Securities and Exchange Commission (SEC)

Definition

The U.S. Securities and Exchange Commission (SEC) is an independent federal agency charged with protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. It oversees securities offerings, exchanges, broker-dealers, investment advisers, and public companies to ensure accurate disclosure and reduce fraud.

Key takeaways

• The SEC was created to restore investor confidence after the 1929 stock market crash and to enforce federal securities laws.
• It regulates market participants, requires disclosure for public securities, and brings civil enforcement actions; criminal referrals go to the Department of Justice.
• The agency uses rulemaking, examinations, enforcement actions, and public filings (EDGAR) to fulfill its mission.
• Recent legal developments have narrowed the SEC’s use of in-house administrative proceedings for imposing civil penalties.

How the SEC is organized and what it does

Leadership and structure
* Headed by five presidentially appointed commissioners (one designated chair). By law no more than three commissioners may be from the same political party.
* Organized into divisions and offices that write rules, analyze markets, register entities, examine conduct, and bring enforcement actions.

Major divisions and roles
* Division of Corporate Finance — reviews disclosures and registration statements to ensure investors receive material information.
* Division of Enforcement — investigates misconduct, brings civil cases, and coordinates with law enforcement; may refer criminal matters to the DOJ.
* Division of Investment Management — regulates investment companies and registered advisers.
* Division of Economic and Risk Analysis — provides economic analysis and data support.
* Division of Trading and Markets — sets standards for fair and orderly markets and oversees exchanges and clearing agencies.

Market transparency and filings
* EDGAR (Electronic Data Gathering, Analysis, and Retrieval) is the SEC’s public database for registration statements, periodic reports, and other disclosures that investors rely on.

How the SEC enforces securities law

Primary enforcement mechanisms
* Civil litigation in federal court — the SEC seeks injunctions, disgorgement of unlawful gains, and civil money penalties; defendants have trial rights.
* Administrative proceedings — internal adjudications before administrative law judges that can result in bans, injunctions, and fines (subject to recent legal limits; see below).

Common remedies and sanctions
* Injunctions to stop unlawful conduct.
* Civil penalties (fines).
* Disgorgement of profits and bar orders (suspending or barring individuals from industry roles).

Change in enforcement forum: SEC v. Jarkesy (June 2024)
* The U.S. Supreme Court ruled that imposing civil penalties for securities fraud through the SEC’s administrative proceedings violated the Seventh Amendment right to a jury trial.
* As a result, the SEC must seek civil penalties for fraud-related matters in federal court, though it can still pursue certain non-monetary administrative remedies. This decision has significant implications for enforcement strategy and timing.

Whistleblower program

• The SEC’s Office of the Whistleblower, created under Dodd‑Frank, offers financial awards (typically 10–30% of recoveries exceeding $1 million) for original, high-quality tips that lead to successful enforcement.
• Whistleblower protections against retaliation are enforced to encourage reporting.

How the SEC makes rules

• Rulemaking usually begins with a concept release or proposal, followed by a public comment period.
• The SEC reviews input, may revise the proposal, and then commissioners vote on adoption.
• Rulemaking balances investor protection, market integrity, and industry feedback.

A brief history and evolution

• 1929–1934: The market crash and ensuing reforms led to the Securities Act of 1933 and the Securities Exchange Act of 1934, which established the SEC.
• 1940s: Investment Company Act and Investment Advisers Act expanded oversight of funds and advisers.
• 1974: Creation of the Commodity Futures Trading Commission (CFTC) clarified jurisdiction over derivatives; subsequent accords defined boundaries with the SEC.
• 1996: National Securities Markets Improvement Act streamlined federal-state regulatory roles.
• 2002: Sarbanes‑Oxley Act strengthened corporate governance, auditor oversight, and executive accountability after major accounting scandals.
• 2007–2008: The financial crisis prompted increased scrutiny and enforcement; many firms faced significant settlements.
• 2010: Dodd‑Frank expanded rulemaking and enforcement powers, and created the SEC whistleblower program.
• 2024: Supreme Court decision in SEC v. Jarkesy limited the SEC’s ability to impose civil penalties in administrative proceedings, shifting many penalty actions to federal courts.

SEC vs. FINRA

• The SEC is the federal regulator that creates and enforces securities laws and oversees exchanges and market structure.
• FINRA is a self‑regulatory organization (SRO) that regulates broker-dealers and licenses industry professionals. FINRA’s disciplinary decisions can be appealed to the SEC.

Oversight and accountability

• The SEC operates under federal statutes (e.g., Securities Acts of 1933 and 1934, Investment Company/Advisers Acts, Sarbanes‑Oxley, Dodd‑Frank) and is accountable to Congress.
• Its policies and enforcement priorities evolve in response to market developments, legislation, and judicial rulings.

Conclusion

The SEC is the central regulator of U.S. securities markets, charged with ensuring disclosure, policing fraud, and maintaining market integrity. Its tools include rulemaking, market oversight, examinations, public disclosure through EDGAR, and enforcement actions. Legal and legislative changes continue to shape how the SEC enforces the laws and protects investors.