Securities And Exchange Commission

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Securities And Exchange Commission

Management Studies

Objectives of SEC:

The prime objectives of SEC are to protect integrity of the stock market and the interests of the investors in securities, to develop the securities market, to ensure proper issuance of securities, and to promulgate new laws, orders, rules and regulations for controlling, and guiding the securities market. SEC is to protect the interests of investors through regulating the market within the framework of the SEC Act. It approves capital issues and prospectus, restricts illicit transactions and insider trading, and controls the STOCK EXCHANGES, securities related fu-ms, and companies involved in the public issue of securities. As a part of these functions, SEC monitors disclosure functions of the companies, timely holding of annual general meetings by them, timely payment of dividends and timely issuance of allotment letters and refund warrants by security issuers.

Functions of SEC:

Section 8 of the SEC -1993 provides that: –

(1) Subject to the provision of this Act, and rules and regulations made there under, it shall be the responsibility and duty of the Commission to ensure the proper issuance of securities, to protect the interest of the investors in securities, and to promote the development of and to regulate the capital and securities market.

(2) In particular and without prejudice to the foregoing provision, the duties may include the following: –

(a) Regulating the business of the Stock Exchanges or any other securities market;

(b) Registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers and manager to an issue, trustee of trust deeds, registrars to an issue, underwriters, portfolio managers, investment advisers, and such other intermediaries who may be associated with securities market in any manner whatsoever;

(c) Registering, regulating and monitoring the working of any form of collective investment scheme including all forms of mutual funds;

(d) Promoting, monitoring and regulating all authorized selfregulatory organizations in the securities market;

(e) Prohibiting fraudulent and unfair trade practices relating to securities or in any securities market;

(f) Promoting investors education and training of all intermediaries of securities market;

(g) Prohibiting inside trading in securities;

(h) Regulating substantial acquisition of share or stock and take-over of companies;

(i) Calling for information from, undertaking investigation and inspection, conducting inquiries and audit of any issuer or dealer of securities, the Stock Exchanges and intermediaries and any self-regulatory organization in the securities market;

(j) Compiling, analyzing and publishing indices on the financial performance of any issuer of securities;

(k) Levying fees or other charges for carrying out the purpose

of this section.

(l) Conducting research and publishing information or the above purposes;

(m) Performing such other functions and duties as may be prescribed for fulfilling the objectives of this Act.


Portfolio management:

Portfolio means a combination of two or more securities or assets. The larger the firm’s short-term marketable securities portfolio, the more chance there is for specialization and economics of scale in its operation. A large security portfolio may justify a staff solely responsible for managing it. Such a staff can undertake research, plan diversification, keep abreast of market conditions, and continually analyze and improve the firm’s portfolio position. When portfolio management is a specialized function in a firm, it is likely that a large number of diverse securities will be considered for investment. Moreover, continual effort can be devoted to achieving the highest yield possible in keeping with the cash needs and the safety, marketability, and maturity requirements of the firm. For companies with modest security positions, there may be no economic justification for a separate staff. Indeed, a single individual may handle investments on a part time basis. Alternatively, part or all of the portfolio management function may be outsourced.


The disclosure document filled with the SEC to register a new securities issue. The registration statement includes the prospectus and other information required by the SEC. Section 10 of the Securities and Exchange Act-1993 provides that:

(1) No stock brokers, sub- brokers, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, underwriter, portfolio manager, investment adviser and such other intermediaries who may be associated with securities market in any manner shall sell or deal in securities except under and in accordance with the conditions of a certificate of registration obtained from the Commission in accordance with the regulations made under this Act; Provided that a person buying or selling securities or otherwise dealing with the securities market as a stock broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, underwriter, portfolio manager, investment adviser, and such other intermediaries who may be associated with securities market immediately before the establishment of the Commission, may continue to do so for a period of six months from such establishment or if he has made an application for such registration within the said period of six months till the disposal of such application.

(2) Every application for registration shall be in such manner, accompanied by such fees, as may be determined by regulations;

(3) The Commission may, by order, suspend or cancel a certificate of registration in such manner as may be provided by regulations;

Provided that no order under this sub-section shall be made unless a person or organization concerned has been given a reasonable opportunity of being heard

I.P.O. (Initial Public Offering):

If the new enterprise is successful, the owners may want to “take the company public” with a sale of common stock to outsiders. Often this desire is prompted by venture capitalists, who want to realize a cash return on their investment. In another situation, the founders may simply want to establish a value, and liquidity, for their common stock. Whatever their motivations, the owners may decide to turn their firm into a public corporation.

