SEC: Definition, Purpose & History

The U.S. Securities and Exchange Commission, or SEC, is an independent agency of the U.S. federal government. Independent agencies exist outside of federal executive departments, such as the Executive Office of the President, and agencies headed by a Cabinet secretary, such as the U.S. Department of Commerce.

Independent agencies have regulatory or rulemaking authority, and they are insulated from presidential influence because the president doesn’t have the authority to dismiss agency members.

What the SEC Does: Main Purpose

Today, the SEC’s mandate is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. To do that, the SEC oversees:

• Securities exchanges, such as the New York Stock Exchange
• Self-regulatory organizations (SROs) including the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB)
• Brokerage firms and investment houses
• Investment advisors
• Mutual funds
• The National Association of Securities Dealers Automated Quotations (NASDAQ)
• Alternative trading systems.

To ensure that investors have the timely, accurate, and complete information they need to make informed investment decisions, the SEC requires that public companies and other companies that it regulates submit quarterly, annual, and other periodic financial reports. The SEC also requires that company managers submit management discussion and analysis (MD&A) reports that describe their company’s performance, operations, and future projects.

The SEC makes this information available through its online database, the Electronic Data Gathering, Analysis, and Retrieval system, known as EDGAR. Free to use, EDGAR contains millions of company and individual filings, and it processes around 3,000 new filings per day or 40,000 new filings per year. EDGAR benefits investors, corporations, and the U.S. economy as a whole by increasing the efficiency, transparency, and fairness of securities markets.

Using Edgar, investors can research a public company’s financial information and operations by viewing the filings the company has made with the SEC. EDGAR also includes information provided by mutual funds including money market funds, exchange-traded funds (ETFs), variable annuities, and individuals.

History of the SEC

The SEC was created by the passage of the U.S. Securities Act of 1933 and the Securities and Exchange Act of 1934. Both acts were in response to the 1929 stock market crash which led to the Great Depression and are considered parts of Franklin D. Roosevelt’s New Deal program. The intent of both laws was that:

• Companies offering securities for sale to the public must tell the truth about their business, the securities they are selling, and the risks involved in investing in those securities.
• Those who sell and trade securities – brokers, dealers, and exchanges – must treat investors fairly and honestly.

The first chairman of the SEC was former president John F. Kennedy’s father Joseph P. Kennedy who identified four missions for the new agency, that it:

• Restore investor confidence in the securities market
• Eliminate unsound practices and prosecute those perpetrating fraud against investors
• End insider trading
• Create a system for registering securities sold in the U.S.

Today, the SEC is comprised of five commissioners who are appointed by the president of the U.S., with one of them being designated as chairman. No more than three commissioners can belong to any one political party, and their terms, which last five years, are staggered with each term ending on June 5th of the succeeding year. To ensure its independence, the president doesn’t have the power to fire appointed commissioners.

Who Runs the Securities & Exchange Commission?

As of June 20, 2022, the current SEC commissioners are:

1. Gary Gensler, chairman whose term began on April 17, 2021
2. Allison Lee
3. Mark Uyeda, whose term expired on June 5, 2022
4. Caroline Crenshaw
5. Hester Peirce

Five Divisions of the SEC

Headquartered in Washington, D.C., and with 11 regional offices around the country, the SEC is comprised of five divisions:

1. Division of Corporation Finance: Ensures that investors are provided companies’ stock price and financial prospects, and it oversees corporate disclosures and the registration of transactions, such as mergers, for public companies; this division is also responsible for operating EDGAR.

2. Division of Trading and Markets: Oversees the activities of securities firms, securities exchanges, self-regulatory organizations such as FINRA, clearing houses, transfer agents, credit rating agencies, and securities information processors. In practice, most enforcement and rulemaking is done by FINRA which also creates the exams that must be passed by those wanting to professionally trade securities.

3. Division of Investment Management: Oversees and regulates investment managers including registered investment companies, registered investment advisors, and variable insurance products by ensuring that disclosures made by mutual funds and exchange-traded funds are useful to retail investors. This division also assists in the enforcement and adaptation of SEC rules.

4. Division of Economic and Risk Analysis (DERA): Known as the SEC’s “think tank”, DERA was created in 2009 to provide data analytics and it is involved in policy-making, rulemaking, enforcement, and the examination of new trends and new financial products and strategies.

5. Division of Enforcement: Responsible for the enforcement of securities laws, it works closely with law enforcement agencies in criminal cases. Typical enforcement cases involve the dissemination of false or misleading information, accounting fraud, or insider trading. This division has the largest budget and the most employees of any of the SEC’s divisions after it was beefed up as a response to the 2007-2008 financial crisis.

