What is the role of the SEC in Chapter 11 bankruptcies?

When a business is struggling with debts, that business may opt for a Chapter 11 bankruptcy. Essentially, this is a reorganization bankruptcy in which the business renegotiates and restructures many of the debts that they owe so that they can get the business back on track and ideally begin operating profitably. Often, businesses operate for many years in Chapter 11, and when a business does declare Chapter 11, it can have a major impact on the value of the investment that shareholders and stockholders have made in the company. As such, while a Chapter 11 bankruptcy is going to be primarily governed by the US federal bankruptcy code, the Securities and Exchange Commission (SEC) may also play a role in setting the rules. 

Shareholders, or those who own stock in a company, are often significantly affected by a Chapter 11 in several ways:

• The value of the stock will decline as a result of the bankruptcy. 
• Shareholders may be asked to return stock and get a new ownership interest in the reorganized company, which is often worth a great deal less than their original investment.
• Shareholders may at times be given the opportunity to vote on a Chapter 11 reorganization plan, though these votes often have little practical effect.

Since there is a major impact on shareholder rights during a Chapter 11, the SEC does have some authority in a Chapter 11 situation. The Securities and Exchange Commission (SEC) largely regulates the securities market which involves the purchase and sale of ownership shares in public companies. They oversee a number of different aspects of the securities market, including required disclosures and rules against insider trading.

Generally, the SEC's role in a corporate bankruptcy is more limited, since a Chapter 11 bankruptcy is not directly related to the purchase, sale or exchange of securities. However, the SEC will:

• Review the disclosure document to determine if the company is telling investors and creditors the important information they need to know; and
• Ensure that stockholders are represented by an official committee, if appropriate.

Although the SEC does not negotiate the economic terms of reorganization plans, the agency may take a position on important legal issues that will affect the rights of public investors in other bankruptcy cases as well. For example, the SEC may step in if they believe that the company's officers and directors are using the bankruptcy laws to shield themselves from lawsuits for securities fraud.