The Securities And Exchange Commission Explained

Following the 1929 stock market crash, the country needed to restore investor confidence. Because many stocks became worthless due to false or misleading information, the securities markets plunged. In 1934, the Securities And Exchange Commission (SEC) was created to protect investors against misleading information that exaggerated a stock’s worth. Since its founding, further Acts have come about in a continuous effort to improve integrity in the market, including:

• Trust Indenture Act of 1939
• Investment Company Act of 1940
• Investment Advisers Act of 1940
• Sarbanes-Oxley Act of 2002
• Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
• Jumpstart Our Business Startups (JOBS) Act of 2012

The SEC is accountable to Congress and operates under the authority of federal laws. It monitors:

• Securities for Sale to the Public: Public companies, fund and asset managers, investment professionals, and other market participants must disclose financial and other information so investors have information to make informed decisions. The SEC enforces federal securities law and holds those who break the law accountable.
• Entities in the Securities Industry: The SEC monitors investment advisers, broker-dealers, and securities exchanges to maintain “fair, orderly and efficient markets.”

The SEC has established securities rules and regulations that promote fair dealing while protecting investors against fraud. They ensure all potential investments provide readily available registration statements, periodic financial reports, and other securities forms. It operates five divisions and 23 offices, run by five president-assigned commissioners, including a Chair. The divisions include:

1. Division of Corporate Finance
2. Division of Enforcement
3. Division of Investment Management
4. Division of Economic and Risk Analysis
5. Division of Trading and Markets

The five commissioners serve in five-year terms. It is common for commissioners to maintain their role for up to 18 months while waiting for their replacement to step in. In addition, the law ensures that no more than three of the five commissioners are from a single party, so the SEC remains nonpartisan.

The SEC can only bring civil actions before a federal court or an administrative judge. This is because law enforcement agencies handle all criminal cases within the Department of Justice. The SEC does, however, share evidence with these agencies and help with court proceedings.

There are two primary sanctions the SEC handles via civil suits:

1. Injunctions:  Injunctions prohibit future violations with the threat of fines or imprisonment for contempt.
2. Civil money penalties and the disgorgement of illegal profits: The SEC can bar or suspend individuals from acting as corporate officers or directors. Also, they bring a variety of administrative proceedings, such as cease and desist orders or imposing bars or suspensions on employment for individuals. Internal officers and the commission hear these cases.

Appeal actions sought by self-regulatory bodies such as FINRA also start with SEC involvement.

While the SEC is a government organization setting rules and regulations regarding securities issuance, marketing, and trading, FINRA is a non-profit, self-regulatory organization overseeing broker-dealers and issuing licenses to securities professionals.

The SEC’s Office of the Whistleblower is related to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. It rewards those who share original information leading to successful law enforcement in cases of monetary sanctions exceeding $1 million. 

SEC rules begin with a concept release and proposal published for public review and comment. Then, the SEC considers input from the public, industry, and subject-matter experts before voting to adopt the rule.

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