Most initial public offerings (IPOs) are accomplished through underwriters. In an IPO because the common stock has not been previously traded in the public market, there is no stock price benchmark to use. For the corporation, the implication is that the initial public stock offering will need to be priced significantly below what management believes it should be based on its true value.

In the section 2-B (15) provides that, “If common stock is being offered, the factors considered in determining the offering price shall be set forth in the prospectus.”

Investment banks:

Investment bankers are middlemen involved in the sale of corporate stocks and bonds. When a company decides to raise funds, an investment banker will often buy the issue (at wholesale) and then turn around and sell it to investors (at retail). Because investment bankers are continually in the business of matching users of funds with suppliers, they can sell issues more efficiently than can the issuing companies. For the service investment bankers receive fees in the form of the difference between the amounts paid to the companies.


(1) Underwriter means the member of an underwriting syndicate that actually arranges a new security issue. Investment bankers typically do not handle the purchase and distribution of an issue single handedly unless it is a very small one. If the amount of money involved is large and the risk of price fluctuations substantial, investment bankers from an underwriting syndicate in an effort to minimize the amount of risk each one carries. The banker’s house that sets up the deal is called the lead, or managing, underwriter. In the section 15 of the IPO rules -1998 provides that (1) The public company making initial public offering shall appoint one or more underwriters, having certificate of registration from the Securities and Exchange Commission to fully underwrite or place primary securities on a firm commitment basis.

(2) The issuer in the event of under subscription shall send notice to the underwriters within ten days of closure of subscription calling upon them to subscribe the securities and pay for them in cash in full within fifteen days of the date of said notice and the said amount shall be credited into share subscription account within the said period.

(3) The underwriting agreement shall contain a condition to the effect as mentioned in sub-rule (2).

(4) The issuer shall, within seven days of the expiry of the period mentioned in sub rule (2), send to the Securities and Exchange Commission proof of subscription and deposit of share money by the underwriter.

Subject: Stocks – Initial Public Offerings (IPOs) Last-Revised: 7 Nov 1995

Contributed-By: Art Kamlet (artkamlet at, Bill Rini (bill at

This article is divided into four parts:

1. Introduction to IPOs

2. The Mechanics of Stock Offerings

3. The Underwriting Process

4. IPO’s in the Real World

I . Introduction to IPOs

When a company whose stock is not publicly traded wants to offer that stock to the general public, it usually asks an “underwriter” to help it do this work. The underwriter is almost always an investment banking company, and the underwriter may put together a syndicate of several investment banking companies and brokers. The underwriter agrees to pay the issuer a certain price for a minimum number of shares, and then must resell those shares to buyers, often clients of the underwriting firm or its commercial brokerage cousin. Each member of the syndicate will agree to resell a certain number of shares. The underwriters charge a fee for their services.

For example, if Popular life insurance company wants to offer its privatelyheld stock to the public, it may contact Brokers to handle the underwriting. Popular life insurance and the brokers may agree that 5 lakes shares of Popular life insurance company will be offered to the public at 10tk per share. Brokers fee for this service charge will be 0.60tk per share, so that Popular life insurance company needs 5000000 tk several other firms to join in a syndicate and to help it market these shares to the public.

A tentative date will be set, and a preliminary prospectus detailing all sorts of financial and business information will be issued by the issuer, usually with the underwriter’s active assistance.

Usually, terms and conditions of the offer are subject to change up until the issuer and underwriter agree to the final offer. The issuer then releases the stock to the underwriter and the underwriter releases the stock to the public. It is now up to the underwriter to make sure those shares get sold, or else the underwriter is stuck with the shares.

The issuer and the underwriting syndicate jointly determine the price of a new issue. The approximate price listed in the red herring (the preliminary prospectus – often with words in red letters which say this is preliminary and the price is not yet set) may or may not be close to the final issue price.

Consider NetManage, NETM which started trading on NASDAQ on Tuesday, 21 Sep 1993. The preliminary prospectus said they expected to release the stock at $9-10 per share. It was released at $16/share and traded two days later at $26+. In this case, there could have been sufficient demand that both the issuer (who would like to set the price as high as possible) and the underwriters (who receive a commission of perhaps 6%, but who also must resell the entire issue) agreed to issue at 16. If it then jumped to 26 on or slightly after opening, both parties underestimated demand. This happens fairly often.

