Transcript Slide 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
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Laws Administered by the SEC
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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
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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.
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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.
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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.
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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.
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Basic Information Package (BIP)
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Market price and dividends
Selected financial data
Management discussion and analysis (MD&A)
Audited financial statements and
supplementary data
• Other information
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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):
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Periodic Reporting Requirements
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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.
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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.
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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.
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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.
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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).
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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.
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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.
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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.
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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.
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