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C H A P T E R

C H A P T E R. 12. Financial Reporting and the Securities & Exchange Commission. SEC. Securities and Exchange Commission (SEC). Established by the Securities Exchange Act of 1934. Commissioners serve 5-year, staggered terms. The chairperson is from the same political party as the President.

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C H A P T E R

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  1. C H A P T E R 12 Financial Reporting and the Securities & Exchange Commission

  2. SEC Securities and Exchange Commission (SEC) Established by the Securities Exchange Act of 1934. Commissioners serve 5-year, staggered terms. The chairperson is from the same political party as the President. Only 3 of 5 can come from the same political party. 5 commissioners appointed by the President.

  3. Division of Investment Management Division of Enforcement SEC Office of Compliance Inspections and Examinations Office of Information Technology Office of the Chief Accountant Division of Market Regulation Division of Corporate Finance

  4. Securities Act of 1933 Securities Exchange Act of 1934 Regulates the initial offering of securities by a company or underwriter. Regulates the subsequent trading of securities through brokers and exchanges. Federal Securities Laws The 1934 Act Established the SEC

  5. Goals of the SEC • To prohibit dissemination of materially misstated information. • To ensure full & fair disclosure to all investors. • To prevent misuse of information by inside parties. • To regulate the operation of securities markets.

  6. Securities Act of 1933 Securities Exchange Act of 1934 Public Utility Holding Company Act of 1935 Full and Fair Disclosure New securities must be registered prior to public sale. Requires continuous reporting by publicly traded companies. Prohibits fraudulent and unfair behavior. Requires registration of interstate holding companies of public utilities.

  7. Full and Fair Disclosure Trust Indenture Act of 1939 Investment Advisers Act of 1940 and Securities Investor Protection Act of 1970 Requires registration of indentures related to public issue of bonds, notes, etc. Requires registration of investment advisors and requires them to follow certain standards. Investment Company Act of 1940 Requires registration of investment companies.

  8. Full and Fair Disclosure Foreign Corrupt Practices Act of 1977 Insider Trader Sanctions Act of 1984 & Insider Trader and Securities Fraud Enforcement Act of 1988 Amends Securities Exchange Act of 1934. Requires maintenance of accounting records and adequate internal accounting controls. Increase penalties against persons who profit from illegal use of inside information.

  9. SEC Requirements

  10. The SEC’s Impact on Financial Reporting • 5-year summary of operations. • Description of the business activities. • 3-year summary of industry segments. • Listing of company directors and executive officers. • Market price of the common stock for each quarter on the last 2 years. • Restrictions on the company’s ability to pay dividends. • MD&A In addition to audited financial statements, Rule 14c-3 of the 1934 Act requires the following:

  11. The SEC’s Impact on Financial Reporting Certain information about the auditor must also be disclosed. • All nonaudit services provided by the independent auditing firm. • Whether the Board of Directors approved all nonaudit services and considered whether they would impair the auditor’s independence. • The % of nonaudit fees to the total annual audit fee. • Individual nonaudit fees > 3% of the annual audit fee.

  12. Congress has assigned GAAP-setting authority to the SEC. The FASB’s standards can always be overridden by the SEC. The SEC allows the FASB to set GAAP. The SEC’s Authority Over GAAP Authority only extends to publicly traded companies.

  13. The SEC’s Authority Over GAAP The SEC does issue authoritative documents. Financial Reporting Releases (FRR’s) Staff Accounting Bulletins (SAB’s) Supplements to Regulations S-K and S-X Views on current accounting and disclosure matters.

  14. Common SEC Registration Forms

  15. PART I Audited financial Statements. An explanation of the use of the proceeds. A description of the security risks. A description of the business. PART II Used by the SEC staff. Includes additional information about the company. Filings with the SEC General contents of SEC registration reports.

  16. Securities issued by governments, banks, and S&L’s Securities issued that are restricted to a company’s own existing shareholders. Offerings < $5 million Offerings < $1 million made to made within a 12-month period. Offerings < $5 million made to 35 or fewer investors within a 12-month period. Private placement of securities to < 36 investors who already have knowledge of the company. Offerings Exempt from SEC Filing

  17. Periodic Filings with the SEC Form 10-K Form 10-Q Annual report filed within 90 days of fiscal year-end. Includes audited financial statements. Quarterly report filed within 45 days of end of quarter. Financial statement are unaudited. Form 8-K Used to disclose a unique or significan happening.

  18. A document that allows the board of directors to vote on behalf of a stockholder. Must be filed with SEC 10 days prior to distribution. Needs to indicate on whose behalf the solicitation is made. Must disclose fully all matters that are to be voted on at the meeting Has to be accompanied by an annual report (usually) Proxy Statements

  19. End of Chapter 12 That was fun! Can we do it again?

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