Introduction to the U.S. Securites and Exchange Commision

8/20/2019 Introduction to the U.S. Securites and Exchange Commision

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Dave Michaels

Bloomberg [email protected]


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George Bluth should have known:

The SEC can’t arrest you

• It’s a civil law enforcement agency

• They don’t have boats

* it would be cool if they did!• Remedies include authority to seek

sanctions (disgorgement, penalties,

interest) and to bar participants

from regulated industries

• Under Sarbanes-Oxley, SEC has authority to

return money to harmed investors


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Regulator of Wall Street

• Companies that raise money in the public

markets (IPOs, debt offerings, etc.)

• Stock exchanges and similar trading platforms

• Brokerages and securities dealers

– Goldman, JP Morgan, Credit Suisse, etc.

•

Investment advisers: mutual fund sponsors,hedge fund managers, private equity


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Debt Markets: $39T

3,652.4

12,504.8

8,728.3

7,845.3

2,028.7

2903.31,336.5

In billions

Municipal

Treasury

Mortgage Related

Corporate Debt

Agency Debt

Money MarketsAsset-Backed


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US Stock Market: $23T


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Broker-Dealers


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Investment Advisers

• Who is this hedge fund manager?

• http://www.adviserinfo.sec.gov/IAPD/Content

/Search/iapd_Search.aspx

– Assets under management

– Owners of fund adviser (general partner)

– Fees they charge

http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspxhttp://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspxhttp://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspxhttp://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspx


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Mutual Funds

• Total net assets in mutual funds (millions):

0.00

2,000.00

4,000.006,000.00

8,000.00

10,000.00

12,000.00

14,000.00

16,000.00

18,000.00

2009 2010 2011 2012 2013 2014


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Mutual Funds

• https://www.sec.gov/edgar/searchedgar/mut

ualsearch.htm

• Additional disclosures on the fund company’s

webpage:

– Prospectus

– Statement of Additional Information (more on

fees, relationships with broker-dealers)

– Statement of Holdings

https://www.sec.gov/edgar/searchedgar/mutualsearch.htmhttps://www.sec.gov/edgar/searchedgar/mutualsearch.htmhttps://www.sec.gov/edgar/searchedgar/mutualsearch.htmhttps://www.sec.gov/edgar/searchedgar/mutualsearch.htm


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Disclosures

• Securities laws are based on idea that

investors can make good decisions if they are

fully informed

– Thus, it’s a disclosure-based regime: companies

must share material information in 10Ks, 10Qs,

8Ks, etc.

• Bad guys often in trouble not for what theydo, but what they didn’t say they would do


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Company Filings

• S-1: The “registration statement”; filed whencompanies go public or issue new stock

• 10-Ks, 10-Qs: Keep an eye out for “Legal

Proceedings,” “Management’s Discussion andAnalysis,” and “Risk Factors”

• 13-D: Reports of major shareholders; filed

when investor exceeds 5% of outstandingshares

• 8-K: Current report of material information


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Report of the whale (8-K)

From JP Morgan 8-K, 9/19/13:


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Annual Proxy Reports

• In SEC-speak, form “DEF 14A” (for searching)

• How much is the CEO paid? What was his/her

bonus?

• Annual vote on the board of directors

• What shareholder-initiated ballot items are up

for a vote? What is management’s position on

them?

• Advisory vote on CEO pay


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Insider Transactions – Form 4

https://searchwww.sec.gov/EDGARFSClient/jsp/EDGAR_MainAccess.jsp


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A Commission


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Rulemaking and Enforcement Actions

Require Commission Votes

• ``Expectations were high for White, who came

to the job with a reputation as a tough

prosecutor. … That reputation has been

dented at the SEC. The pace of rulemaking hasbeen so slow that some staff have labeled

White’s office the cheese cellar: It’s where

policy goes to age.’’


