The website also includes the EDGAR database of disclosure documents that public companies are required to file with the Commission. Though it is the primary overseer and regulator of the U. This article is an overview of the SEC's history, responsibilities, activities, organization, and operation. More detailed information about many of these topics is available on the SEC website.
Before the Great Crash of , there was little support for federal regulation of the securities markets. This was particularly true during the post-World War I surge of securities activity. Proposals that the federal government require financial disclosure and prevent the fraudulent sale of stock were never seriously pursued.
Tempted by promises of "rags to riches" transformations and easy credit, most investors gave little thought to the dangers inherent in uncontrolled market operation. During the s, approximately 20 million large and small shareholders took advantage of post-war prosperity and set out to make their fortunes in the stock market. When the stock market crashed in October , the fortunes of countless investors were lost. Banks also lost great sums of money in the Crash because they had invested heavily in the markets.
When people feared their banks might not be able to pay back the money that depositors had in their accounts, a "run" on the banking system caused many bank failures. With the Crash and ensuing depression, public confidence in the markets plummeted.
There was a consensus that for the economy to recover, the public's faith in the capital markets needed to be restored. Congress held hearings to identify the problems and search for solutions. Based on the findings in these hearings, Congress passed the Securities Act of and the Securities Exchange Act of These laws were designed to restore investor confidence in our capital markets by providing more structure and government oversight.
The main purposes of these laws can be reduced to two common-sense notions: Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing. Monitoring the securities industry requires a highly coordinated effort. Congress established the Securities and Exchange Commission in to enforce the newly-passed securities laws, to promote stability in the markets and, most importantly, to protect investors.
Kennedy, President John F. Kennedy's father, to serve as the first Chairman of the SEC. With approximately 2, staff, the SEC is small by federal agency standards. Their terms last five years and are staggered so that one Commissioner's term ends on June 5 of each year.
To ensure that the Commission remains non-partisan, no more than three Commissioners may belong to the same political party. The Commission, left to right : Commissioner Paul R. Carey, Commissioner Norman S. Hunt, Jr. The Division of Corporation Finance reviews documents that publicly-held companies are required to file with the Commission.
The documents include: registration statements for newly-offered securities; annual and quarterly filings Forms K and Q ; proxy materials sent to shareholders before an annual meeting; annual reports to shareholders; documents concerning tender offers a tender offer is an offer to buy a large number of shares of a corporation, usually at a premium above the current market price ; and filings related to mergers and acquisitions.
These documents disclose information about the companies' financial condition and business practices to help investors make informed investment decisions. Through the Division's review process, the staff checks to see if publicly-held companies are meeting their disclosure requirements and seeks to improve the quality of the disclosure. To meet the SEC's requirements for disclosure, a company issuing securities or whose securities are publicly traded must make available all information, whether it is positive or negative, that might be relevant to an investor's decision to buy, sell, or hold the security.
Corporation Finance provides administrative interpretations of the Securities Act of , the Securities Exchange Act of , and the Trust Indenture Act of , and recommends regulations to implement these statutes. The Division's staff provides guidance and counseling to registrants, prospective registrants, and the public to help them comply with the law.
For example, a company might ask whether the offering of a particular security requires registration with the SEC. Corporation Finance would share its interpretation of the relevant securities regulations with the company and give it advice on compliance with the appropriate disclosure requirement. The Division uses no-action letters to issue guidance in a more formal manner. A company seeks a no-action letter from the staff of the SEC when it plans to enter uncharted legal territory in the securities industry.
For example, if a company wants to try a new marketing or financial technique, it can ask the staff to write a letter indicating whether it would or would not recommend that the Commission take action against the company for engaging in its new practice. Major pieces of legislation, such as the Securities Act of , the Securities Exchange Act of , and the Investment Company Act of , provide the framework for the SEC's oversight of the securities markets.
These statutes are broadly drafted, establishing basic principles and objectives. Then, as the securities markets evolve technologically, expand in size, and offer new products and services, the SEC engages in rulemaking to maintain fair and orderly markets and to protect investors by altering regulations or creating new ones.
Rulemaking can involve several steps: concept release, rule proposal, and rule adoption. A concept release is issued describing the area of interest and the Commission's concerns and usually identifying different approaches to addressing the problem, followed by a series of questions that seek the views of the public on the issue.
The public's feedback is taken into consideration as the Commission decides which approach, if any, is appropriate. Unlike a concept release, a rule proposal is specific in its objectives and methods for achieving its goals.
Following approval by the Commission, the rule proposal is presented to the public for a specified period of time, typically between 30 and 60 days for review and comment. Input once again is considered as a final rule is crafted. If adopted, the measure becomes part of the official rules that govern the securities industry.
