The U.S. Securities and Exchange Commission, commonly referred to as the SEC, is a federal agency that oversees and regulates the securities industry in the United States. As one of the most powerful regulatory bodies in the world, the SEC plays a pivotal role in maintaining fair, orderly, and efficient markets while protecting investors.
Introduction to the SEC
The SEC was created in 1934 under the Securities Exchange Act as an independent, bipartisan, quasi-judicial agency. Prior to its establishment, securities markets were largely unregulated, leading to abusive practices that contributed to the 1929 stock market crash and the Great Depression.
The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. It achieves these goals by:
- Requiring public companies to disclose meaningful financial and other information to the public
- Overseeing the key participants in the securities markets, including securities exchanges, broker-dealers, investment advisors, and mutual funds
- Promoting the disclosure of important market-related information
- Prohibiting fraudulent, deceptive, and manipulative practices in the securities markets
- Monitoring corporate takeover actions in the U.S.
- Bringing civil enforcement actions against violators of securities laws
- Working with criminal law enforcement agencies to prosecute criminals
Headquartered in Washington, D.C., the SEC consists of five presidentially-appointed Commissioners, with staggered five-year terms. One of the Commissioners is designated by the President as Chair of the Commission.
The SEC is organized into five Divisions and multiple Offices that administer various aspects of the agency’s mandate. The key Divisions are:
- Division of Enforcement – Detects and prosecutes violations of securities laws
- Division of Corporation Finance – Oversees corporate disclosures of important information to investors
- Division of Trading and Markets – Establishes and maintains standards for fair, orderly, and efficient markets
- Division of Investment Management – Regulates investment companies and advisors
- Division of Economic and Risk Analysis – Integrates economic analysis and data analytics into the SEC’s work
In fiscal year 2022, the SEC had a budget of $2.26 billion and 4,300 full-time employees. The activities of the SEC are primarily funded by fees from the securities industry, rather than taxpayers.
Key Responsibilities and Functions of the SEC
The wide-ranging responsibilities of the SEC fall into four major categories: companies issuing securities, companies with publicly traded securities, financial services firms, and corporate takeovers.
Companies Issuing Securities
When companies want to issue securities to the public through an initial public offering (IPO), they must register with the SEC. This registration statement is a comprehensive filing that discloses essential information about the company’s business operations, financial condition, management, and more. The SEC closely reviews these statements to ensure compliance with disclosure requirements.
The SEC also sets standards for accounting methods and financial reporting for public companies. These rules were significantly expanded with the Sarbanes-Oxley Act of 2002 passed in the wake of corporate scandals like Enron. Annual and quarterly reports must be filed with the SEC to provide updated financial information to investors.
Publicly Traded Companies
Thousands of companies trade publicly on stock exchanges like the New York Stock Exchange and NASDAQ. These public companies, also called issuers, have ongoing filing, reporting, and disclosure obligations enforced by the SEC.
- They must file quarterly and annual reports detailing their financial performance.
- They must disclose major events, executive changes, and material information that could impact share prices.
- Insider trading and misappropriation of confidential information is strictly prohibited.
- Corporate executives and directors must report their transactions of company stock.
In addition, the SEC has authority over securities exchanges and self-regulatory organizations (SROs) like FINRA that directly oversee brokers, dealers, and other market participants. The SEC ensures these SROs properly enforce regulations including membership rules, codes of conduct, and disciplinary policies.
Financial Services Firms
Various types of financial services firms fall under the regulatory purview of the SEC, including:
- Investment Banks – Help corporations and governments issue securities
- Brokerage Firms – Execute customer orders to buy and sell securities
- Investment Advisers – Provide investment advisory services for a fee
- Hedge Funds – Pool investor money and trade in diverse, complex securities
- Private Equity Firms – Make investments directly in private companies
- Venture Capital Firms – Invest in early-stage companies in exchange for equity
The SEC requires these firms to register and file regular reports. They must abide by standards of practice related to advertising, recordkeeping, custody of customer accounts, disclosures, and cybersecurity policies. The SEC routinely examines these firms to monitor their compliance and risk management practices.
Corporate Takeovers
The SEC administers tender offer rules and other regulations related to corporate takeovers. This involves potential acquirers making a public offer to purchase a company’s shares from existing shareholders. The SEC requires detailed disclosures so shareholders can make informed decisions about these transactions.
Key Regulations and Legislation
Various landmark federal securities laws have enhanced the responsibilities and enforcement powers of the SEC over the decades:
- Securities Act of 1933 – Created the SEC and established disclosure requirements for issuing new securities
- Securities Exchange Act of 1934 – Provided the SEC with broad authority over exchanges, brokers, dealers, and associations
- Investment Advisers Act of 1940 – Established the SEC’s regulation of investment advisers
- Investment Company Act of 1940 – Established requirements for the structure and operations of investment companies
- Sarbanes-Oxley Act of 2002 – Set strengthened accounting, auditing, and financial reporting standards
- Dodd-Frank Act of 2010 – Gave the SEC oversight of private fund advisers and credit rating agencies
In addition to these major federal laws, the SEC can propose new rules and amendments through an open administrative process. This allows the SEC to continually update its regulatory framework in response to market developments.
Enforcement Authority of the SEC
A critical function of the SEC is to detect and prosecute violations of securities laws and regulations. The SEC has broad investigative powers to subpoena documents and witnesses when investigating potential violations.
