The U.S. Securities and Exchange Commission is a federal organization that oversees U.S. Stock Market. The SEC has greatly reduced the chances of another Great Depression in the U.S.
Formation History
Congress established the SEC in 1935 to restore public confidence in Financial Markets following the 1929 stock market crash. Joseph Kennedy was the first chairman. He is also the father of President John F. Kennedy.
The Securities Exchange Act of 1904 created the SEC. 1 Public corporations were required to register all stock sales in order to succeed. This meant that they had to identify the major stockholders.
Prior to the Act, one small group held a majority of shares. The market manipulation was done without anyone’s knowledge. The Public Utility Holding Company Act of 1935 prohibited holding companies from having more than two times the distance from utilities they owned. 2
Holding companies were no longer able to hide the ownership relationships of public utilities. The act gave the SEC the power to split up large utility companies into smaller, regionally-based firms. The act also created local federal commissions that regulate utility rates.
SEC’s current role
The SEC instills confidence in investors about the U.S. Stock Market. This is crucial to the smooth functioning of the U.S. economy. This is done by ensuring transparency in the financial operations of U.S. corporations. It ensures that investors receive accurate and consistent information on corporate profitability.
Investors can then use this information to determine a fair price for a company’s stock. The stock market is vulnerable to sudden changes if there’s no transparency. Enron failed in 2001 because of a lack of transparency. This wasn’t a mistake on the SEC’s part; Enron lied to the SEC in its information submissions and Arthur Andersen LLP did not see the deception during its audit.
The Commission brings criminal charges against offenders such as Enron. The Commission also punishes Insider Trading, deliberate market manipulation, and selling stock and bonds without registration.
Organization
The SEC is composed of five commissioners appointed by the U.S. President. The SEC has approximately 4,500 employees located at the Washington, DC headquarters as well as 11 regional offices throughout the United States.
Five different divisions make up the SEC:
- The Division of Corporation Finance examines corporate filing requirements. The Division of Corporation Finance ensures that companies submit complete and accurate documents. Investors can then assess the health of a business.
- The Division of Trading and Markets is responsible for maintaining the standards which regulate the stock market. The Division of Trading and Markets supervises securities exchanges as well as securities firms. The agency also monitors the self-regulatory bodies of the industry. The Financial Industry Regulatory Authority, the Municipal Securities Rulemaking Board and clearing agencies which facilitate trade settlement are all included. 4 One subset supervises the Securities Investor Protection Corporation. 5 It is a private, non profit corporation that insures customer’s investment accounts in the event of a brokerage going bankrupt.
- The Division of Investment Management is responsible for regulating investment management companies. This includes mutual funds, variable annuities and variable insurance. It examines documents submitted in accordance with the Sarbanes-Oxley Act 2002. 6
- The Division of Enforcement is responsible for investigating and prosecuting violations of securities laws. It conducts investigations in private. It presents its findings before the SEC Commission which then allows it to file in federal court. The Commission often settles cases out of court.
- The Division of Economic and Risk Analysis performs economic and risk analysis for the other divisions. It forecasts the impact of proposed SEC regulations on the economy and markets. It examines the overall market risk. It identifies fraudulent activity early.
Impact on the U.S. economy
The SEC is responsible for increasing transparency, consistency and trust in the U.S. Stock Market. This is a major reason why the New York Stock Exchange has become the most popular and sophisticated exchange in the entire world. This transparency attracts much business to U.S. financial institutions–including banks and legal firms.
It is also easier to plan and execute initial public offerings. When companies reach a certain size, they may decide to sell their stock on the public market to raise equity for their next stage of development. Going public is easy for U.S. businesses, which helps them grow faster and larger than companies in other countries.
The SEC chairman is a member of the Financial Stability Oversight Council. After the 2008 financial crises, the Dodd-Frank Wall Street Reform Act created the council. The council looks for financial market weaknesses that could cause another crisis.
The SEC and You
You are affected by the SEC because it makes it safer to purchase stocks, bonds and mutual funds. The SEC does not regulate derivatives or hedge funds. The SEC offers a wealth of information that can help you make informed investment decisions.
Dodd-Frank mandated that the SEC study the financial literacy level of the average American. The study found that many investors do not understand how markets and the economy function. It offered suggestions on how to improve the knowledge of investors. 8
Investor.gov is a useful SEC tool. Investor.gov is a resource for investors. It provides basic education about topics like how markets work, asset management, and different retirement plans.
