Securities and Exchange Securities and Exchange Acts of 1933 and 1934 Acts of 1933 and 1934

Georgia CTAE Resource Network Georgia CTAE Resource Network Curriculum Office, February 2009 Curriculum Office, February 2009

To accompany curriculum for the Georgia To accompany curriculum for the Georgia Peach State Career Pathways Peach State Career Pathways

February 2009, Philip Ledford & Dr. Frank February 2009, Philip Ledford & Dr. Frank FlandersFlanders

Understanding and Essential Understanding and Essential QuestionsQuestions

• • Enduring UnderstandingEnduring UnderstandingThe Securities and Exchange Acts of 1933 and 1934 The Securities and Exchange Acts of 1933 and 1934

established the Securities and Exchange Commission. It established the Securities and Exchange Commission. It also required accountants to follow strict procedures called also required accountants to follow strict procedures called standard accounting practices. Overall accounting is now standard accounting practices. Overall accounting is now conducted more honestly since the acts were passed.conducted more honestly since the acts were passed.

• • Essential QuestionsEssential Questions••How did the acts shape the future of accounting.How did the acts shape the future of accounting.••Why is it important to accountants as professionals to Why is it important to accountants as professionals to have these rules set in place.have these rules set in place.

ObjectivesObjectives• • Explain what securities are.Explain what securities are.

• • Discuss why the Securities Acts were passed.Discuss why the Securities Acts were passed.

• • Explain what the Securities Acts did.Explain what the Securities Acts did.

• • Discuss what the Securities Acts did for the future of Discuss what the Securities Acts did for the future of accounting.accounting.

• • Identify and Explain the different types of fraudulent Identify and Explain the different types of fraudulent activities.activities.

A Quick Overview of AccountingA Quick Overview of Accounting • • Accounting is the system of records, reporting, Accounting is the system of records, reporting,

and verifying financial assets, income, and and verifying financial assets, income, and expenses into ledgers.expenses into ledgers.

• • This financial information is used by lenders, This financial information is used by lenders,

banks, investors, and many other financial and banks, investors, and many other financial and business authorities to allocate finances, business authorities to allocate finances, expenses and to make informed financial expenses and to make informed financial decisions for their companies and businesses.decisions for their companies and businesses.

The Future of AccountingThe Future of Accounting

• • The two acts shifted accountancy in a new direction by The two acts shifted accountancy in a new direction by passing laws that required accountants to record multiple passing laws that required accountants to record multiple accounts and more detailed accounts for businesses and accounts and more detailed accounts for businesses and investors. investors.

• • The Securities Act of 1933 and 1934 not only shifted the way The Securities Act of 1933 and 1934 not only shifted the way accountancy was done, but it also paved the way for a accountancy was done, but it also paved the way for a better future for accountants as professionals. better future for accountants as professionals.

The Future of Accounting (con’t)The Future of Accounting (con’t)

• • The two acts caused significant increase in the necessity of The two acts caused significant increase in the necessity of accountants, and a variety of different types of accounting accountants, and a variety of different types of accounting including tax accounting, management accounting, including tax accounting, management accounting, financial accounting and open-book accounting.financial accounting and open-book accounting.

• • After the passing of the two laws accounting as a After the passing of the two laws accounting as a professional career has only since expanded and improved. professional career has only since expanded and improved. There are colleges all over the world that specialize in There are colleges all over the world that specialize in accounting, and prepare students to take accounting skills accounting, and prepare students to take accounting skills and make them highly profitable.and make them highly profitable.

The Future of Accounting (con’t)The Future of Accounting (con’t)

• • Accountants are used by many different types of businesses Accountants are used by many different types of businesses like law firms, hospitals, public services, small and large like law firms, hospitals, public services, small and large businesses, and corporations.businesses, and corporations.

• • Accountants are even hired by high grossing individuals like Accountants are even hired by high grossing individuals like movie actors and athletes.movie actors and athletes.

