Organizational Structure of the SEC

1. Organizational Structure of the SEC • The Commission consists of five members appointed by the President of the United States, with the advice and consent of the Senate. • The four divisions of the SEC are as follows: • Division of Corporation Finance • Division of Enforcement • Division of Investment Management • Division of Market Regulation

2. Laws Administered by the SEC • Public Utility Holding Company Act of 1935 • Trust Indenture Act of 1939 • Investment Company Act of 1940 • Investment Advisors Act of 1940 • Securities Investor Protection Act of 1970 • Foreign Corrupt Practices Act of 1977 • Federal Bankruptcy Acts • Sarbanes-Oxley Act of 2002

3. The Regulatory Structure • Regulation S-X and Regulation S-K, govern the preparation of financial statements and associated disclosures made in reports to the SEC. • Regulation S-X presents the rules for preparing financial statements, footnotes, and auditor’s report. • Regulation S-K covers all the non-financial items, such as management’s discussion and analysis of the company’s operations and present financial position.

4. The Regulatory Structure • Financial Reporting Releases (FRRs) disclose amendments or adoption of new rules that affect prepares of financial statements and other disclosures. • Accounting and Auditing Enforcement Releases (AAERs) present the results of enforcement actions taken against accountants or other participants in the filing process. • The use of FRRs and AAERs was initiated in 1982. Prior to that time, Accounting Series Releases (ASRs) were used.

5. The Regulatory Structure • Staff Accounting Bulletins (SABs) allow the Commission’s staff to make announcements on technical issues with which it is concerned as a result of reviews of SEC filings. • SABs are not formal actions of the Commission; nevertheless, most preparers do follow these bulletins because they represent the views of the staff that will be reviewing their companies’ filings.

6. Basic Information Package (BIP) • In the 1980, the SEC undertook a project to reduce the duplicative disclosures companies were required to make for the annual report and in each additional filing with the SEC; that is, the Commission sought to integrate all the disclosures (a.k.a., “incorporation by reference”). • The five classes of information constituting the BIP are provided on the next slide.

7. Basic Information Package (BIP) • Market price and dividends • Selected financial data • Management discussion and analysis (MD&A) • Audited financial statements and supplementary data • Other information

8. The Registration Process • Companies wishing to sell debt (or stock) securities in interstate offerings to the general public are generally required by the Securities Act of 1933 to register those securities with the SEC. • The process of public offerings of securities begins with the preparation of the registration statement. The most common are Form S-1, Form S-2, and Form S-3.

9. SEC Review and Public Offering • Most first-time registrants receive a “customary review,” which is a thorough examination by the SEC and may result in acceptance or, alternatively, a comment letter specifying the deficiencies that must be corrected before that securities may be offered for sale. • Established companies that already have stock widely traded generally are subject to a summary review or a cursory review.

10. SEC Review and Public Offering • Once the registration statement becomes effective, the company may begin selling securities to the public. • This review period is 20 days unless the company receives a comment letter from the SEC.

11. SEC Review and Public Offering • Between the time the registration statement is presented to the SEC and it’s effective date, the company may issue a preliminary prospectus, referred to as a red herring prospectus, which provides tentative information to investors about an upcoming issue.

12. SEC Review and Public Offering • The name “red herring” comes from the red ink used on the cover for this preliminary prospectus, indicating that it is not a offering statement and that the securities being discussed are not yet available for sale. • In addition, the company generally prepares a “tombstone ad” in the business press to inform investors of the upcoming offering. These ads are bordered in black ink, hence the title.

13. SEC Review and Public Offering • The time period between the initial decision to offer securities and the actual sale may not exceed 120 days. In the interim, many factors may effect the stock market and may decrease the company’s ability to obtain capital. • In 1982, the SEC devised the shelf registration rule for large, established companies with other issues of stock already actively traded.

14. Periodic Reporting Requirements • Form 10-K is the annual report of the SEC and must be filed within 90 days after the end of the company’s fiscal year. • Form 10-Q is the interim report of the SEC; it is due within 45 days after the end of each quarter except the fourth quarter, when the 10-K is issued.

15. Periodic Reporting Requirements • Form 8-K is used to disclose unscheduled material events. This form is due within 15 days after the occurrence of the “current event,” defined as follows (see next slide):

16. Periodic Reporting Requirements • A change in the control of the registrant. • Acquisition or disposal of major assets. • Bankruptcy or receivership of the registrant. • Changes in the registrant’s certifying accountants. • Resignations of one or more of the registrant’s directors. • A change in the company’s fiscal year. • Any other events deemed to be of material importance to security holders.

17. Foreign Corrupt Practices Act of 1977 • In the mid-1970s, Congress held a number of public hearings which brought to light that millions of dollars in bribes had been paid to high government officials of other countries by United States-based companies seeking to win defense or consumer product contracts. • Alarmed by the size and scope of these activities, Congress passed the Foreign Corrupt Practices Act of 1977 (FCPA) as a major amendment to the Securities Exchange Act of 1934.

18. Foreign Corrupt Practices Act of 1977 • The FCPA has two major sections: • Part I prohibits foreign bribes. • Part II requires publicly held companies to maintain an adequate system of internal controls and accurate records.

19. Foreign Corrupt Practices Act of 1977 • The FCPA also had significant effect on independent auditors by requiring them to evaluate a company’s internal controls and to communicate any material weaknesses in those controls to the company’s top management and board of directors.

20. Sarbanes-Oxley • The Sarbanes-Oxley Act of 2002 significantly affects auditors and publicly traded companies. • The proposed law gained impetus after the revelations about accounting and financial mismanagement at Enron, WorldCom, and others. • Section 101 of the Act established a new accounting oversight committee to regulate accounting firms, that is, Public Company Accounting Oversight Board (PCAOB).

21. MDA-Required Items • Specific information about the company’s liquidity, capital resources, and results of operations. • The impact of inflation and changing prices on net sales and revenues and on income from continuing operations. • Material changes in line items of the consolidated financial statements from prior-period amount.

22. MDA-Required Items (Continued) • Known material events and uncertainties that may make historical financial information not indicative of future operations or future conditions. • Any other information the company believes necessary for an understanding of its financial condition, changes in financial condition, and results of operations.

23. Pro Forma Disclosures • Pro forma disclosures are essentially “what-if” financial presentations often taking the form of summarized financial statements. • Pro forma statements are used to show the effects of major transactions that occur after the end of the fiscal period, or that have occurred during the year and are not fully reflected in the company’s historical cost financial statements.

24. Pro Forma Disclosures • The SEC requires pro forma statements to be presented whenever the company has made a significant business combination or disposition, a corporate reorganization, an unusual asset exchange, or a restructuring of existing indebtedness.