Definition of Securities and Exchange Commission (SEC), How It Works [ Complete Guides 2024]

What Is the Securities and Exchange Commission?

The U.S. Securities and Exchange Commission 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.

U.S. Securities and Exchange Commission. “What We Do.”

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.

KEY TAKEAWAYS

• The Securities and Exchange Commission is a U.S. government oversight agency responsible for regulating the securities markets and protecting investors.
• The SEC was established by the passage of the U.S. Securities Act of 1933 and the Securities and Exchange Act of 1934, largely in response to the stock market crash of 1929 that led to the Great Depression.
• The SEC can itself bring civil actions against lawbreakers, and also works with the Justice Department on criminal cases.

Understanding SEC?

The SEC is a regulatory and administrative agency created by the U.S. government in 1934 under the Securities Exchange Act.

This Act was passed in response to the stock market crash of 1929, which sent the American market into a tailspin and led to significantly reduced investor confidence.

The SEC was given a three-part mission to help stabilize markets and encourage investor confidence:

1. Ensure fair market activity

According to the SEC, the U.S. capital markets “are the deepest, most dynamic, and most liquid in the world.

They also have evolved to become increasingly fast and extraordinarily complex.”

As of 2023, the SEC is responsible for the oversight of more than $100 trillion in securities trading across both digital and physical markets.

The primary goals of this oversight are fairness and transparency.

The SEC is responsible for ensuring that both buyers and sellers of securities are forthright and truthful about the value of securities, along with potential risks associated with these securities.

2. Enforce financial regulations

Part of ensuring fair market activity means enforcing financial rules and regulations.

As evidenced by the full text of the General Rules and Regulations of the Security Exchange Act, much of this enforcement comes down to reporting and review.

Case in point, under section 240.14c-3, security holders must provide the SEC with an annual report. Under section 240.15d-21, meanwhile, companies must provide reports for employee stock purchases, savings, and other similar plans.

The agency then reviews these reports to ensure both buyers and sellers are acting in good faith.

The SEC also recognizes that financial regulations aren’t static. As technology advances, the agency constantly evaluates current procedures and, where appropriate, modernizes rules to accommodate these changes.

Over the last 90 years, Congress has passed additional Acts that help the SEC maintain market stability. These include:

• The Trust Indenture Act (1939)
• The Investment Company and Investment Advisers Act (1940)
• The Sarbanes-Oxley Act (2002)
• The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)
• The Jumpstart Our Business Startups (JOBS) Act (2012)

The SEC also creates and enforces new rules to help keep pace with changing economic conditions.

To illustrate, in February 2024, the SEC proposed a rule to help qualify venture capital funds inflation adjustment.

As part of the approval process, the SEC will ask for public opinion along with conducting internal evaluations and reviews.

3. Encourage capital formation

Finally, the SEC takes an active role in capital formation to help grow the U.S. economy.

In particular, the SEC offers an interactive capital navigator.

Owners can provide details about their business operations and get capital pathway recommendations to help streamline the funding process.

How the Securities and Exchange Commission (SEC) Works

The SEC’s primary function is to oversee organizations and individuals in the securities markets, including securities exchanges, brokerage firms, dealers, investment advisors, and investment funds. Through established securities rules and regulations, the SEC promotes disclosure and sharing of market-related information, fair dealing, and protection against fraud. It provides investors with access to registration statements, periodic financial reports, and other securities forms through its electronic data-gathering, analysis, and retrieval database, known as EDGAR.

Important: The Securities And Exchange Commission (SEC) was created in 1934 to help restore investor confidence in the wake of the 1929 stock market crash.

The SEC is headed by five commissioners who are appointed by the president, one of whom is designated as chair. Each commissioner’s term lasts five years, but they may serve for an additional 18 months until a replacement is found. The current SEC chair is Gary Gensler, who took office on April 17, 2021. To promote nonpartisanship, the law requires that no more than three of the five commissioners come from the same political party.

