The U.S. Securities and Exchange Commission (SEC) is an independent agency of the U.S. federal government, established after the Wall Street Crash of 1929. The SEC’s main role is to enforce laws against market manipulation.
In addition to the Securities Exchange Act of 1934, which created the SEC, the agency enforces other laws including the Securities Act of 1933, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, and the Sarbanes–Oxley Act of 2002. The SEC was formed under Section 4 of the Securities Exchange Act of 1934 (now codified as 15 U.S.C. § 78d).
Overview
The SEC has three main goals: to protect investors, ensure fair and efficient markets, and support capital formation. To achieve these goals, the SEC requires public companies to file quarterly and annual reports. These reports include a management discussion and analysis (MD&A) that explains the company’s performance and future plans.
Quarterly and semiannual reports are essential for investors to make informed decisions, as investments in capital markets are not federally guaranteed. Disclosure of financial information helps reduce insider trading and fraud by providing equal information to all investors.
The SEC operates an online database called EDGAR, where investors can access filings and submit tips or complaints. The SEC does not comment on ongoing investigations.
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• Commodity Futures Trading Commission
History
Before federal securities laws and the SEC, securities trading was regulated by state-level blue sky laws, which were often ineffective. These laws required registration of securities and brokers but were bypassed by offering securities across state lines.
The SEC was created by the Securities Act of 1933 and the Securities Exchange Act of 1934 as part of Franklin D. Roosevelt’s New Deal. The Securities Act of 1933 regulates initial securities offerings, while the Securities Exchange Act of 1934 governs secondary market trading.
Joseph P. Kennedy Sr. was the first SEC chairman, appointed in 1934. The SEC’s missions included restoring investor confidence, addressing fraud, ending insider trading, and establishing a clear registration system. Kennedy’s leadership helped reassure the business community and encouraged investor participation.
List of Chairs
- Joseph P. Kennedy Sr. (1934-1935)
- James M. Landis (1935-1937)
- William O. Douglas (1937-1939)
- Jerome Frank (1939-1941)
- Edward C. Eicher (1941-1942)
- Ganson Purcell (1942-1946)
- James J. Caffrey (1946-1947)
- Edmond M. Hanrahan (1948-1949)
- Harry A. McDonald (1949-1952)
- Donald C. Cook (1952-1953)
- Ralph H. Demmler (1953-1955)
- J. Sinclair Armstrong (1955-1957)
- Edward N. Gadsby (1957-1961)
- William L. Cary (1961-1964)
- Manuel F. Cohen (1964-1969)
- Hamer Budge (1969-1971)
- William J. Casey (1971-1973)
- G. Bradford Cook (1973)
- Ray Garrett Jr. (1973-1975)
- Roderick M. Hills (1975-1977)
- Harold M. Williams (1977-1981)
- John S. R. Shad (1981-1987)
- David Sturtevant Ruder (1987-1989)
- Richard C. Breeden (1989-1993)
- Arthur Levitt (1993-2001)
- Harvey Pitt (2001-2003)
- William H. Donaldson (2003-2005)
- Christopher Cox (2005-2009)
- Mary Schapiro (2009-2012)
- Elisse B. Walter (2012-2013)
- Mary Jo White (2013-2017)
- Michael Piwowar (acting, 2017)
- Jay Clayton (2017-2020)
- Elad Roisman (acting, 2020-2021)
- Allison Lee (acting, 2021)
- Gary Gensler (2021-present)
Organizational Structure
The SEC is led by five commissioners appointed by the President, with no more than three from the same political party. Their terms last five years, and one commissioner’s term ends on June 5 each year. The President also appoints a chairman.
Current SEC Commissioners
- Gary Gensler (Chair, Democratic, since April 17, 2021)
- Hester Peirce (Republican, since January 11, 2018)
- Caroline A. Crenshaw (Democratic, since August 17, 2020)
- Mark Uyeda (Republican, since June 30, 2022)
- Jaime Lizárraga (Democratic, since July 18, 2022)
Divisions
The SEC has six divisions headquartered in Washington, D.C.:
- Corporation Finance: Oversees public company disclosures and transactions.
- Trading and Markets: Regulates self-regulatory organizations and trading firms.
- Investment Management: Manages regulations for investment companies and advisors.
- Enforcement: Investigates and prosecutes violations of securities laws.
- Economic and Risk Analysis: Integrates economics and data analysis into SEC activities.
- Examinations: Conducts the SEC’s National Exam Program to ensure compliance and market integrity.
Regional Offices
The SEC has 11 regional offices:
- Atlanta
- Boston
- Chicago
- Denver
- Fort Worth
- Los Angeles
- Miami
- New York City
- Philadelphia
- Salt Lake City
- San Francisco
Key Offices
- Office of General Counsel: Provides legal advice and represents the SEC in court.
