Securities and Exchange Commission (SEC): Definition, Purpose, and Function

The Securities and Exchange Commission (SEC) is a U.S. federal agency that is responsible for regulating and overseeing the securities industry. The Securities and Exchange Commission is built to protect investors and maintain fair, orderly, and efficient markets.

The SEC plays a crucial role in safeguarding the interests of investors by guaranteeing their access to accurate information about publicly traded companies. Key measures implemented by the SEC include requiring companies to disclose critical financial information, enforcing securities laws and regulations, and investigating potential violations of securities laws.

The SEC also supervises and regulates vital participants in the securities industry. These key players consist of stock exchanges, broker-dealers, investment advisors, mutual funds, and rating agencies.

What is SEC?

The Securities and Exchange Commission is a United States government agency responsible for enforcing federal securities laws, proposing securities rules, and regulating the securities industry. SEC’s main objectives are to protect investors, maintain fair and efficient markets, and facilitate capital formation. It was established by the Securities Exchange Act of 1934. It seeks to promote transparency, prevent market manipulation, and ensure the accurate disclosure of financial information by publicly traded companies.

SEC provides accurate, transparent, and timely information to investors. This includes financial statements, risks, and other material information, which helps investors make informed decisions. The SEC has the power to investigate and enforce securities laws to maintain market integrity and protect investors. It is able to initiate civil enforcement actions against individuals or entities who violate securities laws, issue fines, or seek injunctions.

The SEC conducts regular examinations of registered entities, such as broker-dealers, investment advisers, and mutual funds, to ensure compliance with securities laws and regulations. This oversight function assists in identifying potential risks and violations before they escalate into more significant issues.

How did the SEC start?

The Securities Act of 1933 led to the creation of the SEC. It was passed in response to the stock market crash of 1929 and the subsequent Great Depression. This law required companies to register and disclose essential financial information to the public before issuing securities.

The Securities Exchange Act was signed into law by President Franklin D. Roosevelt In 1934, establishing the SEC and giving it broad authority to regulate the securities industry, including stock exchanges and broker-dealers. Joseph P. Kennedy, the father of President John F. Kennedy, was appointed as the first Chairman of the SEC that same year.

The Public Utility Holding Company Act  was enacted in 1936 to regulate the complex structures of public utility holding companies and protect consumers from unfair practices. This legislation granted the SEC the authority to break up large utility holding companies. The Investment Company Act and Investment Advisers Act were signed into law, providing the SEC with the authority to regulate investment companies, such as mutual funds, and investment advisers two years later, in 1938.

The Securities Act Amendments expanded the SEC’s authority to regulate securities traded over-the-counter (OTC) in 1964 rather than on an exchange. It established the Office of the Whistleblower to handle tips and complaints from individuals reporting possible violations of federal securities laws in 1970. The Securities Acts Amendments of 1975 provided the SEC with expanded authority to regulate the securities industry and established the Municipal Securities Rulemaking Board (MSRB) to regulate municipal securities.

The Insider Trading Sanctions Act of 1982 increased the penalties for insider trading, making it more expensive and risky for individuals to engage in this illegal activity. The Penny Stock Reform Act of 1990 aimed to curb fraud in the penny stock market by imposing stricter disclosure requirements and sales practice rules. The Sarbanes-Oxley Act passed in 2002, was a response to major corporate accounting scandals, such as Enron and WorldCom, and introduced significant reforms to improve corporate responsibility, enhance financial disclosures, and combat corporate and accounting fraud.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was signed in response to the 2008 financial crisis, introducing a wide range of reforms to the financial industry and establishing new agencies, including the Consumer Financial Protection Bureau (CFPB). The Jumpstart Our Business Startups (JOBS) Act aimed to encourage small business and startup funding by easing certain securities regulations in 2012.

The SEC has had numerous chairpersons throughout its history, including Mary Jo White (2013-2017), Jay Clayton (2017-2020), and Gary Gensler (2021-present, as of my knowledge cutoff in September 2021).

What is the purpose of the SEC?

The purpose of the Securities and Exchange Commission (SEC) is to protect investors and maintain a fair, transparent, and efficient securities market. The SEC aims to prevent fraudulent activities, market manipulation, and financial mismanagement. There are some lesser-known purposes of the SEC apart from the main points as mentioned above. The top five are as given below. 

• It safeguards investors’ interests and promotes confidence in the financial markets, essential for fostering economic growth and stability.
• The SEC has the authority to enforce federal securities laws and ensure compliance by market participants, deterring potential fraud and protecting investors.
• The SEC also mandates companies to disclose accurate and comprehensive financial information, enabling investors to make informed decisions based on reliable data.
• The SEC oversees and regulates critical players in the securities industry, ensuring that they operate within the legal framework and maintain ethical business practices.
• SEC has the power to conduct investigations into any suspected breaches of securities laws and take appropriate action against those found guilty, which helps maintain market integrity and investor confidence.

The SEC creates an environment where businesses can access the capital they need to grow while ensuring that investors have opportunities to invest in a diverse range of companies.

What are the different functions of the SEC?

The SEC’s main functions include formulating and applying securities laws, implementing new regulations, overseeing securities institutions, and coordinating regulations at all levels of government.