IPO Stock at the release price is usually not available to most of the public. You could certainly have asked your broker to buy you shares of that stock at market at opening. But it’s not easy to get in on the IPO. You need a good relationship with a broker who belongs to the syndicate and can actually get their hands on some of the IPO. Usually that means you need a large account and good business relationship with that brokerage, and you have a broker who has enough influence to get some of that IPO.

By the way, if you get a cold call from someone who has an IPO and wants to make you rich, my advice is to hang up. That’s the sort of IPO that gives IPOs a bad name.

Even if you that know a stock is to be released within a week, there is no good way to monitor the release without calling the underwriters every day. The underwriters are trying to line up a few large customers to resell the IPO to in advance of the offer, and that could go faster or slower than predicted. Once the IPO goes off, of course, it will start trading and you can get in on the open market.

2. The Mechanics of Stock Offerings

The Securities Act of 1933, also known as the Full Disclosure Act, the New Issues Act, the Truth in Securities Act, and the Prospectus Act governs the issue of new issue corporate securities. The Securities Act of 1933 attempts to protect investors by requiring full disclosure of all material information in connection with the offering of new securities. Part of meeting the full disclosure clause of the Act of 1933, requires that corporate issuers must file a registration statement and preliminary prospectus (also know as a red herring) with the SEC. The Registration statement must contain the following information:

* A description of the issuer’s business.

* The names and addresses of the key company officers, with salary and a 5 year business history on each.

* The amount of ownership of the key officers.

* The company’s capitalization and description of how the proceeds from the offering will be used.

* Any legal proceedings that the company is involved in.

Once the registration statement and preliminary prospectus are filed with the SEC, a 20 day cooling-off period begins. During the cooling-off period the new issue may be discussed with potential buyers, but the broker is prohibited from sending any materials (including Value Line and S&P sheets) other than the preliminary prospectus.

Testing receptivity to the new issue is known as gathering “indications of interest.” An indication of interest does not obligate or bind the customer to purchase the issue when it becomes available, since all sales are prohibited until the security has cleared registration.

A final prospectus is issued when the registration statement becomes effective (when the registration statement has cleared). The final prospectus contains all of the information in the preliminary prospectus (plus any amendments), as well as the final price of the issue, and the underwriting spread.

The clearing of a security for distribution does not indicate that the SEC approves of the issue. The SEC ensures only that all necessary information has been filed, but does not attest to the accuracy of the information, nor does it pass judgment on the investment merit of the issue. Any representation that the SEC has approved of the issue is a violation of federal law.

3. The Underwriting Process

The underwriting process begins with the decision of what type of offering the company needs. The company usually consults with an investment banker to determine how best to structure the offering and how it should be distributed.

Securities are usually offered in either the new issue, or the additional issue market. Initial Public Offerings (IPO’s) are issues from companies first going public, while additional issues are from companies that are already publicly traded.

In addition to the IPO and additional issue offerings, offerings may be further classified as:

* Primary Offerings: Proceeds go to the issuing corporation.

* Secondary Offerings: Proceeds go to a major stockholder who is selling all or part of his/her equity in the corporation.

* Split Offerings: A combination of primary and secondary offerings.

* Shelf Offering: Under SEC Rule 415 – allows the issuer to sell securities over a two year period as the funds are needed.

The next step in the underwriting process is to form the syndicate (and selling group if needed). Because most new issues are too large for one underwriter to effectively manage, the investment banker, also known as the underwriting manager, invites other investment bankers to participate in a joint distribution of the offering.

The group of investment bankers is known as the syndicate. Members of the syndicate usually make a firm commitment to distribute a certain percentage of the entire offering and are held financially responsible for any unsold portions. Selling groups of chosen brokerages, are often formed to assist the syndicate members meet their obligations to distribute the new securities. Members of the selling group usually act on a ” best efforts” basis and are not financially responsible for any unsold portions.

Under the most common type of underwriting, firm commitment, the managing underwriter makes a commitment to the issuing corporation to purchase all shares being offered. If part of the new issue goes unsold, any losses are distributed among the members of the syndicate.

Whenever new shares are issued, there is a spread between what the underwriters buy the stock from the issuing corporation for and the price at which the shares are offered to the public (Public Offering Price, POP). The price paid to the issuer is known as the underwriting proceeds. The spread between the POP and the underwriting proceeds is split into the following components:

  • Manager’s Fee: Goes to the managing underwriter for negotiating and managing the offering.
  • Underwriting Fee: Goes to the managing underwriter and syndicate members for assuming the risk of buying the securities from the issuing corporation.
  • Selling Concession – Goes to the managing underwriter, the syndicate members, and to selling group members for placing the securities with investors.

