CHAPTER 18

SECURITIES AND EXCHANGE

COMMISSION REPORTING

FOCUS OF CHAPTER 18• The Purpose & Organizational Structure of

the SEC• The Role of the SEC in Relation to the

FASB• The SEC’s Enforcement Powers• SEC Promulgations• The Securities Act of 1933• The Securities Exchange Act of 1934• Regulation of Foreign Securities Traded in

the United States

State Blue Sky Laws• State blue sky laws to regulate the

purchase and sale of securities are supplemented in a major way by the Securities Act of 1933 and the Securities Exchange Act of 1934.

To prevent con artists from trying to “sell the blue sky.”

The Purpose of the Securities Act of 1933

• The 1933 Act:– Applies to the INITIAL DISTRIBUTION

of securities to the public.– Is designed to require companies to

provide full and fair disclosure of the character of securities sold to the public.

The Purpose of the Securities Exchange Act of 1934

• The 1934 Act:– Applies to the SUBSEQUENT TRADING

in outstanding securities.– Is designed to provide for the regulation

of:• Securities exchanges. • Over-the-counter markets.

The Purpose of the SEC• Quasi-judicial agency of the U.S.

government administers:– The Securities Act of 1933.– The Securities Exchange Act of 1934.– Several other acts.

• The 5 SEC COMMISSIONERS have the statutory authority to establish GAAP. – They rely on their CHIEF ACCOUNTANT

to furnish them ADVICE in this respect.

The Role of The SEC In Relation to The FASB

• Historically: The SEC has relied on private sector organizations to establish GAAP. – Occasionally: The SEC steps in and

prohibits or changes accounting practices. • Currently: FASB issues no pronouncement

UNLESS it has the SEC’s informal approval.• Last 15 Years: The SEC has been the driving

force behind the FASB’s efforts to increase the use of fair values in the balance sheet.

The SEC’s Enforcement Powers• The SEC—unlike the FASB—has the power

to:– Order a company to revise its financial

statements if it disagrees with the accounting treatment.

– Take disciplinary actions against auditors of publicly owned companies, such as:• Imposing bars/suspensions, & censures.• Requiring peer reviews or additional

continuing education.

Promulgations of the SEC• The SEC issues numerous promulgations

in carrying out its responsibilities:– Rules, regulations, and forms.– Specific Act releases (e.g. 33-12,775).– Accounting and Auditing

Enforcement Releases (AAERs).– Financial Reporting Releases (FRRs).– Staff Accounting Bulletins (SABs).

Financial Reporting Releases (FRRS): They Concern GAAP

• Financial Accounting Releases: Consist of– Policy/interpretive statements regarding

particular accounting areas.– Discussion of the adoption of an

amendment or revision to Regulation S-X (which deals with accounting matters).

Staff Accounting Bulletins (SABs): A Source of GAAP

• Staff Accounting Bulletins: Consist of the interpretations and practices followed by certain SEC departments that are responsible for reviewing compliance with disclosure requirements. (Over 100 issued.)

• Compliance with SABs is mandatory.• Some of these bulletins establish GAAP in

areas that are not addressed by FASB or its predecessor organizations.

Regulation S-X: The RegulationThat Accountants Deal With The Most

• Accountants and auditors must deal with Regulation S-X, which contains for all SEC filings:– The financial statements required to be

filed for:• The most recent year.• Prior years (e.g. 2 years of P/L).• Any short (< a year) “stub” periods.

– The financial disclosure requirements.

Regulation S-K: Nonfinancial Disclosure Requirements

• All nonfinancial disclosure requirements are contained in Regulation S-K. Examples are:– Management’s & director’s backgrounds.– Management’s compensation.– Management’s discussion and analysis

of operations (the MDA).– Locations of properties.– Legal proceedings.– Risk factors.

The Scope of The 1933 Act• The 1933 Act is a unified piece of

legislation dealing ONLY with the sale of securities to the public.

• Transactions that are exempt from registration under the 1933 Act include:– Private offerings to sophisticated investors.– Strictly intrastate offerings.– Small offerings (Regulation A offerings).– Governmental sales of securities.

