THE SEC

All publicly traded securities are regulated by the United States Securities and Exchange Commission, a federal regulatory body established by Congress under the Securities Exchange Act of 1934. Its chair and commission members are appointed by the president of the United States. It has a very large and enthusiastic staff, with offices in major cities throughout the United States, as well as in Washington, D.C. Its major assignment is to regulate and monitor the offer to sell and trade securities for virtually all public companies, stock exchanges, and securities dealers in the country. A major objective is to assure that all investors have equal and timely access to all information material to the decisions to buy or sell a stock, by virtue of rather stringent rules of disclosure, and that the material is accurate. It does its job well and takes it seriously.

As is the case with any governmental agency, it generally takes on the character of the administration it serves, as well as the commission’s chairperson. But regardless of the administration, or its chair, or in its emphasis on any particular aspect of securities regulation, it never strays from its basic purpose.

In response to the public reaction to the misdeeds of a number of corporations and accounting firms, and with the strictures of the Sarbanes- Oxley Act and other legislation, enforcement of the law is swift and stringent. The SEC, at this writing, is headed by William H. Donaldson, a long-time leading figure on Wall Street and former chairman of the New York Stock Exchange. Under his aegis, the SEC is swiftly and firmly bringing securities regulation into a new era, and bringing new vigor into enforcement. In addition to securities regulation, the SEC now deals as well with the management and structure of the New York Stock Exchange, the National Association of Securities Dealers and NASDAQ, with the accounting and legal professions, with corporate governance, with financial services organizations, and even with law firms in SEC practice—with myriad other issues within its purview that had been long ignored, or which have been newly addressed by legislation. Mr. Donaldson has also been given wider authority by the Sarbanes-Oxley Act, and additional funds (an increase of 66% for 2003) to support the agency’s regulatory actions. At the same time, following a compensation scandal involving the chairman of the New York Stock Exchange—now the former chairman— the NYSE is being reorganized, for both efficiency and relevancy to the needs of its members, its listed companies, and their shareholders. Among SEC initiatives are efforts to give shareholders in a corporation more say in nominating board members and in having greater voice in corporate initiatives and management; in regulating mutual funds, and particularly the lightly regulated hedge funds; in increasing disclosure rules under existing and new laws; in instituting and reporting corporate codes of ethics; in monitoring the actions of security analysts; in monitoring the structure of audit committees under the new regulations of Sarbanes-Oxley, and much more. Moreover, the SEC now publishes online its comments on many companies’ filings.

It should be noted that Sarbanes-Oxley not only grants new powers to the SEC, and that the Congress and the administration have allocated larger amounts of funding (increasing the funding for 2003 by 66%), but that under Mr. Donaldson, the SEC is proving to be more active and innovative than it’s been at any time in recent history. Its initiatives go much beyond enforcement to build a new body of regulation to enable not only the letter of the law, but its spirit as well. However, in spite of the increased funding, the SEC found difficulty in recruiting sufficient lawyers and accountants to handle the increased regulatory load. This is due to competition from the private sector and the newly formed Public Company Accounting Oversight Board (PCAOB).

This newly charged SEC poses a major challenge to corporate investor relations officers, which, in the words of Louis M. Thomson, Jr., president and CEO of the National Investor Relations Institute (NIRI), is to move “from opaque disclosure that complies with the rules to investor relations communications that are compliant but transparent—communications that are clear, concise, and comprehensible.”

Each state also has its body of securities laws and regulations, most of which are enforced by the state attorney general. These laws are known as blue sky laws, since they were originally designed—many of them prior to the establishment of the SEC—to prevent unscrupulous securities dealers from promising and selling investors everything but the blue sky. All companies selling securities to the public must conform to the laws and regulations of both the SEC and every state in which those securities are sold.

All exchanges have rules and regulations governing disclosure practices of companies whose stock is listed—traded—on those exchanges. Naturally, these regulations are often developed to parallel, comply with, or function to complement SEC and state regulation. The exchanges, including NASDAQ however, frequently define or expand the regulations for listed companies. The vast body of regulations covers every aspect of security practices, particularly those that affect the value of that company’s stock in the public market. The regulatory concern here is principally with the legal aspects of the dissemination of that information—the Rules of Disclosure.