ROOTS OF A FINANCIAL CRISIS
Most companies are currently faced with specific challenges, questions and concerns that are caused by today's uncertain economic environment. In times of market instability, there is an increased potential for management fraud as unexpected losses and financing difficulties create pressure on those who are concerned about the financial performance and solvency of their business. Decisions made in the past due to financial crises are constantly being reconsidered and old certainties questioned.
Accounting has been evolving with the development of advancements and setbacks of society. The SEC has to constantly reevaluate their accounting policies due to past ...view middle of the document...
In reality, due to a number of exemptions for trading on the secondary market and small offerings, the Act is mainly applied to primary market offerings by issuers. Under Section 5 of the Securities Act, all issuers must register non-exempt securities with the Securities and Exchange Commission (SEC). Section 5 regulates the timeline and distribution process for issuers who offer securities for sale. The actual registration process is laid out in Section 6, under which registration entails two parts. First, the issuer must submit information that will form the basis of the prospectus, to be provided to prospective investors. Second, the issuer must submit additional information that does not go into the prospectus but is accessible to the public.
THE INVESTMENT COMPANY ACT OF 1940
Congress created the Investment Company Act of 1940. The Act was the last of the major federal securities laws to be enacted, following on the heels of the Securities Act of 1933 and 1934. The Investment Company Act of 1940 defines the responsibilities and limitations that are placed on open-end mutual funds, unit investment trusts, and closed-end funds that offer investment products to the public. Due to the stock market crash in 1929, it was implemented as an attempt to stabilize financial markets and increase the public’s confidence. The regulation is designed to minimize conflicts of interest that arise in complex operations. The Act also requires companies to regularly disclose their financial condition and investment policies to investors when stock is initially sold. It is enforced and regulated by the SEC, but does not permit the SEC to directly supervise the investment decisions or activities of these companies of judge the merits of their investments. By setting out limits regarding filings, service charges, financial disclosure and fiduciary duties of fund companies, the Investment Company Act of 1940 seemed to take the appropriate steps in preventing future disasters.
The Act was deemed necessary for numerous reasons. As public companies, funds already were subject to the disclosure and antifraud provisions of the Securities Act, and mutual fund distributors already were regulated as broker-dealers under the Exchange Act. However, unlike other types of corporations, a mutual fund is nothing more or less than a large pool of liquid assets. Moreover, virtually all mutual funds are managed externally and have no employees of their own. Thus, unlike other corporations, mutual funds are managed by outside entities and individuals that may have conflicting loyalties and obligations. The other federal securities laws rely heavily on disclosure and antifraud provisions to address potential abuses. The Act was recognition by Congress that in the case of the unique conflicts presented by mutual funds, disclosure and antifraud protection aren’t enough.
SARBANES-OXLET ACT OF 2002
The Sarbanes-Oxley Act ("SOX") of 2002 was enacted by Congress in order to...