What Is the U.S. Securities and Exchange Commission?

How the SEC Protects You and Prevents Another Depression

stock-traders.jpg
The SEC regulates the stock market. Photo: Getty Images

The U.S. Securities and Exchange Commission is a federal agency that regulates the U.S. stock market. By helping the U.S. economy, the SEC contributes to the high standard of living we enjoy today. Thanks to the SEC, there is little chance that we will again experience a Great Depression.

What the SEC Does

The SEC maintains confidence in the U.S. stock market. That's critical to the strong functioning of the U.S. economy.

It does this by providing transparency into the workings of U.S. companies. It makes sure investors can get accurate information about corporate profitability.

That allows investors to determine a fair price for the stock of the company. Without this transparency, the stock market would be vulnerable to sudden shifts as hidden information came out. This lack of transparency was the reason for Enron’s failure. That wasn't a failure on the part of the SEC, though. Enron simply lied on the SEC submissions.

The Commission prosecutes offenders like Enron. It also punishes insider trading, deliberate manipulation of the markets, and selling stocks and bonds without proper registration.

There is some concern that the SEC is becoming less effective during the Trump administration. From February through September, 2017, the agency collected $127 million in corporate civil penalties in 15 cases. That's much lower than the $702 million collected from 43 cases during the same period in 2016.

SEC Organization

The SEC has five commissioners who are appointed by the U.S. president. They are supported by 3,100 staff located in 18 offices across the country. 

The SEC has five divisions. The Division of Corporation Finance reviews corporate filing requirements. It makes sure those documents are complete and accurate.

That allows investors to understand a company's health.

The Division of Trading and Markets maintains the standards that regulate the stock markets. It oversees the securities exchanges and securities firms. It also maintains surveillance over the industry's self-regulatory organizations. These include the Financial Industry Regulatory Authority, the Municipal Securities Rulemaking Board  and clearing agencies that facilitate trade settlement. The Division also oversees the Securities Investor Protection Corporation. That is a private, non-profit corporation that insures customer accounts in case a brokerage company goes bankrupt.

The Division of Investment Management regulates investment management companies, including mutual funds and variable annuities. It reviews documents submitted under Sarbanes-Oxley Act of 2002.

The Division of Enforcement investigates and prosecutes violations of securities laws and regulations. It conducts is investigations privately. It can use a formal order of investigation to subpoena witnesses to testify and produce relevant documents. The division presents its findings to the SEC Commission, which allows it to to file a case in federal court. Often the Commission settles the case out of court.

The Division of Economic and Risk Analysis provides economic and risk analyses to the other divisions. It predicts how proposed SEC rules would affect the markets and the economy. It reviews overall risk in the markets. It provides early identification of potential fraudulent activities. 

How the SEC Affects the U.S. Economy

The SEC increases transparency and trust in the U.S. stock market. That's a big reason why the New York Stock Exchange is the most sophisticated and popular exchange in the world. This transparency attracts much business to U.S. financial institutions, including banks and legal firms

It also makes it easier for companies to issue an initial public offering. That' when they have grown large enough to need to sell stock to finance their next phase of development. The ease of going public helps U.S. companies grow larger and faster than those of other countries with less developed markets.

The SEC Commissioner sits on the Financial Stability Oversight Council. The Dodd-Frank Wall Street Reform Act established the council after the 2008 financial crisis. It looks for weaknesses in the financial markets that could create another crisis.

How the SEC Affects You

The SEC affects you by making it safer for you to buy stocks, bonds, and mutual funds. It does not regulate hedge funds or derivatives. The SEC provides lots of information to help you invest. 

Dodd-Frank required the SEC to study the financial literacy of the average American investor. It found that most investors don't understand the basics of how the markets or the economy work. It suggested ways to improve investors' knowledge.

The most useful for you is the creation of Investor.gov. It provides basic education, such how the markets work, asset allocation, and a review of the different retirement plans. It also has a section on How to Select a Broker. You can find out if your broker is registered. It gives you Five Steps to Avoid Investor Fraud.

The site gives you financial planning tools. It can tell you how much you need to retire. You can find out how fees impact your investments. You can even learn how to manage the finances of an incapacitated parent.

History

In 1934, Congress created the SEC to restore the public’s confidence in financial markets after the 1929 stock market crash. The first chairman was Joseph Kennedy, ​President John F. Kennedy's father.

The Securities Exchange Act of 1934 created the SEC itself. But it couldn't have succeeded with the Securities Act of 1933. It required public corporations to register their stock sales. That meant they had to identify who the major holders were. Before the Act, a small group would hold a majority share of stocks. They could manipulate the markets without anyone knowing.

The 1935 Public Utility Holding Company Act  eliminated holding companies more than twice removed from the utilities whose stocks they held. That meant holding companies could no longer obscure the intertwined ownership of public utility companies. The act allowed the SEC to break up large utility combinations into smaller, geographically based companies. It also created the local federal commissions to regulate utility rates.