Below listed are the functions in detail.

1. Formulation and application of securities laws.

The SEC is responsible for creating and implementing federal securities laws and regulations to govern the securities industry. This includes proposing and adopting new rules, amending existing regulations, and interpreting the laws in response to market developments and changes in the industry

2. Implement new regulations.

The SEC constantly formulates and implements new regulations to address emerging trends, risks, and challenges in the securities industry. This ensures that the regulatory framework remains up-to-date and effective in promoting transparency, protecting investors, and maintaining fair and efficient markets.

3. Oversee securities institutions.

The SEC oversees and regulates various institutions within the securities industry, such as stock exchanges, broker-dealers, investment advisors, mutual funds, and rating agencies. It ensures that these entities comply with securities laws and regulations, maintain ethical standards, and operate in a fair and transparent manner.

4. Coordinates of regulation at all levels of government

The SEC works closely with other federal, state, and local regulatory agencies as well as self-regulatory organizations (SROs), to coordinate and streamline securities regulations across different levels of government. This collaboration helps maintain a consistent regulatory environment, reduces inconsistencies and overlapping rules, and effectively addresses emerging challenges in the securities industry.

The SEC also enforces federal securities laws by investigating potential violations and taking appropriate action against those found to be in breach of the laws. This includes civil enforcement actions, fines, or injunctions.

What are the different securities institutions that the SEC oversees?

The SEC is divided into five divisions and each division takes care of specific institutions. 

The Division of Corporation Finance division oversees the disclosure by corporations of important information for investors. A corporation must adhere to disclosure regulations when it sells stock. Division of Corporation Finance reviews disclosure documents filed by corporations on a regular schedule. It also assists in the interpretation of SEC rules. It also makes recommendations to the SEC on new adoption rules.

Division of Trading and Markets division helps the SEC ensure that markets are fair and orderly. The division oversees the daily activities of securities firms, exchanges, self-regulatory organisations, clearing agencies and transfer agents as well as credit rating agencies.

The Division of Investment Management assists the Securities and Exchange Commission to fulfill its mandate of protecting investors and encouraging capital formation. The division oversees and regulates all investment management activities in the country. The division ensures that the information provided to retail clients about mutual funds and ETFs is useful. It also makes sure that regulatory costs are kept to a minimum.

Enforcement is in charge of enforcing securities laws. It makes recommendations about the start of investigations into violations of securities laws. It also works closely with the law enforcement agencies in criminal cases.

 Division of Economic and Risk Analysis is responsible for protecting investors, maintaining fair and orderly markets, and ensuring that they are efficient. The division also performs economic analyses and data analysis, and works with all the offices and divisions within the Commission.

The Securities and Exchange Commission (SEC) oversees securities institutions to ensure compliance with federal securities laws and regulations, maintain market integrity, and protect investors. The main securities institutions overseen by the SEC include stock exchanges, brokers and dealers and institutional investors.

The SEC supervises the operations, practices, and rules of stock exchanges, such as the New York Stock Exchange (NYSE) and NASDAQ, to ensure fair and transparent markets. It also regulates broker-dealers, who act as intermediaries in the buying and selling of securities, to guarantee that they follow the applicable laws and ethical standards.

The watchdog also oversees registered investment advisers, who provide advice and management services to clients regarding securities investments, to confirm that they adhere to legal requirements and fiduciary duties. The SEC also regulates mutual funds, exchange-traded funds (ETFs), and other investment companies, ensuring that they operate in compliance with securities laws, disclose accurate and comprehensive information to investors, and maintain proper governance structures.

Is the stock market regulated by the SEC?

Yes, the stock market in the U.S. is regulated by the SEC. The SEC enforces federal securities laws and oversees stock exchanges, such as the New York Stock Exchange (NYSE) and NASDAQ, to ensure that they operate fairly, transparently, and efficiently.

The Securities and Exchange Commission (SEC) safeguards investors, fosters equity in the securities markets, and stock market and disseminates information about corporations and investment experts. This aids investors in making enlightened decisions, bolstering their investment confidence.

Are the different security types offered in the Stock Market regulated by the SEC?

Yes, the different security types offered in the stock market are regulated by the SEC in the U.S. These security types include common stocks, preferred stocks, corporate bonds, municipal bonds, and various other financial instruments. The SEC ensures that these securities are issued, traded, and managed in compliance with federal securities laws and regulations, providing a fair and transparent environment for investors and market participants.

Arjun Remesh

Head of Content

Arjun is a seasoned stock market content expert with over 7 years of experience in stock market, technical & fundamental analysis. Since 2020, he has been a key contributor to Strike platform. Arjun is an active stock market investor with his in-depth stock market analysis knowledge. Arjun is also an certified stock market researcher from Indiacharts, mentored by Rohit Srivastava.

Shivam Gaba

Reviewer of Content

Shivam is a stock market content expert with CFTe certification. He is been trading from last 8 years in indian stock market. He has a vast knowledge in technical analysis, financial market education, product management, risk assessment, derivatives trading & market Research. He won Zerodha 60-Day Challenge thrice in a row. He is being mentored by Rohit Srivastava, Indiacharts.