Securities and Exchange Commission SEC

Securities and Exchange Commission (SEC)

6 min read

The SEC, or The Securities and Exchange Commission, is an independent federal regulatory agency that protects investors and capital. With headquarters in Washington, D.C., and 11 satellite offices throughout the U.S., the SEC aims to protect investors and ensure that markets are fair, efficient, and orderly. Ultimately, they strive to create a market environment that people can trust.

  • The number one goal of the SEC is to protect investors
  • The Securities and Exchange Commission maintains fair, orderly and efficient markets
  • Created in 1934, the Securities and Exchange Commission stemmed from the 1929 stock market crash
  • The SEC Division of Enforcement is responsible for investigating possible violations of securities laws and regulations

Responsibilities of the Securities and Exchange Commission

  • implementing federal securities laws
  • proposing securities rules
  •  maintaining the securities industry
  • maintaining stock and options exchanges
  • regulating electronic securities markets, 
  • ensuring fair markets and much, much more

History of the Securities and Exchange Commission

During the mid-1920s, “the Roaring Twenties,” times were good financially. With the rapid expansion of the U.S. economy, the nation’s total wealth doubled between 1920 and 1929. And with soaring stock prices, confidence was abundant. So good people poured their entire life savings into the stock market with reckless abandonment. Likewise, the stock market underwent rapid expansion, reaching its peak in August 1929.

As you know, all good things eventually ended on October 29, 1929. Nervous investors began selling overpriced shares en masse. It sent Wall Street into a panic and wiped out millions of investors. In one day alone, over 16.4 million shares of stock were sold! 

The Great Depression was one of the worst economic downturns in the history of the industrialized world. So bad that it lasted ten years. Not only did companies and individuals lose everything, but they also lost trust in the entire banking and finance environment. 

Understandably so, the government wanted to know why this happened. After an in-depth investigation, faulty financial statement reporting was the cause. That’s why, by 1934, the government stepped in and created the Securities and Exchange Commission.

Purpose of the Securities and Exchange Commission

The number one goal of the Purpose of the Securities and Exchange Commission is to protect the investors. To do this, accurate financial information must be on all the financial statements.

As mentioned earlier, the purpose of the SEC is to oversee the banking and finance sector of the business world. But, more importantly, they regulate the practices of the accounting industry. Remember, this is because the leading cause of the crash of 1929 was faulty financial reporting. 

The SEC created another organization to focus strictly on the accounting industry to ensure this occurred. This organization is called the Financial Accounting Standards Board, FASB.

The Financial Accounting Standards Board (FASB)

The SEC charged the FASB with creating the guidelines for financial reporting. Hence, all accounting professionals must follow them to produce accurate and reliable financial statements. These guidelines are called the Generally Accepted Accounting Principles, or GAAP for short. 

The Public Company Accounting Oversight Board (PCAOB)

Another organization formed by the Securities and Exchange Commission is the Public Company Accounting Oversight Board, also known as the PCAOB. The PCAOB oversees accounting professionals who provide independent audit reports for publicly traded companies. 

The SEC's Division of Enforcement

Big Brother is watching. 

The SEC’s Division of Enforcement (Enforcement) aims to determine whether any persons or entities violated federal securities laws. 

More often than not, investigations are confidential. This is to ensure their effectiveness and protect the privacy of those involved. Because of this, the Enforcement Division won’t confirm or deny the existence of an investigation unless the Securities and Exchange Commission brings charges against a person or entity involved. Furthermore, you won’t be able to receive updates on any pending SEC investigations. Interestingly, the charges laid are criminal, not civil.

Common violations include:

  •  misrepresenting important information about potential investments, 
  • manipulating the market prices of securities, 
  • stealing customers’ funds or securities,
  •   insider trading, and 
  • selling unregistered securities.

What Is Insider Trading?

While many people will tell you there’s no one definition of insider trading, there’s a consensus about what it means. But we know the Securities and Exchange Commission is there to keep it from happening. 

For example, trading a company’s securities based on confidential or non-public information about a company is considered insider trading. 

When I hear insider trading, I immediately think of Martha Stewart. That said, let’s take a walk down memory lane…

What Did Martha Stewart Do That Landed Her in Jail?

In 2001, the doctor who founded ImClone, a pharmaceutical company, got bad news. The FDA was not going to approve their experimental cancer drug Erbitux. The doctor told his friends and family before it became public knowledge. Included in that list was Martha Stewart’s stock broker. And you can guess what happens next; Martha sold more than $200,000 worth of ImClone stock shares, “saving herself $45,000 in the process.” I can’t blame her…

Within 18 months of selling that stock based on the illegal tip, the feds indicted Martha. Dawning the stripes, she headed to West Virginia for a 5-month prison sentence. 

And the list of charges from the Securities and Exchange Commission goes on. A quick Google search reveals thousands of fraud cases uncovered by the SEC.

SEC Charges Investment Adviser and Others With Defrauding Over 17,000 Retail Investors

On February 4, 2021, The Securities and Exchange Commission charged three people for running a Ponzi-like scheme. The scheme raised over $1.7 billion from securities issued by GPB Capital. The SEC also charged them with violating the whistleblower protection laws. 

The owner of GPB Capital lied to investors about the source of money used to make an 8% annualized distribution payment to investors. Essentially, they manipulated the financial statements, giving the false appearance that the funds’ income was closer to generating sufficient income to cover the distribution payments than it was.

Final Thoughts

The Securities and Exchange Commission is crucial to the efficient operation of the United States economy. By instilling trust in investors in the United States stock market, we can hope for greater transparency and a thriving economy. 

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