SEC-Securities And Exchange Commission : General Information

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Securities And Exchange Commission - SEC

What is the 'Securities And Exchange Commission - SEC'

The U.S. Securities and Exchange Commission (SEC) is an independent federal government agency responsible for protecting investors, maintaining fair and orderly functioning of securities markets and facilitating capital formation. It was created by Congress in 1934 as the first federal regulator of 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.
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.

BREAKING DOWN 'Securities And Exchange Commission - SEC'

The SEC's primary function is to oversee organizations and individuals in the securities markets, including securities exchanges, brokerage firms, dealers, investment advisors and various 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 comprehensive electronic, data gathering, analysis and retrieval (EDGAR) database.

There are various laws that are at the SEC's disposal for accomplishing its objectives. They are:


• Securities Act of 1933
• Securities Exchange Act of 1934
• 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


Founding of the SEC

When the U.S. stock market crashed in 1929, securities issued by numerous companies became worthless as a result of previously stated false or misleading information. Public faith in securities markets plunged. To restore confidence, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934, which created the SEC. The SEC's primary tasks were to monitor that companies made truthful statements about their businesses and to ensure that securities institutions, such as brokers, dealers and exchanges, treated investors in an honest and fair manner.
Organization of the SEC

The SEC is headed by five commissioners who are appointed by the president, one of which is designated as chairman of the SEC. Each commissioner's term lasts five years, but they may serve for an additional 18 months before a replacement is found. The law requires that no more than three of the five commissioners be from the same political party to promote nonpartisanship.

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 over securities institutions; and coordinate regulation among different levels of government. 
The five divisions are:

• Division of Corporate Finance: Ensures investors are provided with material information 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 financial 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


Authority of the SEC

The division of enforcement of the SEC is the primary department in charge of assisting the Commission with executing its law enforcement function. It does so by recommending the commencement of investigations of securities law violations and prosecuting such cases on behalf of the Commission. The SEC is only allowed to bring civil actions, both in federal court or before an administrative judge. Criminal cases are 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 who ignores an injunction is subject to fines or imprisonment for contempt; and 2) civil money penalties and the disgorgement of illegal profits. In certain cases, the Commission 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.

The SEC also serves as the first level of appeal for actions sought by self-regulatory organizations, such as FINRA or the New York Stock Exchange.

The SEC Office of the Whistleblower

Among all the SEC's offices, the office of the whistleblower stands out as one of the most potent means of securities laws 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. Eligible individuals can receive 10% to 30% of the total sanctions' proceeds.

Enforcement Record of the SEC

The 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 misdemeanor, either directly or in aid of the Justice Department. Typical offenses prosecuted by the SEC include accounting fraud, dissemination of misleading or false information, and insider trading.

After the Great Recession of 2008, the 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 for a Wall Street firm and the second largest in SEC history, second only to the $750 million paid by WorldCom. Still, many criticized the SEC for not doing enough to prosecute the brokers and senior managers who were involved, 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: Kareem Serageldin, a former investment banker at Credit Suisse. The rest either settled for a monetary penalty or accepted administrative punishments.



Understanding the SEC

By Elvis Picardo

The U.S. Securities and Exchange Commission (SEC) is often referred to as the Watchdog of Wall Street, but it wouldn’t be too much of a stretch to think of it as the “Capital Markets Cop.” Two of the SEC’s main objectives are to protect investors and maintain fair, orderly and efficient markets, similar to a regular police force’s primary goals of protecting the public and maintaining law and order. The SEC also has a third key objective in its three-pronged mission – facilitating the capital formation that is necessary to sustain economic growth. These diverse goals necessitate the involvement of the SEC in many areas of the capital markets, as discussed below.

Why the SEC was created

The SEC was formed in 1934, when the U.S. economy was in the iron grip of the Great Depression that had been partly precipitated by the market crash of 1929. Federal regulation of the securities markets was not a burning topic in the free-wheeling days of the 1920s. While securities activity soared in the post-World War I period, proposed regulations aimed at financial disclosure and the prevention of stock fraud were neither actively pursued nor implemented. As an estimated 20 million U.S. investors flocked to the stock market during the “Roaring 20s,” the combination of an intensely speculative environment and little regulation resulted in rampant stock fraud.

The speculative frenzy ended with the stock market crash of October 1929, which took a tremendous toll on public confidence in the markets. Half of the $50-billion in new securities issued in the 1920s became worthless, and by 1932, U.S. stocks were worth only one-fifth of their values in the summer of 1929. With investors and banks losing colossal sums of money, as many as 5,000 U.S. banks had failed by 1933, while the unemployment rate approached 30%.

In this dismal period, there was a growing consensus among U.S. lawmakers that an economic recovery could only take hold if the public’s faith and confidence in capital markets were restored.

The U.S. Congress held hearings to identify the root cause of the economic problems and search for solutions, and based on its findings, passed the Securities Act of 1933. The following year, the SEC was created by the Securities Exchange Act of 1934. The Act aimed at restoring public confidence in the capital markets by providing investors and markets with more reliable information, and transparent, clear rules to foster honest dealing. President Franklin D. Roosevelt subsequently appointed Joseph P. Kennedy – President John F. Kennedy’s father – as the first Chairman of the SEC.

