Securities and Exchange Commission (SEC) defined, how it works

Securities and Exchange Commission (SEC) defined, how it works
Table Content
What is the SEC?
How the SEC works
History of the SEC
Last thoughts

You must’ve seen the name Securities and Exchange Commission (SEC) repeated many times in our daily emails and whichever financial publications you read. But you probably haven’t got a clue what they do and what their purpose is. Well, not to worry! amana is here to help you learn a lot more about the SEC. The SEC is an independent American federal agency that exists to regulate securities markets and protect investors such as yourself. The Securities Act of 1933 and the Securities and Exchange Act of 1934 created the SEC in reaction to the 1929 stock market crisis and the Great Depression. The SEC can sue lawbreakers civilly, as well as cooperate with the Justice Department on criminal prosecutions. But that’s only a top-level breakdown of the SEC. Ready to dig a little deeper? Let’s do it!

What is the SEC?

In a nutshell, the SEC protects investors, maintains fair and orderly securities markets, and facilitates capital development. The American Congress founded it in 1934 to regulate the securities markets. Since then, the SEC has promoted full public transparency, protected investors from fraud and market manipulation, and monitored US business takeovers. It also approves book runners’ registration declarations.

Before being sold to investors, securities issued in interstate commerce must be registered with the SEC, whether it’s via mail or online. Broker-dealers, advisory firms, and asset managers must also register with the SEC if they want to do business legally and by the book. For example, the SEC approves formal Bitcoin exchanges.

How the SEC works

Here’s the deal - the president of the SEC appoints five commissioners, one of whom is the chair. Each commissioner serves for five years plus 18 months until a replacement is chosen. The latest SEC chairman is Gary Gensler, who took over the position on April 17, 2021. To foster nonpartisanship, the law limits commissioners to three belonging to the same party.

The SEC has 23 divisions. Each division interprets and enforces securities laws, as well as makes new rules, oversees securities institutions, and coordinates government supervision. Here are a few of the key divisions to give you an idea:

  • Division of Corporate Finance: this division ensures investors have material information to make sound investment decisions.
  • Division of Enforcement: this division investigates and prosecutes civil litigation and administrative proceedings to enforce SEC regulations.
  • Division of Investment Management: this group regulates investment companies, variable insurance products, and federally registered investment advisors.
  • Division of Economic and Risk Analysis: integrates economics and data analytics into theSEC’s fundamental purpose.
  • Division of Trading and Markets: As the name implies, this division maintains fair, orderly, and efficient trading and investing markets.

Further on the topic of how the SEC works, they can only file civil lawsuits in federal court or administrative court. Criminal cases are handled by the Department of Justice’s law enforcement agencies, although the SEC often helps with evidence and court processes.

The SEC seeks two civil sanctions: first, there are injunctions, which serve to ban further offenses. Ignoring an injunction can result in penalties or even jail time. And there are civil fines and unlawful profits recouped. The SEC may also seek a court order prohibiting or suspending corporate officers or directors. Internal officers and the commission hear SEC administrative procedures, while common actions include cease-and-desist orders, registration revocations, and employment bans or suspensions. A bit clearer on the SEC now? Let’s take a look at its history to give you even more context.  

History of the SEC

The October 1929 stock market meltdown rendered many corporations’ securities worthless. Due to inaccurate or misleading information, public faith in the stock market plummeted. Congress founded the SEC in 1933 and 1934 to restore confidence. The SEC’s main job was to guarantee that firms made true business statements and that brokers, dealers, and exchanges handled investors fairly.

Since then, more laws have helped the SEC in its mission, including: 

  • TIA 1939
  • Act of 1940
  • 1940 IA Act
  • 2002 Sarbanes-Oxley
  • Dodd-Frank Consumer Protection Act of 2010
  • 2012 JOBS Act 14

Every year, the SEC takes civil enforcement actions against corporations and individuals who violate securities laws. It’s directly or indirectly implicated in every big financial wrongdoing case. Accounting fraud, false or misleading information, and insider trading are some of the SEC’s other priorities.

The SEC helped prosecute the financial institutions that triggered the 2008 recession and refund billions to investors. It charged 204 businesses or persons and recovered $4 billion in fines, disgorgement, and other compensation. Goldman Sachs paid $550 million, the highest Wall Street penalty and second-largest in SEC history, behind WorldCom’s $750 million.

Many analysts have criticized the SEC for not doing enough to punish brokers and senior managers engaged in the crisis. Almost none of them were found guilty of substantial wrongdoing. One Wall Street executive has been jailed for crisis-related offenses. The rest were fined or punished administratively.


How does the SEC impact our lives?

You’re directly affected by the SEC because they make it easier for you to invest in stocks, bonds, and mutual funds with less risk. Neither derivatives nor hedge funds are subject to its oversight. The Securities and Exchange Commission is a wealth of information for prospective investors.

What issues does the SEC deal with?

More than 66 million American households have used the securities markets to save for things like starting a family, paying for college, retiring comfortably, or any number of other life goals. The Securities and Exchange Commission is responsible for enforcing these investments' regulations.

What are the SEC’s three main goals?

The threefold mandate of the SEC to safeguard investors, uphold honest and orderly markets, and promote investment continues to guide our work.

Last thoughts 

The SEC continues to be tremendously successful despite continuing criticism. On multiple occasions, it has been successful in achieving its goals of boosting the stock market and reviving public faith in capitalism. The majority of companies and investors benefited from it.

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