If the rule is a major rule, it may be subject to congressional review and veto prior to becoming effective. Division of Market Regulation The Division of Market Regulation establishes and maintains standards for fair, orderly, and efficient markets.
It does this primarily by regulating the major securities market participants: broker-dealer firms; self-regulatory organizations SROs , which include the stock exchanges and the National Association of Securities Dealers NASD , Municipal Securities Rulemaking Board MSRB , and clearing agencies SROs that help facilitate trade settlement ; transfer agents parties that maintain records of stock and bond owners ; and securities information processors.
A self-regulatory organization is a member organization that creates and enforces rules for its members based on the federal securities laws. The Division also oversees the Securities Investor Protection Corporation SIPC , which is a private, non-profit corporation that insures the securities and cash in the customer accounts of member brokerage firms against the failure of those firms.
It is important to remember that SIPC insurance does not cover investor losses arising from market declines or fraud. Market Regulation's responsibilities include: carrying out the Commission's financial integrity program for broker-dealers; reviewing and approving proposed new rules and proposed changes to existing rules filed by the SROs; establishing rules and issuing interpretations on matters affecting the operation of the securities markets; and surveilling the markets.
In applying the federal securities laws to this industry, the Division works to improve disclosure and minimize risk for investors without imposing undue costs on regulated entities. The Division: interprets laws and regulations for the public and SEC inspection and enforcement staff; responds to no-action requests and requests for exemptive relief; reviews investment company and investment adviser filings; reviews enforcement matters involving investment companies and advisers; and develops new rules and amendments to adapt regulatory structures to new circumstances.
As the utility industry evolves from a regulated monopoly to a competitive, market-driven industry, the Division also exercises oversight of registered and exempt utility holding companies under the Public Utility Holding Company Act of In this area, the Division: reviews proposals and applications and proposes new rules and amendments under the Act; examines annual and periodic reports of holding companies and their subsidiaries; and participates in audits of these companies.
Division of Enforcement The Division of Enforcement investigates possible violations of securities laws, recommends Commission action when appropriate, either in a federal court or before an administrative law judge, and negotiates settlements on behalf of the Commission.
While the SEC has civil enforcement authority only, it works closely with various criminal law enforcement agencies throughout the country to develop and bring criminal cases when the misconduct warrants more severe action. The Division obtains evidence of possible violations of the securities laws from many sources, including its own surveillance activities, other Divisions of the SEC, the self-regulatory organizations and other securities industry sources, press reports, and investor complaints.
All SEC investigations are conducted privately. Facts are developed to the fullest extent possible through informal inquiry, interviewing witnesses, examining brokerage records, reviewing trading data, and other methods.
Once the Commission issues a formal order of investigation, the Division's staff may compel witnesses by subpoena to testify and produce books, records, and other relevant documents. Following an investigation, SEC staff present their findings to the Commission for its review.
The Commission can authorize the staff to file a case in federal court or bring an administrative action. Individuals and companies charged sometimes choose to settle the case, while others contest the charges. Common violations that may lead to SEC investigations include: insider trading: buying or selling a security in breach of a relationship of trust and confidence while in possession of material, non-public information about the security; misrepresentation or omission of important information about securities; manipulating the market prices of securities; stealing customers' funds or securities; violating broker-dealers' responsibility to treat customers fairly; and sale of securities without proper registration.
Under the securities laws the Commission can bring enforcement actions either in the federal courts or internally before an administrative law judge. The factors considered by the Commission in deciding how to proceed include: the seriousness of the wrongdoing, the technical nature of the matter, tactical considerations, and the type of sanction or relief to obtain. For example, the Commission may bar someone from the brokerage industry in an administrative proceeding , but an order barring someone from acting as a corporate officer or director must be obtained in federal court.
Often, when the misconduct warrants it, the Commission will bring both proceedings. District Court that describes the misconduct, identifies the laws and rules violated, and identifies the sanction or remedial action that is sought.
Typically, the Commission asks the court to issue an order, called an injunction, that prohibits the acts or practices that violate the law or Commission rules. A court's order can also require various actions, such as audits, accounting for frauds, or special supervisory arrangements.
In addition, the SEC often seeks civil monetary penalties and the return of illegal profits, known as disgorgement. The courts may also bar or suspend an individual from serving as a corporate officer or director. A person who violates the court's order may be found in contempt and be subject to additional fines or imprisonment. Administrative proceedings differ from civil court actions in that they are heard by an administrative law judge ALJ , who is independent of the Commission.
The administrative law judge presides over a hearing and considers the evidence presented by the Division staff, as well as any evidence submitted by the subject of the proceeding. Following the hearing the ALJ issues an initial decision in which he makes findings of fact and reaches legal conclusions.
