Securities and Exchange Commission

Definition

The Securities and Exchange Commission (SEC) is a U.S. government agency responsible for enforcing federal securities laws and regulating the securities industry. It plays a crucial role in protecting investors, maintaining fair markets, and facilitating capital formation. The SEC's activities directly influence the behavior of key stakeholders in corporate governance, ensure transparency in executive compensation practices, and set requirements for companies seeking to list their shares on stock exchanges.

5 Must Know Facts For Your Next Test

1. The SEC was established in 1934 as part of the New Deal response to the stock market crash of 1929 to restore investor confidence.
2. One of the SEC's primary functions is to require public companies to disclose financial and other significant information, ensuring that investors have access to essential data for making informed decisions.
3. The SEC enforces regulations that govern executive compensation disclosures, leading to increased transparency around say-on-pay votes where shareholders can voice their opinions on pay packages.
4. Companies listed on stock exchanges must meet SEC disclosure requirements, which include regular filings such as Form 10-K and Form 10-Q to report their financial performance.
5. The SEC has the authority to impose penalties for violations of securities laws, including fines and the suspension of trading for companies that do not comply with regulations.

Review Questions

• How does the SEC influence the roles of key stakeholders in corporate governance?
  • The SEC influences key stakeholders by establishing rules that promote transparency and accountability among publicly traded companies. For example, through its disclosure requirements, the SEC ensures that shareholders receive timely and accurate information about a company's financial health, which helps them make informed decisions. Additionally, the SEC’s regulations foster an environment where boards of directors must take shareholder concerns into account, reinforcing their role as advocates for investor interests in corporate governance.
• What are the implications of the SEC's say-on-pay rules for executive compensation practices within publicly traded companies?
  • The SEC's say-on-pay rules have significant implications for executive compensation practices as they require public companies to give shareholders a non-binding vote on executive pay packages. This provision promotes greater accountability by allowing shareholders to express their opinions on compensation decisions. The feedback from these votes can lead companies to reassess their pay structures and align them more closely with company performance and shareholder interests, creating a stronger link between compensation and overall corporate governance.
• Evaluate how the SEC's listing requirements affect a company's ability to raise capital and its corporate governance practices.
  • The SEC's listing requirements play a critical role in a company's ability to raise capital by ensuring that only companies meeting specific standards can sell their shares on public exchanges. These standards include stringent disclosure obligations and financial reporting practices that promote transparency. As a result, companies seeking to go public must enhance their corporate governance frameworks to comply with these regulations, fostering better practices such as independent board oversight and robust internal controls. Ultimately, this increases investor confidence and facilitates access to capital markets.

Related terms

Insider Trading: The illegal practice of trading stocks or other securities based on non-public, material information about a company.

Initial Public Offering (IPO): The process through which a private company offers its shares to the public for the first time, often requiring SEC approval.

Regulation S-K: A regulation that sets forth reporting requirements for various SEC filings, including information about a company's business, financial condition, and management.