The Securities and Exchange Commission – Its Importance, Success, and Failures

Infographic that explains what the Securities and Exchange Commission does, its main functions and its structure.

The Securities and Exchange Commission (SEC) is one of the U.S. government agencies that maintain law and order in the securities markets. They promote full public disclosure for all securities and aim to protect investors against fraudulent and manipulative practices in the U.S. Investing is a complex endeavor that can seem confusing and intimidating to a beginner. However, it also offers many opportunities and can be rewarding for those who possess the skill of making the right move at the right moment. Thanks to SEC laws and regulations, investors can feel more secure about their investments.

This article explains the Securities and Exchange Commission’s functions, history, structure, and other factors that impact the fairness and efficiency of U.S. securities markets.

What Is the Securities and Exchange Commission?

The Securities and Exchange Commission is an independent agency of the federal government. It has the approval of Congress and is the main regulatory body for the U.S. securities market. As a result, the SEC is responsible for maintaining fair, orderly, and efficient markets, facilitating capital formation, and protecting investors. It is located in Washington D.C., with 11 regional offices throughout the US. 

This federal agency oversees the securities market and its exchanges, protects investors against frauds and scams, and maintains a lawful and organized capital market system. In addition, the agency provides investors with relevant information about the sale of securities and the financial health of publicly traded companies. As a result, the Securities and Exchange Commission makes investing in stocks, bonds, mutual funds, and other securities a lot safer, especially for investors with little experience.

The Securities and Exchange Commission mandates that all securities that are issued are registered before being sold. Furthermore, financial service firms like asset managers, broker-dealers, advisors, and other professionals working in the securities market must register with the SEC.

The SEC also has the power to punish individuals and organizations violating securities laws. Examples of violations include manipulating markets, insider trading, and supplying false financial information in statements and reports.

What Does the Securities and Exchange Commission Do? 

The primary function of the Securities and Exchange Commission is to monitor individuals and organizations in the securities market, including brokerage firms, investment advisors, securities exchanges, dealers, and investment funds. In addition, it uses rules and regulations to promote the disclosure of information and protection against fraudulent activities. Hence, it gives investors easy access to financial reports, statements, and other information to make informed decisions.

Here is an overview of the U.S. Securities and Exchange Commission’s 5 main functions:

Protection of Investors

After the stock market crash of 1929, the trust in securities was at an all-time low. As a result, the Securities and Exchange Commission was established to implement federal securities laws to restore investor confidence in the financial market. Accordingly, it became THE authority to monitor firms that facilitate transactions, regulatory organizations, and physical stock exchanges like the NYSE.

The SEC implements federal securities laws to ensure that investors are treated fairly and have access to accurate information about investments and their sellers.

To achieve this, it mandates that fund and asset managers, public companies, investment professionals, and others involved in financial markets disclose financial information accurately. This ensures that investors always have all the information necessary to make informed investment decisions.

The Securities and Exchange Commission accomplishes this by strictly enforcing securities laws by fining violators, filing civil cases against wrongdoers, and helping in criminal cases against financial fraud.

Regulating Markets

The SEC has a dedicated division that monitors the daily activities of the securities markets. The division keeps a watch on the major market participants in securities trading, including exchanges, clearing agencies, security firms, credit rating agencies, etc. It also helps implement rules and policies by interpreting matters affecting the operations within the market.

The Securities and Exchange Commission ensures that everybody involved in trading securities discloses information and offers “honest” advice to investors. The goal is that all involved, including dealers, brokers, financial institutions, and advisors, treat investors fairly. In addition, by monitoring the activities of thousands of participants in the industry, the agency maintains fair, efficient, and orderly markets.

Enforcement of Federal Securities Laws

The SEC has created a set of rules and regulations to register securities sold in the US market. As a result, it has the authority to take action against any fraudulent parties that break these laws. In addition, the Division of Enforcement uses surveillance, investor tips, and information from other divisions to determine any law violation. It also works with other law-enforcement agencies to handle criminal activities.

Facilitation of Capital Formation

The SEC provides entrepreneurs and organizations with a wide range of opportunities to access capital markets, help them develop innovations, and create jobs. As a result, according to the Securities and Exchange Commission, about $4 trillion was raised in 2019 in public and private securities, thereby promoting job creation and economic growth.

Regulation and Promotion of Corporate Disclosure and Transparancy

The Securities and Exchange Commission works with the Division of Corporation Finance to implement the rules and regulations outlined in the 1934 Securities Act. The primary aim of this division is to ensure that corporations disclose honest information about securities. In the absence of such protection, there would be more fraudulent activity in the markets. Furthermore, the SEC reviews certain documents like annual reports to ensure corporate disclosure.

Securities and Exchange Commission History

When the U.S. stock market crashed in October 1929, many securities became worthless. As a result, public faith in the security markets was at an all-time low, and an abundance of misleading and false information was floating around. The Securities Act of 1934 was the key to restore trust and confidence in financial markets. 