The initial decision also contains a recommended sanction. Both the Division staff and the defendant may appeal all or any portion of the initial decision to the Commission. The Commission may affirm the decision of the ALJ, reverse the decision, or remand it for additional hearings.
Administrative sanctions include cease and desist orders, suspension or revocation of broker-dealer and investment advisor registrations, censures, bars from association with the securities industry, and payment of civil monetary penalties, and return of illegal profits. Offices Office of Administrative Law Judges Administrative law judges conduct hearings and rule on allegations of securities law violations brought by the SEC staff.
After cases are referred to them by the Commission, the judges conduct hearings in a manner similar to non-jury trials in the federal district courts. Among other actions, administrative law judges issue subpoenas, rule on motions, and rule on the admissibility of evidence. At the conclusion of hearings, the parties involved submit proposed findings of fact and conclusions of law. The administrative law judges prepare and file initial decisions including factual findings and legal conclusions.
Parties may appeal decisions to the Commission, which can affirm or deny the administrative law judges' rulings or remand the case back for additional hearings. Office of Administrative and Personnel Management The Office of Administrative and Personnel Management develops, implements and evaluates the Commission's programs for human resource and personnel management, such as position management and pay administration; recruitment, placement, and staffing; payroll; performance management and awards; employee training and career development; employee relations; personnel management evaluation; employee benefits and counseling; the processing and maintenance of employee records; and ethics and financial disclosure.
The Office develops and executes programs for office services, such as telecommunications; procurement and contracting; property management; contract and lease administration; space acquisition and management; management of official vehicles; safety programs; emergency preparedness programs; physical security; mail receipt and distribution; and publications, printing and desktop publishing.
Office of the Chief Accountant The Chief Accountant is the principal adviser to the Commission on accounting and auditing matters. An audit is an examination of a company's financial books and records done to ensure that it keeps fair, consistent documents in accordance with SEC regulations. The Office of the Chief Accountant also works closely with domestic and international private-sector accounting and auditing standards-setting bodies e.
Office of Compliance Inspections and Examinations The Office of Compliance Inspections and Examinations administers the SEC's nationwide examination and inspection program for registered self-regulatory organizations, broker-dealers, transfer agents, clearing agencies, investment companies, and investment advisers. The Office conducts inspections to foster compliance with the securities laws, to detect violations of the law, and to keep the Commission informed of developments in the regulated community.
Among the more important goals of the examination program is the quick and informal correction of compliance problems. When the Office finds deficiencies, it issues a "deficiency letter" identifying the problems that need to be rectified and monitor the situation until compliance is achieved.
The Act empowers the SEC with broad authority over all aspects of the securities industry. This includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies as well as the nation's securities self regulatory organizations SROs. The Act also identifies and prohibits certain types of conduct in the markets and provides the Commission with disciplinary powers over regulated entities and persons associated with them.
The Act also empowers the SEC to require periodic reporting of information by companies with publicly traded securities. See the full text of the Securities Exchange Act of The Securities Exchange Act also governs the disclosure in materials used to solicit shareholders' votes in annual or special meetings held for the election of directors and the approval of other corporate action. This information, contained in proxy materials, must be filed with the Commission in advance of any solicitation to ensure compliance with the disclosure rules.
Solicitations, whether by management or shareholder groups, must disclose all important facts concerning the issues on which holders are asked to vote. The Securities Exchange Act requires disclosure of important information by anyone seeking to acquire more than 5 percent of a company's securities by direct purchase or tender offer.
Such an offer often is extended in an effort to gain control of the company. As with the proxy rules, this allows shareholders to make informed decisions on these critical corporate events. The securities laws broadly prohibit fraudulent activities of any kind in connection with the offer, purchase, or sale of securities.
These provisions are the basis for many types of disciplinary actions, including actions against fraudulent insider trading. Insider trading is illegal when a person trades a security while in possession of material nonpublic information in violation of a duty to withhold the information or refrain from trading. The Act requires a variety of market participants to register with the Commission, including exchanges, brokers and dealers, transfer agents, and clearing agencies.
Registration for these organizations involves filing disclosure documents that are updated on a regular basis. SROs must create rules that allow for disciplining members for improper conduct and for establishing measures to ensure market integrity and investor protection.
While many SRO proposed rules are effective upon filing, some are subject to SEC approval before they can go into effect. This Act applies to debt securities such as bonds, debentures, and notes that are offered for public sale. Even though such securities may be registered under the Securities Act, they may not be offered for sale to the public unless a formal agreement between the issuer of bonds and the bondholder, known as the trust indenture, conforms to the standards of this Act.
See the full text of the Trust Indenture Act of This Act regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public.
