US Securities and Exchange Commission and How It Protects You
How the SEC Prevents Another Depression
The U.S. Securities and Exchange Commission (SEC) is a federal agency that regulates the U.S. stock market. Thanks to the actions of the SEC, the government has drastically reduced the chance of the U.S. experiencing another Great Depression.
The Securities Exchange Act of 1934 created the SEC itself. To succeed, public corporations had to register their stock sales. That meant they had to identify their major stockholders.
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 prevented holding companies from being 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.
The SEC's Current Role
The SEC gives investors 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 financial workings of U.S. companies. It makes sure investors can get accurate and consistent information about corporate profitability.
This allows investors to have a basis for determining a fair stock price for 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 energy giant Enron’s failure in 2001. That wasn't a failure on the part of the SEC; it happened because Enron lied in its information submissions to the SEC and accounting firm Arthur Andersen LLP failed to see the deception in its audit.
The SEC has five commissioners, appointed by the U.S. president. They have the support of approximately 4,500 staffers located in the Washington, DC headquarters and 11 regional offices across the country.
The SEC is made up of five different divisions:
- The Division of Corporation Finance reviews corporate filing requirements. It makes sure companies submit documents that 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 (FINRA), the Municipal Securities Rulemaking Board, and clearing agencies that facilitate trade settlement. A subset oversees the Securities Investor Protection Corporation (SIPC). This private, non-profit corporation insures customers' investment 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 the Sarbanes-Oxley Act of 2002.
- The Division of Enforcement investigates and prosecutes violations of securities laws and regulations. It conducts its 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 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 the overall risk in the markets. It provides early identification of potentially fraudulent activities.
Impact on the U.S. Economy
The SEC increases transparency, consistency, and trust in the U.S. stock market. That's a big reason 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 orchestrate their initial public offerings of stock. Many companies take their stock to the public markets when they have grown large enough to need equity financing for 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 Chairman 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 a great depth 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.
A useful SEC resource is Investor.gov. It serves as an advocate for investors, providing basic education on topics such as how the markets work, asset allocation, and a review of different retirement plans.