The Securities and Exchange Commission (SEC)

Mark Henricks Nov 23, 2022

Created in response to the Great Depression, the U.S. Securities and Exchange Commission (SEC) is largely responsible for protecting investors during the purchase or sale of U.S. securities. The federal agency does this by overseeing key players that include brokers, investment advisors and stock exchanges. They make sure public companies disclose the required information and protect investors against fraud. Put simply, it exists to ensure that the system is fair. Helping people maximize their investment returns, though, is not its job. For that, you can work with a financial advisor.

SEC History

After the 1929 crash, there was little trust in U.S. securities markets – and a faint appetite for investing. But without investment and capital formation, the country would not recover from the ensuing Great Depression. So Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934 to restore confidence in the markets. As a result, the SEC came to exist – and function independently of other government agencies and departments.

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

The Investment Company Act of 1940
The Investment Advisers Act of 1940
The Sarbanes-Oxley Act of 2002
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

One important responsibility on the SEC’s plate is uncovering and prosecuting insider trading, accounting fraud and other violations of the law. Toward that end, Dodd-Frank enhanced the agency’s regulatory powers with the formation of the whistleblower program. This program authorizes the SEC to pay tipsters for information leading to successful law enforcement prosecutions. Since the first reward in 2012, the agency has SEC has issued more than $320 million to 57 individuals, including $39 million to one whistleblower in 2018.

That said, the SEC has been criticized for its impotency in response to the 2008 financial 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 by the Securities Exchange Act in 1934, the SEC has primary oversight of the U.S. securities markets. The independent agency’s mission is protecting investors and maintaining fair, orderly and efficient markets. This is in the interest of its third objective, facilitating capital formation.

To fulfill its role, the SEC interprets and enforces federal securities laws. It oversees all key market participants, including the stock exchanges, brokerages, mutual funds, the Financial Industry Regulatory Authority (FINRA), credit rating agencies and investment advisors.

Foreign and domestic authorities coordinate with the SEC at all levels to ensure that any securities that are sold through U.S. exchanges are done so with transparency and honesty. To do this, the SEC completes the following tasks:

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, advice and other 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 FINRA;
Collects and analyzes data to assist the agency’s policymaking, enforcement and oversight.

However, the SEC can only bring civil actions against violators of securities laws. It can also seek injunctions against further illegal activity and financial penalties and restitution for certain acts. If it wants to bring a criminal case, however, it has to do so through the Department of Justice.

Examples of SEC Activities

Each year the SEC brings hundreds of civil actions against people and organizations for breaking securities laws. It 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 seeks to educate investors. Its free searchable online database, EDGAR, is home to 21 million filings by public companies and other entities. If you’re looking for a company’s 10-K annual reports or 10-Q quarterly reports, EDGAR is the place to go.

Organization of the SEC

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

Corporate finance: Reviews initial prospectuses, annual and quarterly filings and other documents and filings by public companies;
Trading and markets: Oversees self-regulatory organizations like FINRA, trade clearing agencies, transfer agents credit rating agencies and others;
Investment management: Watches over mutual funds, fund managers, analysts and investment advisers;
Enforcement: Investigates and, if necessary, prosecutes civil actions for selling unregistered securities, manipulating prices, stealing from customers and other violations;
Risk and economic analysis: Supplies commissioners with economic and risk analysis to guide their rule-making.

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’s main purpose is to protect investors and regulate the selling and purchasing of securities. It does this by regulating the capital markets, enforcing securities law and ensuring required disclosures. The independent agency works with federal, state and foreign authorities in the process.

Tips for Finding the Right Financial Advisor

Finding the right financial advisor may be difficult if you’re not sure where to start. Typically, the candidates are all strangers with whom you are going to entrust your hard-earned savings. However, finding the right financial advisor doesn’t have to be hard anymore. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can 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 brokers. This could present some conflicts of interest that the advisor should tell you about.

Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.

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