The nation’s top securities industry watchdog barks and bites.
The Securities and Exchange Commission, or SEC, was established in 1934, when the public’s confidence in investment markets had been undermined. In response, Congress passed, and President Roosevelt signed, the first comprehensive federal securities laws in the United States and empowered the SEC to interpret and enforce them.
Inside the SEC
The SEC is led by five commissioners, who are appointed by the US president to five-year terms. One commissioner, designated by the president and confirmed by the Senate, serves as chairman. To keep the Commission nonpartisan, no more than three commissioners can belong to the same political party. However, there are periods when seats remain vacant, which can shift the balance of power.
The SEC describes its mission as protecting investors, maintaining fair, orderly, and efficient markets, and facilitating the raising of capital. In its watchdog role, it oversees securities exchanges, brokers-dealers, RIAs, and mutual funds, with an emphasis on protecting investors against fraud and ensuring that they have the information they need to make informed decisions. It also provides extensive educational information at its website.
Corporate finance
The Division of Corporate Finance oversees initial and continuing disclosure of corporate information to investors.
Trading and markets
The Division of Trading and Markets oversees securities exchanges, broker-dealers, self-regulatory organizations, and other market participants.
Investment management
The Division of Investment Management oversees and regulates mutual funds, exchange traded funds, and RIAs, analysts, and managers.
Enforcement
The Division of Enforcement investigates securities law violations and recommends civil action or collaborates in criminal prosecution as appropriate.
Economic and risk analysis
The Division of Economic and Risk Analysis provides economic analysis and research, risk assessment, and data analytics to support agency resources. SEC divisions that oversee particular securities, including those that are publicly registered but nontraded and those that aren’t required to register because they raise limited cash, provide formal guidance on what’s required to meet agency rules.
Caveat emptor
Caveat emptor, Latin for “buyer beware,” is the principle that underlies US securities laws. Rather than evaluating the investments that companies offer in seeking to raise capital, federal law focuses on disclosure — requiring that investors have access to the facts they need to make informed investment decisions. This includes both positive and negative information about the issuer, covering its business activities and strategies, the composition of its management, its financial health, and any foreseeable risks.
To make this information readily available, any company that wants to sell securities to the public must file specific, comprehensive documentation with the SEC. New securities must be registered and potential investors provided with a prospectus. In addition, companies must report periodically on their business and financial standing in an annual, audited report known as the 10-K, and in a quarterly, unaudited report known as the 10-Q.
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Making the rules
While the nation’s securities laws establish broad requirements, a big part of the SEC’s job is to turn the language of the laws into rules that the industry can follow. For instance, since the law makes insider trading illegal, the SEC defines what corporate officers must do to ensure that their trades are legal.
SEC rules are regularly revised to keep pace with changes in the industry. New or amended rules are of great concern to all market participants, so the rulemaking process allows all interested parties to comment before a rule is finalized.
The process usually begins with a rule proposal, written by staff and presented to the Commission for review. If the SEC wants public feedback before drafting a proposal, it sometimes describes the issue in a concept release and asks for comments.
If the Commission likes a proposed rule, it presents the rule to the public, and everyone with an interest in the outcome has a month or two to register a point of view. After reviewing the comments, the staff generally revises the rule and presents it again to the Commission for adoption. If a rule touches on a highly sensitive, far-reaching issue or represents a major change, it may be the subject of litigation and may ultimately be approved — or rejected — by Congress.
Looking out for investors
Along with full disclosure, or transparency, another major principle on which federal securities laws are built is that RIAs have a fiduciary responsibility to put investors’ interests first. So, for example, if an adviser recommends that an investor buy or sell a certain stock or bond, it should be because that action is in the investor’s interest — not just because the trade, and any associated fees, are good for the adviser or the adviser’s firm. To enforce these protections, the SEC registers and regulates investment companies and investment advisers, who are paid for providing advice. It also oversees FINRA, which regulates broker-dealers, who buy and sell securities for their clients and must make suitable recommendations.
Taking action
If the SEC’s Division of Enforcement discovers potential wrongdoing, it has several options, depending on the nature of the violation and the solution it believes will benefit investors most.
The SEC can prosecute two types of cases: civil actions, which are heard in US District Courts, and administrative actions, which are heard by administrative law judges. Remedies may include censure, suspension or expulsion from the securities industry, fines, or return of illegal profits.
In addition, the Commission collaborates with law enforcement agencies in bringing criminal cases when they are warranted.
What Is The Purpose Of SEC? by Inna Rosputnia
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