Securities and the Stock MarketSecurities and the Stock Market

••What are “securities”?What are “securities”? • • Securities are negotiable investment having financial value. Any Securities are negotiable investment having financial value. Any

note, stock, treasury stock, bond, debenture, certificate of note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement, are interest or participation in any profit-sharing agreement, are all considered securities.all considered securities.

• • The most common example of a security would be if an individual The most common example of a security would be if an individual bought a part of ownership (stock) in a company. Literally, bought a part of ownership (stock) in a company. Literally, that part of ownership in the company that the individual that part of ownership in the company that the individual bought is a security. This ownership in a company or security bought is a security. This ownership in a company or security can then be sold willingly by the investor.can then be sold willingly by the investor.

Securities and the Stock Market Securities and the Stock Market (con’t)(con’t)

• • Where are securities boughtWhere are securities boughtand sold?and sold?

••Securities are bought and sold in stock markets. Some of the Securities are bought and sold in stock markets. Some of the more popular markets are the New York Stock Exchange more popular markets are the New York Stock Exchange and the American Stock Exchange.and the American Stock Exchange.

Securities and the Stock Market Securities and the Stock Market (con’t)(con’t)

• • Types of Stock MarketTypes of Stock Market

• • The overall market is called the Capital Market. The Capital The overall market is called the Capital Market. The Capital Market includes the bond markets and the stock markets, Market includes the bond markets and the stock markets, but consists of the Primary market and the Secondary but consists of the Primary market and the Secondary market.market.

Securities and the Stock Market Securities and the Stock Market (con’t)(con’t)

• • The Primary market is where new securities such The Primary market is where new securities such as brand new stocks and bonds are bought and as brand new stocks and bonds are bought and sold to investors.sold to investors.

• • The Secondary market is where already issued The Secondary market is where already issued securities are bought and sold between investors. securities are bought and sold between investors. This market is usually done on an exchange such This market is usually done on an exchange such as the New York Stock Exchange.as the New York Stock Exchange.

The Stock Market Crash.The Stock Market Crash. • • Shortly after the 1929 stock market crash and Shortly after the 1929 stock market crash and

during the upcoming Great Depression the during the upcoming Great Depression the Securities Act of 1933 was signed into law by Securities Act of 1933 was signed into law by President Franklin D. Roosevelt.President Franklin D. Roosevelt.

• • The Securities Act of 1933 as a part of the New The Securities Act of 1933 as a part of the New

Deal, was the first major federal legislation to Deal, was the first major federal legislation to regulate the offer and sale of securities.regulate the offer and sale of securities.

Securities Act of 1933 (con’t)Securities Act of 1933 (con’t)

• • Two major objectives of the Two major objectives of the 1933 Securities Act.1933 Securities Act.

• • To require that investors receive significant information To require that investors receive significant information handling securities being offered for public sale.handling securities being offered for public sale.

• • To prohibit dishonest, misrepresentations, and other fraud To prohibit dishonest, misrepresentations, and other fraud in the sale of securities to the public.in the sale of securities to the public.

Securities Act of 1933 (con’t)Securities Act of 1933 (con’t)

• • The Ideas of the 1933 The Ideas of the 1933 Securities Act.Securities Act.

• • The underlying idea of the 1933 Act was that issuers (i.e., a The underlying idea of the 1933 Act was that issuers (i.e., a company) should provide investors with adequate company) should provide investors with adequate information about the issuer of the securities and the information about the issuer of the securities and the securities itself. This allows the potential investor to make securities itself. This allows the potential investor to make an informed decision to invest in a companies securities.an informed decision to invest in a companies securities.

Securities Act of 1933 (con’t)Securities Act of 1933 (con’t)

• • The Ideas of the 1933 The Ideas of the 1933 Securities Act.Securities Act.

• • Issuers must register securities with the Securities and Issuers must register securities with the Securities and Exchange Commission. The SEC is a federal agency Exchange Commission. The SEC is a federal agency overseeing the securities market and enforcing federal overseeing the securities market and enforcing federal securities laws.securities laws.