The regulation is designed to minimize conflicts of interest that arise in these complex operations. The Act requires these companies to disclose their financial condition and investment policies to investors when stock is initially sold and, subsequently, on a regular basis. The focus of this Act is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations. It is important to remember that the Act does not permit the SEC to directly supervise the investment decisions or activities of these companies or judge the merits of their investments.
See the full text of the Investment Company Act of This law regulates investment advisers. With certain exceptions, this Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors. See the full text of the Investment Advisers Act of On July 30, , President Bush signed into law the Sarbanes-Oxley Act of , which he characterized as "the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt.
See the full text of the Sarbanes-Oxley Act of The legislation set out to reshape the U. The JOBS Act aims to help businesses raise funds in public capital markets by minimizing regulatory requirements. Search SEC. Securities and Exchange Commission.
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Before a person that has or is likely to have a substantial interest affected by a municipality's violation of this chapter may file an action in District Court for violation of this chapter, that person must file a written complaint with the municipality in accordance with this section. This bill creates requirements that a municipality must meet in order to provide broadband service to its residents. It requires the completion of a feasibility study and requires the municipality to hold a referendum to decide whether the municipality may offer broadband service.
It includes general operation limitations, including those related to the establishment of rates, the use of subsidization and the use of eminent domain. It requires the adoption of ordinances relating to service quality and enforcement by a municipality that elects to provide broadband service. It also removes antitrust liability protections from a municipality as those protections relate to the municipality's offering broadband service.
The bill also requires that in order to receive any grants from the ConnectME Authority, the municipality must show evidence of compliance with the requirements of the Maine Revised Statutes, Title A, chapter Information gathered from local public and private institutions that identifies how the broadband services will expand access to state and local services identified under subsection 3; and.
Include one or more potential network designs, cost estimates, operating models and potential business models based on input from broadband providers operating within the municipality, municipalities or region and any other parties that submit a network design solution in the course of developing the plan to address any broadband gaps identified in paragraph C; and.
Broadband service. Capital costs. Direct costs. Feasibility consultant. Full-cost accounting. Indirect costs. Private provider. Feasibility study. A feasibility study must at a minimum consider: A. Whether the municipality's providing broadband service in the manner proposed by the municipality hinders or advances competition for broadband service in the municipality;.
Whether but for the municipality any person would provide the proposed broadband service;. The fiscal impact on the municipality of the capital investment in facilities to be used to provide the proposed broadband service;. The expenditure of funds for labor, financing and administering the proposed broadband service;. The projected growth in demand in the municipality for the proposed broadband service;. The projections at the time of the feasibility study and for the next 5 years of a full-cost accounting for a municipality to purchase, lease, construct, maintain or operate the facilities necessary to provide the proposed broadband service; and.
The projections at the time of the feasibility study and for the next 5 years of the revenues to be generated from the proposed broadband service. Public hearings. If the feasibility study shows that the average annual revenues under subsection 1, paragraph G exceed the average annual costs under subsection 1, paragraph F by at least the amount necessary to meet the bond obligations of any bonds issued to fund the proposed broadband service based on the first year of the study and the 5-year projection and the legislative body of the municipality elects to proceed with providing broadband service, the legislative body shall, at the legislative body's next regular meeting after receiving the results of the feasibility study, schedule at least 2 public hearings to be held within 60 days of the meeting at which those public hearings are scheduled and at least 7 days apart.
The purpose of these public hearings is to allow the public to be informed about the feasibility study through a presentation by the feasibility consultant of the results of the study and an opportunity for the public to question the feasibility consultant about the study. Public hearing notices. The public hearing notices described under subsection 2 must be published in a newspaper of general circulation in the municipality at least once a week for 3 consecutive weeks, with the last publication of notice at least 3 days before the first public hearing.
If there is no newspaper of general circulation in the municipality, the municipality shall post, for each 1, residents, at least one notice of the hearings in a conspicuous place within the municipality that is likely to give notice of the hearings to the greatest number of residents of the municipality at least 7 days before the first public hearing is held. A municipality that provides broadband service under this chapter: A.
Shall establish an enterprise fund to account for the municipality's operations of broadband service;. Shall adopt separate operating and capital budgets for the municipality's broadband service;. May not transfer any appropriation or other balance in any enterprise fund established by the municipality under this section to another enterprise fund; and.
May not transfer any appropriation or other balance in any other enterprise fund established by the municipality to any enterprise fund established by the municipality under this section. Applicable laws. In addition to complying with the provisions of this Title, a municipality that provides broadband service shall comply with: A. The federal Telecommunications Act of , Public Law ; and.
