The Birth of the SEC
As explained by History.com, on October 29, 1929, Black Tuesday hit Wall Street as investors traded some 16 million shares on the New York Stock Exchange in a single day. Billions of dollars were lost, wiping out thousands of investors. In the aftermath of Black Tuesday, America and the rest of the industrialized world spiraled downward into the Great Depression (1929-39), the deepest and longest-lasting economic downturn in the history of the Western industrialized world up to that time.
Stock prices began to decline in September and early October 1929, and on October 18 the fall began. Panic set in, and on October 24, Black Thursday, a record 12,894,650 shares were traded. Investment companies and leading bankers attempted to stabilize the market by buying up great blocks of stock, producing a moderate rally on Friday. On Monday, however, the storm broke anew, and the market went into free fall. Black Monday was followed by Black Tuesday (October 29), in which stock prices collapsed completely and 16,410,030 shares were traded on the New York Stock Exchange in a single day. Billions of dollars were lost, wiping out thousands of investors, and stock tickers ran hours behind because the machinery could not handle the tremendous volume of trading.
The stock market would inevitably continue, but it had become devastatingly apparent that sweeping guidelines would have to be implemented in order to mitigate such future occurrences. Out of the chaos rose the Securities and Exchange Commission, more commonly known as the SEC.
According to CNBC, the following is a succinct explanation of the function and purpose of the Securities and Exchange Commission.
The mission of the SEC, as it says on its website, is “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
In other words, the SEC is out to catch those in the financial industry who are breaking SEC rules and by doing so, keep the stock markets honest and maintain investor confidence. We’ll see how it actually does this in a bit.
As it’s set up, the SEC is a federal agency and receives its funding from Congress. The SEC employs approximately 3,500 people from Washington, DC—where it’s headquartered—and in its 11 regional offices, which include the cities of New York, Chicago, Los Angeles, Denver, Atlanta and Miami.
How Does the SEC Work?
The authority given by Congress to the SEC allows it to bring civil enforcement actions against individuals or companies alleged to have committed accounting fraud, bribery, provided false information, or engaged in insider trading or other violations of securities law.
Its main areas of enforcement are:
· Insider trading
· Accounting fraud
· False or misleading investment information
And the SEC has oversight in all areas involved in the securities markets, which include:
· Securities exchanges
· Securities brokers and dealers
· Investment advisors
· Mutual funds
That is, of course, the brief explanation provided by CNBC in 2012. Since then the SEC has primarily maintained the aforementioned areas of focus and jurisdiction. However, as the markets evolve and change, the SEC moves in concordance.
There are a myriad of perpetually evolving securities law-related policies, rules, regulations, guidance and issues. It is important to go back and explain certain key facts to lay a proper foundation for an understanding of the topics which layer on this foundation. A thorough understanding of the purpose of the SEC is of the utmost importance in order to fully comprehend current and future securities regulations. A large portion of the following information comes directly from the source, the SEC itself. Their website, SEC.gov, is an exceptionally useful resource for practitioners, issuers, investors and all market participants.
The mission of the SEC is to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation. Although each mission should be a priority, the reality is that the focus of the SEC changes based on its chair and commissioners and political pressure. Former Chair Mary Jo White viewed the SEC enforcement division and the task of investor protection as the agency’s top priority. Jay Clayton’s background and pro-business predisposition will likely create a focus more intent on capital formation.
In addition to regulating and overseeing the processes involved in capital formation such as registrations and exceptions, the SEC regulates the market participants themselves, including securities exchanges, brokers and dealers, investment advisors, investment companies, issuers and investors, and civilly enforces the law as to each of these participants. In terms of securities exchanges, brokers and dealers and investment advisors, the SEC is primarily concerned with disclosure, fair dealing and protecting against fraud. The SEC brings hundreds of enforcement proceedings each year as a result of suspected violations of numerous and greatly diverse rules. One particularly insightful article that further elaborates on the aforementioned can be found here.