This act actually created the Securities and Exchange Commission and gave the agency broad authority over different aspects of the securities industry. Its main task was to ensure that companies stated their businesses genuinely. In addition, the agency also was in charge of regulating and overseeing self-regulatory organizations like trade exchanges, transfer agents, clearing agencies, and brokerage firms.

Before the 1934 Act, small groups holding many stocks could dominate the markets and manipulate them. This changed with the enactment of the Securities Exchange Act of 1934. This act requires that public companies register their stock sales and define and disclose their top stockholders.

It also identifies and prohibits some types of conduct in the securities market and gives the SEC powers to regulate individuals and entities associated with securities markets. The law also empowers the Commission to mandate public companies to periodic reporting of information.

Laws That Govern Securities

Infographic that lists the Securities and Exchange Commission's most important laws that govern the securities industry.

While the primary law governing the functioning of the SEC was the Securities Exchange Act of 1934, several additional laws have helped the agency in its mission. For example, these laws enable the Securities and Exchange Commission to take action against numerous securities law violations of individuals and organizations every year. Here are some examples of some of the laws governing securities in the U.S.

Securities Act of 1933

The Securities Act of 1933, also known as “The Truth in Securities Law,” was the first piece of federal legislation to protect investors. After the stock market crash of 1929, during the Great Depression, there was a need for more regulations to prevent fraud. Many believed that irresponsible financial practices contributed to the crash of 1929. The 1933 Act’s main goal was to ensure that buyers would receive full disclosure and accurate information regarding securities traded. This required security issuers to submit a registration statement that included an informative prospectus about the company’s security, company, and finances. 

As a result, this act prevents fraud and misrepresentation in securities markets. Even today, issuers of securities must submit a registration statement and prospectus, so investors have the information they need to make informed decisions.

Although the Securities and Exchange Commission requires the information to be accurate, it cannot guarantee it. However, if investors can prove they suffered losses because of incomplete or incorrect information, they might get compensation for these losses.

Trust Indenture Act of 1939

This law applies to debt securities like debentures, notes, and bonds offered for public sale. It prohibits bond issues over $10 million without a formal written agreement (indenture). The bondholder and issuer have to sign the indenture and disclose the particulars of the debt issuance.

Investment Company Act of 1940

This Act monitors and guides the structure of investment companies and their activities. In other words, it sets standards for the industry. This law intends to reduce conflicts arising in complex operations. Therefore, it mandates companies to disclose their financial condition and policies to investors. Besides the law requiring disclosure of information about the fund and investment objectives to the investors, it also monitors and provides insight into the company structure and operations.

Investment Advisers Act of 1940

This securities law regulates and defines the responsibilities of investment advisers. It provides a legal ground for monitoring people who advise individuals, institutions, and funds on investing matters. This Act requires advisors who have more than $100 million in assets under management or advise a registered investment company to register with the Securities and Exchange Commission and meet its rules and regulations to protect investors.

Sarbanes-Oxley Act of 2002

The Law of Sarbanes-Oxley signed in 2002 mandated several reforms to improve corporate responsibility, prevent corporate and financial fraud, and enhance financial disclosures. In addition, this law has added strict reforms to existing regulations and has imposed tough penalties on violations.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

This Act was created as a response to the 2008 financial crisis. The Dodd-Frank Wall Street Reform and Consumer Protection Act reshaped the securities regulatory and consumer protection system. It encompasses various areas that needed updating, including trade restrictions, consumer protection, corporate governance, and regulation of financial products. The Act is over 2300 pages long and contains many provisions that still need implementation.

Jumpstart Our Business Start-ups Act of 2012

The JOBS Act of 2012 aims to help small businesses by loosening the regulations imposed by the SEC. For example, it minimizes reporting requirements for companies earning less than $1 billion in revenue and gives them easier access to crowdfunding to help them raise capital.

SEC Structure

The Securities and Exchange Commission is located in Washington D.C., with 11 regional offices throughout the US. It is led by five commissioners appointed by the U.S. President. One of them is the chairperson of the SEC. A commissioner’s term is 5 years, and no more than 3 commissioners can belong to the same political party.

Furthermore, the agency has five divisions and twenty-four offices. Their responsibilities include rulemaking, securities law enforcement, coordination of regulations, and providing information about securities institutions.

Here is an overview of its five divisions and their responsibilities.

Corporation Finance Division 

This Division of Corporation Finance ensures corporations submit accurate information about their securities to the public. In addition, It oversees the proper registration of transactions in the corporate finance field. A mergers and acquisitions deal is an example of a disclosure that the SEC pays close attention to.

It also provides assistance to companies regarding the interpretation of its rules and regulations, and it makes recommendations regarding revisions and adding additional rules to the Commission.

