What is The SEC?

Being an investor in the stock market, you might have heard about the “SEC”. While many know that “SEC” stands for the U.S. Securities and Exchange Commission, what they do not know is the role of this government body. In order to become a successful investor, one has to be aware and well informed of every aspect of the stock market. The SEC is a regulator of the financial markets and helps protect investors, maintain fair, orderly, and efficient markets while facilitating capital formation. This organization also helps in protecting retail investors and traders while ensuring there are no unfair activities being conducted in the stock market. In this article, we shall go over what the SEC is, what are its functions, the history of the SEC, and understand the role of this organization. So, let’s get started! 

The U.S. Securities and Exchange Commission – SEC 

The U.S. Securities and Exchange Commission (SEC) is an Independent agency of the United States federal government that was created during the after-effect of the Wall Street Crash of October 1929. It is a regulatory agency that is responsible for the implementation of federal securities laws and the imposing of securities rules. 

It maintains the functionality of the securities markets industry and the stock and options exchanges. It also facilitates capital formation and regulates electronic securities markets in the country. The SEC’s headquarters is in Washington DC and has about 11 operational regional offices throughout the U.S. The SEC strives to create a trustworthy market environment for the common people. 

The Securities and Exchange Commission happens to be the first regulatory securities market that was created in the year 1934 by Congress. It is aimed at protecting investors against fraudulent and manipulative practices in the market. The SEC monitors every corporate takeover in the United States and promotes full public transparency. It also approves of Bookrunner registration statements amongst underwriting firms. 

The SEC scrutinizes every issue of securities coming in from interstate commerce through the mails or internet. These securities have to be registered with the SEC before they can be sold to investors. The same goes for financial services such as broker-dealers, advisory firms, asset managers, and their professional representatives. All must be registered with the SEC before the commencement of business.

History of the Securities and Exchange Commission (SEC) 

During the October 1929s’ Wall Street Crash in the United States, some blue sky laws were enforced on the state level. This law was in charge of regulating sales of securities that protect the public’s investment against fraud. However, the laws guiding the securities that were issued by lots of companies became ineffective.

Because of the falsified information provided to the public, the trust that they once held for the securities markets crumbled. It was for this reason that Congress had to pass the Securities Act of 1933 to help regulate the interstate sale of securities at the federal level. The Securities Exchange Act of 1934, which formed the SEC, was created to regulate the sale of securities in the secondary market.

The SEC was formed by section 4 of the Securities Exchange Act of 1934. This was referred to as the “Exchange Act” to enforce federal securities law and to make sure that companies gave out truthful statements about their business dealings, and that brokers, exchanges, and dealers would treat investors fairly and with honesty.

Over the years, additional laws have helped the SEC in its mission:

  • Investment Company Act of 1940
  • Trust Indenture Act of 1939
  • Investment Advisers Act of 1940
  • Sarbanes-Oxley Act of 2002
  • Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
  • Jumpstart Our Business Startups (JOBS) Act of 2012

The SEC brings about numerous civil enforcement actions every year against firms and individuals that violate securities laws. It aids in every major case of financial misconduct, whether directly or in coexistence with the Justice Department. Accounting fraud, distribution of false information, and insider trading are all typical offenses that are prosecuted by the SEC. 

The SEC was used as an instrument to prosecute the financial institutions, responsible for the crisis of the Great Recession, and returning billions of dollars to investors in 2008. In totality, the SEC has charged about 204 entities or individuals and retrieved close to $4billion in penalties, disgorgement, and other monetary relief. 

However, some observers had crucial information on some brokers and senior managers that were involved in the crisis and were never found guilty of any related wrongdoings. They have criticized the SEC for not putting much effort into prosecuting these sets. In the end, it was only one Wall Street executive that was jailed for crimes relating to that crisis. Others settled for a monetary penalty or accepted administrative punishments.

The SEC Organizational Setup 

About five commissioners of the Securities and Exchange Commission are appointed by the U.S. President, where one among them is chosen to be the Chairman of the commission. Each one of the Commissioner’s terms lasts up to five years, and may likely serve for an additional 18 months in office until a replacement is found.

This is according to the law that states that not more than three Commissioners will come from the same political party, to avoid being biased. The SEC’s current chairman is Gary Gensler and he was appointed by the US President, Joe Biden on April 17, 2021. The SEC is made up of five divisions and has a total of 24 offices.

