- The SEC is a government agency that protects investors and ensures fair and efficient capital markets.
- The SEC ensures investment brokers, stock exchanges, and other market participants comply with US securities laws.
- It also regulates the disclosures of publicly held companies to help investors make informed decisions.
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If you’ve ever heard the name Bernie Madoff or Enron, then the Securities and Exchange Commission (SEC) is probably on your radar. But the agency does a lot more than just investigate white-collar crimes and financial scandals.
The SEC also regulates capital markets, ensures investors have a safe and fair playing ground, and holds publicly traded companies to certain reporting and disclosure laws, among other things. Here’s what you need to know about this important agency.
What is the SEC?
The SEC is an independent, public agency of the US government. It’s one of many agencies and wears several hats, but its main goal is to ensure the integrity of capital markets and the fair treatment of American investors.
“The Securities and Exchange Commission is the primary US securities market regulator,” says Robert R. Johnson, chartered financial analyst and professor of finance at Creighton University and author of various investing books, including “Investment Banking for Dummies.” “The mission of the SEC is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
The agency also investigates and prosecutes fraud, insider trading, and other securities-related crimes. Enron and Bernie Madoff are two of the SEC’s highest-profile cases. Another well-known case is the investigation of Martha Stewart for insider trading in the early 2000s.
What does the SEC do?
The SEC’s overarching goal is to protect US investors by maintaining a fair market. But it doesn’t work directly with investors. Instead, it performs its duty by regulating stock exchanges, as well as those who sell and trade securities, including brokers, investment advisors and asset managers. It also regulates investment companies, including investments such as mutual funds and ETFs, and ensures that companies follow public disclosure and reporting laws.
“The SEC is there to instill confidence,” says Vincent Lupo, managing director of US Tiger Securities, an investment brokerage based in New York. “Whether you’re saving for retirement or trying to attain new financial goals, the SEC is there to enforce the rules and make sure you’re protected. They require public companies and other market participants to disclose financial and other important information so that investors have the complete information to make informed investment decisions – which is especially important in today’s marketplace.”
The SEC performs a variety of functions, including:
- Protecting investors from financial fraud or manipulation
- Enforcing securities laws and regulations
- Regulating the activities of brokers, asset managers and other investment professionals
- Informing investors with accurate market information, data and scam alerts
- Monitoring corporate takeover actions
- Ensuring publicly held companies follow disclosure and financial reporting laws
That last one is important, as all publicly held companies must both register with the SEC and issue certain disclosures and financial reports on a regular basis. According to John Carney, partner at law firm BakerHostetler and former senior counsel for the SEC, it’s also one of the most important SEC duties of all.
“They oversee how public companies report their earnings and how they make their disclosures, because that’s what makes stocks go up and down,” Carney says. “They make sure companies tell the truth about what’s how they’re doing, how much money they’ve made and all their operations.”
How the SEC operates
The SEC is an independent agency within the US government that’s run by a chairman and four commissioners, all of whom are appointed by the US president and confirmed by the Senate. Each commissioner or chairman serves a term of five years.
As you can see above, the SEC has a lot of work to do, so it’s quite a large organization. More than 4,000 employees work for the agency, spread across six divisions and 26 offices. The six divisions include:
- Corporation finance: This department holds companies to disclosure and reporting laws – both when they go public and on a regular basis. This helps investors make more informed and successful decisions.
- Examinations: The examinations division works to analyze existing processes and regulations that affect US securities. Its “exams” are used to improve and inform future policy and enforcement practices.
- Economic and risk analysis: This department handles the SEC’s analytics and data efforts, which inform actions across the rest of the agency.
- Investment management: This division regulates investment companies, including mutual funds, money market funds and ETFs. As the agency itself explains, “The work of the Division of Investment Management touches the lives of Main Street investors. We oversee mutual funds and other investment products and services that investors may use to help them buy a home, send kids to college or prepare for retirement.”
- Enforcement: The enforcement division investigates securities violations and prosecutes misconduct through civil penalties and the US court system.
- Trading and markets: The division of trading and markets regulates securities professionals, stock exchanges and other market participants. It also establishes and maintains market standards to ensure a fair playing ground for all investors.
The SEC’s main headquarters are located in Washington DC, but has regional offices in 11 locations across the U.S., including New York, Chicago, and Los Angeles.
The financial takeaway
If you have a 401K or are invested in the stock market or a mutual fund, then the SEC has a hand in the success of those investments and the information you have to base them on.
The SEC is also there should you need guidance or fall victim to a dishonest broker or investment advisor. As Carney puts it, “People should know that they can call the SEC. The SEC is there to protect them. If you believe an asset manager or a broker stole from you, the SEC can run an investigation, go after them, bring charges and try to get your money back.”