Investment Management Division

This division is responsible for regulating investment management companies and advisors. The Division of Investment Management administers various federal securities laws and assists the SEC in interpreting these laws. Furthermore, it assists the Commission in enforcement matters that involve investment entities and advisors. Besides, it advises on adapting Securities and Exchange Commission rules to new situations.

Enforcement Division

This Division of Enforcement implements regulations and investigates possible violations. Therefore, It recommends that the Securities and Exchange Commission brings civil actions against violators in federal court or administrative proceedings before an administrative law judge. Besides civil actions, it can also recommend criminal actions. The Division of Enforcement is the biggest in terms of budget and members. After the financial crisis of 2007-2008, its resources and the number of civil actions have increased significantly. 

Economic and Risk Analysis Division

This division provides risk and economic analysis to other divisions. In addition, it participates in the working of the Securities and Exchange Commission across different activities, including law-making and enforcement. As a result, its tasks include providing the SEC and other offices with high-quality, detailed statistical and economic analysis and expertise to identify market risks and violations of the securities laws.

Trading and Markets Division

The Trading and Markets Division is responsible for maintaining order, efficiency, and fairness in the securities market. For instance, it oversees exchanges such as the New York Stock Exchange and securities firms. Furthermore, this division monitors industry workings and interprets changes proposed for the regulations.  

SEC Offices and the Office of the Whistleblower

The 24 offices of the Securities and Exchange Commission include the Offices of :

  • Compliance
  • Public Documents
  • Economic Analysis
  • Human Resources
  • Inspector General
  • Risk Assessment and more

Among the Securities and Exchange Commission’s offices, the Office of the Whistleblower is one of the most effective means of securities law enforcement. It was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Whistleblowing Program encourages individuals or a group of individuals to voluntarily report possible fraud and federal securities laws violations to the SEC. It does so by offering the whistleblower a significant monetary reward. Companies and organizations cannot file under the Whistleblowing Program.

If the case leads to the SEC successfully taking action against the violator and sanctions exceed $1 million, the whistleblower gets their reward. Depending on the case, whistleblowers are entitled to an award of between 10% and 30% of the monetary sanctions imposed. The more specific and timely the tip information is, the more likely the case will lead to an award. Examples of securities laws violations are insider trading, Ponzi schemes, Pyramid schemes, securities theft, unregistered securities, false or misleading securities reporting, etc.

The Securities and Exchange Commission will do anything in its power to keep the identity of the whistleblower anonymous. In addition, the Program prohibits retaliation by employers against their employees and others who have filed whistleblowing cases.

Infographic that explains how the Securities and Exchange Commission's Whistleblowing process works.

It is important to understand that to be eligible for an award, a whistleblower has to follow certain steps in the process. Because the process can take several years, it is crucial to hire an attorney to help you. To date, the SEC has awarded almost $1 trillion in whistleblower rewards. So far, the largest awards have been $114 million and $50 million.

SEC Criticism and Conclusion

Since its creation, the SEC has implemented various laws to protect investors and maintain fair and orderly securities markets. As a result, it brings many civil suits and helps prosecute criminal cases against firms and individuals that violate securities laws.

The Securities and Exchange Commission receives a lot of criticism for not confronting faults and not doing a good job holding its executives and corporate executives accountable. This was definitely the case in the Bernard Madoff fraud. Accusations that the SEC was ignoring several red flags and tips on the alleged fraud were widespread.

In 2009, the SEC failed to implement several recommendations made by the Inspector General of the Project on Government Insight. For example, it did not implement 27 out of the 52 recommended steps in the Inspector General’s report.

The Securities and Exchange Commission has also been criticized for destroying many documents related to companies’ and banks’ criminal investigations in the 2008 Great Recession. The documents included those associated with matters under inquiry. In addition, many observers criticized the SEC for not taking proper steps to help prosecute managers and brokers involved in the crisis, all of whom were never proven guilty of doing anything wrong.

More recently, the SEC has been accused of “slap-on-the-wrist” sanctions, settling rather than taking big banks to trial, failing to name individuals, and requiring that companies admit guilt.

So, it is obvious that the Securities and Exchange Commission is not perfect. However, it has made investing safer and more easily accessible. But, of course, there is room for improvement. Although keeping up with modern technology isn’t easy, the Securities and Exchange Commission aims to protect investors from fraud and keep the securities markets running smoothly. Hopefully, further efforts by the SEC will increase sanctions against violators, keep the securities market run smoothly, and make investors feel safer than they ever have before.

Vikram R
Vikram Raghavan is a value investor, technologist, and Finexy co-founder. In addition to stock market investing, Vik also invests and advises startups on growth marketing and product management. Vik's work is focused on themes of marketplaces, micro-entrepreneurship, marketing automation, and user growth. Previously, Vikram led product and growth teams at Overstock.com, focusing on efforts across acquisition, new user experience, churn, and notifications/email. He holds an MBA in Finance from Temple University and a B.S. in Computer Information Systems and Finance from Bemidji State University.