They aim to interpret and carry out enforcement actions on securities laws, issue new rules, provide oversight of securities institutions, and coordinate regulation amongst different levels of the government.

Below are the five divisions within the SEC and their respective roles:

1. Division of Trading and Markets

This division takes care of the day-to-day activities of major securities market participants, the securities exchanges, the securities firms, the self-regulatory organizations, the clearing agencies, and also the securities information processors.

2. Division of Corporation Finance

The responsibility of this division is to assist the Securities and Exchange Commission to perform the role of taking care of the corporate disclosure of important information to investors. A corporation’s duty when a stock gets sold is to adhere to the regulations related to its disclosure. The Division of Corporation Finance is mandated to review disclosure documents that get filed by corporations regularly. This division interprets the rules of the SEC and also recommends new adoption rules that are related to the SEC.

3. Division of Investment Management

The Division of Investment Management does help the Securities and Exchange Commission to execute the role of promoting capital formation and protecting its investors. It regulates and takes care of the country’s investment management industry. This division ensures that the disclosures about investments such as mutual funds and exchange-traded funds are useful to the retail customers. It also makes sure that the regulatory costs are not too high.

4. Division of Economic and Risk Analysis

The Division of Economic and Risk Analysis helps in protecting the investors and ensuring that markets are fair, efficient, and in order. This division provides economic analyses and data analytics, as well as communicates with all the divisions and offices within the Commission.

5. Division of Enforcement

This division is met with the responsibility of enforcing the securities laws. It offers recommendations on the commencement of investigations of securities law violations. The Division of Enforcement as the name implies works closely with the law enforcement agencies to take on criminal cases.

The SEC brings in civil actions in federal court or before an administrative judge. Though criminal cases are under the jurisdiction of the law enforcement agencies within the Department of Justice, the SEC works hand in hand with these agencies to provide proof of evidence and also help with the court proceedings.

Functions and Purposes of SEC 

The Security and Exchange Commission performs several functions. Some of these functions include:

  • Regulation: SEC is the body that is vested with the authority to control and regulate the activities carried out in the capital market.
  • Listing function: There are several types of market participants or players in the stock market. Some of these players include bankers, stockbrokers, underwriters, investors, and portfolio managers. These different entities are all listed and controlled by the Security and Exchange Commission.
  • Control of independent organizations: Different autonomous organizations that are involved in the stock exchange market are monitored and controlled by the SEC.
  • Registration functions: It is the responsibility of the SEC to register independent players in the market such as companies and joint investors.
  • Prevention of Insider Trading: Members of company management can oftentimes use inside information to make a profit from the company shares. These profits are not accounted for thereby depriving the shareholders of their part in such transaction. Through its regulatory functions, the SEC minimizes and restricts such activities, thereby protecting the interest of shareholders and investors.
  • Prevention of forgery: It is the responsibility of the SEC to ensure that illegal transactions are identified and prevented. The body also sees to it that those who carry out such activities in the market are prosecuted.
  • Auditing of organizations: The Securities and Exchange Commission sees to it that the accounts of different organizations involved in the securities market are audited to ensure transparency.
  • Education of the members of the public: Members of the public may at one point or the other require access to various information and data about issuing companies to make informed decisions before investing. It is the responsibility of the SEC to ensure that such information is made available to the general public.
  • Research: SEC researches possible ways to improve the operations in the capital market through the examination of listed organizations. The findings of these researches are then published in journals and made accessible to members of the public.
  • Indexing: The Securities and Exchange Commission indexes transactions in the stock exchange. Through indexing, information in the stock exchange market is analyzed. Through these analyses, members of the public can become more aware of happenings in the market.

Conclusion

Now, with all this information, we hope that you understand what the SEC is and what are its functions in the financial markets. So, to summarize, the Securities and Exchange Commission is a U.S government surveillance agency that is responsible for the regulation of securities markets and the protection of investors. It can also bring about civil actions against law violators, as they team up with the Justice Department on criminal cases. We hope that this article provided you with valuable information. If you would like to see more such content on the stock market and finance, do check out Jeremy’s YouTube channel “Financial Education”. Happy investing! 

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