Federal securities laws are based on the foundation that all investors, whether large institutions or private individuals, should have access to fair and equal disclosure and information about an investment before they buy it as well as during the period of time they hold it. Public company reporting requirements are designed to provide meaningful, comparable information and data about public companies so that investors can conduct due diligence and make an analysis as to whether to buy, sell or hold a particular security. The intention of the SEC in these matters is quite simple: total transparency should be practiced at all times by issuers who make an investment vehicle available to the general public and institutions.
In order to be effective in its mission in an ever-changing global economy, the SEC must stay connected with market participants and their needs, and also remain abreast of, and utilize, all possible technological advantages. Moreover, the SEC considers the education of investors to be a key component to its mission. Educated investors make better decisions, and ideally smarter decision making curtails unacceptable losses to unqualified, underqualified and/or uninformed investors.
The overwhelming majority of leads and the corresponding evidence that reveals wrongdoing on behalf of issuers emanates from the investment community. Consequently, investors who are more thoroughly educated as to what is a compliant or noncompliant investment foster a more level and fair marketplace while providing regulators with an even broader, more effective pool of prosecutorial information. In essence, the greater the degree of transparency practiced by issuers, the more astute the investment society becomes. The more intelligent and incisive the investment society becomes, the more transparent issuers must be in order to prevail.
The SEC was formed as a response to the stock market crash of October 1929 and the following period of the Great Depression. First, Congress passed the Securities Act of 1933, which was designed to regulate disclosure and truth in the purchase and sale of securities. Second, Congress passed the Securities Exchange Act of 1934, which created the SEC and was designed to regulate the people who sell and trade securities, including public companies, brokers, dealers and exchanges. Joseph Kennedy, John F. Kennedy’s father, was the first chairman of the SEC.
The SEC is controlled by five commissioners appointed by the president. Each commissioner serves a five-year term and the terms are staggered as to the individual commissioners. One of the commissioners is designated as the chairman by the president. By law, and in an effort to ensure bipartisan policies, no more than three of the commissioners can belong to the same political party.
The SEC is divided into five divisions and 23 offices, all of which are headquartered in Washington, D.C., although there are 11 regional offices throughout the country.
Division of Corporation Finance
The Division of Corporation Finance (CorpFin) oversees disclosure documents filed by companies with the SEC, including, for example, registration statements on Form S-1, 1-A or Form 10, SEC reports on Forms 10-Q, 10-K and 8-K, and proxy materials related to annual and special shareholder meetings. CorpFin routinely reviews the documents filed with the SEC and may provide comments on the filings. A more in-depth explanation of SEC disclosures and reporting requirements can be read here.
CorpFin provides administrative interpretations and guidance on the federal securities laws for the public and makes specific recommendations to the SEC for rule implementation and changes. In addition to the more formal written no-action letter process, CorpFin maintains staff that is available to answer calls by potential issuers and investors to provide guidance and interpretations on the federal securities laws, including related to whether a particular offering would qualify for an exemption from the registration requirements. CorpFin also works with the Office of Chief Accountant to monitor accounting activities, including the Financial Accounting Standards Board (FASB), which formulates generally accepted accounting principles (GAAP).
Division of Enforcement
The Division of Enforcement conducts investigations and brings civil and administrative proceedings on behalf of the SEC to enforce the federal securities laws. The Division of Enforcement is not itself a criminal prosecutorial authority but does work with law enforcement agencies such as the Department of Justice and attorney general offices around the U.S. to recommend and assist with criminal cases.
All SEC investigations are private. Once an investigation is completed, the SEC will decide to take no action, pursue a civil complaint or pursue an administrative proceeding. Matters that may result in civil or administrative proceedings are often settled first. Securities attorney Laura Anthony, founder of the corporate law firm Legal & Compliance, LLC, published an article on this very same topic that can be referenced here.