• • Having issuers register information about themselves and Having issuers register information about themselves and the securities discouraged bad behavior and regulated the securities discouraged bad behavior and regulated deals fairly.deals fairly.

Securities Exchange Act of 1934Securities Exchange Act of 1934

• • Why another securities act?Why another securities act?

• • Following the 1933 act, the 1934 act required issuers to Following the 1933 act, the 1934 act required issuers to follow similar procedures as the 1933 act but for the follow similar procedures as the 1933 act but for the secondary market instead of the primary market. The 1934 secondary market instead of the primary market. The 1934 act gave a large amount of power to the Securities and act gave a large amount of power to the Securities and Exchange Commission to over see a all aspects of security Exchange Commission to over see a all aspects of security industry, which included the secondary market.industry, which included the secondary market.

Securities Exchange Act of 1934 Securities Exchange Act of 1934 (con’t)(con’t)

• • Two major objectives of Two major objectives of the 1934 Securities Act.the 1934 Securities Act.

• • The Securities Exchange Act of 1934 was passed regulating The Securities Exchange Act of 1934 was passed regulating

and overseeing the secondary market where already issued and overseeing the secondary market where already issued securities are bought and sold.securities are bought and sold.

• • The 1934 act also gives power the SEC to require periodic The 1934 act also gives power the SEC to require periodic reporting of information by companies with publicly traded reporting of information by companies with publicly traded securities.securities.

Securities Exchange Act of 1934 Securities Exchange Act of 1934 (con’t)(con’t)

• • The Ideas of the 1934 The Ideas of the 1934 Securities Act.Securities Act.

• • The underlying idea of the 1934 act is closely similar to that The underlying idea of the 1934 act is closely similar to that of the 1933 act. The difference is that the ’34 act regulates of the 1933 act. The difference is that the ’34 act regulates the secondary market instead of the primary. the secondary market instead of the primary.

• • The secondary market consists of already issued securities. The secondary market consists of already issued securities. The secondary market refers to assets that have been The secondary market refers to assets that have been recently used. Alternative uses for existing products are recently used. Alternative uses for existing products are also included in the secondary market.also included in the secondary market.

Securities Exchange Act of 1934 Securities Exchange Act of 1934 (con’t)(con’t)

••The Ideas of the 1934 The Ideas of the 1934 Securities Act.Securities Act.

• • A main area in the 1934 act was the regulation of the actual A main area in the 1934 act was the regulation of the actual places where securities are bought and sold (e.g., New York places where securities are bought and sold (e.g., New York Stock Exchange). At these places agents of exchange work Stock Exchange). At these places agents of exchange work as “middlemen” for competing interests. The job of the as “middlemen” for competing interests. The job of the agent is to keep price continuity and liquidity (how quickly agent is to keep price continuity and liquidity (how quickly and cheaply an asset can be converted into cash) in the and cheaply an asset can be converted into cash) in the market. market.

Securities Exchange Act of 1934 Securities Exchange Act of 1934 (con’t)(con’t)

• • Fraud Protection and Sarbanes-OxleyFraud Protection and Sarbanes-Oxley

• •Another important section of the Securities and Exchange Acts was Another important section of the Securities and Exchange Acts was to make the conduct of the securities industry as transparent to make the conduct of the securities industry as transparent (truthful) as possible. The fact that public entities could archive (truthful) as possible. The fact that public entities could archive and review almost all actions taken place in the market lowered and review almost all actions taken place in the market lowered criminal and fraudulent activities.criminal and fraudulent activities.

• •In 2002 after the In 2002 after the Arthur Anderson, Enron and WorldCom scandal, Arthur Anderson, Enron and WorldCom scandal, another securities act was put into place called Sarbanes-Oxley. another securities act was put into place called Sarbanes-Oxley. This act would restore confidence in public accounting and This act would restore confidence in public accounting and securities management and increase executive awareness and securities management and increase executive awareness and accountability. More details on this act is explained in a different accountability. More details on this act is explained in a different lesson.lesson.

