Securities and Exchange Commission (SEC) Defined, How It Works
What Is the Securities and Exchange Commission (SEC)?
The U.S. Securities and Exchange Commission (SEC) is an independent federal government regulatory agency responsible for protecting investors, maintaining fair and orderly functioning of the securities markets, and facilitating capital formation. It was created by Congress in 1934 as the first federal regulator of the securities markets. The SEC promotes full public disclosure, protects investors against fraudulent and manipulative practices in the market, and monitors corporate takeover actions in the United States. It also approves registration statements for bookrunners among underwriting firms.12
Generally, issues of securities offered in interstate commerce, through the mail or on the Internet, must be registered with the SEC before they can be sold to investors. Financial services firms—such as broker-dealers, advisory firms and asset managers, as well as their professional representatives—must also register with the SEC to conduct business. An example: they would be responsible for approving any formal bitcoin exchange.3
- The Securities and Exchange Commission (SEC) is a U.S. government oversight agency responsible for regulating the securities markets and protecting investors.
- The SEC was established by the passage of the U.S. Securities Act of 1933 and the Securities and Exchange Act of 1934, largely in response to the stock market crash of 1929 that led to the Great Depression.
- The SEC can itself bring civil actions against lawbreakers, and also works with the Justice Department on criminal cases.
How the Securities and Exchange Commission (SEC) Works
The SEC’s primary function is to oversee organizations and individuals in the securities markets, including securities exchanges, brokerage firms, dealers, investment advisors, and investment funds. Through established securities rules and regulations, the SEC promotes disclosure and sharing of market-related information, fair dealing, and protection against fraud. It provides investors with access to registration statements, periodic financial reports, and other securities forms through its electronic data-gathering, analysis, and retrieval database, known as EDGAR.4
The Securities And Exchange Commission (SEC) was created in 1934 to help restore investor confidence in the wake of the 1929 stock market crash.1
The SEC is headed by five commissioners who are appointed by the president, one of whom is designated as chair. Each commissioner’s term lasts five years, but they may serve for an additional 18 months until a replacement is found. The current SEC chair is Gary Gensler, who took office on April 17, 2021. To promote nonpartisanship, the law requires that no more than three of the five commissioners come from the same political party.56
The SEC consists of five divisions and 23 offices.2 Their goals are to interpret and take enforcement actions on securities laws, issue new rules, provide oversight of securities institutions, and coordinate regulation among different levels of government. The five divisions and their respective roles are:
- Division of Corporate Finance: Ensures investors are provided with material information (that is, information relevant to a company’s financial prospects or stock price) in order to make informed investment decisions.7
- Division of Enforcement: In charge of enforcing SEC regulations by investigating cases and prosecuting civil suits and administrative proceedings.8
- Division of Investment Management: Regulates investment companies, variable insurance products, and federally registered investment advisors.9
- Division of Economic and Risk Analysis: Integrates economics and data analytics into the core mission of the SEC.10
- Division of Trading and Markets: Establishes and maintains standards for fair, orderly, and efficient markets.11
The SEC is allowed to bring only civil actions, either in federal court or before an administrative judge. Criminal cases fall under the jurisdiction of law enforcement agencies within the Department of Justice; however, the SEC often works closely with such agencies to provide evidence and assist with court proceedings.12
In civil suits, the SEC seeks two main sanctions:
- Injunctions, which are orders that prohibit future violations. A person or company that ignores an injunction is subject to fines or imprisonment for contempt.
- Civil money penalties and the disgorgement of illegal profits. In certain cases, the SEC may also seek a court order barring or suspending individuals from acting as corporate officers or directors. The SEC may also bring a variety of administrative proceedings, which are heard by internal officers and the commission. Common proceedings include cease and desist orders, revoking or suspending registration, and imposing bars or suspensions of employment.12
The SEC also serves as the first level of appeal for actions sought by the securities industry’s self-regulatory organizations, such as FINRA or the New York Stock Exchange.
