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United States Securities and Exchange Commission (SEC)

Commonly known as the SEC - is a United States government agency having primary responsibility for enforcing the federal securities laws and regulating the securities industry/stock market. The SEC was created by section 4 of the Securities Exchange Act of 1934 (now codified as 15 USC § 78d and commonly referred to as the 1934 Act). In addition to the 1934 Act that created it, the SEC enforces the Securities Act of 1933, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Sarbanes-Oxley Act of 2002 and other statutes.

Appointed by George W. Bush, Christopher Cox is the current chairman of the SEC. President Franklin Delano Roosevelt appointed Joseph P. Kennedy, Sr., father of President John F. Kennedy, to serve as the first Chairman of the SEC. For a full list of SEC chairs and commissioners, see: Securities and Exchange Commission appointees.

The SEC was established by the United States Congress in 1934 as an independent, non-partisan, quasi-judicial regulatory agency following years of depression caused by the Great Crash of 1929. The main reason for the creation of the SEC was to regulate the stock market and prevent corporate abuses relating to the offering and sale of securities and corporate reporting. The SEC was given the power to license and regulate stock exchanges. Currently, the SEC is responsible for administering seven major laws that govern the securities industry. They are: the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940 and, most recently, the Sarbanes-Oxley Act of 2002.

The enforcement authority given by Congress allows the SEC to bring civil enforcement actions against individuals or companies found to have committed accounting fraud, provided false information, or engaged in insider trading or other violations of the securities law. The SEC also works with criminal law enforcement agencies to prosecute individuals and companies alike for severe offenses.

To achieve its mandate, the SEC enforces the statutory requirement that public companies submit quarterly and annual reports, as well as other periodic reports. As part of the annual reporting requirement, the company’s top management must provide a narrative account in addition to the numbers called the «management discussion and analysis» which provides an overview of the previous year of operations and how the company fared in that time period. Management will usually also touch on the upcoming year, outlining future goals and approaches to new projects. In an attempt to level the playing field for all investors, the SEC maintains an online database called EDGAR (the Electronic Data Gathering, Analysis, and Retrieval system) online from which investors can access this and other information filed with the agency.

Quarterly and annual reports from public companies are crucial for investors to make sound decisions when investing in the capital markets. Unlike banking, investment in the capital markets is not guaranteed by the federal government. The potential for big gains needs to be weighed against equally likely losses. Mandatory disclosure of financial and other information about the issuer and the security itself gives private individuals as well as large institutions the same basic facts about the public companies they invest in, thereby increasing public scrutiny while reducing insider trading and fraud.

The SEC makes reports available to the public via the EDGAR system. SEC also offers publications on investment-related topics for public education. The same online system also takes tips and complaints from investors to help the SEC track down violators of the securities laws.

Creation

Prior to the enactment of the federal securities laws and the creation of the SEC, there existed so-called Blue Sky Laws, which were enacted and enforced at the state level. However, these laws were generally found lacking; the Investment Bankers Association told its members as early as 1915 that they could «ignore» Blue Sky Laws by making securities offerings across state lines through the mail. After holding hearings on abuses on interstate frauds (commonly known as the Pecora Commission), Congress passed the Securities Act of 1933 which regulates interstate sales of securities (original issues) at the federal level. The subsequent Securities Exchange Act of 1934 regulates sales of securities in the secondary market. Section 4 of the 1934 Act created the U. S. Securities and Exchange Commission to enforce the federal securities laws. Both laws are considered part of Franklin Roosevelt’s «New Deal» raft of legislation.

The Securities Act of 1933 is also known as the «Truth in Securities Act» or the «Federal Securities Act» and is often shorted to the «1933 Act.» Its goal is to increase public trust in the capital markets by requiring uniform disclosure of information about public securities offerings. The primary drafters of 1933 Act were Huston Thompson, a former Federal Trade Commission chairman, and Walter Miller and Ollie Butler, two attorneys in the Commerce Department’s Foreign Service Division, with input from Supreme Court Justice Louis Brandeis. For the first year of the law’s enactment, the enforcement of the statute rested with the Federal Trade Commission, but this power was transferred to the SEC following its creation in 1934. (Interestingly, the first, rejected draft of the Securities Act written by Samuel Untermyer vested these powers in the U. S. Post Office, because Untermyer believed that only by vesting enforcement powers with the postal service could the constitutionality of the act be assured.) The law requires that issuing companies register distributions of securities with the SEC prior to interstate sales of these securities, so that investors may have access to basic financial information about issuing companies and risks involved in investing in the securities in question. Since 1996, most registration statements (and associated materials) filed with the SEC can be accessed via the SEC? s online system, EDGAR.

