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What Is the Securities and Exchange Commission (SEC)?

May 14, 2022
7
min

The SEC is an independent federal agency with a mission to protect investors, giving them the resources to make informed decisions while navigating the market.

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The stock market crash of 1929 would mark the beginning of the Great Depression, a years-long economic downturn where the Dow Jones Industrial Average dropped by 90% in less than four years. Because companies and brokers had provided misleading information to investors, market confidence eroded. 

To help recover from this bear market and restore faith in a shaken system, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934, which created the U.S. Securities and Exchange Commission. At that time, the SEC’s main function was to ensure companies truthfully reported their business activities and that brokers and exchanges were honest with investors.

The SEC helped bring stability to financial markets, effectively achieving a key reform under then-President Franklin D. Roosevelt’s economic recovery program known as the New Deal.

Over time, the SEC’s responsibilities have expanded to include greater protections for investors through strengthened market regulation, increased enforcement activities, and firmer penalties for violations.

What is the Securities and Exchange Commission?

The U.S. Securities and Exchange Commission, or SEC, is well-known as the watchdog of Wall Street. Created to protect investors from fraud and instill investor confidence in the financial markets, the SEC earned its reputation from a history of enforcing securities laws. Notably, the independent federal agency requires public companies to provide a clear financial picture of their business including fiscal condition.

The SEC’s purpose and mission 

The purpose of the SEC is to maintain fair and efficient markets, regulate the activities of investment professionals, and ensure publicly held companies follow financial reporting laws.

Today, its primary mission is to oversee markets, brokerages, and securities professionals. It gives investors access to financial reporting and SEC registration statements through EDGAR—or Electronic Data Gathering, Analysis, and Retrieval—the electronic filing system the SEC created to make corporate filings available to the public.

With six divisions, the SEC employs more than 4,000 employees. And while its overall goal remains to protect U.S. investors, it doesn’t work directly with them. Rather, it maintains a safe investment environment by regulating stock exchanges, broker-dealers, companies, and investment products.

The duties of the SEC

Interpreting and enforcing securities laws, issuing new rules and regulations, and providing oversight to securities institutions are among the SEC’s core responsibilities.

The agency carries out enforcement actions through civil litigation while also assisting the Department of Justice (DOJ) in criminal proceedings, working with DOJ’s law enforcement agencies throughout the process. 

The SEC litigates all kinds of financial misconduct cases, including accounting fraud, insider trading, and the dissemination of false information. After the 2008 recession, the SEC prosecuted the financial institutions that caused the subprime mortgage crisis, charging more than 200 entities and collecting and disbursing close to $4 billion in penalties and other relief.

Spurred by the financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established the SEC’s Office of the Whistleblower. The whistleblower program rewards people for sharing information that leads to successful law enforcement actions for monetary sanctions over $1 million. Whistleblowers can receive up to 30% of the total sanction proceeds.

After a thorough investigation, the SEC’s Enforcement Division can recommend legal action in two ways: filing a civil case in federal court or bringing administrative action. If a complaint goes to federal court, possible sanctions include:

  • Injunctions. Court orders prohibiting certain conduct in the future that violates SEC rules or securities laws. Violation can result in fines or imprisonment for contempt.
  • Civil monetary penalties. The SEC may ask for repayment of illegal profits, or disgorgement, as an enforcement tool to deter future wrongdoings.

Meanwhile, administrative actions that can be handed down by an administrative law judge include:

  • Cease and desist orders. Stops and prevents a company in the future from violating securities laws, and SEC rules and regulations.
  • Bars and suspensions. The SEC may seek to relieve officers or directors, for example, from employment or positions with associations for violation of securities laws.

In addition, the SEC oversees self-regulatory organizations (SROs) like the Financial Industry Regulatory Authority (FINRA) and the New York Stock Exchange, and hears appeals from these SROs.

On the investor side, the SEC also develops standards, such as the SEC yield, which is a yield calculation that allows investors to evaluate bond funds. Based on the most recent 30-day period of fund filings with the SEC, it is also called the “standardized yield.”

The SEC: A brief history

The SEC is an agency formed in 1934 under President Franklin D. Roosevelt when Congress passed the Securities Exchange Act, officially establishing the SEC. It transferred the Federal Trade Commission’s power of enforcement to the SEC, allowing it to investigate and prosecute individuals and companies that violate national financial securities laws. 

Since then, the SEC has grown and taken on more responsibilities. Here is a brief timeline of SEC history:

1934. Franklin D. Roosevelt signs the Securities Exchange Act establishing the SEC as a government entity.

1939-1940. Additional securities laws within the SEC’s jurisdiction are passed. They include:

  • The Trust Indenture Act of 1939, which prohibits bond issues over $10 million from being offered without a written agreement; 
  • The Investment Company Act of 1940, which regulates the organization of investment companies; and 
  • The Investment Advisers Act of 1940, a federal law that defines the role of—and regulates—an investment advisor.

1994. The SEC creates its EDGAR database giving the public access to registration statements, scheduled financial reports, and other documents from public companies.

2002. Congress passes the Sarbanes-Oxley Act to help protect investors from fraudulent financial reporting by corporations.

2010. Congress passes the Dodd-Frank Wall Street Reform and Consumer Protection Act to further protect consumers and regulate trading. 

The SEC’s divisions

Five commissioners are appointed to the SEC by the U.S. president, with one designated as SEC chair. Each commissioner’s term lasts five years with an optional 18 additional months during the search for a replacement. No more than three of the five commissioners can come from the same political party. The SEC, with 25 main offices plus 11 regional offices nationwide, includes  six divisions: 

  • Division of Corporation Finance. This division ensures that investors have the relevant information they need to make informed investment decisions. It holds companies to disclosure and reporting laws both when they go public and on a regular basis.
  • Division of Enforcement. Through this division, the SEC conducts investigations into possible violations of securities laws and prosecutes civil suits and administrative proceedings.
  • Division of Examinations. This large division is responsible for examining newly registered entities, and also works to ascertain securities law violations. Each year, it publishes its priorities, which are currently to examine: private funds; environment, social, and governance (ESG) investing; retail investors and working families; informational securities; and crypto-assets. 
  • Division of Investment Management. This division oversees investment products like mutual funds, as well as companies and federally registered investment advisors.
  • Division of Economic and Risk Analysis. With involvement across SEC divisions, this group engages in policy making, enforcement, as well as handling analytics and data efforts.
  • Division of Trading and Markets. This section establishes and maintains standards for fair and efficient markets. It also regulates the major securities market participants, including broker-dealer and self-regulatory agencies.  

The bottom line

The Securities and Exchange Commission is an independent federal agency with a mission to protect investors, maintain orderly and fair markets, and facilitate investment. Its creation in 1934 helped strengthen protections in the markets for investors. But like the markets, the SEC’s duties have evolved over time. There is an ongoing focus on greater transparency and financial disclosures from public companies. However, new divisions and offices, for example, have expanded the regulatory agency’s roles and responsibilities, which include enforcing securities laws, issuing new rules and regulations, and oversight of securities institutions. 

Importantly, the existence of the SEC continues to promote confidence in investors by giving them the resources to make informed decisions while navigating the market.

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