agents who keep records of ownership of securities and handle physical stock certificates, and clearing agencies that oversee securities trades among investors and financial institutions to finalize transactions smoothly. These market participants must register with the SEC and provide information about their activities on a regular basis.
The SEC's work with securities exchanges and brokerage firms underscores the nature of securities regulation as a somewhat cooperative venture. Exchanges and brokers have created their own organizations to oversee their activities, with rules for appropriate conduct among professionals and firms and procedures for evaluating complaints and allegations of misconduct. These self-regulating organizations often impose their own disciplinary actions when members violate their rules. Rather than maintain sole responsibility for all securities-related activities, the SEC reviews and approves the rules created by these organizations. This makes sure that there are several different entities whose joint goal is to safeguard the integrity of the securities markets.
The SEC has played a vital role in establishing and maintaining the reputation of America's securities markets. By giving the investing public access to information, and serving as a regulator with the power to take action to correct problems, the SEC works hard to protect investors like you.
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Fool contributor Dan Caplinger checks the SEC website so often that he's on a first-name basis with Edgar. He doesn't own shares of the companies mentioned in this article. The Fool's disclosure policy would make any regulator proud.