- Office of the Chief Accountant: Sets accounting and auditing policies.
- Office of Compliance, Inspections, and Examinations: Inspects financial entities and advisors.
- Office of International Affairs: Manages international regulatory policies.
- Office of Information Technology: Supports IT needs for the SEC.
- Inspector General: Oversees internal operations and investigations.
- Office of the Whistleblower: Handles tips and provides rewards for information leading to enforcement actions.
Destruction of Documents
According to former SEC employee and whistleblower Darcy Flynn, as reported by Matt Taibbi, the SEC has a history of destroying thousands of documents related to preliminary investigations of alleged crimes committed by major financial institutions such as Deutsche Bank, Goldman Sachs, Lehman Brothers, and SAC Capital. These documents included those pertaining to “Matters Under Inquiry” (MUI), which are the initial stages of the investigation process. This practice of document destruction reportedly began as early as the 1990s and came to light in 2010 when Flynn informed the National Archives and Records Administration (NARA). Flynn also mentioned a meeting where SEC officials discussed possibly denying the destruction of documents due to its potentially illegal nature.
Iowa Republican Senator Charles Grassley and others took notice of Flynn’s whistleblowing. The SEC defended its procedures in a statement, with NPR quoting legal experts who downplayed the significance of the document destruction, suggesting that it did not involve sensitive materials related to high-profile cases. The core debate was whether early-stage SEC inquiries should be considered “investigative records” that must be preserved for 25 years under the law. The SEC’s inspector general was tasked with investigating the allegations, with a report expected by the end of September.
SEC and Cryptocurrency
On June 5, 2023, the SEC filed charges against Binance and its founder Changpeng Zhao, followed by charges against Coinbase the next day for operating as an unregistered securities exchange, broker, and clearing agency. A major issue in these cases is the definition of what constitutes a security. The SEC relies on a 1946 U.S. Supreme Court case (the Howey case) that defined a security as an investment contract, where the value depends on the efforts of others. This definition is central to disputes over the status of digital assets and their associated blockchain systems.
Whistleblower Program
The SEC’s whistleblower rewards program, established under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, offers financial incentives to individuals who report violations of securities laws. Whistleblowers can receive 10-30% of the penalties collected as a result of their information. By 2021, the SEC had recovered $4.8 billion and paid out over $1 billion to whistleblowers. The SEC issues an annual report to Congress, with the 2021 report available online.
Relationship to Other Agencies
The SEC collaborates with various organizations, including self-regulatory bodies like FINRA, SIPC, and MSRB, as well as federal agencies, state regulators, international agencies, and law enforcement. The President’s Working Group on Financial Markets, established by Executive Order 12631 in 1988, aims to enhance market integrity and investor confidence. The SEC also works with the FTC, which focuses on consumer protection and anti-competitive practices, while the SEC concentrates on securities markets.
Other agencies and committees related to the SEC include:
- The Temporary National Economic Committee, which was defunded in 1941 but whose records remain sealed.
- The Municipal Securities Rulemaking Board (MSRB), which develops rules for municipal securities but does not have enforcement authority.
- The Asset Management Advisory Committee (AMAC), established in 2019 to provide diverse perspectives on asset management.
State securities regulators can enforce blue sky laws, requiring state registration for securities. The National Securities Markets Improvement Act of 1996 (NSMIA) exempts nationally traded securities from state registration but preserves state anti-fraud authority.
The SEC is also a member of the International Organization of Securities Commissions (IOSCO) and uses international agreements to address cross-border misconduct.
Related Legislation
- 1933: Securities Act of 1933
- 1934: Securities Exchange Act of 1934
- 1938: Temporary National Economic Committee
- 1939: Trust Indenture Act of 1939
- 1940: Investment Advisers Act of 1940
- 1940: Investment Company Act of 1940
- 1968: Williams Act
- 1982: Garn–St. Germain Depository Institutions Act
- 1999: Gramm–Leach–Bliley Act
- 2000: Commodity Futures Modernization Act
- 2002: Sarbanes–Oxley Act
- 2003: Fair and Accurate Credit Transactions Act
- 2006: Credit Rating Agency Reform Act
- 2010: Dodd–Frank Wall Street Reform and Consumer Protection Act
- 2012: Volcker Rule
- 2020: Holding Foreign Companies Accountable Act
- 2023: SEC Cybersecurity Rules: Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure by Public Companies
Conclusion
The SEC plays a crucial role in regulating U.S. securities markets but has faced challenges, including criticism over document destruction and adapting to cryptocurrency. Its whistleblower program has been effective in uncovering violations, and its collaboration with other regulatory bodies ensures market integrity. As financial markets evolve, the SEC’s practices will continue to adapt to maintain transparency and investor protection.