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Agency Structure

Chairman

Trading andMarkets

InvestmentManagement

Enforcement

CorporationFinance

Examiners

GeneralCounsel

Commissioner

Commissioner

Commissioner

Commissioner


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Enforcement

• Commissioner votes on settlements and

decisions to litigate

• Subpoenas are issued by staff under delegated

authority

• Defendants can be sued in federal district

court or SEC administrative court

– http://www.sec.gov/litigation/litreleases.shtml

– http://www.sec.gov/litigation/apdocuments.shtml

http://www.sec.gov/litigation/litreleases.shtmlhttp://www.sec.gov/litigation/litreleases.shtml


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The SEC just sued Mark Cuban!

• Check: Federal Court or Administrative Proceeding?

• Names of defense counsel on SEC news release (202-551-4120)

• Read the SEC Complaint (linked from news release)

• What does any of this mean?

• Call law professors who are experts in securities law:

• Columbia’s John Coffee, Duke’s Jim Cox, Michigan’s Adam

Pritchard, etc.


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Five National Specialized Units

• Asset Management (mutual funds, hedge

funds, private equity)

• Municipal Securities and Public Pension

• Complex Financial Instruments

• Foreign Corrupt Practices (Bribery)

•

Market Abuse (Insider Trading, Cases AgainstExchanges or Trading Venues)


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Financial Crisis

• As of 2002, highest penalty ever was $10M vs.

Xerox for accounting fraud

• 2010: Goldman Abacus (CDO) case: $550M

• 2014:

– Morgan Stanley - $275 million

– Credit Suisse - $196 million

– Alcoa - $175 million

– RBS - $150 million


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SEC Enforcement Trends

Source: Steinway, Sonia “SEC Monetary Penalties Speak Very Loudly, But What Do They Say?”Yale Law Journal, October 2014


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Administrative Proceedings

* SEC’s in-house court

* Trial by SEC-appointed

judge, not by jury

* “Win rate” is 90%,

versus 69% in federal

court (WSJ, 5/6/15)

* Authority expanded by

2010 Dodd-Frank law


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Administrative Proceedings vs.

Civil Court Actions

386352

429 469 462 469

610

285312

252266 272

207

145

0

100

200

300

400

500

600

700

800

2008 2009 2010 2011 2012 2013 2014


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Municipal Bonds

• A debt security issued by a state, municipality or

county to finance capital expenditures

• Municipal Securities Rulemaking Board’s EMMA

site is source for disclosures and priceinformation/trade data

• http://emma.msrb.org/home •

http://emma.msrb.org/homehttp://emma.msrb.org/home


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Other Fun Stuff

• Political contributions by municipal securitiesdealers:

http://emma.msrb.org/MarketActivity/PoliticalContributions.aspx

• Find any issuers in your home state or region:http://emma.msrb.org/issuerhomepage/Map

• Sign up for alerts:http://emma.msrb.org/EmmaHelp/ManagingAlerts.aspx

http://emma.msrb.org/MarketActivity/PoliticalContributions.aspxhttp://emma.msrb.org/MarketActivity/PoliticalContributions.aspxhttp://emma.msrb.org/issuerhomepage/Maphttp://emma.msrb.org/issuerhomepage/Maphttp://emma.msrb.org/MarketActivity/PoliticalContributions.aspxhttp://emma.msrb.org/MarketActivity/PoliticalContributions.aspxhttp://emma.msrb.org/MarketActivity/PoliticalContributions.aspx


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Enforcement Cases vs. Munis


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Disclosures are good source of info re: local finances

and economies

Source: City of Dallas Official Statement, GO Bonds, issued: 12/22/2014, CUSIP: 235219KF8


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Disclosures cover balance sheet info,

legal matters, pension obligations


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Munis face increasing scrutiny

• “Calpers, at $300 billion the largest publicpension in the U.S., reported in July that itearned 2.4 percent in its last fiscal year, less

than one-third its 7.5 percent target.”• ``Dallas is facing increasing financial pressure

as lower-than-forecast returns cause theshortfall in its police and firefighters’ pensionfund to more than triple to $4.7 billion,Moody’s Investors Service said.’’

Source: Making U.S. Pensions Honest About Returns Means Bigger Deficits,

Bloomberg 9/13/15

Introduction to the U.S. Securites and Exchange Commision

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