Among all the SEC’s offices, the Office of the Whistleblower stands out as one of the most potent means of securities law enforcement. Created as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC’s whistleblower program rewards eligible individuals for sharing original information that leads to successful law enforcement actions with monetary sanctions in excess of $1 million. The individuals can receive 10% to 30% of the total sanctions’ proceeds.13
History of the SEC
When the U.S. stock market crashed in October 1929, securities issued by numerous companies became worthless. Because many had previously provided false or misleading information, public faith in the integrity of the securities markets plunged. To restore confidence, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934, which created the SEC. The SEC’s primary tasks were to ensure that companies made truthful statements about their businesses and that brokers, dealers, and exchanges treated investors in an honest and fair manner.1
In the years since additional laws have aided the SEC in its mission:
- Trust Indenture Act of 1939
- Investment Company Act of 1940
- 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 201214
Today the SEC brings numerous civil enforcement actions against firms and individuals that violate securities laws every year. It is involved in every major case of financial misconduct, either directly or in conjunction with the Justice Department. Typical offenses prosecuted by the SEC include accounting fraud, the dissemination of misleading or false information, and insider trading.
After the Great Recession of 2008, the SEC was instrumental in prosecuting the financial institutions that caused the crisis and returning billions of dollars to investors. In total, it charged 204 entities or individuals and collected close to $4 billion in penalties, disgorgement, and other monetary relief. Goldman Sachs, for example, paid $550 million, the largest penalty ever for a Wall Street firm and the second-largest in SEC history, exceeded only by the $750 million paid by WorldCom.1516
Still, many observers have criticized the SEC for not doing enough to help prosecute the brokers and senior managers who were involved in the crisis, almost all of whom were never found guilty of significant wrongdoing. So far, only one Wall Street executive has been jailed for crimes related to the crisis. The rest either settled for a monetary penalty or accepted administrative punishments.17
How Does the SEC Make New Rules?
A new SEC rule starts with a concept release, which leads to a proposal. Both a concept release and subsequent proposal are published for public review and comment. The SEC considers the public’s input on the proposal as it determines its next steps.18 The SEC will then convene to consider input from the public as well as industry or other subject-matter experts are considered. They then vote to adopt the rule.
Is the SEC the Same as FINRA?
No. The SEC is a government organization that sets rules and regulations regarding the issuance, marketing, and trading of securities. The SEC is also charged with protecting investors. FINRA (formerly NASD) is a non-profit self-regulatory industry organization that oversees broker-dealers and issues licenses to securities professionals.
Who Is the SEC Accountable to?
The SEC is an independent federal agency that is headed by a bipartisan five-member commission, comprised of the Chairman and four Commissioners who are appointed by the President and confirmed by the U.S. Senate.19 The SEC is accountable to Congress as it operates under the authority of federal laws including the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, the Investment Advisers Act of 1940, and the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), among others.
- U.S. Securities and Exchange Commission. “The Role of the SEC.”
- U.S. Securities and Exchange Commission. “What We Do.”
- U.S. Securities and Exchange Commission. “Chairman’s Testimony on Virtual Currencies: The Roles of the SEC and CFTC.”
- U.S. Securities and Exchange Commission. “About EDGAR.”
- U.S. Securities and Exchange Commission. “Current SEC Commissioners.”
- U.S. Securities and Exchange Commission. “Gary Gensler Sworn in as Member of the SEC.”
- U.S. Securities and Exchange Commission. “Division of Corporation Finance.”
- U.S. Securities and Exchange Commission. “Division of Enforcement.”
- U.S. Securities and Exchange Commission. “Division of Investment Management.”
- U.S. Securities and Exchange Commission. “Economic and Risk Analysis.”
- U.S. Securities and Exchange Commission. “Trading and Markets.”
- U.S. Securities and Exchange Commission. “How Investigations Work.”
- U.S. Securities and Exchange Commission. “Office of the Whistleblower.”
- U.S. Securities and Exchange Commission. “The Laws That Govern the Securities Industry.”
- U.S. Securities and Exchange Commission. “Addressing Misconduct That Led to or Arose From the Financial Crisis.”
- U.S. Securities and Exchange Commission. “SEC Distributions to WorldCom Fraud Victims Top Half-Billion Dollar Mark.”
- The New York Times. “Why Only One Top Banker Went to Jail for the Financial Crisis.”
- Inbestor.gov. “Rulemaking, How It Works.”
- U.S. Securities and Exchange Commission. “PERFORMANCE AND ACCOUNTABILITY REPORT.”
Prepare and write by:
Author: Mohammed A Bazzoun
If you have any more specific questions, feel free to ask in comments.
For More Article