What is the Securities and Exchange Commission (SEC)?
The U.S. Securities and Exchange Commission (SEC) is an autonomous federal government regulatory body tasked with promoting capital creation, safeguarding investors, and ensuring the securities markets operate pretty and orderly. Congress established it as the first federal regulator of the securities markets in 1934. The SEC oversees corporate takeover activities in the U.S., encourages complete public disclosure, and defends investors against deceptive and manipulative market tactics. Additionally, it authorizes registration statements for underwriting businesses’ bookrunners.
Securities offered for sale in interstate commerce, via mail, or online generally need SEC registration before being made available for purchase by investors. Financial services companies—asset managers, broker-dealers, advisory firms, and their professional representatives—must also register with the SEC to do business. As an example, they would be in charge of approving any official Bitcoin exchange.
How the Securities and Exchange Commission (SEC) Works
Supervising entities and persons in the securities markets, such as investment funds, brokerage companies, dealers, consultants, and securities exchanges, is the primary duty of the SEC. The SEC encourages fair dealing, fraud prevention, and the disclosure and exchange of market-related information via its developed securities rules and regulations. Its electronic data-gathering, analysis, and retrieval database, known as EDGAR, makes registration statements, periodic financial reports, and other securities filings accessible to investors.
In the aftermath of the 1929 stock market crisis, the Securities and Exchange Commission (SEC) was established in 1934 to assist in regaining investor trust.
Five commissioners, one of whom serves as chair, are chosen by the president to lead the SEC. The terms of each commissioner are five years, with the option to serve an extra 18 months in case a successor is not found. Gary Gensler assumed the role of SEC chair on April 17, 2021. The statute stipulates that no more than three of the five commissioners may be members of the same political party to foster nonpartisanship.
There are 23 offices and five divisions within the SEC.
Their objectives include:
- Overseeing securities institutions.
- Issuing new regulations.
- Interpreting and enforcing securities laws.
- Coordinating regulation across several governmental levels.
The functions of the five divisions are as follows:
For investors to make wise investment choices, the Division of Corporate Finance ensures they are given substantial information about a company’s financial prospects or stock price.
The Division of Enforcement is responsible for carrying out administrative actions, civil lawsuits, and case investigations to enforce SEC rules.
The Division of Investment Management is responsible for overseeing federally registered investment advisers, variable insurance products, and investment businesses.
The SEC’s Division of Economic and Risk Analysis incorporates data analytics and economics into its primary goals.
Division of Trade and Markets
Creates and upholds norms for equitable, well-organized, and productive markets.
The SEC may only file civil lawsuits, and they may do so in administrative or federal courts. The Department of Justice’s law enforcement divisions handle criminal matters, yet the SEC often collaborates closely with these divisions to provide evidence and support legal procedures.
The SEC primarily pursues two punishments in civil suits
Injunctions are court decrees that forbid further transgressions. A person or business that disobeys an injunction faces penalties or jail time for contempt.
Civil monetary fines and the confiscation of illicit gains. The SEC may also ask a judge to issue an injunction prohibiting or delaying someone from serving as a director or officer of a company in certain circumstances. The commission and internal officers may also hear a variety of administrative cases brought by the SEC. Orders to halt and desist, registration revocation or suspension, and the imposition of bans or job suspensions are standard processes.
Additionally, the SEC acts as the first level of appeal for decisions taken by the New York Stock Exchange, FINRA, and other self-regulatory bodies in the securities sector.
The Office of the Whistleblower is one of the most effective tools for securities law enforcement of all the SEC’s offices. The SEC’s whistleblower program, established due to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, pays qualified persons for disclosing firsthand information that results in successful law enforcement proceedings with fines exceeding $1 million. The people may be awarded 10% to 30% of the total profits from the penalties.
The SEC’s past
The October 1929 fall of the U.S. stock market rendered many corporations’ assets worthless. Public confidence in the integrity of the securities markets plummeted due to several people having previously given inaccurate or misleading information. Congress introduced the Securities Act of 1933 and the Securities Exchange Act of 1934, establishing the SEC to regain public trust. Ensuring that corporations disclosed accurate information about their operations and ensuring exchanges, brokers, and dealers handled investors fairly and honestly were the primary responsibilities of the SEC.
Since then, several pieces of legislation have been passed to support the SEC’s goals:
- The 1939 Trust Indenture Act
- The 1940 Investment Company Act
- 1940’s Investment Advisers Act
- The 2002 Sarbanes-Oxley Act
Dodd-Frank The Jumpstart Our Business Startups (JOBS) Act of 2012 and the Wall Street Reform and Consumer Protection Act of 2010
These days, the SEC files many civil enforcement cases each year against companies and people who violate securities rules. Every significant financial malfeasance case involves it directly or in cooperation with the Justice Department. The SEC often prosecutes cases involving insider trading, accounting fraud, and the distribution of false or misleading information.
The SEC they played a crucial role in pursuing the financial firms responsible for the 2008 Great Recession and helping investors regain their billions. It levied charges against 204 organizations or persons and amassed about $4 billion in fines, disgorgement, and other financial remedies. For instance, Goldman Sachs paid $550 million, the second-highest fine in SEC history and the most significant penalty ever for a Wall Street company, surpassed only by WorldCom’s $750 million payment.
Even still, several commentators have chastised the SEC for not going far enough in aiding the prosecution of the crisis-related brokers and top management, almost all of whom were never found guilty of serious misconduct. Only one Wall Street executive has been imprisoned for crisis-related offenses so far. The others either consented to administrative sanctions or a monetary fine.
How Are New Rules Made by the SEC?
A concept release precedes a proposal to create a new SEC regulation. A concept release and a follow-up proposal are available for public inspection and feedback. When deciding what to do next, the SEC considers public feedback on the plan.
The SEC will then gather to discuss suggestions from the general public, business leaders, and other subject-matter experts. A vote then approves the regulation.
Are FINRA and the SEC the same thing?
No. A federal agency called the SEC establishes guidelines for issuing, advertising, and trading securities. Investor protection is another of the SEC’s responsibilities. A non-profit industry self-regulatory body, FINRA (previously NASD), oversees broker-dealers and grants securities industry professionals licenses.
To whom is the SEC accountable?
The Chairman and the four Commissioners, nominated by the President and approved by the Senate, comprise the nonpartisan five-member panel that leads the SEC, an independent federal body.
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 other federal laws, give the SEC authority and subject it to congressional oversight.
Conclusion
- The U.S. government oversight body overseeing the securities markets and safeguarding investors is called the Securities and Exchange Commission (SEC).
- The U.S. Securities Act of 1933 and the Securities and Exchange Act of 1934, passed in reaction to the 1929 stock market crisis that precipitated the Great Depression, formed the SEC.
- The SEC collaborates with the Justice Department on criminal prosecutions and has the authority to file lawsuits in its own right against lawbreakers.
