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Commission Oversees U.S. Securities Markets with Tough Love
Commission Oversees U.S. Securities Markets with Tough Love
By Howard Cincotta
This is the fifth article in a series on the U.S. financial system and market regulation.
Washington - In 1792, a group of 24 New York brokers met under a buttonwood tree to sign an agreement forming the country's first stock market. The tree is long gone, replaced by Wall Street - both a location in lower Manhattan and a name synonymous with the finance and investment industry.
In 2006, Wall Street conducted activities valued at $43.9 trillion, according to the U.S. Securities and Exchange Commission (SEC), the chief regulatory body for the vast and varied U.S. securities markets.
By another measure, the securities industry raised $3.9 trillion for businesses in 2006, says an industry association.
STOCK MARKET REVOLUTION
Once perceived as a citadel for elite financiers, Wall Street today represents a nation of shareholders. As recently as 1952, only 4 percent of Americans invested in the stock market. By 2005, that share had grown to half of all American households - including those who own bonds or stocks directly, or indirectly through mutual funds.
In the case of the U.S. oil and gas industry, for example, individuals directly own 23 percent of the stock; mutual funds, almost 30 percent; pension funds, 27 percent; and individual retirement accounts (IRAs), 14 percent - with the balance held by corporations or other institutions.
The "American" securities market no longer is an exclusively American enterprise. More than 1,230 non-U.S. companies are registered with the Securities and Exchange Commission.
"Foreign trading activity in U.S. securities has exploded," said SEC Chairman Christopher Cox. Today, foreign investment in U.S. stocks is more than $33 trillion, according to the chairman. "That's more than twice the GDP [gross domestic product] of the European Union."
Wall Street has become a social phenomenon as well. "With each passing year, the noise level in the stock market rises," said financier Warren Buffett in his book Timeless Principles for the New Economy. "Television commentators, financial writers, analysts, and market strategists are all over-talking each other to get investors' attention."
EQUITY AND DEBT
The SEC oversees the vast U.S. securities market with both encouragement and realism - a kind of tough love.
On one hand, the SEC recognizes that efficient, accessible and fair financial markets are vital "toward promoting the capital formation that is necessary to sustain economic growth."
The SEC, headed by five commissioners appointed by the president, works to ensure that market rules and risks are clear and accessible to companies and investors alike - especially when so many people rely on their investments to secure their futures, whether they plan to buy a house, educate children or fund retirement.
On the other hand, the SEC does not protect against the risk of loss in the pursuit of profit. U.S. individual bank deposits are guaranteed up to $100,000; stock market investments are not.
The SEC, in other words, does not shield investors from price fluctuations, but it does work to ensure fairness.
When Fred Alger & Company was found to have allowed late trading outside of normal business hours, as cited in its 2007 annual report, the SEC ordered the company to relinquish $30 million in illicit profits and pay $10 million in civil penalties.
Stocks are shares of corporations sold to raise capital, meaning that the investors collectively own the company. The other means of raising money is by selling bonds, which are, in effect, loans to business or government. If someone invests in bonds, he or she becomes a creditor. Bonds generally pay interest and carry a fixed value.
Generally, stocks are higher-risk, higher-profit equity securities; bonds are more stable debt securities with predictable but lower rates of return.
One of the most popular investment tools is mutual funds, which pool money from many sources and invest in stocks, bonds or other securities. Another variant is an index fund, whose objective is to track the same rate of return as one of any number of major market indexes - such as the Standard and Poor's 500 Composite Index - by investing in a mix of stocks and bonds that mirror that particular index.
OVERSIGHT AND ENFORCEMENT
Wall Street resisted federal regulation until the stock market crash of October 1929, which signaled the beginning of the Great Depression. Investor losses were huge, and it was apparent to all that recovery needed the restoration of the public's faith in the fairness and accessibility of the stock market.
The SEC, established in 1934, pays special attention to requirements for timely and accurate disclosure of information, fair dealing and protection against fraud.
"The SEC oversees the nearly $44 trillion in securities trading annually on U.S. equity markets," Cox said in recent congressional testimony, including "the disclosures of almost 13,000 public companies, the activities of about 11,000 investment advisers, nearly 1,000 fund complexes, and 5,700 broker-dealers."
The SEC is also a law enforcement agency. Every year it conducts hundreds of investigations and, when necessary, brings civil suits against violators of securities laws.
Among the most common violations that trigger SEC action are misrepresentation or omission of information, price manipulation and insider trading. As in the Fred Alger case, companies typically must "disgorge" any financial gains from their illegal activity and pay civil penalties.
Since 2002, Cox said, "We have returned a total of more than $3.7 billion to wronged investors."
A comprehensive overview of SEC regulation in Cox's recent congressional testimony ( http://www.sec.gov/news/testimony/2008/ts050708cc.htm ) and more information on the Securities and Exchange Commission ( http://www.sec.gov/about/whatwedo.shtml ) are available on the SEC Web site.
Source: U.S. Department of State
judythpiazza@newsblaze.com
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