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SEC Fundamentals, Part 1

Note: These captions are generated by machine-learning algorithms, so the quality of the
captions may vary.

Course Overview
(a) Course Objectives
Welcome to this course on the SEC, which is intended to help you obtain current knowledge
relevant to auditors and other accounting professionals to carry out your responsibilities in
accordance with regulatory requirements and authoritative guidance. This course is the first of
two modules. 
 
By the end of this first course, you should be able to: 
 Identify who the SEC is and what they do 
 State the laws the SEC administers 
 Describe key SEC reporting rules and filings 
The second module will focus specifically on Rules S-X and S-K. 

(b) Creation of the SEC

The 1933 Act was a byproduct of the stock market crash of 1929, and the subsequent examination
by Congress of practices within the securities industry. It was administered by the Federal Trade
Commission before the enactment of the 1934 Act. 
 
The SEC was created by the 1934 Act. The initial function of the SEC was twofold: to maintain fair,
efficient, and orderly securities markets and to regulate initial and subsequent distribution of
securities for the protection of investors. The SEC today protects the interests of millions of
investors who, directly or beneficially, participate in the securities markets. 

(c) Organization of the SEC

The SEC is an independent agency composed of five members, not more than three of whom may
be members of the same political party. They are appointed by the President of the United States,
with the advice and consent of the Senate, for five-year terms. The terms are staggered so that
one expires on June 5th of each year. The chairman of the SEC is designated by the President. 
The SEC’s staff is organized into 5 divisions and 23 offices. The main offices of the SEC are located
at 100 F Street NE, Washington, DC 20549. There are also 11 regional offices. The regional offices
are the field representatives of the SEC. It is their responsibility to process and review the various
filings of registered broker-dealers and to provide enforcement and inspection capabilities
throughout the country. 
 
The SEC, through its staff of lawyers, accountants, securities analysts and examiners, engineers,
and other professionals, is responsible for administering the securities laws. The securities laws

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were designed to facilitate informed investment analyses and prudent and discriminating
investment decisions by the investing public.  
It is the investor, not the SEC, who ultimately must judge the worth of securities offered for sale.
The SEC is powerless to pass on the merits of securities; and assuming proper disclosure of the
financial and other information essential to informed investment analysis, the SEC cannot bar the
sale of securities that such analysis may show to be of questionable value. 

The SEC and the Laws it Administers

(d) The Securities Statutes
The Securities Act of 1933 (Securities Act or the 1933 Act) and the Securities Exchange Act of 1934
(Exchange Act or the 1934 Act) are the principal securities statutes.  
 
In addition, there are other principal acts that are associated with the securities: The Trust
Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940,
the Securities Investor Protection Act of 1970, and the Public Company Accounting Reform and
Investor Protection Act of 2002 (Sarbanes-Oxley).  
 
The Dodd-Frank Act, the Jumpstart Our Business Startups (JOBS) Act, and the Fixing America’s
Surface Transportation (FAST) Act affected the securities statutes but are not administered by the
SEC.  
 
The SEC also serves as an adviser to the United States district courts in connection with Federal
Bankruptcy Act reorganization proceedings involving registrants. 
 
Click on each book to learn more about the key points in each statute.

(e) Securities Act of 1933

The Securities Act of 1933 is sometimes referred to as the “truth in securities” act. This act
defines security as: 
 
Any note, stock, bond, debenture, evidence of indebtedness, certificate of interest or participation
in any profit-sharing agreement, collateral-trust certificate, reorganization certificate or
subscription, transferable share, investment contract, voting trust certificate, certificate of deposit
for a security, fractional undivided interest in oil, gas or other mineral rights, or, in general, any
interest or instrument commonly known as a “security,” or any certificate of interest or
participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right
to subscribe to or purchase, any of the foregoing.          
 
Click on each lock icon to read about the two primary objectives of this act.

In addition to the SEC, states regulate both interstate and intrastate offerings by what are
commonly called blue sky laws (which get their name from the fact that they were originally aimed

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at promoters “who sold building lots in the blue sky”). Unlike SEC regulations, which basically
relate to disclosure requirements, many blue-sky laws prescribe financial requirements that must
be met by issuers. Blue sky requirements vary considerably from state to state and may set
minimum earnings and capitalization levels or may limit underwriters’ compensation and dilution
of the public investors’ interests.

(f) Securities Exchange Act of 1934

The Exchange Act, as amended, is primarily concerned with the trading and ongoing reporting
related to registered securities.  
 
Section 12 of the Exchange Act contains registration requirements for companies (1) whose
securities are listed or traded on a national securities exchange or in certain over-the-counter
markets [Section 12(b)] or (2) whose assets are greater than $10 million and that have a class of
equity securities (i) held by at least 2,000 persons at year-end, or (ii) held by more than 500
persons who are not accredited investors (nonpublic banks and bank holding companies are not
subject to the 500 unaccredited investor threshold) [Section 12(g)].  Registration statements under
the 1934 Act are filed by companies that become subject to the reporting requirements of the SEC
other than by an initial sale of securities to the public. 
 