The underwriting fee us usually distributed to the three groups in the following percentages:

* Manager’s Fee 10% – 20% of the spread

* Underwriting Fee 20% – 30% of the spread

* Selling Concession 50% – 60% of the spread

In most underwritings, the underwriting manager agrees to maintain a secondary market for the newly issued securities. In the case of “hot issues” there is already a demand in the secondary market and no stabilization of the stock price is needed. However many times the managing underwriter will need to stabilize the price to keep it from falling too far below the POP. SEC Rule 10b-7 outlines what steps are considered stabilization and what constitutes market manipulation.

The managing underwriter may enter bids (offers to buy) at prices that bear little or no relationship to actual supply and demand, just so as the bid does not exceed the POP. In addition, the underwriter may not enter a stabilizing bid higher than the highest bid of an independent market maker, nor may the underwriter buy stock ahead of an independent market maker.

Managing underwriters may also discourage selling through the use of a syndicate penalty bid. Although the customer is not penalized, both the broker and the brokerage firm are required to rebate the selling concession back to the syndicate. Many broke rages will further penalize the broker by also requiring that the commission from the sell be rebated back to the brokerage firm.

4. IPO’s in the Real World

Of course knowing the logistics of how IPO’s come to market is all fine and dandy, but the real question is, are they a good investment? That does tend to be a tricky issue. On one hand there are the Boston Chickens and Snapples that shoot up 50% or 100%. But then there is the research by people like Tim Loughran and Jay Ritter that shows that the average return on IPO’s issued between 1970 and 1990 is a mere 5% annually.

How can the two sides of this issue be so far apart? An easy answer is that for every Microsoft, there are many stocks that end up in bankruptcy. But another answer comes from the fact that all the spectacular stories we hear about the IPO market are usually basing the percentage increase from the POP, and the Loughran and Ritter study uses purchase prices based on the day after the offering hit the market.

For most investors, buying shares of a “hot” IPO at the POP is next to impossible. Starting with the managing underwriter and all the way down to the investor, shares of such attractive new issues are allocated based on preference. Most brokers reserve whatever limited allocation they receive for only their best customers. In fact, the old joke about IPO’s is that if you get the number of shares you ask for, give them back, because it means nobody else wants it.

While the deck may seem stacked against the average investor. For an active trader things may not be as bad as they appear. The Loughram and Ritter study assumed that the IPO was never sold. The study does not take into account an investor who bought an issue like 3D0 (THDO – NASDAQ), the day after the IPO and sold it in the low to mid 40’s, before it came crashing down. Obviously opportunities exist, however it’s not the easy money so often associated with the IPO market.

Portions of this article are copyright 1995 by Bill Rini. Securities Laws

The basic laws that cover the securities market are:

* Securities Act, 1920

* Securities and Exchange Ordinance, 1969;

* Securities and Exchange Act, 1993;

* Depository Act, 1999

* Conditions imposed by the Commission;

* Rules framed by the Commission, –

* Regulations and bye laws issued by the stock exchanges and depository.

Securities and Exchange Commission Act, 1993

Functions concerning issuer of securities:

* Prohibiting fraudulent and unfair trade practices relating to securities or in any securities market;

* Prohibiting insider trading in securities;

* Regulating substantial acquisition of shares or stock and take-over of companies;

Securities and Exchange Commission Act, 1993

* Calling for information from , undertaking investigation and inspection, conducting inquiries and audit of any issuer, or dealer of securities;

* Analyzing and publishing indices on the financial performance of any issuer of securities, [Section 8]

Conclusion: Securities and Exchange Commission Act, 1993

Section 18 of the Act provides a penalty for contravention of any of the provisions of the Act- rigorous imprisonment for a term not exceeding five years or a fine not less than five lakh taka.

If the directions given under the provisions of the Act are not complied with or for failure to supply information or to afford proper cooperation to any person involved in the inquiry- then after giving the offender a chance of hearing- a fine not less than one lakh taka and for every day that default continues a fine not exceeding ten thousand taka per day.

Securities and Exchange Ordinance, 1969

Securities and Exchange Ordinance among other things primarily deals with the issuer of securities and stock exchanges.