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The Securities and Exchange Commission (SEC)

Mark Henricks
What is the SEC?

The Securities and Exchange Commission (SEC) regulates the financial world, enforcing securities law and overseeing financial advisors. Since it was born during the Great Depression, the SEC has been the chief overseer of markets and advisors and protector of investors. Still wondering what that job entails? Let’s take a closer look.

SEC History

The American public may have distrusted markets ever so slightly after the 1929 crash. Amid the ensuing Great Depression, Congress passed the Securities Act of 1934 and set up the SEC to function independently of other government agencies and departments.

The Securities Act of 1933 gave the early SEC the power to force public corporations to register their stock sales and identify major shareholders. By 1935 Public Utility Holding Company Act did away with holding companies that obscured the often-similar ownership of public utilities. That since-repealed act gave the SEC the power to break up large public utilities into small regional entities.

As financial markets developed, the SEC’s role changed with help from new legislation including:

The agency’s whistleblower program, created by Dodd-Frank, is perhaps the most visible of its recently enhanced regulatory powers. The program pays tipsters for information leading to successful law enforcement prosecutions, landing one whistleblower $39 million in 2018.

However, the SEC has also been criticized for its response to the recent economic crisis. The SEC charged 204 entities and individuals and collected $4 billion in penalties, but only managed one conviction for crimes related to the crisis.

Securities and Exchange Commission facts

Established through the Securities Exchange Act in 1934,the SEC is an federal agency operating independently of other agencies and departments.

The SEC’s primary mission is protecting investors and maintaining fair, orderly, and efficient markets. To a lesser degree, it exists to create more goods and services to raise national income levels.

It does all of the above by interpreting and enforcing federal securities laws while issuing new ones. It also has to inspect financial institutions (securities firms, brokers, investment advisers and ratings agencies) while overseeing private regulators

Foreign and domestic authorities coordinate with the SEC at all levels to ensure that any securities that are sold are sold to the public truthfully. To do this, the SEC:

  • registers securities sold to the public, requiring sellers to disclose pertinent information through documents such as prospectuses and annual and quarterly reports;
  • registers investment advisors, brokers, dealers, investment managers and others who sell securities and related services;
  • enforces the securities laws by pursuing civil actions, levying financial penalties, barring bad actors from the industry and other actions;
  • regulates securities markets including exchanges like the New York Stock Exchange and NASDAQ and self-regulatory bodies like the Financial Industry Regulatory Authority (FINRA);
  • collects and analyzes data to assist the agency’s policymaking, enforcement and oversight.

However, the SEC can only bring civil actions against its targets. It can seek injunctions against further illegal activity or financial penalties for certain acts. If it wants to bring a criminal case against a violator, it has to do so through the Department of Justice.

Examples of SEC Activities

What is the SEC?

Each year the SEC brings hundreds of civil actions against people and organizations for breaking securities laws. If you or the folks handling your finances conducted insider trading or committed securities or accounting fraud, the SEC will want to know about it.

The SEC makes headlines for investigating cases including the Martha Stewart insider trading scandal and the Bernie Madoff Ponzi scheme and the Enron fraud. After the Great Recession the SEC fined Goldman Sachs a record $550 million for defrauding subprime mortgage investors.

The SEC also attempts to educate investors. Its free searchable online database, EDGAR, is home to 21 million filings by public companies and other entities. If and investor is seeking a company’s 10-K annual reports or 10-Q quarterly reports, EDGAR is where you can find it.

Organization of the SEC

What is the SEC?

The SEC is headed by five commissioners appointed by the U.S. President. To limit political favoritism, no more than three commissioners can be from the same political party.

The commissioners oversee five divisions:

  • corporate finance, which reviews initial prospectuses, annual and quarterly filings and other documents and filings by public companies;
  • trading and markets, overseeing self-regulatory organizations like FINRA, trade clearing agencies, transfer agents credit rating agencies and others;
  • investment management, watching over mutual funds, fund managers, analysts and investment advisers;
  • enforcement, which investigates and, if necessary, prosecutes civil actions for selling unregistered securities, manipulating prices, stealing from customers and other violations;
  • risk and economic analysis, supplying commissioners with economic and risk analysis to guide its rulemaking.

The SEC has roughly 4,600 employees  in offices across the U.S. The commissioners discuss agency business in regular meetings that are open to the public and news media. If the commissioners are considering enforcement actions, however, those meetings are private.

The Bottom Line

The SEC regulates the financial world, enforcing securities law and policing financial advisors. It is a powerful regulatory entity, but is by no means alone in its efforts.

Investing Tips

  • Finding a financial advisor in good standing can keep you from running afoul of the SEC, but finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
  • Fee structure matters when choosing an advisor. Fee-based advisors, unlike fee-only advisors, may also act as broker-dealers. This could create some potential conflicts of interest.

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