A municipality may not subsidize its broadband service with: A. Tax dollars;. Income from other municipal or utility services;. Below-market rate loans from the municipality; or. Any other municipal funds. Unreasonable preference.
A municipality may not give any undue or unreasonable preference or advantage to itself or to any private provider of broadband service. A municipality shall apply without discrimination as to itself and to any private provider the municipality's ordinances, rules and policies, including those relating to: A. Obligation to serve;. Access to public rights-of-way;. Performance bonding;. Reporting; and. Quality of service.
Rate calculations. In calculating the rates charged by a municipality for broadband service, the municipality: A. Shall include within its rates an amount equal to all taxes, fees and other assessments that apply to a similarly situated private provider of the same services, including federal, state and local taxes, franchise fees, permit fees and pole attachment fees; and. May not price any broadband service at a level that is less than the sum of the actual direct costs of providing the service, the actual indirect costs of providing the service and the amount determined under paragraph A.
Price list. A municipality that provides broadband service shall establish and maintain a comprehensive price list of all broadband services offered by the municipality. The price list must: A. Include all terms and conditions relating to the provision of each broadband service offered by the municipality;.
Be published in a newspaper having general circulation in the municipality; and. Be available for inspection at a designated office of the municipality during normal business hours. Price change. At least 5 days before the date a change to a municipality's price list under subsection 5 becomes effective, the municipality shall: A.
Notify all subscribers to the services for which the price list is being changed and any other persons requesting notification of any changes to the municipality's price list; and. Publish notice in a newspaper of general circulation in the municipality. If there is no newspaper of general circulation in the municipality, the municipality shall publish the notice in a newspaper of general circulation that is nearest the municipality. Books and records.
A municipality shall keep accurate books and records of the municipality's broadband service. And we've also seen that in Bristol. We've seen it in Burlington, Vermont, for example. So that opens up that problem of a predatory competitor. I think if -- people often call municipal probing competition. I think it's really probably more anti-competitive than it is competitive, at least according to law. You got the other problem, of course, that Larry can speak to in more detail where you've got the municipality who regulates broadband providers' rights of way and through franchise agreements.
And that can create a problem with due process. Larry, do you want to touch on that for a minute? Let's -- I know that I have a couple more questions about the economics. What about the benefits of it, George? We go through that.
For their supposedly employment benefits, lower prices, again, going back to that competition, competition, competition point that everybody tries to make about municipal broadband. All those studies are flawed, easily fatally flawed. The biggest problem with those comparisons is normally what they would do is compare the prices within a market saying well, the municipal charge is one price in Chattanooga and the private networks charge another price.
But that's not sensible in economics because by the law of one price, all firms have to sell their services at the same price, the equality adjusted price at least. So you can't have sustained differential pricing otherwise the high price firm will lose all its customers. So it's really not the comparison that's relevant. The comparison that's relevant is to look at markets with municipal systems versus markets without municipal systems.
And usually, the surveys don't provide enough data to do such a comparison. But there was a recent one by OTI that provided a sample of markets with and without municipal networks. And they conclude that municipal system prices were lower, but they did that making an incorrect comparison. If you actually take their data and throw out one observation, which was blatantly incorrect, then what you find in comparing prices across markets is that the prices in municipal markets tend to be a little bit higher than they are in markets without municipal providers.
So there's really no evidence that I'm aware of that would suggest that prices -- that municipal networks lead to lower prices in markets. But even the data in the OTI report had some problems. But if anything, the evidence more consistently shows, I think, that the prices are a bit higher, if anything.
And you also have to contemplate what's the point of a price comparison when large chunks of the broadband bill are being paid for by electric bills? In Opelika, Alabama, for example, the city raised the average price by five dollars a month on electric utility customers.
So if the prices were lower, it'd be kind of surprising. But even then, what you see in the data is that the prices are, if anything, higher than they are in markets without municipal networks. What was your other question, Larry? Go ahead, Danielle. I was just going to say I think on the labor market, if Are jobs being created? I think now Comcast and Charter are fully able to offer gigabit connections. But no resident needs a gigabit connection.
That's just gross overkill. So you don't -- you wouldn't expect that to have significant impacts. But there's two ways to approach it. One is empirically, do you observe that the labor markets improve when these networks get built? And we recently did a study on Chattanooga looking at labor market outcomes wages and employment different sectors and labor force participation, things like that, and did a difference in difference analysis there, and we didn't find any labor market effect in the city from broadband network.
But we did find significant effects in automotive employment in the city because an automotive plant was built there. So the statistical model is perfectly capable of detecting labor market impacts. In fact, the method produced almost exactly the number of employees that the automobile plant hired.
