2: Regulatory Environment
Sustain an Effective and Flexible Regulatory Environment Other Information:
Federal securities laws seek to promote fair, orderly, and competitive markets that protect investors from undisclosed risk
while fostering innovation and market access. The Commission’s role is to put those laws into action— by establishing a regulatory
environment that permits competition to flourish, while at the same time protecting investors. Most securities regulation
flows from two central principles. First, all investors should have equal access to accurate,complete, and timely information
about the securities they buy, sell, and hold. Securities regulations require that issuers and other regulated entities disclose
information about their current and expected future financial performance, to provide investors with an accurate idea of what
a security represents. Second, investors should be able to rely upon self-regulatory organizations (SROs), broker-dealers,
investment advisers and investment companies, and other market participants to conduct their securities transactions efficiently
and in the investor’sbest interests. For example, the regulations often require that these entities register with the Commission,
disclose potential conflicts of interest, and maintain effective internal controls. Federal law gives the Commission broad
authority to shape the regulatory framework for the securities industry. Rulemaking may be required because of Congressional
mandates, changing economic conditions, advances in technology, the advent of novel products or services, or new types of
abuses. When properly crafted, these rules serve to protect investors and promote competition, market efficiency, and capital
formation. Therefore, rulemaking is designed to strengthen the structure of the trading markets, improve corporate governance,
enhance disclosure, promote reliable accounting standards, ensure the accountability of market professionals, and facilitate
the flow of important information to the public, among other goals. The Commission’s rulemaking activities are supported by
a wide range of analyses, with the goal of promoting the mission of the SEC while minimizing undue burdens on market participants.
The division or office proposing the rule, along with the Office of the General Counsel, examines the legal basis for the
rule and its interactions with other laws and regulations. An important component of the rulemaking process is economic and
quantitative analysis performed by the proposing division or office and the Office of Economic Analysis (OEA), in an effort
to make sure that a rule is narrowly tailored to achieve its intended objective, avoids unintended consequences, and is economically
and financially sound. The various statements and reports that issuers, broker dealers,and others are required to file with
the Commission are submitted in a format or form proscribed by the SEC’s rules. The forms specify which rules are applicable
and explain who must file, the amount of the information required, and when the information must be provided. Since disclosure
is such an important part of the regulatory landscape, these forms play an important part in defining the extent of the disclosure
obligation and carry the legal force of the rules they implement. Beyond its rules and forms, the agency provides guidance
when it sets forth the views of the Commission or its staff on questions of current concern, without stating them in the form
of legal requirements. The principal form of these statements is through a publicly distributed SEC bulletin containing thestaff’s
position on a particular legal or accounting issue or its interpretation of a rule or regulation. The Commission also issues
concept and other releases that solicit the views of the public on securities issues, so that it can better evaluate the need
for future rulemaking. This collaborative process ensures a broad and accessible forum in which interested parties can offer
input on regulations—input which sometimes can have a significant impact on the shape of the final rule proposal. This collaboration
serves to make the final rules that are adopted by the Commission better structured and more effective. The staff also responds
to inquiries from individuals or companies about whether an activity undertaken in a specified manner would violate the securities
laws. The inquiries take the form of written requests that the staff not recommend enforcement or other action to the Commission
if the activity is completed as specified. The originators of “no-action” requests submit their inquiries privately, but the
staff publicly releases both the request and the agency’s response upon completion. In addition, in order to ensure that the
financial statements investors use to make investment decisions are presented fairly,consistently, and with credibility, the
Commission monitors or participates in domestic and international standard setting initiatives involving accounting and auditing
practices. Finally, because rulemaking is one of the SEC’s primary functions and involves staff in virtually every program,the
agency recognizes that regular reviews of Commission regulations and its rulemaking processes are necessary to confirm that
intended results are being achieved. Just as the securities rules require that company disclosures be clear and precise, the
Commission also attempts to write rules that are easily understood and not overly prescriptive. For that reason, the agency
makes a concerted effort to eliminate obsolete and redundant filing requirements, especially when it promulgates new rules
that must work in concert with existing regulations. As required by the Sarbanes-Oxley Act, the Commission has engaged in
extensive rulemaking to address issues of corporate and fund governance. New standards for the independence of directors and
key board committees and the governance policies and practices of SROs will have significant effects for years to come. Many
companies are recognizing anew that it is a good business practice to comply not just with the letter of the securities laws,
but also with their spirit and underpinnings. If market participants view reforms as opportunities to improve internal controls,improve
the performance of the board, and improve their public reporting, they ultimately will be better managed, more transparent,
and therefore more attractive to investors.
Objective(s):
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