Takeaways
- The SEC is a U.S. federal agency that protects investors and oversees financial markets.
- The SEC has five appointed commissioners who serve five-year terms.
- The SEC has over 4,500 employees and 11 regional offices throughout the U.S.
- The SEC oversees financial disclosures, regulates securities markets, and enforces securities laws.
- The SEC’s mission is to protect investors, create efficient markets, and facilitate capital formation.
You may have heard the Securities and Exchange Commission, or SEC, mentioned in finance or business media. You are not alone if you don’t fully understand the full breadth of what the SEC does. As an investor, the SEC is here to protect your interests and, as a result, does a lot of behind-the-scenes regulation, enforcement, and oversight of the capital markets.
Whether you are new to investing or have a huge portfolio of stocks and bonds, you should know all about the SEC.
What is the SEC?
The Securities and Exchange Commission (SEC) is an independent federal agency created by the Securities and Exchange Act of 1934. The SEC oversees the United States securities industry to helps ensure fair and transparent markets, protect investors, and enable capital formation.
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The SEC is headed by a five-member commission, which the President of the United States and the Senate appoint and approve, respectively. The SEC has over eleven regional offices throughout the U.S. to engage in enforcement efforts, examine businesses, stock transactions, and address other compliance issues. Gaining a bit more granular insight into how the SEC operates will help you understand how significant a role it plays in the equity and debt capital markets.
What Does the SEC Do?
The Securities and Exchange Commission has over 4,500 employees that carry out its mission of controlling and supervising business transactions, stock trades, investment firms, and other market members [1]. With its mission to protect investors, maintain fair, organized, and efficient capital markets, and facilitate capital formation, the SEC has a lot to handle.
The SEC achieves its objectives through various means, including enforcing securities laws, regulating securities markets, and overseeing financial disclosures by publicly traded companies, like those listed on the NASDAQ or NYSE.
The SEC has the authority to investigate potential violations of securities laws, impose sanctions on wrongdoers (in cases of fraud), and enforce compliance with regulatory requirements. One of the SEC's key functions is enforcing laws that prevent fraud and ensure transparency in financial markets.
In addition to inspecting securities firms, investment advisors, and rating agencies, the SEC also monitors independent and self-regulatory organizations in securities, accounting, and auditing. These auditing and accounting companies are supposed to ensure that companies are fairly reporting their financial statements and describing their businesses to ordinary investors who invest in stocks or bonds [2].
How to Report SEC Violations
If you ever suspect that someone is breaking securities laws, such as insider trading or fraud, you can report it to the SEC anonymously.
The SEC has a section on its website where you can submit tips, complaints, or referrals for suspected securities fraud or wrongdoing through the SEC’s online TCR system. Alternatively, you can call by phone or send a written letter or email. Reporting violations helps the SEC keep the market fair for all equity and fixed-income investors.
SEC Structure
The SEC has five commissioners who are chosen by the President and subsequently approved by the Senate. These commissioners serve for five-year terms. No more than three members can be from the same political party. This balance helps ensure that decisions are fair and not influenced by political bias.
Within the SEC, there are five different divisions and offices, each with its own job:
- Division of Trading and Markets: As an investor, the Division of Trading and Markets helps level the playing field. This division regulates the big securities market players like the broker-dealers, stock exchanges, clearing agents, and transfer agents.
- Division of Investment Management: If you are saving and investing to build the funds for a down payment on a house, amass retirement savings, or save for your child’s college, the Division of Investment Management has your back. This division oversees mutual funds, ETFs, and investment advisors.
- Division of Corporate Finance: Research and due diligence are imperative before making any investment. The Division of Corporate Finance is focused on ensuring you have access to material information to make an educated and informed investment decision.
- Division of Enforcement: If you submit an anonymous tip to the SEC, the Division of Enforcement is probably involved. This division investigates white-collar crimes such as possible violations of securities laws and prosecutes the Commission’s civil suits.
- Division of Economic and Risk Analysis: Following the 2008 housing crisis and subsequent government bailout efforts, the Division of Economic and Risk Analysis was created in 2009 to focus on data analysis and economics. Importantly, this division spans the SEC to gather information, synthesize, and analyze the implications. It uses data to help with enforcement, policy-making, and examination efforts.
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What Powers Does the SEC Have?