The SEC consists of five divisions and 23 offices. Their goals are to interpret and take enforcement actions on securities laws, issue new rules, provide oversight of securities institutions, and coordinate regulation among different levels of government. The five divisions and their respective roles are:

• Division of Corporate Finance: Ensures investors are provided with material information (that is, information relevant to a company’s financial prospects or stock price) in order to make informed investment decisions.
• Division of Enforcement: In charge of enforcing SEC regulations by investigating cases and prosecuting civil suits and administrative proceedings.
• Division of Investment Management: Regulates investment companies, variable insurance products, and federally registered investment advisors.
• Division of Economic and Risk Analysis: Integrates economics and data analytics into the core mission of the SEC.
• Division of Trading and Markets: Establishes and maintains standards for fair, orderly, and efficient markets.

The SEC is allowed to bring only civil actions, either in federal court or before an administrative judge. Criminal cases fall under the jurisdiction of law enforcement agencies within the Department of Justice; however, the SEC often works closely with such agencies to provide evidence and assist with court proceedings.

In civil suits, the SEC seeks two main sanctions:

1. Injunctions, which are orders that prohibit future violations. A person or company that ignores an injunction is subject to fines or imprisonment for contempt.
2. Civil money penalties and the disgorgement of illegal profits. In certain cases, the SEC may also seek a court order barring or suspending individuals from acting as corporate officers or directors. The SEC may also bring a variety of administrative proceedings, which are heard by internal officers and the commission. Common proceedings include cease and desist orders, revoking or suspending registration, and imposing bars or suspensions of employment.

It also serves as the first level of appeal for actions sought by the securities industry’s self-regulatory organizations, such as FINRA or the New York Stock Exchange.

Among all the SEC’s offices, the Office of the Whistleblower stands out as one of the most potent means of securities law enforcement. Created as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC’s whistleblower program rewards eligible individuals for sharing original information that leads to successful law enforcement actions with monetary sanctions in excess of $1 million. The individuals can receive 10% to 30% of the total sanctions’ proceeds.

History of the SEC

When the U.S. stock market crashed in October 1929, securities issued by numerous companies became worthless. Because many had previously provided false or misleading information, public faith in the integrity of the securities markets plunged. To restore confidence, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934, which created the Securities and Exchange Commission (SEC). The SEC’s primary tasks were to ensure that companies made truthful statements about their businesses and that brokers, dealers, and exchanges treated investors in an honest and fair manner.

In the years since additional laws have aided the SEC in its mission: 

• Trust Indenture Act of 1939
• Investment Company Act of 1940
• Investment Advisers Act of 1940
• Sarbanes-Oxley Act of 2002
• Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
• Jumpstart Our Business Startups (JOBS) Act of 2012

Today the Securities and Exchange Commission (SEC) brings numerous civil enforcement actions against firms and individuals that violate securities laws every year. It is involved in every major case of financial misconduct, either directly or in conjunction with the Justice Department. Typical offenses prosecuted by the SEC include accounting fraud, the dissemination of misleading or false information, and insider trading. 

After the Great Recession of 2008, the Securities and Exchange Commission (SEC) was instrumental in prosecuting the financial institutions that caused the crisis and returning billions of dollars to investors. In total, it charged 204 entities or individuals and collected close to $4 billion in penalties, disgorgement, and other monetary relief. Goldman Sachs, for example, paid $550 million, the largest penalty ever for a Wall Street firm and the second-largest in SEC history, exceeded only by the $750 million paid by WorldCom.

Still, many observers have criticized the SEC for not doing enough to help prosecute the brokers and senior managers who were involved in the crisis, almost all of whom were never found guilty of significant wrongdoing. So far, only one Wall Street executive has been jailed for crimes related to the crisis. The rest either settled for a monetary penalty or accepted administrative punishments.

How Does the SEC Make New Rules?

A new Securities and Exchange Commission (SEC) rule starts with a concept release, which leads to a proposal. Both a concept release and subsequent proposal are published for public review and comment. The Securities and Exchange Commission (SEC) considers the public’s input on the proposal as it determines its next steps. The Securities and Exchange Commission (SEC) will then convene to consider input from the public as well as industry or other subject-matter experts are considered. They then vote to adopt the rule.

Is the Securities and Exchange Commission the Same as FINRA?

