U.S. Securities and Exchange Commission: What is it?

The Securities and Exchange Commission (SEC) is among the most influential financial regulators. This government agency’s primary competence is regulating the securities market in the United States, with its main goal being the protection of individuals investing in the stock market.

A Bit of History

The origins of the SEC can be traced back to the era of the Great Depression, which spanned from 1929 to 1939. During this period, the US securities market operated in a relatively unregulated manner. However, on October 24, 1929, the market experienced a significant crash, causing extensive harm to numerous investors and, subsequently, the entire populace of the nation. It’s worth noting that there was an earlier substantial crisis in the American stock market in 1907, although it was of short duration and did not lead to a severe decline in living standards.

In contrast, the situation in and after 1929 was markedly different: individuals left destitute resorted to drastic measures such as jumping out of windows, renting hotel rooms for the sole purpose of ending their lives, and queuing up for meager meals. The backbone of the US economy during the 1920s, the farmers, poured surplus milk into the streets and burned excess grain in stoves due to the unfavorable market conditions. By 1932, the stock market had plummeted by nearly 90% from its peak in 1929. This downturn gave rise to “Hoovervilles,” makeshift settlements assembled from available materials that resembled the slums of modern-day India and served as a means of mass survival. Some of these settlements persisted until the late 1940s.

In 1932, the Democratic Party, led by Franklin Roosevelt, assumed power and devised a comprehensive strategy to revive the economy. One of the core components of this strategy was the imposition of control over the previously unregulated securities market. Consequently, in 1933, the “Securities Act” was enacted, followed by the “Securities Exchange Act” the following year. To enforce these legislative measures, the Securities and Exchange Commission (SEC) was established in 1934. The initial chairman appointed by the Senate to lead the SEC was Joseph Kennedy, whose son would later become one of the most prominent American presidents. Intriguingly, Joseph Kennedy himself managed to accumulate wealth during this arduous period.

Functions and Responsibilities of the SEC

• Enforcement of Market Participants’ Compliance with Laws: The SEC monitors all market participants to ensure adherence to legal regulations.

• Tracking Suspicious Activities and Insider Trading: The SEC watches for suspicious transactions and investigates insider trading activities.

• Detection of Undervalued Securities Transactions: It identifies transactions involving undervalued securities.

• Monitoring the Timeliness of Public Data Releases: The SEC oversees the timing of public data releases to maintain transparency and fairness.

• Conducting Audits of Brokerage and Financial Firms: The SEC conducts audits of brokerage and financial companies to ensure their compliance with regulations.

• Market Surveillance and Prevention of Monopolies: It observes the market to prevent the emergence of monopolistic practices.

• Regulation of Stock Exchanges: The SEC is also responsible for regulating the operations of stock exchanges.

• Identification of Fraudulent Schemes and Theft: The SEC identifies fraudulent schemes, including instances of embezzlement and other violations, wherever applicable.

Entities Subject to SEC Oversight

• US Stock Exchanges: Such as NASDAQ, NYMEX, COMEX, NYSE, and others.

• Major Financial Holdings: Companies like BlackRock ($6 trillion AUM), J.P. Morgan ($2 trillion AUM), Vanguard Group ($5 trillion AUM).

• Over-the-Counter Markets: Like OTC Markets Group and similar platforms like the OTC Bulletin Board.

• Hedge Funds: Including those managed by individuals like Buffett and Soros.

• Banks and Their Investment Arms: Including subsidiary investment funds.

• Brokerage Companies: Firms engaged in securities brokerage.

• Companies Issuing Stocks and Bonds: Entities issuing securities on both exchange and over-the-counter markets.

• Market Makers: Entities that facilitate trading by providing liquidity in the market.
• Large Investors: Those acquiring more than 5% ownership in a company. Such investors fall under SEC oversight once this threshold is reached.

• Other Successful Investors: Investors whose trading activities exhibit notable success in the stock market.

List of Trading Instruments

• Stocks
• Futures Contracts
• Options
• Cheques (Checks)
• Money Certificates
• Mutual Funds
• And more

Localization of the SEC

The headquarters of the Securities and Exchange Commission is located in the capital of the United States at 100 F Street, NE Washington, DC 20549. Regional offices are situated in New York, Boston, Philadelphia, Atlanta, Miami, Chicago, Fort Worth, Denver, Salt Lake City, Los Angeles, and San Francisco.

Leadership Structure of the SEC

The Securities and Exchange Commission is composed of five members, one of whom serves as the Chairman. The candidates are nominated by the President of the United States and are then confirmed by the Senate. One member is designated by the President to serve as the Commission’s Chairman. Up to three members can be appointed from the same political party. Decisions are made during Commission meetings, and a simple majority is sufficient for decision-making. In the event of a tie, the Chairman’s opinion becomes decisive. A quorum is achieved with the presence of three members.

Members must be well-known figures in the market who have achieved a certain level of prominence in their careers and have earned impeccable reputations. Upon taking office in the federal agency, they step down from their positions in commercial entities. This approach helps maintain a balance between the interests of market participants and the state.

Ways of SEC Market Oversight

• Analysis of Market Participants’ Mandatory Reporting

• Mandatory reporting involves the examination of information provided by market participants regarding their accounts and the quality of services offered by brokers, traders, investment advisors, and others.

• Voluntary Information: Investors voluntarily provide information about their accounts and the quality of services offered by brokers, traders, investment advisors, and others.

• Supervision of Stock Exchanges: Stock exchanges, which are self-regulatory organizations, are subject to oversight by the SEC.

• Coordination and Information Exchange: The SEC coordinates actions and exchanges information with other financial regulators, both domestic and international.

• Mutual Information Exchange: The SEC also engages in information exchange with self-regulatory organizations like MSRB and FINRA.

Difference between FINRA and SEC: FINRA is distinct from the SEC as it operates as a self-regulatory organization composed of market participants rather than a government entity. Although it holds significant authority, it doesn’t possess the status of a governmental agency. While both regulators share certain overlapping responsibilities, their functions somewhat mirror each other, yet they function at varying tiers within the broader regulatory structure.

Recap

As a federal government agency, the SEC ensures the protection of investors’ rights while also facilitating efficient capital raising for businesses through various means. The operations of the SEC serve as a model of regulatory effectiveness for many countries. Given the magnitude of the U.S. capital market, the success or shortcomings of the SEC significantly influence the stability of the global financial system.