Activities of Divisions and Offices
The Commission’s work is remedial, not punitive. Its primary activities are to ensure investor protection through full disclosure of material information and to ensure that the securities markets are fair and honest in compliance with federal securities laws, rules, and regulations.
The Commission also works closely with criminal authorities in matters of mutual interest.
Interpretation and Guidance
Each division provides guidance and counseling to registrants, prospective registrants, the public, and others to help them determine the application of the law and its regulations and to aid in complying with the law. For example, this advice might include an informal expression of opinion about whether the offering of a particular security is subject to the registration requirements of the law and, if so, advice on compliance with disclosure requirements of the applicable registration form. These interpretations of the rules and laws help ensure conformity on the part of the registrants. Also, most divisions occasionally issue "no action" letters which indicate whether the division would recommend Commission action on matters regarding registrants in certain circumstances.
One of the most common activities engaged in by the divisions is rulemaking. The Commission’s objective of requiring regulated entities to provide effective disclosure, with a minimum of burden and expense, calls for constant review of practical operations of the rules and registration forms adopted. If experience shows that a particular requirement fails to achieve its objective, or if a rule appears unduly burdensome in relation to the resulting benefits, the staff presents the problem to the Commission. The Commission then considers modifying the rule or other requirement. Based on its particular area of expertise, the appropriate division often contributes specific analyses.
Many suggestions for rule modification follow extensive consultation with industry representatives and others affected. The Commission normally gives advance public notice of proposals to adopt new or amended rules or registration forms and affords the opportunity for interested members of the public to comment on them.
The Commission decides, generally in open meetings, whether the new rules or amendments to existing rules are warranted. Proposals approved by the Commission become mandatory within a specific time period after publication in the Federal Register.
The Commission investigates complaints and other indications of possible law violations in securities transactions primarily through the Commission’s field offices and the Division of Enforcement. Most violations arise under the Securities Act and the Securities Exchange Act. (Fraud prohibitions of the Securities Act are similar to those contained in the Securities Exchange Act.) Investigation and any subsequent enforcement work is conducted.
Most of the Commission’s investigations are conducted privately. Facts are developed to the fullest extent possible through informal inquiry, interviewing witnesses, examining brokerage records and other documents, reviewing trading data, and similar means. The Commission is empowered through a formal order to issue subpoenas requiring sworn testimony and the production of books, records, and other documents pertinent to the subject matter under investigation. In the event of refusal to respond to a subpoena, the Commission may apply to a federal court for an order compelling obedience.
Inquiries and complaints by investors and the general public are primary sources of leads for detecting violations in securities transactions. Another source is inspections by SEC field offices and the Office of Compliance Inspections and Examinations of the books and records of regulated entities to determine whether their business practices conform to the prescribed rules. Still another means is conducting inquiries into market fluctuations in particular stocks which do not appear to result from general market trends or from known developments affecting the issuing company.
Investigations frequently concern the sale without registration of securities subject to the registration requirement of the Securities Act. Misrepresentation or omission of material facts concerning securities offered for sale, whether or not registration is required, is another common subject of investigation. The antifraud provisions of the law also apply to the purchase of securities, whether involving outright misrepresentations or the withholding or omission of pertinent facts to which the seller was entitled. For example, it is unlawful in certain situations to purchase securities from another person while withholding material information which would indicate that the securities have a value substantially greater than that at which they are being acquired. These provisions apply not only to transactions between brokers and dealers and their customers but also to the reacquisition of securities by an issuing company or its "insiders."
Other types of inquiries relate to manipulating market prices of securities, misappropriating customers’ funds or securities, conducting a securities business while insolvent, buying or selling securities from or to customers at prices not reasonably related to current market prices, and violating broker-dealers’ responsibilities to treat customers fairly.
A common type of violation involves the broker-dealer who gains the customer’s trust and then takes undisclosed profits in securities transactions with or for the customer over and above the agreed commission. For example, the broker-dealer may have purchased securities from customers at prices far below, or sold securities to customers at prices far above, their current market prices. In most of these cases, the broker-dealer risks no loss; the purchases from customers are made only if simultaneous sales can be made at prices substantially higher than those paid to the customers. Conversely, sales to customers are made only if simultaneous purchases can be made at prices substantially lower than those charged the customer. Another type of violation involves firms engaging in frequent trading in the customer’s account (called churning) to generate increased commissions, usually without regard to any resulting benefit to the customer.