The SEC employs immense administrative powers to satisfy its central goal of safeguarding investors and fixing wrongdoing in the financial markets. A portion of its vital powers and obligations include:
Registration and Disclosure
Companies that must abide by the Exchange Act Reporting and Registration requirements must register with the SEC. Compliance with this Act means these companies must continuously report their annual report on Form 10-K or quarterly reports on Form 10-Q to the SEC.
These documents, such as a company’s financial statements, management discussion and analysis, and key financial indicators, help inform average investors of a company's progress, give insights into its business, and offer forward-looking statements about its future. If you are a stockholder of a publicly traded company, you will have access to annual reports, proxy statements, and other documents. These are usually easily available on the research portal to the best online stock brokerages.
Enforcement Actions
The SEC can investigate potential violations of securities regulations, impose sanctions and pursue enforcement actions against individuals and entities engaged in fraudulent or misleading practices.
Some of the most common federal securities violations include insider trading, selling unregistered securities, stealing funds, stock price manipulation and other issues.
Rulemaking
The SEC develops and enforces rules and guidelines that govern various aspects of the securities industry, including trading practices, corporate governance, and disclosure requirements.
According to the Regulatory Act, the SEC must put out an agenda on rules that is it considering. This happens two times per year [3].
Market Oversight
The SEC monitors the activities of insurance exchanges, self-regulatory organizations (SROs), and other market participants to ensure compliance with regulatory rules and identify potential misconduct.
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Investor Education
Whether you are a first-time investor or a seasoned investor, the SEC provides resources and educational materials to help you understand your rights and make informed investment decisions in secure markets.
Although the SEC's primary functions focus on regulation, enforcement, and investor protection, its scope extends beyond these fundamental duties.
Market Reconnaissance and Analysis
The SEC also conducts market surveillance and analysis to identify emerging trends, risks, and vulnerabilities within the securities markets. By monitoring market activities and analyzing data, the SEC can detect potential threats, insider trading schemes and more to ensure the integrity of the U.S. securities markets are preserved and protected.
International Efforts
The SEC collaborates with international organizations to develop a more global consensus on how to handle emerging threats, regulatory issues, or policies.
For example, the SEC is an active member of the Board of the International Organization of Securities Commissions (IOSCO). There are active members of the SEC staff who work to facilitate collaboration between the organizations.
Corporate Administration and Disclosure
In addition to enforcing regulations, the SEC plays a crucial role in shaping corporate governance practices and promoting transparency in corporate disclosures.
The SEC aims to strengthen corporate accountability and empower investors with relevant information through regulatory initiatives such as proxy voting reforms and enhanced disclosure requirements.
Investor Support and Outreach
The SEC focuses on upholding the interests of retail investors and advancing monetary proficiency and investor education.
Through outreach programs, the SEC encourages investors to make informed investment choices and protect themselves against uninformed investment speculation, extortion, or misleading business practices.
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Strategic Promotion and Official Oversight
Beyond its enforcement efforts, the SEC plays a pivotal role in influencing corporate governance standards and fostering transparency in corporate disclosures. The SEC's regulatory initiatives extend beyond mere compliance requirements to actively shape the landscape of corporate practices, aiming to enhance accountability and empower investors with comprehensive information.
The SEC's involvement in shaping corporate governance practices and promoting transparency in corporate disclosures is integral to maintaining the integrity and efficiency of the securities markets. A company’s Board of Directors is the central corporate governance body. The SEC has mandated certain disclosures, rules, and regulations for these officers.
By setting regulatory standards and encouraging compliance, the SEC plays a vital role in safeguarding investor interests and fostering trust in the financial system.
Smart Summary
The SEC is a central figure in the broader securities markets. Whether you are investing in stocks, bonds, retirement plans, mutual funds, or ETFs, the SEC has the authority to regulate these securities. As a result, it aims to make the markets more fair, transparent, and accessible to investors. The SEC handles the bad actors in the market so that you can focus on diversifying your investments and achieving your long-term financial goals.
(1) U.S. Securities and Exchange Commission. About the SEC. Last Accessed April 8, 2024.
(2) U.S. Securities and Exchange Commission. Investor Bulletin: An Introduction to the U.S. Securities and Exchange Commission – Organization and Mission. Last Accessed April 8, 2024.
(2) U.S. Securities and Exchange Commission. RuleMaking Activity. Last Accessed April 8, 2024.
