What is the Securities and Exchange Commission (SEC)?
The U.S. Securities and Exchange Commission (SEC) enforces laws surrounding trading securities (stocks, bonds, options, etc.) and brokerages — it is tasked with ensuring the fair and orderly functioning of the securities markets.
The U.S. Securities and Exchange Commission (SEC) is the government agency that deals with laws that govern how investors and businesses can trade stocks, bonds, options, futures, and other securities. The SEC has three goals:
To accomplish these goals, the SEC requires companies to file annual financial reports, and it watches markets for evidence of fraud. The SEC was formed in the wake of the Great Depression, with the hope that it would help restore the confidence investors had in the market.
An example of the SEC’s involvement in keeping markets fair and efficient are its actions in the wake of the collapse of Enron. After the company went bankrupt in 2001 and its accounting fraud was revealed, the SEC charged the company’s President, CEO, and COO with multiple violations, including fraud and lying to investigators. By charging the people involved with fraud that impacted the securities market, the SEC punished those who affected the market and endeavored to deter others from committing similar crimes.
The SEC is like a referee for the securities markets…
The SEC is there to make sure everyone plays fairly and the rules are followed — when people break the rules, the SEC doles out punishments or even ejects them from the game.
The U.S. Securities and Exchange Commission (SEC) is a U.S. government agency that is funded by congress but works independently. The SEC is tasked with monitoring, regulation, and enforcement within its areas of control.
The SEC is primarily tasked with regulating the securities markets and enforcing government regulations surrounding stock exchanges, brokerages,publicly traded corporations,and investors.
The SEC works to protect investors and keep the markets efficient. It also works to help facilitate companies raise capital and maintain efficient markets. To accomplish its goals, the SEC requires publicly traded companies to meet specific requirements, such as submitting regular reports.
The SEC contains multiple divisions, including:
Each division is responsible for different tasks relating to the SEC’s goals.
The SEC is managed by five commissioners, each appointed by the President of the United States for a term of five years and confirmed by the Senate, though each commissioner’s term may be extended by up to a year and a half if no replacement is nominated. The SEC cannot have more than three commissioners who are part of the same political party. This helps keep the SEC non-partisan. One commissioner is also designated by the President of the United States as the chairman of the SEC.
Each of the SEC’s five divisions is tasked with monitoring and regulating different aspects of securities trading. When the SEC identifies new issues that require regulation, it publishes proposed rules for public comment. After some time, it either decides not to impose the regulation or puts the regulation in place.
The Corporate Finance division oversees the disclosures, such as annual reports, that public companies make.
The Investment Management division monitors registered investment companies and advisors.
The Economic and Risk Analysis division, created in 2009, is the newest. Its job is using analytics and economics to advance the SEC’s rulemaking and enforcement goals.
The Enforcement division partners with each other division to investigate and prosecute violations of securities laws and regulations. These investigations are usually non-public and culminate, if they find wrongdoing, in a civil action in a U.S. District Court or an administrative proceeding. Where necessary, the SEC refers matters to state and federal prosecutors.
The Trading and Markets division manages self-regulatory groups like the Financial Industry Regulatory Authority (FINRA). It also interprets regulatory changes. Because the majority of the SEC’s enforcement is delegated to FINRA, this division is essential to enforcing SEC regulations.
When the SEC identifies wrongdoing, it brings the perpetrators to court, seeking injunctions to legally bar them from certain actions or seeking monetary penalties to punish them and force them to forfeit illegal profits.
The purpose of the SEC is to keep the U.S. stock markets fair for everyone and running efficiently.
Efficient markets are an essential part of capitalism because they allow companies to raise capital by selling equity quickly. Without an efficient stock market, it takes longer for businesses to raise money, and they may not be able to raise as much as they should be able to due to incorrect share valuations.
Keeping markets fair ensures that regular investors have the same opportunities as everyone else to invest and make money. Without regulations against things like insider trading, people with privileged knowledge would be able to abuse the markets, leaving the majority of investors at a major disadvantage.
The SEC also promotes transparency from publicly traded companies, which means that they cannot unfairly mislead investors. This transparency keeps businesses from competing unfairly with each other for investor capital.
The five commissioners of the SEC are in charge of the agency, with one commissioner named as chairman of the agency serving as the agency’s head. The commissioners and the chairman are appointed by the president of the United States, giving presidents significant power in determining the management of the SEC. However, the president does not have the power to fire the SEC’s commissioners, giving the agency independence from the rest of the government.
The SEC was established by the 1934 Securities Exchange Act. This law, in combination with the Securities Act of 1933, marked the federal government’s first major efforts to regulate the sale of securities sold by companies.
With the passage of these laws, President Franklin Delano Roosevelt gave Joseph P. Kennedy Sr. the responsibility of cleaning up the U.S. securities markets, as the first head of the SEC.
Kennedy identified four missions for the SEC:
Over the years, the role of the SEC expanded and changed with the passage of laws like:
The SEC was formed largely in response to the Great Depression. It was formed in 1934, near the Depression’s height. The commission worked to restore investor confidence in the market and to ensure that businesses issuing securities did so without attempting to defraud investors.
The two tenets that the SEC tried to enforce during the Depression were:
Today, the SEC helps investors by making sure that the stock market is fair and that publicly traded companies are not trying to defraud investors.
For example, SEC regulations are the reason that companies file annual reports containing information about their income, expenses, and account balances. This information helps investors know what they’re getting into when they buy shares in a company.
SEC regulations also restrict insider trading. This policy protects investors from malicious actors unfairly dumping shares of a company that is about to fail or buying up cheap shares of a company that is about to rise in value.
The SEC’s rules also help investors feel safe about investment advice that they get. SEC rules dictate what investment advisers can and cannot do when giving advice or selling products to their clients.
What is an Annual Report?
An annual report is a published paper that publicly-traded companies release to make sure their shareholders are up-to-date on their financial state of affairs.
What is Multilevel Marketing (MLM)?
A multilevel marketing (MLM) company is one whose business model includes distributors who sell the company’s product and recruit further distributors below them, known as a “downline,” to join.
What are Options Greeks?
Option Greeks are used to measure the risk of an option and to gauge an option’s sensitivity to the variables that make up that risk — The variables are represented by the Greek letters Delta, Gamma, Theta, Vega, and Rho.
What is an Original Equipment Manufacturer (OEM)?
Original equipment manufacturer (OEM) refers to a company that sells its products for use as a single component in the creation of another company’s product — which is typical in the auto and computer industries.
What is a Qualified Dividend?
A qualified dividend is a distribution made to an equity owner in a company that qualifies for the lower tax rate applied to long-term capital gains.