Overview On 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

(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

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

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

of this section.

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 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 aol.com), Bill Rini (bill at moneypages.com)

This article is
divided into four parts:

1. Introduction to

2. The Mechanics of
Stock Offerings

3. The Underwriting

4. IPO’s in the Real

I . Introduction to

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

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.

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.

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

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,

* Securities and
Exchange Ordinance, 1969;

* Securities and
Exchange Act, 1993;

* Depository Act,

* 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]

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.