The Exchange Act is not an update of the Securities Act. The Securities Act deals with the initial
offering of securities; the Exchange Act is concerned with the subsequent trading in those
securities. 
 
Click on each box to learn more.

(i)  Periodic Reporting Requirements 

The Securities Act does not provide for the filing of any periodic reports with the SEC. Any
company that has had a public offering of securities registered under the Securities Act is
automatically required under Section 15(d) of the Exchange Act to file periodic reports required
under Section 13 — for example, Form 10-K, Form 10-Q, and Form 8-K.  
 
A registrant’s first report on one of these forms is due for the first period ending after the latest
annual or interim period for which financial statements were included in the effective registration
statement. 
 
An issuer that files a registration statement under the Securities Act and is thus automatically
subject to the periodic reporting requirements under Section 15(d) of the Exchange Act may be
required to register under Section 12(g) of the Exchange Act.   
 
Registration under Section 12(g) automatically suspends an issuer’s obligation to file reports under
Section 15(d), but the issuer is still subject to periodic reporting requirements under Section 13 of
the Exchange Act, because Section 13 applies to issuers of securities registered under Section

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12(g).  Section 13 of the Exchange Act requires periodic reports to be filed by “every issuer of a
security registered pursuant to Section 12 (of the Exchange Act).”  Under Section 12(b) of the
Exchange Act, companies that are listed on a national securities exchange (NYSE, NYSE Amex
Equities, and NASDAQ) are also required to file periodic reports under Section 13 of the Exchange
Act. 

(ii) Deregistration and Termination or Suspension of Reporting Requirements

In general terms, an issuer that has made a public offering of securities registered under
the Securities Act that remain outstanding may only suspend, but not terminate, its reporting
obligations if the number of its U.S. security holders falls below the requisite thresholds. By
contrast, an issuer that has not made a public offering but that is a reporting company because the
number of its U.S. shareholders exceeds the requisite thresholds for other reasons may terminate
its reporting obligations once the number falls below the requisite thresholds. 
 
Click each tab to learn more.  

(g) Trust Indenture Act of 1939

Click the box to learn more about this act. 

(h) Investment Com

(i) pany Act of 1940 
Click the projector screen to learn more about this act. 

(j) Investment Advisers Act of 1940 

Persons or firms who engage in the business of advising others, for compensation, about their
security transactions must register with the SEC. Their activities in the conduct of such business
are subject to standards of the act, which make unlawful certain fraudulent and deceitful
practices, and which require, among other things, disclosure of any interests such advisers may
have in transactions executed for clients. The act also gives the SEC rulemaking powers concerning
fraudulent and other activities of investment advisers. 

(k) Securities Investor Protection Act of 1970 

This act created the Securities Investor Protection Corporation (SIPC), a nonprofit organization
composed of: 
 
 all brokers and dealers registered under the 1934 Act, and 
 members of a national securities exchange other than certain brokers and dealers. 
Under this act, the SIPC must submit to the SEC an annual report on its operations that contains
audited financial statements. The SEC then must submit this report with its comments, if any, to
the President and Congress. 

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 (l) Bankruptcy Reform Act of 1978
The Bankruptcy Reform Act of 1978 provides, among other things, that the SEC shall furnish
independent and expert advice to the United States district courts regarding proposed plans of
reorganization of debtor corporations. Although the act does not specifically require the services
of an independent public accountant, parties to the proceedings, such as the trustee or trustee’s
counsel, usually hire accountants to assist them. 
 
Click each plus sign to learn more about this act.

(m) The Public Company Accounting Reform and Investor Protection Act of 2002
The Public Company Accounting Reform and Investor Protection Act of 2002 (Accounting Reform
Act of 2002) is also known as the Sarbanes-Oxley Act of 2002 (the SOX Act). 
 
The act fundamentally changed how audit committees, management, and auditors carry out their
respective responsibilities and interact with each other. It laid out specific requirements for each
of these parties with regard to corporate responsibilities, auditor regulation and independence,
and financial reporting. It also provided for enhanced criminal penalties for corporate fraud. 
 
Click on each number to read more about what this act accomplished.  

(n) Jumpstart Our Business Startups (JOBS) Act 

The primary goal of the Jumpstart Our Business Startups, or the JOBS Act, is to improve small
companies’ access to public capital markets. The act amends several provisions of the securities
laws to ease the process and costs associated with raising capital from the public. 
 
To encourage private companies to complete initial public offerings of their equity, the act created
a new category of filers called emerging growth companies (EGCs), which are entitled to certain
reporting relief.  
 