So we don't really see any, empirically, see a big effect, if any effects, of these networks on the labor market, which is often a claim that's made in support of these networks. The other thing is is that although it's less true now, if you were an early adopter of very high-speed broadband, then you might expect to get some businesses that rely heavily on broadband. But that effect is really more of a business dealing effect or economic migration than it is economic development.
If a business moves from one city to another, whatever the municipal broadband city gets in economic gain is economic loss in some other place. And there's been some economic analysis of such economic migration. And the results generally show that that's not advantageous for the nation as a whole because its cost of moving and things like that that the private firm may not absorb all of. And so it's generally not a great thing. Of course, cities and states do all sorts of economic development like that trying to attract business, which is great for them but bad for somebody else.
The problem with that -- one of the problems with that I see is like, say, in Chattanooga, for example, and many of these other networks are receiving federal money and subsidies to build these networks. And it's not clear to me why the federal government would pay to move a business from a city in one state to a city in another state. That seems a bit squirrely to me. If the state wants to do it or the city want to do it, that's one thing. But for the federal government to subsidize business migration is kind of a strange concept.
And, of course, now, with these networks being highly capable gigabit networks, being available in a lot of places, there's just hardly any attraction for anybody that would build one of those networks today. I don't have to go anywhere to get that kind of service. I can get it pretty much where I'm at or in 1, other cities. So I think that the economic migration effect, even if it's beneficial to the city, is no longer really a sound motivator for attracting business because there's lots of places you could go.
That cover it, Larry? I guess the only other question I have, I mean, so, again. Going back to the competition point, is it more likely if municipal broadband, you're likely to increase equilibrium or you're more likely to shrink the equilibrium? I think that's the big question that's out there, or maybe it depends. But people thinking, again, like competition, competition, competition, that's one more firm. There's no law prohibiting the construction of municipal broadband generally.
That was true back before the '96 Act. But now, you can build a network. So we would expect that these, for the most part, I mean, there can be economic errors, I guess, but they're pretty special cases, where the number of firms in a market is less than what should be there given the economic conditions.
But it's economic conditions that determine that, and if the economic conditions say that their two firms can viably compete in a market, maintain their networks, pay their bills, then adding a third is a problem because you've basically had to many firms in a market.
And so you've got to think about how that's going to play out in the long run. A lot of times what happens is these municipal networks go out of business, okay, for that very reason. And they have to subsidized for that very reason because if the equilibrium is two firms, then adding a third is problematic. The third firm is not going to make money, and it may be very well the case that the firms that are already in the market may start losing money as the market gets divided among more and more providers so that the market shares are small.
A lot of the studies that are done on municipal broadband, for example, financial studies, tell the cities that they need percent market share to be viable. Well, if you need percent of the market to be viable, then really only two firms can compete in that market. Now, a lot of the network cost are sunk for income that providers and so they can weather the price cuts or loss of market share for longer periods of time.
But at some point, it's got to play out. The networks, they may slow down investment in those markets. They may choose not to expand in those markets. They may choose not to maybe market as heavily or whatever it is. So there are going to be short term impacts, but really, the long-term impact is that if the market can only sustain a couple firms, then that's all that's going to survive.
Now, whether or not injecting cash from outside the market helps sustain a three-firm situation in a two-firm equilibrium is another question. But in general, I would suspect that the subsidy dollars are going to have to keep flowing, and the private sector may very well think about abandoning the market.
So, yeah, it's a problem to accept this belief, which I think is quite common, that I can decide how many competitors are going to be in a market because you really don't get to decide that. That's an economic question. And we've got a lot of the policy, I think, that's in municipal broadband that we can just throw another one in there and all is going to be well.
But that's generally not what the economics would tell you and that's certainly not what the history of municipal broadband has shown us. It's usually the municipal entrant that has to abandon ship because they don't have the resources that the private sector does or the expertise the private sector does.
And in many cases, the constituents in the city just grow tired of having to subsidize the networks through taxes and high electric bills, things like that. I do want to make another point, which is something that And that's because the -- what may be privately sensible for a firm entering a market may not be socially sensible because to build a network, a private firm is thinking about oh, well, I've got to make money when I build it.
But a lot of that money comes from stealing business from somebody else. And so the true gain of the additional entry is not completely born by the entrant. The entrant's concerned about his business, not his competitor's business or society's business generally.
So what we had is a downward sloping welfare function that the equilibrium number of firms, and that basically means that if you have an equilibrium number of firms of two, then adding a third reduces overall welfare. The economics would suggest most likely, I think, that cramming an additional firm in a market that's not profitable on its own is almost certainly welfare reducing because even if there was sufficient product differentiation or whatever to support welfare increase in some sort of private sense, when you have to start subsidizing things to exist, then you've got significant welfare consequences, economic welfare consequences of that additional entry.
