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The government has many things to deal with — foreign policy, public health, defense, etc. The Securities and Exchange Commission (SEC) was created specifically to deal with securities and trade.
But what exactly does it do, and why does it matter to investors? Read on to learn more about the SEC, how it works, and why its existence is important for the U.S economy.
What Is the Securities and Exchange Commission (SEC)?
The SEC is an independent federal government agency responsible for protecting investors by overseeing the stock market. They also propose and enforce federal securities laws.
The SEC consists of six Divisions headed by presidentially appointed Commissioners with staggered five-year terms.
In addition, the agency has 23 Offices that assist with a variety of services that contribute to the mission of the SEC. The President designates one of these Commissioners as the agency’s Chief Executive.
In December 2020, the SEC announced that the Office of Compliance Inspections and Examinations had been renamed to become the Division of Examinations.
What Does the SEC Do?
The primary role of the SEC is to enforce the rules against fraud. In addition, the goal of the SEC is to provide transparency to the financial markets and securities, giving investors confidence to invest.
Ensuring that companies report accurate financial data and investigating potential fraud cases are examples of what the SEC does.
What Does it Mean to File with the SEC?
“Filing with the SEC” means providing regulatory documents to the SEC. This is a mandatory process for companies listed on the stock market to prove transparency and adherence to regulations.
However, the same does not apply to smaller companies, as explained below. This is due to the JOBS Act further discussed in the history of the SEC.
These regulatory forms include financial information and full disclosures of the company. The information provided in these filings is vital to analysts and investors.
One such piece of information is the annual and quarterly financial statements that they use to form their thesis on the company and its future, including price targets.
It also shows the holdings of institutional investors, which is indicative of the interest and confidence that big investors have in their stock.
Because these documents are time-sensitive, the SEC developed the Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) to streamline consolidating and uploading documents.
You can access the forms via EDGAR, too. Search the company’s filings by using its ticker symbol, and it displays the most recent filings at the top. In addition, they are available for free to view and download.
Brief History of the SEC
The U.S Stock market crashed in 1929, causing the securities of many companies listed on the exchange to become worthless.
The crash led to the closure of 5,000 banks, causing widespread bankruptcies, rampant unemployment, and homelessness.
United States Senate Committee on Banking and Currency conducted a hearing to investigate the events leading to the crash, known as the Pecora Investigations.
They found that numerous financial institutions had misled investors and participated in widespread insider trading.
The SEC was formed to regain investors’ trust following the devastating crash via the Securities Exchange Act of 1934. As a result, a series of laws were passed by Congress to start regulating securities:
- Securities Act of 1933 requires the registration of most securities sales in the United States. This was aimed to prevent securities fraud and states that investors must receive truthful financial data about public securities.
- Glass-Steagall Act of 1933 created the Federal Deposit Insurance Corporation (FDIC), which oversees the banks and protects people’s deposits.
- The Public Utility Holding Company Act of 1935 gave the SEC power to break up utility companies exhibiting monopolistic behaviors that drove prices up while providing poor services.
These legislations helped to restore the economy. Since then, more laws have been passed to assist the SEC in regulating the securities market:
- Trust Indenture Act (TIA) of 1939: prohibits the issuance of bonds valuing above $10 million without a formal written agreement. This cap was increased to $50 million in 2015.
- Investment Advisers Act of 1940: regulates and defines the role and responsibilities of an investment advisor.
- Investment Company Act of 1940: regulates the organization and activities of investment companies and sets the standards for the investment company industry.
- Sarbanes-Oxley (SOX) Act of 2002: aims to protect investors from fraudulent financial reporting by corporations.
- Dodd-Frank Act of 2010: contains a collection of reforms aimed to prevent another 2008-like financial crisis.
- Jumpstart Our Business Startups (JOBS) Act of 2012: allows fewer disclosures by companies with less than $1 billion in revenue to investors. This was aimed to support small businesses through deregulation by the SEC after the financial crisis in 2008 by creating more jobs and providing means of crowdfunding. However, this means that investors of such companies are at greater risk of fraud.
U.S. Securities and Exchange Commission Divisions
- Enforcement: The staff in the Division of Enforcement conduct investigations into possible violations of the federal securities laws and conduct prosecutions to those who do so.
- Trading and Markets: This Division oversees major market participants to ensure that they are fair, orderly, and efficient. Some examples of major participants are broker-dealers, stock exchanges, Financial Industry Regulatory Authority (FINRA), and transfer agents.
- Examinations: The Division of Examinations conducts the National Exam Program to improve compliance, prevent fraud, monitor risk, and inform policy. The information from the exams provides the SEC with rule-making initiatives, detecting risks, improving industry practices, and pursuing misconduct.
- Corporate Finance: The Division of Corporate Finance ensures that investors are provided with information from truthful and transparent companies. In addition, they ensure that companies seeking to go public are legitimate and continue to monitor them throughout their existence on the stock market.
- Economic and Risk Analysis: The Division of Economic and Risk Analysis was formed in 2009 to incorporate data and analytics to improve the function of the SEC as a whole.
- Investment Management: The primary role of this Division is to administer the Investment Company Act of 1940 and Investment Advisers Act of 1940. It develops regulations for investment companies, insurance products, unit trusts, and exchange-traded funds for investment advisors.
Who Does the SEC Prosecute?
The SEC prosecutes both institutions and individuals that are suspected to be involved in criminal activity. This is the job particularly for the Division of Enforcement.
The Division of Enforcement initiates an investigation based on factors such as the nature of violations, number of victims affected by misconduct, and amount of potential harm or actual harm of the misconduct.
Once initiated, they may perform a series of investigations that include an informal inquiry, examining brokerage records, review trading data, and issue subpoenas.
SEC investigations are civil, not criminal. Therefore, the SEC does not have the ability to put people in jail, but they may refer potential criminal cases to criminal law enforcement.
The SEC may charge an individual or an entity for violating federal securities laws. The SEC usually seeks remedies such as monetary penalties and restrictions on individuals’ ability to work in the securities industry.
>> More: How FINA and the SEC are Different
Why Is the SEC Important?
Investments play an important role in the economy of any country. Companies require money to expand their capabilities to deal with the demand for their product, be it for consumers within the country or export. Thus, getting investors to invest in the company is one way to raise money.
The stock market offers the best opportunity for companies to reach out to investors. By listing their company on the market, they have access to all kinds of investors, retail to institutional, that trade on the stock market. In addition, it provides them a convenient platform to sell their shares to raise capital more efficiently.
Being efficient at preventing fraud and providing transparency to investors gives the New York Stock Exchange its popularity.
In addition, its reputation woos investors from many parts of the world, bringing in money from other countries and funneling them into the companies listed on their exchange.
How Does the SEC Affect Retail Investors?
Thanks to the SEC, retail investors can be assured that investing in the U.S stock exchange is safe.
However, it is important to note it does not regulate hedge funds and the derivatives market. Examples of derivatives are futures contracts and options, which hedge funds trade with.
The SEC also provides comprehensive resources for investors on topics related to the financial markets, and you can access them on Investor.gov.
Bottom Line: What Is the SEC?
The SEC aims to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
Born from the depths of the Great Depression, the SEC has served to extinguish criminal activity that exists within the securities market.
Through its existence, the U.S. stock market has established itself to be one of the most trusted and popular markets for investors worldwide to purchase securities.
This has helped boost the strength of the U.S economy by providing means for many U.S. companies to expand internationally, becoming major players across industries.