Reporting Forms UsedUnder The 1933 Act

• The SEC has 15 registration forms that are used under the 1933 Act. These forms are:– EXTENSIVE ENUMERATIONS of

information to be included in the filing.– Not forms similar to tax return forms.

• Form S-1 is the most commonly used form.• Which form to use is a legal determination

to be made by legal counsel—not by accountants.

The 1933 Act: Primary Versus Secondary Offerings

• The initial distribution of securities to the public can be made by either a:– PRIMARY OFFERING: The company

issues new securities directly to the public.• The company receives the money.

– SECONDARY OFFERING: Security holders of the company sell some or all of their existing securities to the public.• The security holders receive the

money.

The Scope of the 1934 Act• The 1934 Act deals with many areas:

– Regulation of securities exchanges.– Registration of securities on exchanges.– Registration of over-the-counter

securities.– Filing of periodic & other reports.– Proxy regulations.– Antifraud & insider trading.– Regulation of brokers & dealers.

Reporting Forms Under the 1934 Act

• In filing periodic and other reports, companies commonly use:– Form 10-K, annual report.– Form 10-Q, quarterly report.– Form 8-K, current reports for material

events (e.g. a bankruptcy filing). Includes:• A change in outside auditors

(due in 5 days; all others are due in 15).

Foreign Corporations• Foreign corporations issuing securities in

USA must comply with SEC regulations.• Form F-1 is for registration of securities.• Form 20-F is for (1) annual reports and (2)

reconciling foreign GAAP to U.S. GAAP.• Form 6-F is for semiannual reporting and

Form 8-K-type event disclosures.• Foreign firms disclose quarterly data only

voluntarily.

The Major Distinction Betweenthe 1933 Act and the 1934 Act• Registration under the 1933 Act pertains

to registering a quantity of securities, such as 125,000 shares of common stock.

• Registration under the 1934 Act pertains to registering a class of securities, such as:– Common stock– Preferred stock– Bonds

Becoming Subject to the 1934 Act: The Usual Process

• Most companies become subject to the SEC’s 1934 Act reporting requirements as follows:– Register the sale of a quantity of common

shares under the 1933 Act (usually a primary offering).

– Immediately register the common stock (as a class) under the 1934 Act (using Form 10).• Enables the specific quantity of shares

registered under the 1933 Act to trade.

Becoming Subject to the 1934 Act: The “Becoming Big Enough” Process

• A company that has never registered securities under the 1933 Act becomes subject to the reporting requirements of the 1934 Act whenit has both:– More than 500 shareholders.– Assets of more than $10 million.

• Deregistration from the 1934 Act is allowed if:– An entity has less than 300 shareholders or– The above two requirements are not met.

Good News: Business’s Perception of the SEC

• The SEC is perceived as one of the most capable and effective governments agencies—a tough police officer of corporate conduct.

Review Question #1

Privtex is “going public.” Which regulation deals with preparing its financial statements and which registration form does it use, respectively? A. Regulation S-1 and Form S-X.B. Regulation S-K and Form S-X.C. Regulation S-K and Form S-1.D. Regulation S-X and Form l.E. Regulation S-X and Form S-1.

Privtex is “going public.” Which regulation deals with preparing its financial statements and which registration form does it use, respectively? A. Regulation S-1 and Form S-X.B. Regulation S-K and Form S-X.C. Regulation S-K and Form S-1.D. Regulation S-X and Form l.E. Regulation S-X and Form S-1.

Review Question #1With Answer

Review Question #2Privtex is “going public.” It has 500,000 shares outstanding—all to officers and employees. It registers 200,000 new shares with the SEC and also registers under the 1934 Act. The SEC approves the offering. How many shares can trade immediately. A. -0- B. 200,000 shares. C. 500,000 shares. D. 700,000 shares.

Review Question #2With Answer

Privtex is “going public.” It has 500,000 shares outstanding—all to officers and employees. It registers 200,000 new shares with the SEC and also registers under the 1934 Act. The SEC approves the offering. How many shares can trade immediately. A. -0- B. 200,000 shares. C. 500,000 shares. D. 700,000 shares.

End of Chapter 18

Time to Clear Things Up—Any Questions?