No. The Securities and Exchange Commission (SEC) is a government organization that sets rules and regulations regarding the issuance, marketing, and trading of securities. The Securities and Exchange Commission 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 (SEC) Accountable to?

It 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.

What is the SEC’s Regulation SCI?

The Securities and Exchange Commission created Regulation Systems Compliance and Integrity (Regulation SCI) in 2015. It’s a set of rules that track the security and other technical capabilities of U.S. securities markets.

Regulation SCI came about in response to securities markets’ increasing use of technology and IT automation. It provides oversight of the financial securities’ markets use of IT. The goal of these rules is to minimize problems resulting from the industry’s increasing dependence on technology. They also ensure there is a smooth and fast way for markets to recover when issues happen.

Issues that the regulation covers are referred to as SCI events. They include disruptions in the markets’ systems, problems related to compliance, and security vulnerabilities and attacks.

Entities that Regulation SCI covers include clearing agencies, plan processors, self-regulatory groups and some alternative trading systems. These organizations must have IT policies and processes related to system capacity, integrity, resilience, availability and security. They are required to notify the Securities and Exchange Commission and take corrective action when an SCI event occurs. They also must conduct an annual review of their Regulation SCI procedures and report the results to the Securities and Exchange Commission (SEC).

How does the SEC help small businesses?

There are multiple ways the Securities and Exchange Commission (SEC) can help small businesses, including:

1. Capital formation

In 2019, the agency established the Office of the Advocate for Small Business Capital Formation (OASBCF).

The Office provides resources for small businesses to understand the capital raising process and navigate the SEC rules associated with this process.

Given the increasing volume and variety of potential capital sources, the SEC’s guidance can help small businesses avoid possible pitfalls and streamline capital generation.

The SEC also provides guidance for businesses that choose to raise capital by selling securities.

Specifically, the SEC’s small business publications contain information about how to register a public offering, how to report securities data, and where owners can find more information about the SEC regulations.

2. Rules and regulations analysis

The OASBCF also analyzes proposed rules from both the Securities and Exchange Commission (SEC) and those from self-regulatory organizations (SROs) to determine their potential impact on small businesses and investors.

Armed with this information, the office can help SMBs effectively navigate these rules to both streamline processes and reduce the risk of non-compliance.

This type of assistance is critical for smaller businesses as the pace of regulatory change accelerates and compliance expectations evolve to meet global consumer demand.

Each year the Office releases an Annual Report which contains an analysis of current market trends, SEC rulemaking, and OASBCF recommendations.

3. Issue resolution

In addition, the OASBCF helps small businesses and investors resolve issues with the SEC and with SRO by recommending specific policy changes to both Congress and the Commission.

For instance, the organization has recommended changes such as scaling security disclosure requirements to match the size of the business, improving access to educational resources and tools for SMBs, and modifying the definition of an “accredited investor” to give owners more options in demonstrating financial sophistication.

What role does the SEC play in US markets?

While the primary mission of the Securities and Exchange Commission (SEC) remains the same, the agency has diversified its role to keep pace with changing markets.

According to the SEC’s official website, the agency now performs five key functions:

1. Informing and protecting investors

Investors are kept informed about market trends with regular investor alerts and bulletins.

In addition, the Securities and Exchange Commission (SEC) provides data on all registered investment professionals, including their current registration status and background.

2. Facilitating capital formation

The Securities and Exchange Commission (SEC) facilitates capital formation with resources such as the Capital Raising Hub for small businesses and the FinHub for financial technology firms.

3. Enforcing federal securities laws

Securities laws are enforced through both digital and physical enforcement actions, and the SEC provides a list of the latest court actions and administrative proceedings.

The Office of the Whistleblower also allows members of the public to report unfair or fraudulent practices.

4. Regulating securities markets

The Securities and Exchange Commission (SEC) helps regulate securities markets with both final and proposed rules, and actively seeks out investor feedback on current and future SEC rulemaking.

5. Providing data

Finally, the Securities and Exchange Commission (SEC) provides market data such as Money Market Fund Statistics, information about active broker-dealers, and reports from registered investment advisers.

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