Typical violations pursued by the SEC include:
- Insider trading – Trading based on non-public confidential information
- Accounting fraud – Falsifying financial statements and records
- Misleading disclosures – Providing inaccurate or incomplete information
- Unregistered offerings – Selling securities without proper registration
- Investment adviser fraud – Misconduct by those managing securities on behalf of clients
- Broker-dealer fraud – Misconduct or abuse by brokerage firms and representatives
When violations are identified, the SEC can impose a variety of civil sanctions such as fines, disgorgement of ill-gotten gains, and limitations on activities. For criminal matters, the SEC works cooperatively with law enforcement agencies to prosecute securities violators.
High-profile cases brought by the SEC often make headlines and remind companies they are being watched. In fiscal year 2021, the SEC brought over 760 enforcement actions and levied $5.4 billion in penalties and disgorgement.
Funding and Organizational Structure
The SEC describes itself as a small agency with a big mission. Though it only has about 4,300 full-time employees, its regulatory oversight extends to millions of entities and trillions of dollars in assets.
The SEC is an independent federal agency that operates under the oversight of Congress. Its budget is set annually through the Congressional appropriations process, and funds come primarily from fees on the securities industry rather than taxpayers.
The SEC is structured into five main divisions, with each division containing various specialized offices:
Division of Enforcement
- Detects and investigates securities law violations
- Recommends action against violations
- Works closely with criminal authorities to prosecute criminal violations
Division of Corporation Finance
- Ensures investors have access to material information about public companies
- Reviews registration statements for securities offerings
- Develops corporate disclosure policies and rules
Division of Trading and Markets
- Establishes and maintains standards for fair, orderly, and efficient markets
- Oversees key market participants including stock exchanges, brokers, and clearing agencies
- Regulates corporate takeovers through tender offers, mergers, and proxy contests
Division of Investment Management
- Regulates investment companies like mutual funds and ETFs
- Oversees investment advisers to funds, individual customers, and institutions
- Develops regulatory policies for investment companies and advisers
Division of Economic and Risk Analysis
- Integrates economic and statistical analysis into SEC policy and rulemaking
- Assesses new rules and polices for potential economic impact
- Identifies and analyzes risks, market trends, and activities
In addition, there are five regional SEC offices located throughout the country that support the SEC’s programs. Numerous other offices provide critical functions like public affairs, legislative affairs, human resources, and more.
The Commission itself is comprised of five presidentially-appointed individuals, including the Chair, who provide high-level oversight and leadership for the SEC’s activities.
Criticisms of the SEC
Despite its wide-ranging authority, the SEC is not without its critics. Following are some of the most common complaints levied against the agency:
Too slow to detect problems – The SEC has been criticized for failing to detect major corporate scandals and Ponzi schemes before serious investor losses occurred. For example, it did not uncover the massive accounting fraud at Enron until after the company collapsed.
Failure to adequately punish wrongdoing – Some claim SEC settlements and fines for securities laws violations are not harsh enough. The SEC responds that settlements avoid long legal proceedings and ensure losses are returned to harmed investors sooner.
Revolving door – There are concerns about SEC staff leaving the agency to work for companies the SEC regulates, or Wall Street professionals joining the SEC. This “revolving door” may undermine the SEC’s independence and impartiality.
Regulatory overreach – As an unelected body, some believe the SEC wields excessive and unaccountable power in rulemaking. They argue the costs of compliance reduce competition and innovation.
Insufficient transparency – Critics assert the SEC does too much of its work behind closed doors and needs to be more transparent about its operations. The SEC counters it must maintain confidentiality during investigations.
Despite these criticisms, the SEC retains strong regulatory powers and continues working to strengthen investor protections. Recent reforms introduced by SEC Chair Gary Gensler aim to aggressively police Wall Street and pursue misconduct.
The Road Ahead for the SEC
The SEC will continue grappling with major issues and market trends in the years ahead, including:
Cryptocurrencies – The SEC is still evaluating how to oversee cryptocurrencies, digital assets, decentralized finance and NFTs. Clearer guardrails may be established to protect investors.
Individual investors – With an influx of retail investors active in the markets, especially on platforms like Robinhood, the SEC is concerned about potential risks from gamification, payment for order flow, social media scams and more.
ESG issues – As Environmental, Social and Governance considerations grow, the SEC is examining enhanced disclosures around climate change, corporate diversity, human capital management and sustainability.
Cybersecurity – The SEC is prioritizing cybersecurity policies, risk management, incident reporting, and prevention of ransomware attacks that could impact market infrastructure.
Artificial intelligence – The agency is studying how to address the opacity of AI and machine learning tools used across the industry for trading, advice, and analysis.
While the investing landscape is constantly changing, the essential mission of the SEC remains unchanged – protecting investors, maintaining fair markets, and enabling capital formation to drive economic growth. With its vast powers and resources, the SEC will continue asserting its authority to achieve these vital aims.
Conclusion
For over 85 years, the U.S. Securities and Exchange Commission has served a crucial role enforcing securities laws, regulating markets, overseeing industry participants, and protecting the interests of investors. Its extensive regulatory authority reaches into virtually every corner of the financial markets.
Despite organizational challenges and ever-evolving markets, the SEC retains potent tools to carry out its mission. By continuing to evolve with the times and aggressively prosecuting violations, it seeks to maintain robust, innovative, and fair capital markets that investors can have confidence in.