Since the JOBS Act was signed into law, the SEC staff has issued several sets of frequently asked
questions and other interpretive guidance. This guidance as well as a complete text of the law are
available online. Click each document to view them now.

SEC Reporting: The Key Rules

(o) Understanding the SEC’s Rules and Regulations  
Upon entering the public reporting arena, accountants are exposed to new rules and requirements
that often are foreign to them. The most obvious difference is the legal format of the SEC’s rules
and regulations concerning financial disclosures, nonfinancial disclosures, and application of
accounting principles.  
 
The extensive use of citations, footnotes, and other cross-referencing techniques makes
researching issues difficult.  

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The next sobering discovery is the number of different levels of rules, regulations, and
interpretations.  
 
Finally, subtle and not-so-subtle differences between the SEC’s requirements
and Generally Accepted Accounting Principles become apparent.  
 
A natural reaction is to question where to begin. Understanding the organization of the SEC
and understanding which group within the SEC to approach for an interpretation makes this
process less overwhelming.  
 
The SEC staff encourages registrants and their independent accountants to consult with them on
complex issues and has an excellent reputation for helping resolve problems. 

(p) General Instructions for the Forms 

When a company first undertakes to become a registrant or when a registrant decides to raise
additional funds through equity or debt offering, the decision about which form to use is a legal
question to be resolved between the company and its legal counsel. The accountant can assist in
evaluating whether the company qualifies to use a specific form but should not make the legal
determination. After the form has been selected, the accountant may then be significantly
involved in reviewing the information. 
 
Once the company becomes a registrant subject to the periodic reporting requirements of the
1934 Act, decisions about which form to file become less difficult, but decisions about the form
and content of the information to be supplied can still be problematic. 
 
The first step in any filing should be to review the
ctions applicable to the form being used. These instructions will refer you to the specific elements
of Regulations S-X and S-K that are required for the form. 
 
Click on each item listed to learn see an example of what is required for each form. 

The next step would be to review the specific requirements of the various Regulation S-K and SX
items cited. 
 
Instructions to the forms (and the forms themselves) can be found on the SEC’s website. Final or
proposed changes to the forms that are not yet effective can usually be identified through
searching Title 17 of the Code of Federal Regulations (CFR) 228, 229, and 249. 
 
The SEC’s published rules include scaled reporting requirements for issuers that are smaller
reporting companies. The scaled disclosure requirements or reporting relief for smaller reporting
companies and emerging growth company are not identical. 

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The SEC’s Electronic Filing System
(q) How to File Electronically
All domestic and foreign private issuers, foreign governments, and all beneficial ownership reports
(filed by officers, directors, and principal security holders) are required to be filed electronically. 
 
Click on the computer mouse to hear more about how to file electronically.  

In order to file a document using EDGAR, a company must obtain the following codes by filing
Form ID with the SEC: 
 
Central Index Key (CIK). The CIK uniquely identifies each filer, filing agent, and training agent. The
CIK number works as the logon to the EDGAR system. An applicant cannot change this code. 
 
CIK Confirmation Code (CCC). The applicant will use the CCC in the header of the applicant’s filings
in conjunction with the applicant’s CIK to ensure that the applicant authorized the filing. This code
can be changed. 
 
Password (PW). The PW allows the applicant to log onto the EDGAR system, submit filings, and
change the applicant’s CCC. 
 
Password Modification Authorization Code (PMAC). The PMAC allows the applicant to change the
applicant’s password. 
 
Passphrase. The passphrase allows a registrant to regenerate all of the above other than the CIK
number.

(r) XBRL Reporting Program

XBRL (also known as eXtensible Business Reporting Language) is a reporting language developed
by an international nonprofit consortium of approximately 250 major companies, organizations,
and government agencies.  
 
XBRL is a standardized format for tagging financial information so computers can extract,
exchange, analyze, and display it. For example, if a company has $100 million in total revenues,
then that number would be identified by currency, actual number, and by an identifying
description. 
 
Using computers to perform these tasks allows them to be performed more quickly, cheaply, and
accurately than if they were performed manually. 
 
The SEC requires issuers to provide an exhibit containing financial statements and schedules in
interactive data format using XBRL. The SEC amended its XBRL reporting requirements to require
the use of “Inline XBRL” (SEC Release No. 33-10514). 

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Click each calendar icon on the screen to learn more about when the Inline XBRL requirements
take effect.  

Form 10-Q filers will commence Inline XBRL reporting in their Form 10-Q for the first quarter
ending on or after these dates. Currently, the information in XBRL files is excluded from the officer
certification requirements, and issuers are not required to obtain assurance on such information
from third parties, such as auditors. In the adopting release, the Commission noted that the
change in format to Inline XBRL does not change this. 
 
