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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 SX (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 Regulation
That 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 Used
Under 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 Between
the 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 when
it 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.
Review Question #1
With Answer
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 #2
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. -0B. 200,000 shares.
C. 500,000 shares.
D. 700,000 shares.
Review Question #2
With 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. -0B. 200,000 shares.
C. 500,000 shares.
D. 700,000 shares.
End of Chapter 18
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