At one time or another, investors and advisors will have to deal with the US Securities and Exchange Commission (SEC) in their securities and other investment transactions. Maybe not surprisingly, only a few investors and advisors know a whole lot about the SEC, why it exists, and why it is important.
Many people take the SEC for granted. Its very existence is based on the premise that all financial markets must be structured, and responsibly regulated to protect the interests of the American public at large.
In this article, InvestmentNews delves into the seldom-asked questions about the SEC. What is the SEC and what does it do? Why was the SEC created and when?
This article would benefit both experienced and novice investors. After familiarizing themselves with the SEC, new investors should read this guide for beginners before making their first investment.
The SEC is an independent government agency whose main purpose is threefold:
Other functions of the SEC include:
The SEC is the one government regulatory body tasked with enforcing laws that protect against market manipulation. Its core mandate is to provide oversight on the actions of organizations and individuals like broker dealers, advisors, stock exchanges, and investment fund firms.
In its role as the US government’s regulatory agency responsible for enforcing federal securities laws and regulating the securities industry, the SEC’s jurisdiction includes a wide range of activities. The SEC’s jurisdiction is overseeing the following:
Meanwhile, the SEC's regulatory scope includes:
In addition, the SEC has the authority to:
What is the SEC’s mission? Ever since its inception, the SEC’s goal has been to protect investors. The securities laws the SEC upholds are founded on a simple concept: everyone deserves fair treatment and has the right to access all the relevant facts about investments and those who sell them.
The SEC protects investors by enforcing federal securities laws to ensure that the markets operate truthfully and fairly. It’s the SEC’s job to:
To the extent that it is legal, the SEC urges companies who deal in securities to disclose all the information relevant to investors. This includes:
And to those who sell and trade securities and offer advice to investors – such as brokers-dealers, investment advisers, and exchanges – the SEC prescribes that they treat investors fairly and honestly.
In fact, the SEC goes as far as to recommend that advisers apply a standard of care – aka a fiduciary duty to their clients, the investors.
The SEC ensures market fairness and transparency by enforcing its financial rules and regulations. Under the General Rules and Regulations of the Security Exchange Act, much of the rules’ enforcement boils down to reporting and reviewing investments.
A good example is Section 240.14c-3, which states that security holders must furnish an annual report to the SEC. Meanwhile, under Section 240.15d-21, companies must provide reports on employees' savings plans, employee stock purchases, and other similar tools.
The SEC reviews all these reports to make sure that the buyers and sellers of securities act in good faith. And even as technology advances, the SEC consistently evaluates current procedures. When appropriate, the SEC modernizes those rules that can accommodate these improvements.
At nearly a century in existence, the SEC has passed various Acts designed to ensure market stability:
To consistently ensure that the market remains fair, the SEC also creates and enforces new rules to stay apace with changing economic conditions. One example is in February 2024, when the SEC proposed a rule to help qualify venture capital funds inflation adjustment.
To ensure even more fairness and transparency, the SEC will routinely ask for the public’s opinion along with conducting internal evaluations and reviews before approving amendments to securities laws.
The public is also able to send in whistleblower submissions to the SEC directly:
To enforce its rules and regulations, the SEC can proactively initiate investigations into possible cases of securities fraud or other violations. The SEC doesn’t have to wait on any aggrieved parties to look into probable cases of fraud. SEC staff regularly monitor company filings, the internet, and news reports that may suggest a violation of SEC rules.
To further fulfill its mandate, the SEC can initiate investigations at the request of other SEC divisions, and state or federal agencies tasked with investigating white-collar crimes. Here are some departments within the SEC and organizations apart from the SEC that help enforce federal securities laws:
This is a dedicated department tasked with detecting fraudulent and/or improper financial reports. The SEC has made a substantial investment in this department, equipping it with the tools and personnel capable of making data analyses and proactively identifying potential fraudulent acts.
This department in the SEC oversees corporate disclosure and compliance with securities laws. It reviews and evaluates registration statements, periodic reports, and other filings submitted by public companies to ensure that they provide accurate and timely information to investors.
This private-sector nonprofit corporation created by the Sarbanes-Oxley Act of 2002 monitors accounting professionals who do independent audit reports for publicly traded companies. As they are required by the Act to audit and report on public accounting firms, they can report irregularities to the SEC.
FINRA is a regulatory body authorized by US Congress to protect investors. This entity presides over the broker-dealer industry and ensures that it operates fairly and honestly.
At present, FINRA monitors over 624,000 brokers across the US and analyzes billions of daily market events. They can report irregularities in this sector to the SEC.
Any public company that suspects fraudulent or improper activity in their organization can report this to the SEC. Self-reporting may occur because:
Whether it’s NASDAQ, the New York Stock Exchange, the National Stock Exchange or any of the other major stock exchanges, the US SEC has jurisdiction over them. Investors and advisers may not know it, but the SEC is a crucial component of the US economy. Without the SEC, chaos would most certainly ensue. Some of the most vulnerable sectors of society can lose their retirement savings, apart from simply being unable to create and preserve wealth.
