Created in response to the Great Depression, the U.S. Securities and Exchange Commission (SEC) is largely responsible for protecting investors in U.S. securities. The federal agency does this by overseeing key players (including brokers, investment advisors and stock exchanges), making sure public companies disclose required information and protecting 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 should consult a financial advisor. Read on for more about the SEC.
After the 1929 crash, there was little trust in U.S. securities markets – and 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, the 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 recent financial crisis (in 2008). 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.
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:
- 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 elated 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 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, which oversees self-regulatory organizations like FINRA, trade clearing agencies, transfer agents credit rating agencies and others;
- investment management, which watches 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, which supplies commissioners with economic and risk analysis to guide its 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. 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.
Tips for Finding the Right Financial Advisor
- Choosing a financial advisor isn’t easy for anyone. Typically, the candidates are all strangers – with whom you are going to entrust your hard-earned savings. To narrow the field, use SmartAsset’s free matching tool. It will recommend up to three advisors in your area and vetted by us.
- 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.
Photo credit: ©iStock.com/xijian, ©iStock.com/MysteryShot, ©iStock.com/vm