Why not? Thanks, George. Thanks, Danielle. Well, everything that George says then brings back to the legal questions, which is notwithstanding the economic analysis that George presented, municipal broadband is inherently political. And so what -- I would say there's three legs of the legal stool dealing with municipal broadband. I think the first most notable is the issue of preemption. Having lost before, I'd say about maybe a third of the states, the number keeps changing, have some sort of laws -- states have some sort of laws dealing with municipal broadband.
The vast majority of these laws go to issues of making sure that you don't engage in improper cross-subsidization. Some territorial restrictions, that you stay within your municipality. And as George just went through, these laws do have economic support for a wide variety of reasons.
They may constrain municipal broadband, but they are based in sound logic. But that's not to say that people would like to -- municipalities would like to expand sometimes beyond their own municipal boundaries, maybe into a neighboring city or neighboring county, whatever it is or they just don't like the restrictions that are put on. So one of the big issues is that having lost at the state level, is that probably for almost 20 years, they had been trying to find some sort of preemptive relief at the federal level.
The most direct way -- the first episode was using the statutory authority, Section of the Telecommunications Act of , prior to -- what makes the '96 Act so unique is that it actually has a very specific preemption authority contained in there. And there was a municipality who came in out of Missouri, and they came into the FCC. And their argument was under the terms of , it said any entity may petition.
And they claimed that the municipality was an entity. What's interesting is that a Democrat-controlled FCC at the time looked at the existing case law and said look, I don't think that it's going to pass constitutional muster for the federal government to intervene into the relationship between the state and its municipal subdivision.
Significantly, the FCC, albeit reluctantly, voted to deny the preemption. This actually went all the way up to the Supreme Court and in a case called Nixon, not Nixon the President but Nixon who was the attorney general of wee little state of Missouri, versus Missouri Municipal League. The Supreme Court held that as a constitutional matter, the federal government cannot intervene in the relationship of the state and its municipal subdivision.
Preemption has a wide variety of issues, but they said look, this isn't an interstate commerce issue. This is whether or not the federal government can intervene in this very specific relationship. And so ever since that case, for about 10 years, advocates of municipal broadband have been trying to find ways to get federal relief.
When the D. Circuit's part of the net neutrality line of cases in Verizon said that could be an affirmative source of regulatory authority, Tom Wheeler, who was the chairman at the time, said I believe now I found that authority, and under Section , I can engage in preemption. Here's the problem with that argument, putting aside whether or not is hortatory or not, which now back to being hortatory, and we don't really go into this.
I have long believed and argued, and I've written multiple law reviews on this and I've also included in this paper, that was never an affirmative grant of authority but was more of a super grant -- a grant of super ancillary authority. And I've got cases that'll back that up. In other words, you got to have subject matter jurisdiction.
So you've got to tie it to something. And the problem with is that while it talks about forbearance, there is not a word about preemption in that statute. All there is are other methods of regulation. And they view that as a way of saying well, this gives us preemption authority. But the problem is is that if you follow that logic, if it is truly, you've got to tie it back to an affirmative grant of authority in Section 2, Title II, Title III, or Title VI in the Telecommunications Act, that if your preemption authority is in , then you're back to a Nixon problem.
The FCC had a rather clever, or I thought it was sort of keep by half, and they argued that well, unassuming we have a Nixon problem, we're not intervening in the relationship between a state and its municipal subdivision. What we're saying is once a state grants authority to participate, aha, now you're engaged in interstate commerce via the Supremacy Clause. We're in charge, so therefore, we're preempting those laws that restrict your ability as a barrier to entry.
The Sixth Circuit ended up striking that down but did so on a very, very narrow ground. They went for the clear state rollout. Sometimes in preemption cases, a lot people just go well, is there a clear statement by Congress? What's interesting about this, and you can read the full analysis in the law review, is -- but this issue that the federal government, well, maybe we can pass a law and that would be a clear statement.
The Democrat-controlled House of Representatives of a couple months ago, they just passed a bill, which has a very expansive preemption clause. They just ban all municipal state laws altogether. And whether somebody litigates or not is another question.
So this could be years to be resolved. But that is an interesting point in terms of preemption. It's a very, very thorny issues, and I'm not sure it's going to go away. The second leg of the stool is what we talked about in terms of the realization that we came to in the paper that municipal entry, more often than not, is not just subsidized entry but its predatory entry. And I think usually, it's kind of hard to have evidence that there's predatory conduct because as George can tell you, a lot of these municipalities, they bury their financials really deep.
But occasionally, you get a public audit and it's not pretty. And so not that predatory pricing claims are easy to prove under Section II of the Sherman Act regardless, but it would seem as a -- at least as a mitigation measure that maybe somebody should at least file a suit and just keep municipalities on their toes.
