What is the Securities and Exchange Commission (SEC)?
The U.S. Securities and Exchange Commission (SEC) is an independent federal government regulatory agency responsible for protecting investors, maintaining fair and orderly functioning of the securities markets, and facilitating capital formation.
It was created by Congress in 1934 as the first federal regulator of the securities markets. The SEC promotes full public disclosure, protects investors against fraudulent and manipulative practices in the market, and monitors corporate takeover actions in the United States. It also approves registration statements for bookrunners among underwriting firms.
Generally, issues of securities offered in interstate commerce, through the mail or on the Internet, must be registered with the SEC before they can be sold to investors. Financial services firms—such as broker-dealers, advisory firms and asset managers, as well as their professional representatives—must also register with the SEC to conduct business. An example: they would be responsible for approving any formal bitcoin exchange.
How does the Securities and Exchange Commission work?
The SEC has five commissioners who serve five-year terms. No more than three of the commissioners may belong to the same political party.
The agency has six major divisions:
- The Division of Corporation Finance ensures companies disclose important information to the investing public. The division ensures information is available about companies when they initially go public and after. It also provides help to companies interpreting SEC rules and forms. And it reviews new rules and revisions to existing rules.
- The Division of Trading and Markets is in charge of developing and overseeing the standards for the securities markets. It also monitors the main players in the industry, including brokers, stock exchanges, clearing agencies and FINRA.
- The Division of Investment Management helps protect investors and encourages capital formation through oversight and regulation of the investment management industry. It administers the Investment Company Act of 1940 and Investment Advisers Act of 1940. It also monitors mutual funds and other investment services.
- The Division of Enforcement investigates securities law violations and initiates civil and criminal actions. It also prosecutes civil suits in federal courts and handles administrative proceedings.
- The Division of Economic and Risk Analysis provides the data analytics the SEC needs to pursue its mission. Its work includes policy- and rule-making, as well as support for enforcement activities.
- The Division of Examinations manages the SEC’s examination program. SEC exams help organizations identify risks and improve compliance. They also help the SEC identify and pursue misconduct and improve its rules and regulations.
SEC has 11 regional offices. Its subgroups include an office of Administrative Law Judges, an Advocate for Small Business Capital Formation, an Investor Advocate, and a Strategic Hub for Innovation and Financial Technology.
Organizational Setup of the Securities and Exchange Commission
The Securities and Exchange Commission comprises five Commissioners who are appointed by the US President. One of them is designated as the Chairman of the Commission. The law dictates that no more than three Commissioners may come from the same political party, to ensure non-partisanship.
Here are the five divisions within the SEC:
1. Division of Corporation Finance
This division is responsible for helping the Securities and Exchange Commission in performing its role of overseeing the corporate disclosure of important information to investors. When stock is sold, a corporation is required to adhere to regulations related to disclosure.
The Division of Corporation Finance is tasked to review on a regular basis disclosure documents that are filed by corporations. It also helps interpret the rules of the SEC. It likewise gives recommendations related to new adoption rules to the SEC.
2. Division of Trading and Markets
This division assists the SEC in ensuring that markets are fair, orderly, and efficient. It oversees the day-to-day activities of major securities market participants, securities firms, securities exchanges, self-regulatory organizations, clearing agencies, transfer agents, credit rating agencies, as well as securities information processors.
3. Division of Investment Management
The division of Investment Management helps the Securities and Exchange Commission in executing its role of protecting investors and promoting capital formation. It oversees and regulates the country’s investment management industry.
It ensures that disclosures about investments such as mutual funds and exchange-traded funds are useful to retail customers. The division also ensures that the regulatory costs are not too high.
4. Division of Enforcement
The division of Enforcement is responsible for the enforcement of securities laws. It gives recommendations on the commencement of investigations of securities law violations. It is also in charge of working closely with law enforcement agencies to take on criminal cases.
5. Division of Economic and Risk Analysis
This division is in charge of protecting investors and keeping markets fair, orderly, and efficient. It also provides economic analyses and data analytics, and interacts with almost all divisions and offices within the Commission.
Is the Securities and Exchange Commission the Same as FINRA?
No. The SEC is a government organization that sets rules and regulations regarding the issuance, marketing, and trading of securities.
The SEC is also charged with protecting investors. FINRA (formerly NASD) is a non-profit self-regulatory industry organization that oversees broker-dealers and issues licenses to securities professionals.
Who Is the Securities and Exchange Commission Accountable to?
The SEC is an independent federal agency that is headed by a bipartisan five-member commission, comprised of the Chairman and four Commissioners who are appointed by the President and confirmed by the U.S. Senate.
The SEC is accountable to Congress as it operates under the authority of federal laws including the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, the Investment Advisers Act of 1940, and the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), among others.