After the initial filing, a registrant is required to provide an exhibit containing interactive data with
each quarterly and annual report. It is also required to provide such an exhibit with (1) each
current report (that is, Form 8-K or 6-K) containing updated or revised versions of its financial
statements, and (2) certain registration statements.

(s) Other Materials

The SEC occasionally provides guidance on topics of general interest to the business and
investment communities by issuing interpretive releases. The interpretive releases reflect the
SEC’s views and interpretation of federal securities laws and SEC regulations but are not positive
law.  
 
The other materials this course will discuss include: 
 SEC Interpretive Releases 
 Financial Reporting Releases 
 Accounting and Auditing Enforcement Releases 
 Staff Accounting Bulletins 
 Staff Legal Bulletins 
 Emerging Issues Task Force, and the 
 Financial Reporting Manual  

(t) SEC Interpretive Releases

First, we will learn about SEC Interpretive Releases. Click on each tab to begin.

(u) Financial Reporting Releases (FRR) 

Over the years, the SEC has published the opinions (originally called Accounting Series Releases, or
ASRs) of the SEC on major accounting questions and on the form and content of financial
statements and financial disclosures.  
 
In addition, over the years, several significant amendments, in the form of Financial Reporting
Releases, were made to the rules governing the form and content of financial statements filed
with the SEC. Although the amendments are incorporated into Regulation S-X, the releases
frequently provide guidelines and interpretations. Therefore, when questions arise in applying

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amendments to Regulation S-X, it is helpful to refer to the release itself so that you will be better
informed about the purpose of the amendment, and thus be able to comply with its intent. 
 
The SEC has codified these opinions to present their contents in a more cohesive manner. The
Codification of Financial Reporting Policies (FRC) contains those releases relating to financial
information. 

A brief description of some of the more significant releases appear on the table on your screen.
Excluded are those releases related to (1) independence of certifying accountants (contained in
Sections 601, 602, and 604 of the FRC), (2) specialized industries (contained in Section 400 of the
FRC), and (3) those used to announce amendments to Regulation S-X. For convenience, each
release is referenced to the original ASR or FRR number. 
 
Read the table in its entirety by scrolling down to the final section, 607. 

(v) Accounting and Auditing Enforcement Releases 

From April 1982 to present, the SEC has issued thousands of Accounting and Auditing Enforcement
Releases (AAERs) dealing with everything from elaborate frauds to major audit failures to
relatively minor schemes to improve net income. Although the intent of the AAERs is not to
establish new policy in the areas of accounting or auditing, the actions brought by the SEC do
illustrate the variety of activities that constitute financial fraud and emphasize the importance of
the independence of the auditor as a means of preventing fraud and other misconduct. 
 
Certain recurring themes have appeared in AAERs over the years relating to revenue
recognition problems, delayed recognition of losses, financial reporting problems, reliability of
accounting information, culpability of auditors, and enforcement cases against auditors. A review
of the AAERs may identify situations in which the staff has established specific guidelines
pertaining to the transactions in question. 

(w) Staff Accounting Bulletins

Staff Accounting Bulletins (SABs) are interpretations and practices followed by the Division of
Corporation Finance and the Office of the Chief Accountant. 

Click on each icon to learn more about SABs.

(x) Staff Legal Bulletins 

Staff Legal Bulletins, which are also known as SLBs, were first issued in 1997 and reflect the views
of the SEC staff, but are not rules or regulations; this is similar to SABs. 
 
A brief summary of more significant appears on the chart on the screen. Click each SLB number in
the left column to read a detailed description.

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 (y) Emerging Issues Task Force 
FASB ASC incorporates the consensus positions of the EITF. Therefore, any company filing with the
SEC should have a thorough understanding of how EITF consensus positions affect their particular
accounting questions or practices. A current agenda and a description of recently discussed issues
for the EITF can be viewed on FASB’s website at www.fasb.org. The operating procedures, task
force members, meetings and agenda are also posted on this website.  
 
Click the URL to visit the website and learn more.  

(z) Financial Reporting Manual (FRM) 

The FRM is an internal training tool and reference document that addresses topics of specific
interest to accountants (for example, financial statement requirements, disclosures) and has been
expanded to include positions reached in joint meetings the SEC has with the CAQ’s SEC
Regulations Committee and that committee’s International Practices Task Force. 
 
It is updated periodically to provide new or revised interpretations. As updates are published, the
staff includes a summary immediately following the FRM cover that describes the nature of the
changes and lists the paragraphs that were updated. The staff also annotates the FRM to
communicate the date a paragraph was most recently updated. 
 
Read the list on the screen to see what topics the FRM covers. You can also click on the book icon
to view the manual as a pdf.  

Review and Wrap-Up

(aa) Wrap-Up
As a result of taking this course, you should now be able to identify the SEC as well as the laws it
administers. Additionally, you should be able to identify key reporting rules and filings which may
impact your work.  
 
You may now proceed to the final exam portion of the course. 

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