Monfex Financial Dictionary Securities and Exchange Commission (SEC)

Securities and Exchange Commission (SEC)

The US Securities and Exchange Commission (SEC) belongs to the main authorities that regulate the financial markets of the United States. Other authorities are the Commodity Futures Trading Commission (CFTC) and Financial Industry Regulatory Authority (FINRA), National Futures Association (NFA), etc.

What Is the Securities and Exchange Commission (SEC)?

The Securities and Exchange Commission is an independent government body that regulates the federal securities market. Its three key purposes are the protection of investors, maintenance of fair and effective markets, and facilitation of capital formation. This organization enforces the five major federal securities laws:

The Securities Act of 1933 – regulates the distribution of new securities.
The Securities Exchange Act of 1934 – controls the sales of securities in the secondary market. Exactly this law led to the establishment of the SEC.
The Trust Indenture Act of 1939 – regulates debt securities.
The Investment Advisers Act of 1940 – controls investment advisers.
The Investment Company Act of 1940 – regulates mutual funds.

Additionally, theу control the Sarbanes-Oxley Act of 2002 that protects investors from fraudulent financial reporting by corporations. It is also in charge of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. This act targets the financial sectors that supposedly caused the 2008 financial crisis, such as banks, credit rating agencies, and mortgage lenders. Finally, the SEC is also related to the Jumpstart Our Business Startups (JOBS) Act of 2012. This law makes capital raising for small businesses more affordable, such as allowing them to go public while having less than $1 billion in annual gross revenue.

History

Before the organization was created, there existed the so-called blue sky laws that regulated the offering and sale of securities to protect the public from fraud. However, these laws appeared to be ineffective. After holding hearings on abuses on interstate frauds, Congress passed the Securities Act of 1933 at the federal level. The subsequent Securities Exchange Act of 1934 created the U.S. Securities and Exchange Commission with the purpose of the federal securities laws enforcement.

The SEC had four primary tasks:

to bring back the investors' confidence in the securities market,
to end the low-level fraud,
to eliminate the fraud by top management of major corporations,
to set up a complex system of registration for all securities sold in the United States.

They succeeded in these four missions. Today, the law requires that issuing companies register distributions of securities with the SEC prior to interstate sales of these securities. Since 1994, most registration statements filed with the SEC have been accessed via the SEC's online database - the Electronic Data Gathering, Analysis, and Retrieval system (EDGAR).

How SEC Works

The SEC requires that public companies and other regulated companies submit quarterly and annual reports, as well as other periodic reports. Additionally, they must provide the "management discussion and analysis" (MD&A) report that outlines both the previous and next year of operations. The report shows the company's key decisions throughout the year and shares the future goals for the upcoming year. All of these reports are important for investors so that they make informed decisions when investing in the capital markets.

The SEC publishes the reports through the EDGAR online system. The same system also takes tips and complaints from investors to help the commission to track down those who violate the securities laws. The SEC never comments on the existence or status of an ongoing investigation.

Structure

The President appoints 5 commissioners to be in charge of the SEC for 5 years each, one of whom is designated as chairman.

The commission consists of 5 departments:

Corporate Finance. Makes sure that the investors get information relevant to a company's financial prospects or stock price to make reasonable investment decisions.
Economic and Risk Analysis. Analyzes economic data to predict risks.
Enforcement. Enforces the SEC regulations by investigating cases and prosecuting civil suits and administrative proceedings.
Investment Management. Control investment companies, insurance products, and federally registered investment advisors.
Trading and Markets. Creates and maintains standards for fair, orderly, and efficient markets.

The Bottom Line

The US Securities and Exchange Commission has been regulating the securities markets in the United States since 1934, when the Securities Exchange Act was established. The commission enforces this act and many others, such as The Securities Act of 1933, The Trust Indenture Act of 1939, The Investment Company Act of 1940, The Investment Advisers Act of 1940, etc.

In addition, the SEC requires that public companies and other regulated companies submit the quarterly, annual, and other periodic reports. All this information is stored and published in the SEC's online database called EDGAR. The commission consists of five major departments: Corporate Finance, Economic and Risk Analysis, Enforcement, Investment Management, and Trading and Markets.