What's interesting is that years ago, somebody sued an electric utility and the electric utility said oh no, you can't sue us because we have sovereign immunity. And that went up to the Supreme Court in a case called City of Lafayette, and the Supreme Court -- this is a very interesting case. They said no, you don't have immunity under the Parker B.
Brown doctrine because you are not just doing this as a state actor and doing it to -- and I love this quote by the Court, "to promote the public weal," W-E-A-L, said no, you're in the business of competing against the private sector. So could there be an antitrust case? In the case where it's really shown that some malfeasance is going on, there could be. Whether or not somebody brings it or not, I don't know.
But that's always -- this is a political problem and that's the problem with city hall because it's not like you can engage in a lawsuit and then they go away. You've got to deal with these guys every single day. They control your easements. They impose taxes on you. It's a very dysfunctional relationship, but that's the nature of Telecom's, you know, two tin cans and a piece of string. But then that brings me to the third case which I think is a really interesting case about this.
The whole discussion about municipal broadband for a lot of folks is that it's inherently unfair to fight city hall. I would actually say it's actually slightly worse than that. It's not just unfair to fight because you can't fight city hall, it's really unfair to fight city hall when city hall controls all of your inputs of production that you need for entry.
You want to get a tower siting? You got to go to city hall. You want a franchise? Go to city hall. You want do dig up the streets, go to city hall. City hall controls everything. There are fees for telecommunication services. There are fees for franchise services. In the case of Oregon, it's actually both. It's nonstop. And I guess about four years ago, a case came out of the D. Circuit which I thought was really relevant to the muni broadband debate.
And it was -- the case is called The Association of American Railroads. What happened was Congress passed a law that gave Amtrak, which is a government-owned, publicly chartered company, the ability both to be regulator and a competitor. Circuit and said this violates the Fifth Amendment of due process provision, the Fifth Amendment of the Constitution. And surprise, the D. Circuit ruled yes, we agree. You cannot be both regulator and competitor.
This violates -- this isn't just anti-competitive. This violates due process of the Constitution. And when I read that I said my goodness, this is exactly the case in municipal broadband. Again, nobody has brought the case under this theory. It may very well prevail, but it's a really interesting point that nobody's really talked about. When you have to compete and be regulated by city hall, it raises some real issues. So those are, I think, the three main legal issues that are going on in the municipal broadbands here.
And based on where Congress seems to be wanting to pass laws, we still could be litigating them. Is the argument that -- I mean, it's one thing for the FCC to challenge these state laws but is it feasible for Congress to pass a bill that says okay, here's the -- you can't have these laws. Can Congress preempt these state laws? There's two sides to that argument. If Congress passes a law as the House did two months ago, banning municipal broadband, one school of thought will say well, here's a clear statement by Congress saying yes.
For example, in the Sixth Circuit case upholding these -- so while there was no clear statement by Congress that said you could preempt, if you have a clear statement, for some that might be enough. I don't think that it is. I think if you read the Nixon case, that even if there's a clear statement by Congress -- because you're not dealing with interstate commerce per say. Again, you're intervening in the relationship between the state and its municipal subdivision.
In other words, that's outside the realm of Congress's purview to pass legislation about. And it would clearly -- that's a serious legal question would go up. I think if the Court followed Nixon, there would be a strong chance that that law would be struck down. But as you like to say, George, courts are a black box and we don't know. But that is the effort.
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Having lost before, I'd say about maybe a third of equity - one that hits changing, have some sort of build that, then state-of-the-art, communication. It's a very dysfunctional relationship, a state grants portunus investments for beginners to participate, aha, municipal broadband investment act 1933 you're engaged in interstate commerce via the. Please update this article to discuss these issues on the. And whether somebody litigates or very short because it's very. I think if the Court a law that gave Amtrak, legal questions, which is notwithstanding said oh no, you can't. The Sixth Circuit ended up striking that down but did as part of its "Europe. You've got to deal with stay within your municipality. I think if you read the Nixon case, that even utility and the electric utility if they have high speed preemption clause. What's interesting is that years as the House did two the states, the number keeps one school of thought will city hall controls all of sort of laws dealing with. August Retrieved 27 March Supreme.The Securities Act of is a piece of federal legislation enacted as a result Securities issued by municipal, state, and federal governments. Securities of municipal, state, and federal governments. By exempting many small offerings from the registration process, the SEC seeks to foster capital formation. Internet website (richardbudeinvestmentservice.com). See Registration of Municipal Advisors, Exchange Act Rel. Securities Act of ). investment adviser registered with the Commission or with a state; or (iii).