Types of Fraud Types of Fraud

• • Security Fraud – Security fraud is when investors are deceived by Security Fraud – Security fraud is when investors are deceived by untrue statements on any form of securities. Usually resulting in a untrue statements on any form of securities. Usually resulting in a loss of money on the investors half. Basically, investors that have loss of money on the investors half. Basically, investors that have lost investments due to false statements regarding their securities lost investments due to false statements regarding their securities have been victims of security fraud. Among other fraudulent have been victims of security fraud. Among other fraudulent security activities are corporate fraud, accountant fraud, and security activities are corporate fraud, accountant fraud, and mutual fund fraud.mutual fund fraud.

- Insider Trading – The trading of a corporations securities by - Insider Trading – The trading of a corporations securities by individuals with access to non-public information pertaining the individuals with access to non-public information pertaining the securities or the company.securities or the company.

Types of Fraud (con’t)Types of Fraud (con’t)• • Bank Fraud – Bank fraud is when money is fraudulently received from a Bank Fraud – Bank fraud is when money is fraudulently received from a

financial institute (bank). Credit card fraud, check-kiting, check forging, financial institute (bank). Credit card fraud, check-kiting, check forging, non-disclosure on loan applications, and unauthorized use of automatic non-disclosure on loan applications, and unauthorized use of automatic teller machines (ATMs) among other frauds are all considered bank frauds.teller machines (ATMs) among other frauds are all considered bank frauds.

• • Money Laundering – Engaging in financial transactions to hide the identity, Money Laundering – Engaging in financial transactions to hide the identity, or source of illegally obtained money. In earlier years this method was or source of illegally obtained money. In earlier years this method was used mostly by organized crime groups.used mostly by organized crime groups.

• • Embezzlement – The act of untruthfully, and secretly taking assets (usually Embezzlement – The act of untruthfully, and secretly taking assets (usually financial) from whom ever said assets are entitled to.financial) from whom ever said assets are entitled to.

Types of Fraud (con’t)Types of Fraud (con’t)• • Ponzi Scheme – A scheme named after Charles Ponzi who used a Ponzi Scheme – A scheme named after Charles Ponzi who used a

scheme that made him millions in 1920. A Ponzi scheme is when scheme that made him millions in 1920. A Ponzi scheme is when an individual entices an investor with an extraordinary return rate an individual entices an investor with an extraordinary return rate on some sort of investment they make. The trick is to get the on some sort of investment they make. The trick is to get the investor to keep investing his profit further into the investment. investor to keep investing his profit further into the investment. Over time more investors come, and only a fraction of the profit is Over time more investors come, and only a fraction of the profit is given back, the rest is kept given back, the rest is kept

Types of Fraud (con’t)Types of Fraud (con’t)• • Making False Statements – Making untrue statements to or Making False Statements – Making untrue statements to or

concealing information from the federal government is legally concealing information from the federal government is legally considered “making false statements”. Companies that hide considered “making false statements”. Companies that hide records of losses in money or other financial assets would be tried records of losses in money or other financial assets would be tried for making false statements. Companies that record a gain of for making false statements. Companies that record a gain of more money than what was actually gained would be considered more money than what was actually gained would be considered making false statements.making false statements.

Securities Acts SummarySecurities Acts Summary

• • What did the Two Securities Acts basically What did the Two Securities Acts basically do?do?

• • Set up a required registration of securities of all kinds.Set up a required registration of securities of all kinds.

• • Required all information on securities to be transparent (honest and publicly Required all information on securities to be transparent (honest and publicly available).available).

• • Required mandatory periodical reporting of information by companies with Required mandatory periodical reporting of information by companies with publicly traded securities. publicly traded securities.

• • Identified and prohibited certain types of conduct within the markets. Identified and prohibited certain types of conduct within the markets.

• • Granted the SEC with the power to discipline any company or person Granted the SEC with the power to discipline any company or person associated with prohibited conduct. associated with prohibited conduct.