The Securities and Exchange Commission: Overview

The Securities and Exchange Commission (SEC) regulates American stock and securities exchanges, brokers, investment advisors, and mutual funds.

Congress passed the Securities Exchange Act of 1934 to establish the SEC, among other things. The federal government created the SEC to restore investor confidence. It was also formed to help reform securities markets following the stock market crash of 1929 and during the Great Depression. Its mission is:

1. Protect investors in capital markets
2. Maintain fair, orderly, and efficient markets
3. Facilitating capital formation

The SEC tries to carry out this mission by:

1. Requiring public disclosure of financial information for publicly traded companies
2. Bringing enforcement against violators of securities law
3. Developing SEC rules for securities

Public Disclosure

Reliable public information is essential in preventing fraud and promoting informed investment decisions. The SEC requires that public companies disclose important financial information to the commission and the public.

When a company wants to sell a security, such as in a public stock offering, it must register that security with the SEC. Registration statements and prospectuses include descriptions of the company's properties and business. They also include the security offered for sale, and financial statements made by independent accountants. Investors considering whether to buy a company's securities use this information. It's available on the EDGAR database.

The SEC also requires several other forms of public disclosure. For example, companies worth over $10 million in assets held by more than 500 investors must file annual corporate reports. Companies must disclose information about shareholder votes to the SEC. They also must disclose information about offers to buy more than 5% or more of a company's stock.

Enforcement

The SEC's regulatory power is backed by its enforcement authority. The SEC may bring civil suits in federal court against violators of securities laws. The SEC can also partner with the Department of Justice in criminal actions. The Commission can bring actions against people or companies for violations such as:

• Insider trading
• Accounting fraud
• Providing false or misleading information
• Failing to disclose information in public reports

An enforcement action typically involves three separate steps. With information from investors, corporate insiders, or investigators, the SEC may perform an informal investigation. It examines brokerage records, witnesses, and public documents. These proceedings are usually kept private.

Then the SEC issues a formal order of investigation requiring the parties to release records to investigators. Finally, if the SEC believes there has been wrongdoing, it may move the case forward to federal court or take administrative action.

Rulemaking

The U.S. Securities and Exchange Commission (SEC.gov) also interprets federal securities laws. It issues or amends rules and regulations for the securities industry. These include rules about traditional federal securities law such as:

• The Securities Act of 1933,
• The Investment Advisers Act of 1940 (governs investment advisers)
• The Investment Company Act of 1940 (regulates the organization of companies that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public)

The SEC also implements newer financial reform acts, like the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which amended the Sarbanes-Oxley Act of 2002. These rules cover a range of important issues. These include the regulation of mortgage-backed investments, derivatives, and financial reporting.

Self-Regulatory Organizations

Self-regulatory organizations (SRO) include exchanges and associations. They govern the markets and are subject to oversight by the Securities and Exchange Commission. Among other things, SROs:

• Watch the markets
• Investigate and discipline members involved in improper trading
• Make referrals to the SEC about suspicious trades by nonmembers

The SEC must ensure that SROs are fulfilling their regulatory responsibilities.

Organization

The SEC has headquarters in Washington, D.C., and has 11 regional office locations. Five commissioners appointed by the President lead the SEC. Though the President appoints the commissioners, they can't get fired by the President. This protects their independence. To keep the SEC nonpartisan, up to three commissioners may belong to the same political party at one time.

The SEC has five divisions:

• Corporate Finance, which oversees public financial disclosures
• Trading and Markets, which regulates broker firms, investment houses, and the Financial Industry Regulatory Authority (FINRA)
• Investment Management, which supervises investment companies such as mutual funds
• Enforcement, which investigates and brings actions over violations of securities laws
• Economic and Risk Analysis, which integrates economics and data analysis into SEC operations

The SEC has 22 different offices. This includes the Office of Administrative Law Judges, the Office of the Chief Accountant, and the Office of Compliance Inspections and Examinations.

Protect Yourself From Securities Fraud

Even though the securities industry is heavily regulated, securities fraud continues. If an entity or person acts in a way to manipulate the investment market illegally, the entity or person has committed securities fraud. Financial advisors or analysts, corporations, broker-dealers, or private investors can commit securities fraud.

There are a variety of actions that a person or entity can perform that constitute securities fraud in the sale of securities. Just a few examples include the following:

• Hiding or distorting company information
• Acting on inside information
• Purposefully offering poor investment advice to market participants

Learn More About Securities Resources

• Securities Law: Links — A collection of online resources about securities law. It includes investor associations, summaries of securities laws and regulations, the leading stock exchanges, and government agencies responsible for oversight.
• Basic Terms for Shareholders and Investors — Every investor should understand securities terms before buying or trading securities. Examples are: "accredited investor," "blue sky laws," "fiduciary relationship," "proxy statement," and "public offering."
• Dodd-Frank Reform and Consumer Protection Act — Summary of the Dodd-Frank Wall Street reforms and how they affect shareholders.
• Researching Investments — Links from the SEC to help you research your investments. It includes links to the agency's EDGAR database of public companies and its EMMA electronic data gathering database of municipal securities (SEC).
• Shareholder Voting — Everything you need to know about shareholder voting. It has details about how to vote in a corporate election, the difference between "registered" and "beneficial" owners, and related matters (SEC).

If You Have Questions About Securities Law, Contact a Lawyer

The rules and regulations governing securities law and the SEC are many and complex. Violations can have serious repercussions. Contact an experienced securities law attorney with questions about securities issues.