How the SEC Enforces Regulations

The Division of Enforcement can initiate a civil action in a U.S. District Court or an administrative action that is heard by an independent administrative law judge (ALJ). Administrative actions can result in cease and desist orders or the suspension or revocation of registrations. Civil actions can result in injunctions and disgorgement of illegal profits. While not having criminal authority, the SEC can refer cases to both state and federal prosecutors.

Office of the Whistleblower

The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 amended the Securities Exchange Act of 1934 by adding a section that provides monetary awards to individuals providing information concerning possible securities law violations, and that lead to successful SEC actions that result in monetary sanctions of $1 million or more. Whistleblowers can receive between 10% and 30% of any sanctioned amount.

How The SEC Makes Rules

Before proposing a new rule, the SEC must consider whether the new rule will promote “efficiency, competition, and capital formation,” whether it is “necessary or appropriate in the public interest,” and what its effect will be on competition.

To institute new rules, the SEC must publish a notice of the proposed rule in the Federal Register. The publication kicks off a comment period during which interested parties can provide information or analysis of the proposed rule. The SEC then responds to significant comments before releasing the final rule which must also include the basis and purpose of the rule.

Top SEC Legislation for Investors To Know

The Securities Act of 1933 mandated federal regulation of original issues of securities while the Securities Exchange Act of 1934 mandated federal regulation of secondary markets. Original issues are the direct sale of securities to purchasers while previously-issued securities are bought and sold in secondary markets.

After 1934 Congress passed additional acts to aid the SEC. These include:

1. Dodd-Frank Act of 2010

Named for its sponsors Senator Christopher Dodd (D-Connecticut) and Representative Barney Frank (D-Massachusetts), the act focused on those sectors of the U.S. financial system that were primarily responsible for the 2007-2008 Great Recession, including banks, mortgage lenders, and credit rating agencies. A primary goal was to outlaw the subprime mortgages that fueled the housing bubble that arose between 2000 and 2006 during which U.S. home prices rose by 84%.

Dodd-Frank created new agencies such as the Consumer Financial Protection Bureau (CFPB) which protects consumers against abuses by credit card issuers and mortgage lenders. The act also created the Office of Financial Research which identifies threats to the financial stability of the U.S., and it created the Orderly Liquidation Authority to oversee the liquidation of large companies.

The Dodd-Frank Act also created the Volcker Rule which restricts banks from making some kinds of speculative investments, and it ended the exemption from regulation of security-based swaps, requiring credit-default swaps, from being cleared through an exchange or clearinghouse. In 2018, then President Donald Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act which repealed certain portions of Dodd-Frank.

2. JOBS Act of 2012

The purpose of the JOBS Act, where JOBS stands for Jumpstart Our Business Startups, was to boost small businesses by lowering disclosure and reporting requirements for businesses with under $1 billion in revenue. The JOBS Act also allowed for the advertising of securities offerings and allowed non-accredited investors to invest in startups through crowdfunding. It also expanded the number of companies that can offer stock without going through SEC registration.

SEC vs. FINRA & Other Regulatory Organizations

FINRA, which stands for the Financial Industry Regulatory Authority is an independent, self-regulatory organization that oversees more than 3,500 brokerage firms, 154,000 branch offices, and around 625,000 registered securities professionals who trade in equities (stocks), corporate bonds, and securities futures and options. FINRA creates and administers the qualifying exams that securities professionals must pass, including the Series 7 General Securities Representative Qualification Examination and the Series 3 National Commodities Futures Examination.

By comparison, the SEC is a governmental organization that is tasked with protecting individual investors and maintaining the integrity of both formal and over-the-counter (OTC) exchanges.

Other Regulatory Organizations

Besides FINRA, other regulatory organizations that work with the SEC include:

• SiPC: Is a 50-year-old non-profit corporation that works to restore investors’ cash and securities when their brokerage firm fails
• MSRB: The Municipal Securities Rulemaking Board is a regulatory body that creates rules for banks and investment firms that issue and sell municipal bonds, notes, and other municipal securities. The MSRB regulates the underwriting, selling, and trading of municipal securities which are used to finance public projects.
• Department of Justice: On June 22, 2020, the Department of Justice’s Antitrust Division signed an inter-agency Memorandum of Understanding (MOU) to foster cooperation and communication between the DOJ and the SEC.

Bottom Line

By regulating securities markets, the SEC facilitates the formation of capital which helps entrepreneurs start businesses and companies to grow. In 2021 alone, $5 trillion was raised through public and private securities offerings which promoted job creation and economic growth.