The Securities and Exchange Commission: Overview

The Securities and Exchange Commission (SEC) is the federal agency primarily responsible for the regulation of American stock and securities exchanges, brokers, investment advisors and mutual funds. The SEC was created to restore investor confidence and help reform markets following the stock market crash of 1929 and during the Great Depression. Its mission is three fold:

  1. Protect investors
  2. Maintain fair, orderly, and efficient markets
  3. Facilitate capital formation

 

The SEC attempts to carry out this mission through requiring public disclosure of financial information for publicly traded companies, bringing enforcement against violators of securities law, and developing securities rules and regulations.

Public Disclosure

Reliable, public information is essential in preventing fraud and promoting informed investment decisions. The Securities and Exchange Commission requires that public companies disclose important financial information to the Commission and the public. When a company wishes to sell a security, such as in a public stock offering, it's required to register that security with the SEC. Registration statements and prospectuses include descriptions of the company's properties and business, of the security offered for sale, and financial statements made by independent accountants. This information, available on the EDGAR database, is used by investors considering whether or not to purchase a company's securities.

In addition to securities registration, the SEC requires several other forms of public disclosure. For example, companies worth more than $10 million in assets whose securities are held by more than 500 investors must file annual corporate reports. Information about shareholder's votes must be disclosed to the SEC, as must information regarding offers to purchase more than 5% or more of a company's stock.

Enforcement

The SEC's regulatory power is backed by its enforcement authority. The SEC may bring civil suits in federal court, or partner with the Department of Justice in criminal actions, against violators of securities laws. The Commission can bring actions against individuals or companies for violations such as:

  • Insider trading
  • Accounting fraud
  • Providing false or misleading information
  • Failing to disclose information in public reports

An enforcement action typically involves three separate steps. With information from investors, corporate insiders or investigators, the SEC may perform an informal investigation, examining brokerage records, witnesses and public documents. These proceedings are usually not made public. Following this, the SEC issues a formal order of investigation requiring the parties involved to release records or documents to investigators. Finally, if the SEC believes there has been wrong doing, it may more the case forward to federal court or take administrative action.

Rulemaking

The Securities and Exchange Commission is also responsible for interpreting federal securities laws and issuing or amending rules and regulations for the securities industry. These include rules regarding traditional federal securities law, such as the Securities Act of 1933, as well as newer financial reform acts, like the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. These rules cover a range of important issues, like the regulation of mortgage-backed investments, derivatives and financial reporting.

Organization

The Securities and Exchange Commission is headed by five Commissioners appointed by the President. The President also designates one Commissioner as Chair, or executive, of the SEC. Though the Commissioners are appointed by the President, they cannot be fired by the President, in order to protect their independence. To keep the SEC nonpartisan, no more than three Commissioners may belong to the same political party at one time.

The SEC is organized into the following five divisions:

  • Corporate Finance, which oversees public financial disclosures
  • Trading and Markets, which regulates broker firms, investment houses, and the Financial Industry Regulatory Authority (FINRA)
  • Investment Management, which supervises investment companies such as mutual funds
  • Enforcement, which investigates and brings actions over violations of securities laws
  • Economic and Risk Analysis, which integrates economics and data analysis into SEC operations

In addition, the SEC contains 22 different offices, such as the Office of Administrative Law Judges, Office of the Chief Accountant, and the Office of Compliance Inspections and Examinations.

If You Have Questions About Securities Law

The rules and regulation governing securities law and the SEC are numerous and complex. Violations can have serious repercussions. In addition to using the information available here, consider contacting an experienced securities law attorney if you have questions or concerns regarding insider trading, financial fraud, public disclosure or other securities issues.

Next Steps

Contact a securities lawyer to assist with any issues related to securities laws and financial instruments.

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