The law requires that the customer receive a written confirmation of each securities transaction. This confirmation discloses whether the securities firm is acting as a dealer (a principal for its own account) or as a broker (an agent for the customer). If the latter, the confirmation must also disclose the broker’s compensation from all sources as well as other information about the transaction.
The facts developed by the staff in investigations are considered by the Commission to determine whether there is valid evidence of a violation, whether further action should be taken to determine if a violation actually occurred, and whether some sanction should be imposed.
When facts show possible fraud or other violations, the laws provide several courses of action which the Commission may pursue, including:
- civil action, where the Commission may apply to an appropriate U.S. District Court for an order prohibiting the acts or practices alleged to violate the law or Commission rules, or request court ordered remedies such as disgorgement or civil money penalties; or
- administrative remedy, where the Commission may, after hearings, issue orders to suspend or expel members from exchanges or over-the-counter dealers association; deny, suspend, or revoke broker-dealer registrations; or censure for misconduct or bar individuals (temporarily or permanently) from any association with the securities industry.
In the case of exchange or association members, SEC registered brokers or dealers, or individuals who may associate with any such firm, the administrative remedy is generally invoked. In these administrative proceedings, the Commission issues an order specifying illegal acts or practices allegedly committed and directs that a hearing be held for the purpose of taking evidence. At the hearing, counsel for the Division of Enforcement or a field office undertakes to establish those facts supporting the charge. Respondents have full opportunity to cross-examine witnesses and to present evidence in defense. If the Commission ultimately finds that the respondents violated the law, it may take remedial action in the form of statutory sanctions as indicated above. The respondent has the right to seek judicial review of the decision by the appropriate U.S. Court of Appeals. Remedial action may effectively bar a firm from conducting a securities business in interstate commerce or on exchanges, or an individual from association with a registered firm, and also may include fines.
The many instances in which these legal sanctions have been invoked present a formidable record. Of great significance to the investing public is the deterrent effect of the very existence of the fraud prohibitions of the law and the Commission’s powers of investigation and enforcement. These provisions of the law, coupled with the disclosure requirements applicable to new security offerings and to other registered securities, tend to inhibit fraudulent stock promotions and operations. They also increase public confidence in securities as an investment medium. This facilitates financing through the public sale of securities, which contributes to the economic growth of the nation.
Procedures in Administrative Proceedings
All formal administrative proceedings of the Commission must be conducted according to SEC Rules of Practice. These rules establish procedural safeguards to protect the rights of parties to these proceedings. Included are requirements for timely notice of the proceeding and for a sufficient specification of the issues or charges involved to enable parties to prepare their cases adequately. All parties, including counsel for the SEC, may appear at the hearing, present evidence and cross-examine witnesses. In addition, other interested persons may intervene or be given limited rights to participate. In some cases, the relevant facts may be stipulated instead of conducting an evidentiary hearing.
Hearings are conducted before a hearing officer, normally an administrative law judge appointed by the Commission. The hearing officer, who is independent of the interested SEC division or office, rules on the admissibility of evidence and on other issues arising during the course of the hearing. At the conclusion of the hearing, participants may urge in writing that the hearing officer adopt specific findings of fact and conclusions of law. The hearing officer then prepares and files an initial decision (unless waived), stating conclusions based on facts established by the evidence and including an order disposing of the issues. Copies of the initial decision are served on the parties and participants, who may seek Commission review. If review is not sought and the Commission does not order review on its own motion, the initial decision becomes final and the hearing officer’s order becomes effective.
If the Commission reviews the initial decision, the parties and participants may file briefs and be heard in oral argument before the Commission. On the basis of an independent review of the record, the Commission prepares and issues its own decision. The laws provide that any person or firm aggrieved by a decision of the Commission may seek review by the appropriate U.S. Court of Appeals. The initial decisions of hearing officers as well as the Commission decisions are made public. Ultimately, the Commission decisions (as well as initial decisions which have become final and are of precedential significance) are published.