Founding Principles

The SEC interprets and enforces the federal laws that govern the U.S. securities industry, which are based on two basic principles –

• Investors should have access to all pertinent information about a security prior to making an investment decision. Companies offering securities to the public must therefore disclose comprehensive and accurate information about their businesses, the securities offered for sale, and the risks involved in investing in them.

• People engaged in securities sales and trading must put investors’ interests first and treat them fairly and honestly. The SEC ensures this by overseeing the key players in the securities industry, including exchanges, broker/dealers, advisers, funds and rating agencies.

As the SEC notes on its website, it is first and a foremost a law enforcement agency. Arguably the SEC’s most feared unit, the Division of Enforcement has brought civil enforcement actions against innumerable individuals and companies for securities law violations such as insider trading, accounting fraud and providing misleading information about securities offered to the public.

Organization of the SEC

The SEC has five Commissioners appointed by the President of the United States, with the advice and consent of the Senate.
The President designates one of the five Commissioners as Chair of the Commission; the current Chair, Mary Jo White, was sworn in on April 10, 2013, and will be in office until 2019.

The Commissioners serve staggered five-year terms, with one Commissioner’s term ending on June 5 of each year. In order to ensure that the SEC remains non-partisan, a maximum of three Commissioners may belong to the same political party.
The SEC has its headquarters in Washington, DC. It is organized into five Divisions and 23 Offices, with about 3,500 staff located in Washington and 11 regional offices across the U.S.

The SEC’s five Divisions have the following responsibilities:

• Division of Corporation Finance – oversees corporate disclosure of important information to the investing public. It reviews documents that public companies are required to file with the SEC, such as registration statements, annual and quarterly filings, proxy materials and annual reports. The Division also provides interpretation of securities acts, monitors activities of the accounting profession that result in formulation of generally accepted accounting principles (GAAP), and provides guidance and counseling to registrants and the public to help them comply with securities law.

• Division of Trading and Markets – assists the SEC is executing its responsibility to maintain fair, orderly and efficient markets. It provides day-to-day oversight of major securities market participants and also oversees the Securities Investor Protection Corporation. Additional responsibilities include reviewing proposed new rules and proposed changes to existing rules, and market surveillance.

• Division of Investment Management – is responsible for investor protection, and for promoting capital formation through oversight and regulation of the U.S. investment management industry, which includes mutual funds and professional fund managers, research analysts, and investment advisers to retail customers. A focus of this Division is ensuring that disclosures about popular retail investments like mutual funds and exchange-traded funds are useful to retail investors, and that the regulatory costs such consumers have to bear are not excessive. Additional responsibilities include assisting the SEC in interpreting laws and regulations for the public, and providing assistance in enforcement matters involving investment companies and advisers.

• Division of Enforcement – assists the SEC in executing its law enforcement function by (a) recommending commencement of investigations into securities law violations, (b) recommending that the SEC bring civil actions in federal court or as administrative proceedings before an administrative law judge, and (c) by prosecuting these cases on behalf of the SEC. It also works closely with law enforcement agencies to file criminal cases when warranted.

• Division of Economic and Risk Analysis – the Division’s two main functions are providing economic analyses to support SEC rulemaking and policy development; and providing research, analysis, risk assessment and data analytics to support the SEC on matters presenting the biggest perceived risks in litigations, examinations, and registrant reviews.

Recent Developments

The SEC’s stellar reputation has been a bit tarnished in recent years by its failure to detect the massive Bernie Madoff and Allen Stanford Ponzi schemes, as well as its lack of success in booking one of the really big players who contributed to the 2008-09 financial crisis. However, it has scored a couple of major wins in its ongoing crusade against white-collar crime.

• Raj Rajaratnam – In 2011, billionaire hedge fund manager Rajaratnam was sentenced to 11 years in prison for insider trading, the longest jail term imposed in such a case. Founder and manager of the Galleon hedge fund, Rajaratnam was convicted for orchestrating a wide-ranging insider trading ring that included Rajat Gupta, former McKinsey CEO and Goldman Sachs board member.

• SAC Capital – In November 2013, SAC Capital – founded by Steve Cohen, one of the 150 wealthiest people in the world – agreed to a record $1.8 billion fine for insider trading. The SEC alleged that insider trading was widespread at SAC Capital, and involved stocks of more than 20 public companies from 1999 to 2010. As many as eight traders or analysts who worked for SAC have either been convicted or have pleaded guilty to charges of insider trading.

The Bottom Line

The SEC’s triple mandate of investor protection, maintenance of orderly markets and facilitation of capital formation makes it one of the most important entities in capital and financial markets. The increasing complexity of these markets will continue to give the SEC a prominent role in ensuring that they function smoothly and offer all investors a level playing field.


Source: https://www.investopedia.com/terms/s/sec.asp (*)


(*) https://www.sec.gov/edgar/searchedgar/companysearch.html

(Link to search for corporations´ 10-K-Form filing)