Securities And Exchange Commission – SEC

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 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 monitoring that companies made truthful statements about their businesses; and 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. Currently there are three vacancies on the Commission awaiting appointment by President Donald Trump. 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 Corporation 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 up $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 individual is in jail for crime 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.
Published at Thu, 04 May 2017 21:25:00 +0000

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