The Commission has only civil authority. However, if fraud or other willful law violation is indicated, the Commission may refer the facts to the Department of Justice with a recommendation for criminal prosecution of the offending persons. That Department, through its local U.S. Attorneys (who frequently are assisted by Commission attorneys), may present the evidence to a federal grand jury and seek an indictment. In its investigations and enforcement actions, the SEC cooperates closely with other federal, state, and local law enforcement officials.
Other SEC Offices
Office of the Chief Accountant
The Chief Accountant is the principal adviser to the Commission on accounting and auditing matters arising from the administration of the various securities laws. The primary Commission activities designed to achieve compliance with the accounting and financial disclosure requirements of the federal securities laws include:
- rulemaking and interpretation that supplements private-sector accounting standards, implements financial disclosure requirements, and establishes independence criteria for accountants;
- review and comment process for agency filings directed to improving disclosures in filings, identifying emerging accounting issues (which may result in rulemaking or private sector standard-setting), and identifying problems that may warrant enforcement actions;
- enforcement actions that impose sanctions and serve to deter improper financial reporting by enhancing the care with which registrants and their accountants analyze accounting issues; and
- oversight of private sector efforts, principally by the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA), which establish accounting and auditing standards designed to improve financial accounting and reporting and the quality of audit practice.
Office of International Affairs
The Office of International Affairs (OIA) has primary responsibility for the negotiation and implementation of information sharing arrangements and the development of other initiatives to facilitate international enforcement and regulatory cooperation. These arrangements provide for cooperation in investigations of suspected unlawful conduct, market surveillance, and in the oversight of the operations of regulated entities involved in cross-border activities. OIA addresses other international issues that arise in litigated matters, such as effecting service of process abroad, gathering foreign-based evidence under various international conventions, freezing assets located abroad, and enforcing judgments obtained by the SEC against foreign parties.
OIA operates in a consultative role regarding the significant ongoing international programs and initiatives of other SEC divisions and offices. OIA coordinates the work of the SEC in multilateral organizations such as the International Organization of Securities Commissions and the Council of Securities Regulators of the Americas.
OIA is also regularly engaged in discussions with foreign regulators on ways to facilitate cross-border activities, including offerings, securities trading, and the provision of advisory services, including ways to expand access to each other’s markets. OIA also is responsible for the SEC’s technical assistance program for assisting countries with emerging securities markets in developing the regulatory infrastructure necessary to promote investor confidence.
Office of Legislative Affairs
The Office of Legislative Affairs is responsible for coordinating the legislative efforts of the Commission and communications between the Commission and Congress, including preparation of congressional testimony. The office serves as liaison with Members of congress and congressional committees and staff, responds to congressional requests, and disseminates information about Commission legislative proposals and Commission actions to Congress. The office also coordinates information about legislation in which the Commission has an interest with the Office of Management and Budget and other government departments and agencies, and responds to inquiries from the public about such legislation and Commission testimony before Congress. The office monitors Congressional activities of interest to the Commission and disseminates information about such activities to appropriate Commission officials.
Office of the Inspector General
The Office of the Inspector General is responsible for conducting internal audits and internal investigations of agency programs and operations and reviewing existing and proposed legislation and regulations related to agency programs and operations. The office also recommends policies to promote economy and efficiency and to prevent fraud and abuse in agency programs and operations.
Office of Economic Analysis
The Office of Economic Analysis deals with the economic and empirical issues which are inextricably associated with the SEC’s regulatory activities. The office analyzes impacts and benefits of proposed regulations, conducts studies on specific rules, and engages in long-term research and policy planning.
The Office of Economic Analysis also analyzes potentially significant developments in the marketplace. Its work includes gathering and analyzing data on a wide range of market activities that may require attention by the Commission. Results of this work are used internally as part of the process to determine whether Commission action is necessary and to keep abreast of trends in the marketplace. Occasionally, subject to approval of the Commission, the research of this office is published.
Office of Administrative Law Judges
Pursuant to the Administrative Procedure Act of 1946 and the federal securities laws, administrative law judges preside at evidentiary hearings where the Commission has determined that public hearings are appropriate, in the public interest, and necessary for the protection of investors.
The hearings, governed by the Commission’s Rules of Practice, are conducted in a manner similar to non-jury trials in the federal district courts. After notice is given, the parties appear at the hearing and present evidence as to the allegations in the Commission’s Order Instituting Proceedings.
