ital market. Moreover, it oversees standards that have traditionally been considered
the most thorough, and arguably the most burdensome. This is not the only reason,
however. Because of the rigor of its standards and the importance of the markets it
oversees, the SEC has been intrinsically involved in every attempt to promote global
standards, every effort to make the international capital markets more accessible to
all issuers, and every discussion of what investors who depend on financial state-
ments really need.
14.2 FUNCTION AND ORGANIZATION. The SEC was founded in 1934 to admin-
ister the federal securities legislation introduced in 1933 and 1934 after the Wall
Street crash of 1929. It is an independent agency rather than a department of the U.S.
government, which means that the White House does not have the same influence
over the Commission’s policies as it does over, for example, the Commerce Depart-
ment. The Administration does, however, appoint the five commissioners of the SEC
to five-year terms of office. All commissioners are subject to Senate confirmation,
and Congress additionally exercises supervision of the Commission, among other
things, by having control of its budget.
The SEC has four principal operating divisions, with numerous support and spe-
cialist offices. The largest division is the Division of Corporation Finance, which re-
views disclosure documents filed by domestic and foreign issuers. The Division of
Market Regulation deals with the conduct of trading on the secondary securities mar-
kets and the regulation of broker dealers. The Division of Investment Management
regulates the management of investment companies or mutual funds and the offering
of securities by such institutions. The Division of Enforcement investigates viola-
tions of securities laws and regulations. The Office of the Chief Accountant develops
policies on accounting issues. The Office of the General Counsel is the Commission’s
chief legal office and represents the Commission in judicial and legislative matters.
Through these divisions and offices, the SEC regulates all aspects of capital raising
through the sale of securities in the United States and the conduct of intermediaries
in the U.S. securities markets.
The capital raising process in the United States, which is the primary focus of this
chapter, is regulated by the SEC on the basis of “full disclosure,” rather than by ap-
plying “merit regulation,” which is the case in many U.S. states (which also regulate
securities offerings) and foreign countries; that is, rather than reviewing disclosure
documents in order to ascertain whether a particular offering is a good investment or
not, the SEC permits investors to make up their own minds as to the merits of an of-
fering and concentrates on whether all information material to such investors is set
forth in the disclosure document. Provided that all information that an investor needs
in order to make an informed investment decision is made public (through the SEC’s
registration and prospectus delivery requirements), the SEC permits even securities
representing dubious investments to be offered to the public. This in part accounts for
the emphasis that the Commission places on the provision of financial information
and compliance with auditing standards. In fact, SEC staff often refer to financial dis-
closure requirements and accounting standards as being “at the heart” of the full dis-
closure program. If an investor is to be able to make an informed investment deci-
sion, it is essential that he or she be able to compare alternative investment
opportunities. Thus, meaningful comparison depends on accounting standards being
as complete as possible.
14 • 2 GLOBALIZATION OF WORLD FINANCIAL MARKETS