Published on: October 24, 2022

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

Author: Laura Brocca

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

You must have seen the name Securities and Exchange Commission (SEC) repeated many times in our daily emails and whichever financial publications you read. You might have figured more or less that it is a U.S. market regulator but we at amana think it might be worth your while to dig a bit deeper to understand its purpose and activity. 

The SEC is an independent federal agency that exists to regulate securities markets and protect investors from fraud and misleading information. 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 issuers and other market participants in civil courts for non-criminal violations or team up with the Justice Department of the US government on criminal cases. The primary objective of the SEC is to ensure transparency and disclosure about all market instruments which are allowed to be sold to investors and traded on various exchanges, including online platforms. 

What is the SEC?

In a nutshell, the SEC protects investors, maintains fair and orderly securities markets, and facilitates capital market development. The SEC has promoted full public transparency about issuers and their investment products or equity, protected investors from fraud and market scams. It also approves book runners’ registration declarations.

Before being sold to investors, securities such as bonds or shares must be registered with the SEC, following detailed and rigorous process, normally handled by investment banks and lawyers. 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 and enforces reporting obligations on issuers of securities. 

How the SEC works

The Sec, like many independent regulators in the US, is a collegial body. There are five commissioners appointed by the US President for five year-terms. One of the commissioners is appointed chair and he or she wields the decisive influence over the enforcer’s actions and runs day-to-day affairs. The current SEC chairman is Gary Gensler, who took over the position on April 17, 2021. To foster non-partisanship, the law limits the number of commissioners nominated by the currently ruling party to three. 

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 the SEC’s enforcement activities.
  • Division of Trading and Markets: As the name implies, this division maintains fair, orderly, and efficient trading and investing markets.

The SEC can seek two civil sanctions in court: first, there are injunctions, which serve to ban further offenses even before the cases are tried in detail. Ignoring an injunction can result in penalties or even jail time. Considerable civil fines and compensations can be approved by the courts. The SEC may also seek a court order prohibiting or suspending corporate officers or directors. Internal officers and the commission supervise SEC administrative proceedings, with common actions including cease-and-desist orders, registration revocations, and employment bans or suspensions. 

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 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 and along established rules.

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 is directly or indirectly involved in every big financial wrongdoing case. Accounting fraud, false or misleading information, and insider trading are some of the SEC’s priorities.

The SEC helped prosecute financial institutions at the core of the financial sector crisis that triggered the 2008 recession and helped refund billions to investors. It charged 204 businesses or persons and recovered $4 billion in fines, disgorgement, and other compensation. For example, Goldman Sachs paid $550 million, the highest Wall Street penalty and second-largest in SEC history, behind WorldCom’s $750 million. Often the fear of SEC is such that offenders settle cases out of court to limit the damage. 

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?

We are directly affected by the SEC because they make US capital markets safe for investors all around the world buying stocks, bonds, and mutual funds.. The Securities and Exchange Commission offers 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 as a way to save and invest to be able to pay for college, retire comfortably, or pursue other life goals. The Securities and Exchange Commission is responsible for enforcing regulations protecting your investment from fraud, although not from normal risk associated with securities investing. 

What are the SEC’s three main goals?

In its own words, the threefold mandate of the SEC is to safeguard investors, uphold honest and orderly markets, and promote investment. 

Last thoughts 

The SEC continues to be tremendously successful despite criticism that it sometimes does too much and sometimes that it does too little. 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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