The Securities and Exchange Commission (or SEC) is the US government agency that oversees the trading of stocks and bonds and other investment products known as securities to maintain fair markets and prevent fraudulent dealing. The agency is responsible for identifying and investigating criminal activity in the securities industry.
What is a security?
The SEC governs the securities industry. Securities are tradeable financial assets used to raise capital. They include a variety of financial products, but the main categories are:
- Stocks
- Bonds
- Mutual funds and exchange-traded funds
- Insurance products like annuities
What is an exchange?
The markets where these trades happen are known as securities exchanges. National securities exchanges include major global organizations like the New York Stock Exchange and the Nasdaq Stock Market, as well as smaller exchanges like the Miami International Securities Exchange and the Chicago Board Options Exchange. These markets are all subject to federal securities laws, which have been established over time to regulate their activities.
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When was the SEC created?
The SEC was created in 1934 as a response to the Great Depression, when public confidence in the US markets was low.
The Securities Act of 1933, sometimes referred to as the “truth in securities” law, established a registration process for securities traders to make the industry more transparent and keep participants honest. Sellers were required to disclose relevant information — including information about the risks associated with a deal — before trading securities, and buyers were protected by a right to recover any losses sustained in deals in which they could prove they had been deceived or misled.
The following year Congress passed the Securities Exchange Act of 1934, which established the SEC. The new legislation outlawed practices like insider trading — the dealing of securities “while in possession of material, nonpublic information” — and empowered the SEC to register and regulate organizations involved in the securities industry, including by requiring companies to publish periodic public reports on their trading.
What does the SEC do?
The SEC’s stated mission has three parts:
- protect investors (those who trade financial assets to make a profit)
- maintain fair, orderly, and efficient markets
- facilitate capital formation
That means monitoring malpractice like insider trading, regulating the exchange markets and the corporations participating in public trade, and enforcing federal securities laws.
The agency collects and reviews financial information on public and some private companies, conducts investigations into violations of the trading rules, and engages with investors through educational programs and investor roundtables.
How is the SEC structured?
The SEC is led by commissioners appointed by the US president. There are typically five commissioners — though two seats recently sat vacant from late 2015 to January 2018 — and no more than three can be members of the same political party. The commission oversees six divisions and 11 regional offices where over 4,500 staff members work.
The organization is supported by a group of four advisory committees composed of external, mostly private-sector members selected via different methods.
How does an SEC investigation work?
The SEC’s Enforcement Division initiates the agency’s investigations of companies that may have violated trading rules from a variety of sources, from internal monitoring to external clips and media reports. SEC investigators then collect evidence through documents, data records, and interviews. Once the investigation is complete, it is presented to the commission for review. From there, the case can be brought to federal court, settled outside of court, or heard by an independent judge to recommend SEC sanctions. SEC sanctions can include bans from trading or revocation of registrations.
What is a Form 10-K?
The SEC requires many corporations to file periodic reports, per the Securities Exchange Act of 1934 . These annual reports are called Form 10-K and include information on the financial state of the company, including audited financial statements.
Since government agencies themselves do not release 10-Ks, USAFacts compiles government financial data into an annual Government 10-K report using the format of the SEC’s Form 10-K.
What is the EDGAR database?
Form 10-Ks are compiled in a free public database called the Electronic Data Gathering, Analysis, and Retrieval system, or EDGAR.
EDGAR includes information from:
- All publicly traded companies
- Companies listing securities on a US security exchange
- Companies with a certain classes of assets
Is there recent legislation impacting securities markets?
Two pieces of federal legislation enacted during former President Barack Obama’s first administration had significant effects on federal securities trading.
Dodd-Frank
In the wake of the Great Recession, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, a bill that aimed to “protect consumers from abusive financial services practices” by establishing the Consumer Finance Protection Bureau (CFPB), introducing regulations to curb the “excessive risk-taking" that had impacted the market a few years prior, and reforming the practice of government bailouts.
The CFPB is responsible for setting and enforcing rules around the relationship between big financial institutions and the public, including regulations on homebuying, overdraft fees, credit cards, and student loans.
The JOBS Act
In April 2012, the Jumpstart Our Business Startups Act of 2012 — also known as the JOBS Act — was passed in an effort to minimize regulation on small businesses with respect to fundraising. The legislation included provisions on crowdfunding and efforts to streamline the process of smaller and younger companies going public.
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