The Whistleblower Program
The topic of the SEC whistleblower program is far too complex for this particular platform, but required reading can be located here. As for the corresponding topic of the SEC’s efforts to prevent microcap fraud, the article SEC Continues Efforts to Prevent Microcap Fraud is an essential resource.
Division of Trading and Markets
The Division of Trading and Markets is responsible for the SEC’s role of maintaining fair, orderly and efficient markets. In executing its duties, the Division provides daily oversight of major market participants, including the securities exchanges, broker-dealers, self-regulatory organizations including FINRA and the MSRB, clearing agencies, transfer agents, securities information processors and credit rating agencies.
This Division also oversees the Securities Investor Protection Corporation (SIPC), which provides insurance against loss in customer accounts due to the bankruptcy or other overall failure of brokerage firms. SIPC does not ensure against individual losses from market declines or negligent or fraudulent broker conduct.
The Division of Trading and Markets also assists with financial integrity programs for broker-dealers, reviewing rules proposed by self-regulatory organizations, drafting and proposing rules and interpretations related to market operations and surveilling the markets.
Division of Investment Management
The Division of Investment Management helps oversee the investment management industry, including mutual funds, fund managers, analysts and investment advisors. The Division of Investment Management is responsible for both investor protection and promoting capital formation in the industry, balancing between disclosures by funds and limiting regulatory costs that ultimately reduce gains.
The Division of Investment Management assists the SEC in promulgating and interpreting laws and regulations in the investment management industry, responds to no-action letter and exemptive relief requests, reviews investment company and investment advisor filings with the SEC, and assists in enforcement proceedings.
Division of Economic and Risk Analysis
The Division of Economic and Risk Analysis helps with all aspects of the SEC’s mission through its economic analysis and data analytics. This Division interacts with all other divisions and offices of the SEC, providing economic and risk analyses related to policymaking, rulemaking, enforcement and examinations. The Division also provides advance risk assessments as to litigation, examinations, registrants’ reviews and general economic support.
Offices of the SEC
The SEC has several offices that perform functions related to the SEC’s overall mission, including, but not limited to, the Office of General Counsel, the Office of the Chief Accountant, the Office of Compliance Inspections and Examinations, the Office of Investor Education and Advocacy, the Office of Credit Ratings, the Office of International Affairs, the Office of Municipal Securities, the Office of Ethics Counsel, the Office of the Investor Advocate, the Office of Women and Minority Inclusion, the Office of the Chief Operating Officer, the Office of Legislative and Intergovernmental Affairs, the Office of Public Affairs, the Office of the Secretary, the Office of Equal Employment Opportunity, the Office of the Inspector General and the Office of Administrative Law Judges, a few of which deserve explanation.
The General Counsel, as part of the Office of the General Counsel, is appointed by the chairman, is the chief legal officer of the SEC and provides legal advice and counsel to all divisions, other offices, commissioners and the chairman on all matters within the SEC’s jurisdiction. The General Counsel office also represents the SEC in all civil and administrative litigation matters.
The chief accountant, as part of the Office of the Chief Accountant, is also appointed by the chairman and advises the SEC on all accounting and auditing matters, including approving PCAOB auditing rules. In addition, the Office of the Chief Accountant assists the SEC in establishing accounting principles and overseeing the private sector accounting standards-setting process. The chief accountant liaises with FASB, which in turn establishes GAAP. It also liaises with the PCAOB, the International Accounting Standards Board and the American Institute of Certified Public Accountants.
The Office of Investor Education and Advocacy responds to questions, complaints and suggestions from the public. The Office also publishes information and holds seminars and other outreach educational programs to educate the public on the securities laws and their rights.
Further information on this and many other corporate finance topics can be found at LawCast.com.
Lawcast is a derived from the term podcast and specifically refers to a series of news segments that explain the technical aspects of corporate finance and securities law. The accepted interpretation of lawcast is most commonly used when referring to LawCast.com, the securities law network. Example: “LawCast expounds on NASDAQ listing requirements.”