Securities and Exchange Commission

What It Means

The Securities and Exchange Commission, commonly referred to as the SEC, is an official governmental body of the United States that monitors securities markets and protects investors by providing thorough, up-to-date, and accurate information about securities and the companies that issue securities. Securities are financial holdings such as stocks and bonds; people invest their money in securities in order to make money. In the case of stocks, the investor is purchasing a part of a company and can thus receive part of the profits the company makes; with bonds, people lend money to a government or company and get to collect a fee when the loan is paid back. Examples of securities markets include the New York Stock Exchange and NASDAQ, both of which are places where stocks are bought and sold, or “traded,” as investors often say.

Investing in securities is a financial risk. If a person buys $100 worth of stock, the value of that stock could drop substantially the following day. Therefore, investors need information about companies in order to deal in the stock market. All public companies (companies whose shares can be traded on the stock market) are required to make pertinent financial information available to investors by filing that information with the SEC. The SEC then posts the information so that investors can review it and make well-informed decisions about buying, selling, and holding their securities.

When Did It Begin

Prior to 1933 the sale of securities in the United States was governed by state laws, but the stock market crash of 1929 (when the value of investments suddenly and sharply declined) demonstrated that the states could not adequately govern the sale of securities. In order to restore investors’ confidence, the federal government began monitoring and regulating the sale of securities. The Securities Act of 1933 was the first federal legislation regulating the sale of securities in the United States. This act required that investors have financial information available to them before purchasing securities. The act also stipulated that any deceit or misrepresentation accompanying the sale of a security was a federal offense. The Securities and Exchange Commission was established the following year, under the Securities Act of 1934; it was charged with enforcing the provisions of the Securities Act of 1933.

More Detailed Information

The SEC consists of five commissioners, each of whom is appointed by the president and approved by the Senate. Also with Senate approval, the president names one of the commissioners chairman of the SEC. A commissioner’s term is five years, and the terms are staggered so that each year a commissioner steps down and a new one is appointed. Regulations stipulate that no more than three commissioners may belong to the same political party. In addition to its headquarters, which are located in Washington, D.C., the SEC has 11 regional and district offices and more than 3,000 employees.

The SEC is composed of four main divisions: Corporation Finance, Market Regulation, Investment Management, and Enforcement. Corporation Finance makes sure that public corporations disclose all relevant financial information to investors. This division also charts corporate activities such as mergers (the combination of two or more companies) and acquisitions (when one company overtakes or absorbs another company). The Market Regulation division oversees the New York Stock Exchange, NASDAQ, and other securities markets as well as the brokerage firms (companies acting as agents, facilitating trades between buyers and sellers on the stock market) that operate in these markets. The Investment Management division monitors mutual funds (investment companies that buy diverse groups of securities for clients).

Finally, the Enforcement division works with the other branches of the SEC to investigate violations of securities laws. The SEC administers seven laws: the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, 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. To enforce these laws, the SEC requires that all public companies submit quarterly (once every three months) and annual (end-of-year) reports summarizing the financial state of the company. In addition to charts and numbers, these companies must also provide a narrative, or written, account of their financial dealings and an outline of their future plans. These reports are posted on EDGAR, the SEC’s online database.

Recent Trends

In the first few years of the twenty-first century, there were several high-profile cases of insider trading (the illegal practice of using privileged information to make investing decisions) and accounting fraud (a company distorting its financial records), which reduced investor confidence in the stock market. To restore fairness and investor confidence, the U.S. government sought to strengthen the power of the SEC. One of the measures taken to accomplish this goal was the Sarbanes-Oxley Act of 2002. This act established the Public Company Accounting Oversight Board (PCAOB) to ensure that firms hired to do the accounting for public companies kept accurate financial records. In 2004 the SEC announced that it would post all comment letters (queries sent by the commission seeking clarification about a company’s financial records) on its website so that investors would know which companies were drawing the attention of the SEC.