Shortly after the stock market crash of 1929, a regulatory body called the Securities & Exchange Commission (SEC) was born. Its goal was to restore investor confidence and faith in a financial sector that was notorious for fraudulent activities, easy credit and hazardous investments. Two significant proposals by the U.S. Congress, the Securities Act of 1933 and the Securities Exchange Act of 1934, led the way to the formation of the SEC and, ultimately, a structured financial industry under government supervision. (Find out more in The SEC: A Brief History Of Regulation.)
The aim of both of these acts was to protect investors from any indiscretions that could arise from:
- Fraudulent and questionable public companies.
- Dishonest and unscrupulous individuals dealing in the securities markets.
The SEC is divided into four main divisions. They work together, but have specific areas in which they mandate and ensure compliance. These departments are Corporate Finance, Market Regulation, Investment Management and Enforcement.
Division of Corporate Finance
This division is responsible for overseeing the disclosure documents that are required to be filed with the SEC by U.S. public companies. Meant to increase transparency so that investors are able to make informed decisions, the filings require companies to provide prudent and truthful disclosure of financial and material information. According to the SEC, the definition of material information is any information pertaining to a particular business that might be relevant to an investor's decision to buy, sell or hold the security.
The documents that companies are required to file include the registration statements for public offerings, quarterly and annual filings (Forms 10-Q and 10-K), annual reports to shareholders, documents detailing mergers and acquisitions and proxy/voting materials sent out to shareholders before annual meetings. The SEC mandates that all public companies file these documents in a timely fashion unless the company is foreign or has less than $10 million in assets and fewer than 500 shareholders. All material information, whether positive or negative, must be available first to the SEC, which, in turn, provides it to investors electronically through its electronic data gathering and retrieval (EDGAR) database. (For more on corporate disclosure, read Show And Tell: The Importance Of Transparency.)
Division of Market Regulation
This division establishes and maintains fair, orderly and efficient markets by regulating the participants in the securities industry. These participants range from the largest clearing corporations and exchanges, which are also known as self-regulatory organizations (SROs), to the various broker-dealer firms and investment houses. In short, the Division of Market Regulation establishes the rules of the investment industry.
This division also interprets any proposed changes to existing regulations and reviews any disagreements over the operations of the securities industry. It maintains constant surveillance of market activity to ensure that no policies are being manipulated. With ever-expanding securities markets and new synthetic investment products being created every year, the Division of Market Regulation faces a continual need to create new rules and amend others.
Division of Investment Management
As overseers of the investment management industry, this division ensures the preservation of all rules affecting investment companies and their advisors. To make certain that all rules and regulations are being upheld, the SEC requires that all investment companies and federally registered investment advisors file the appropriate documents. More specifically, this division looks at public regulations and laws, and makes changes to existing rules if circumstances provide reason to do so. (For information on choosing a financial advisor, see Shopping For A Financial Advisor.)
Division of Enforcement
Working closely with the other three divisions, this group investigates possible violations of securities laws and provides recommendations when further action is needed. Keep in mind that the division of enforcement has only civil enforcement authority; it must cooperate with different law-enforcement agencies such as the FBI or local police to bring about criminal charges.
The process of enforcement involves three separate steps:
| 1. An informal investigation is privately conducted. This involves the meticulous examination of brokerage trading records, cross examination of witnesses and inspection of public documents.
2. The SEC then issues a formal order of investigation requiring the parties involved to release any records or documents that are material to the investigation.
3. The SEC decides whether the case should be forwarded to federal court or administrative action should be taken.
Common violations include insider trading, misrepresentation, deliberate omission of significant information regarding public company filings, market manipulation, violation of fiduciary duties/single theory and any related disturbances that affect the smooth operation of the U.S. securities market and the market's integrity. (For further reading, see Understanding Dishonest Broker Tactics.)
For more information on the various securities laws that govern the securities industry visit the SEC's website.
The SEC is on your side. Whether you are a large investment firm or just the average investor, the SEC tries to make sure that all public companies provide accurate information so that investors can make educated decisions. While large-scale cases of fraud occur from time to time, the SEC, by and large, is there to protect individual investors. By maintaining accurate records, inspecting company reports and keeping a watchful eye over market activity, the SEC acts as a police force, a lawmaker and sometimes even a court for the securities market.
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