The United States’ Securities and Exchange Commission came about after the Great Depression of the 1920s. When the stock market crashed in October 1929, US Congress had to devise a way to prevent another crisis of that magnitude. Historians have yet to agree about the main reason why the Great Depression came about, but part of it was the American public’s loss of confidence in the US financial system. For instance, many depositors withdrew all their money from the banks, since they were fearful that the bank would suddenly close due to insolvency.
These mass withdrawals or “bank runs” created the logical consequence of widespread bank failures.
Bank failures then led to decreased consumer spending and business investment, as there were fewer banks to lend money. There was also a lot less money available for lending, partly because people preferred to stash their cash at home. This loss of confidence in the system got so bad that in 1933, one-fifth of all the banks in the US had closed.
The Great Depression and other factors prompted US Congress to pass the Securities Act of 1933, which would be more commonly known as the “truth in securities” law. Among its provisions was to require registration for securities traders, so the financial industry would be more transparent and hopefully keep its participants honest.
The law also required sellers to reveal important information, including any potential risks associated with their transactions. Meanwhile, buyers were given the right to recover any losses from deceit or misrepresentation in their transactions with sellers.
A year later in 1934, Congress passed the Securities Exchange Act of 1934, which formally established the Securities and Exchange Commission.
With the birth of the SEC, fraudulent practices like insider trading, or the dealing of securities “while in possession of material, nonpublic information” were outlawed. The SEC was also empowered to register and regulate organizations involved in the securities industry, including by requiring companies to periodically release public reports on their trading.
What is the SEC’s impact on the US financial markets? Here are some of its notable rulings and achievements:
This is an Act that was passed by the SEC to regulate debt securities, including bonds, debentures, and notes offered for public sale. Although they may be registered under the Securities Act, such securities may not be offered for public sale unless a formal agreement between the bonds issuer and the bondholder (trust indenture), conforms to the standards of this Act.
The Investment Company Act was designed to regulate the organization of companies, including mutual funds, that primarily invest in, reinvest, and trade in securities, and whose own securities are offered to the investing public.
This act is meant to minimize conflicts of interest arising from these complex operations. Its provisions require companies to disclose their financial condition and investment policies in their IPO, then update investors regularly.
The focus of the Investment Company Act is on informing the investing public about the fund and its investment objectives, as well as on investment company structure and operations. However, the Act does not give the SEC the power to directly supervise the investment decisions or activities of these companies, nor can they judge the merits of their investments.
This law is chiefly concerned with regulating investment advisers. With a few exceptions, this Act requires firms or sole practitioners who are paid to advise others about securities investments to undergo SEC registration. They must also conform to regulations designed to protect investors.
The Act was amended in 1996 and 2010. Now, only advisers who have at least $100 million of assets under management or advise a registered investment company are required to register with the SEC.
President George W. Bush signed into law the Sarbanes-Oxley Act of 2002 on July 30th of that year, which he described as "the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt."
The Sarbanes-Oxley Act mandated several reforms that enhanced corporate responsibility, financial disclosures, and to prevent corporate and accounting fraud. The Act also created the Public Company Accounting Oversight Board or PCAOB, to oversee the activities of the auditing profession.
Signed into law on July 21, 2010 by President Barack Obama, this legislation set out to reshape the US regulatory system in several areas:
Introduced on April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act was designed to help businesses raise capital in public capital markets by minimizing regulatory requirements.
Clearly, the SEC has an expansive mandate and wide jurisdiction over the US financial markets. But there are interesting things to know about the SEC; for one, the SEC can only impose civil penalties, meaning fines. It’s not in the SEC’s power to detain or incarcerate offenders. The SEC must conduct a lengthy and thorough investigation, then coordinate with the proper authorities like the FBI to arrest anyone who breaks federal securities laws.
On May 27, 2023, the SEC marked its 90th anniversary. It was on that day in 1933 that President Roosevelt had Congress enact the Securities Act, founding the SEC. During that time, as America emerged from the Great Depression, the financial markets were filled with “hucksters and con artists”.
Roosevelt and US Congress devised an effective remedy for this in the Truth and Securities Act. Ever the eloquent speaker, Roosevelt declared, “those who seek to draw upon other people’s money must be wholly candid regarding the facts on which the investor’s judgment is asked.”
Watch the short video as the SEC celebrated its 90th birthday:
Without the SEC, investors would not be informed enough to deal with new financial technologies and identify real investments from high-tech scams. The US (and possibly the global) financial system would see bad actors taking over, eroding investor confidence, and ensuring economic disaster.
For more stories and updates on the SEC, read and bookmark our section on Regulation and Legislation.
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