Administrative law judges issue subpoenas, rule on motions and the admissibility of evidence, and take other actions relative to the hearing. At the conclusion of the hearing, the parties submit proposed findings of fact and conclusions of law. The administrative law judge prepares and files an initial decision that includes factual findings, legal conclusions, and a dispositive order.
Office of the Executive Director
The Executive Director develops and executes the overall management policies of the Commission for all its operating divisions and offices. The Executive Director administers programs to implement certain statutes, regulations, and Executive orders. Program functions include appointing program officials; reviewing and approving program policies, procedures, and regulations; authorizing and transmitting reports; and assuring appropriate resource requirements to implement the programs.
Office of Investor Education and Assistance
(Formerly Office of Consumer Affairs)
The SEC created the Office of Investor Education and Assistance specifically to serve individual investors. The office makes sure the concerns and problems encountered by individual investors are known throughout the SEC and considered when the agency takes action. Investor assistance specialists are available to answer questions and analyze complaints. They may also refer complaints to the appropriate SEC Division or Office. In certain situations, a copy of the complaint is sent to the brokerage firm or company involved, requesting a written response. This sometimes helps in the resolution process.
The office cannot act as lawyer or force a broker, brokerage firm or company to resolve complaints. Actions taken by the office or the SEC should not be seen as a substitute for private individuals acting on their own. Both federal and state securities laws provide important legal rights and remedies to victims of wrongdoing. Investors can seek to resolve complaints through the courts, arbitration or mediation.
Office of Filings and Information Services
The Office of Filings and Information Services is responsible for the receipt and initial handling of all public documents filed with the Commission. The office also is responsible for custody and control of the Commission’s official records, development and implementation of the Commission’s records management program, and authentication of all documents produced for administrative or judicial proceedings.
Through the office’s Public Reference Branch, the public may obtain a wide range of information from quarterly and annual reports, registration statements, proxy material and other reports submitted by SEC filers. All public documents are available for inspection in the Public Reference Room of the Commission’s headquarters office in Washington, D.C. and in the Northeast and Midwest regional offices in New York City and Chicago, respectively. Copies of documents may be obtained for a nominal charge. Estimates of the cost of copying specific documents can be provided. All corporate filings made after May 6, 1996 are available on the SEC internet website <www.sec.gov>.
Office of the Secretary
This office schedules Commission meetings, prepares and maintains records of Commission actions, and reviews documents submitted to the Commission for action. Specific activities include reviewing all official orders, releases, and other documents approved by the Commission or by the staff pursuant to delegated authority; publishing official documents and releases of Commission actions in the Federal Register and the SEC Docket, and on the SEC internet website <www.sec.gov>; monitoring compliance with the Regulatory Flexibility Act of 1980; tracking compliance with the Government in the Sunshine Act; and receiving documents in administrative proceedings, requests for confidential treatment, and comment letters on rule proposals.
The office also is responsible for operation of libraries in the Commission’s headquarters and field offices and maintenance of agency records concerning administrative proceedings.
Office of Public Affairs, Policy Evaluation and Research
The Office of Public Affairs, Policy Evaluation and Research administers internal and external Commission information programs, coordinates Commission press relations, manages the foreign visitors program, and monitors press coverage of issues related to the Commission and securities industry. The office is also responsible for providing research support in regulatory and enforcement policy areas, providing information for speeches for the Chairman and Commissioners, and assisting in planning and coordinating special initiatives of the Commission.
Office of Municipal Securities
The Office of Municipal Securities serves as a clearing house and point of coordination of the Commission’s municipal securities activities. The office provides expertise to the Commission and staff members, assists in municipal securities initiatives throughout the Commission and works towards assuring a full understanding of Commission policy decisions relating to municipal securities. The office’s mission is to work inside the Commission with the various divisions and offices regarding regulatory actions and the enforcement of the Commission’s rules. In addition, it provides technical assistance in legislative matters and in the development and implementation of major Commission initiatives in the municipal securities area. The office also works directly with the municipal securities industry, for example, in implementing the recent disclosure initiatives developed in partnership with the industry and with ongoing efforts to educate state and local officials about risk management issues. The office’s activities are intended to assure the full understanding and implementation of Commission policy decisions relating to municipal securities.
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