SEC Explained

The Securities and Exchange Commission is in charge of regulating the securities markets in the U.S.
Mar 29, 2022

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What is the SEC?

The Securities and Exchange Commission is an independent federal agency tasked with regulating U.S. securities markets. Its mission comprises three goals: protecting investors; ensuring the markets remain fair, orderly and efficient; and facilitating capital formation

.

What does the SEC do?

The SEC strives to maintain public trust in the U.S. markets. To carry out its three-part mission, the SEC enforces federal securities laws, addresses wrongdoing in the markets and monitors entities in the securities industry — such as investment advisors, securities exchanges and broker-dealers — to make sure they are treating investors properly

.

Much of the SEC’s work is guided by two core principles:

  • Companies seeking public investment must be truthful about their business.

  • Those who sell securities and offer investment advice must be fair and honest with investors.

Those beliefs can be traced back to the SEC’s founding in 1934, when it was established by Congress to safeguard investors from fraudulent and unfair behaviors following the stock market crash of 1929.

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What powers does the SEC have?

Most businesses that seek public investment are required to register their securities with the SEC and submit regular filings about their operations, unless their offering qualifies for an exemption. In addition, individuals and businesses that sell securities or offer investment advice must register with the SEC or their state securities authorities.

SEC filings and disclosures made by both companies and individuals are available to the public through EDGAR, the SEC’s free database of filings

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To protect investors, the commission investigates possible wrongdoing and takes civil action against potential wrongdoers in the federal courts, administrative proceedings or both

. The SEC uses civil suits to seek court injunctions against certain behaviors, while administrative actions can result in cease-and-desist orders. Both can lead to financial penalties and the return of illegally obtained profits.

Some common violations the SEC is interested in are:

  • Insider trading.

  • Stock price manipulation.

  • Misrepresentation or omission of key information about securities.

  • Ponzi and pyramid schemes, which are forms of fraud that focus primarily on generating money by recruiting new members or investors.

  • Theft or misappropriation of funds or securities.

  • False or misleading statements about a company.

  • Bribery of foreign officials.

Although the SEC cannot bring criminal charges itself, it can work with law enforcement agencies — such as the Justice Department — that have the power to do so.

In addition, the SEC conducts rule-makings — the process used to create rules that implement newly passed legislation that has been signed into law. It can also create new rules that fall under its existing authority

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Who reports SEC violations?

Members of the public — both whistleblowers and non-whistleblowers — can report suspected fraud or violations of securities law to the SEC

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And with the protection of the SEC’s whistleblower program, qualified individuals who supply original information that leads to SEC-enforced sanctions exceeding $1 million can receive between 10% and 30% of the monetary sanctions collected. Employers are prohibited from retaliating against employees who come forward about possible violations

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How is the SEC structured?

Leadership

The SEC is composed of five commissioners, who need to be appointed by the president and confirmed by the Senate

. The president selects one of them to chair the commission, giving the chosen commissioner the power to set the SEC’s regulatory agenda.

Each commissioner’s term lasts five years, although they are permitted to stay on for an additional 18 months afterward if a replacement is not ready. In an effort to remain nonpartisan, a maximum of three commissioners can belong to the same political party.

Organizational structure

The SEC consists of six divisions

:

  • Corporation Finance: Makes sure that investors have the necessary information to make informed investment decisions.

  • Economic and Risk Analysis: Conducts economic and statistical analysis related to market issues.

  • Enforcement: Investigates potential violations of federal securities laws and prosecutes civil suits in federal courts and administrative proceedings.

  • Examinations: Conducts the National Exam Program to examine entities in the securities industry for issues related to compliance, fraud and risk.

  • Investment Management: Shapes regulatory policies related to investment companies and investment advisers.

  • Trading and Markets: Oversees day-to-day behavior of major players in the securities markets, as well as the Securities Investor Protection Corp.

In addition, the SEC includes several offices, many of which are administrative, that support the agency’s work. It also has an Office of Inspector General, which is responsible for monitoring the SEC’s activities and operations.

Location

The SEC is headquartered in Washington, D.C., and has 11 regional offices in California, Colorado, Florida, Georgia, Illinois, Massachusetts, New York, Pennsylvania, Texas and Utah

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