The Securities Exchange Act of 1934 is also known as «the Exchange Act» or «the 34 Act». This act regulates secondary trading between individuals and companies which are often unrelated to the original issuers of securities. Entities under the SEC? s authority include securities exchanges with physical trading floors such as the New York Stock Exchange (NYSE), self-regulatory organizations such as the National Association of Securities Dealers (NASD), the Municipal Securities Rulemaking Board (MSRB), online trading platforms such as NASDAQ and ATS, and any other persons (e. g., securities brokers) engaged in transactions for the accounts of others.

SEC Structure

Headquartered in Washington, D. C., the SEC consists of five Commissioners appointed by the President of the United States with the advice and consent of the Senate. Their terms last five years and are staggered so that one Commissioner’s term ends on June 5 of each year. To ensure that the SEC remains non-partisan, no more than three Commissioners may belong to the same political party. The President also designates one of the Commissioners as Chairman, the SEC’s top executive.

Within the SEC, there are four divisions, 18 offices and approximately 3,100 staff. Beside its headquarters in Washington, D. C., the SEC has 11 regional and district offices throughout the United States.
The SEC’s four main divisions are: Corporation Finance, Market Regulation, Investment Management, and Enforcement.
Corporation Finance is the division that oversees the disclosure made by public companies as well as the registration of transactions, such as mergers, made by companies. The division is also responsible for operating EDGAR.

The Market Regulation division oversees self-regulatory organizations (SROs) such as NYSE, NASD and MSRB, and all broker-dealer firms and investment houses. Market Regulation also interprets proposed changes to regulations and monitors operations of the industry. In practice, the SEC delegates most of its enforcement and rulemaking authority to NYSE and NASD. In fact, all trading firms not regulated by other SROs must register as a member of NASD. Individuals trading securities must pass exams administered by NASD to become registered representatives.

The Investment Management Division oversees investment companies (commonly referred to as mutual funds) and their advisory professionals. This division administers federal securities laws, in particular the Investment Company Act of 1940.

The Enforcement Division works with the other three divisions to investigate violations of the securities laws and regulations and to bring actions against alleged violators. The SEC conducts investigations in private first, via information interviews. It then issues a formal order of investigation and can compel witnesses to testify and companies to produce records for the investigation. The SEC can bring a civil action in a U. S. District Court or an administrative proceeding which is heard by an independent administrative law judge (ALJ). To press criminal charges, the SEC must work with law enforcement offices to bring actions against violators.

Relationship to other agencies

In addition to working with various SROs such as NYSE and NASD, the Securities and Exchange Commission also works with other federal agencies, state securities regulators and law enforcement agencies.

In 1988 Executive Order 12631 established the President's Working Group on Financial Markets. The Working Group is chaired by the Secretary of the Treasury and includes the Chairman of the SEC, the Chairman of the Federal Reserve and the Chairman of the Commodity Futures Trading Commission. The goal of the Working Group is to enhance the integrity, efficiency, orderliness and competitiveness of the financial markets while maintaining investor confidence.

The Securities Act of 1933 was originally administered by the Federal Trade Commission (FTC). The Securities Exchange Act of 1934 transferred this responsibility from FTC to the SEC. The main mission of the FTC is to promote consumer protection and to eradicate anticompetitive business practices. The FTC regulates general business practices, while the SEC focuses on the securities markets.
The Municipal Securities Rulemaking Board (MSRB) was established in 1975 by Congress to develop rules for companies involved in underwriting and trading municipal securities. The MSRB is monitored by the SEC, but the MSRB does not have the authority to enforce its rules.

While most violations of securities laws are enforced by the SEC and the various SROs it monitors, state securities regulators can also enforce state-wide securities laws known colloquially as Blue sky laws. States may require securities to be registered in the state before they can be sold there. The National Securities Markets Improvement Act of 1996 (NSMIA) addresses this dual system of federal-state regulation by amending Section 18 of the 1933 Act to exempt nationally traded securities from state registration, thereby pre-empting state law in this area. However, NSMIA preserves the states' anti-fraud authority over all securities traded in the state.

The SEC also works with federal and state law enforcement agencies to carry out actions against actors alleged to be in violation of the securities laws.

Basis of Mutual Funds | The ABCs Classes | Fees and Expenses | The Risks of Investing | Selecting Fund | Duties of Mutual Funds | List of Indian Mutual Funds