Securities and Exchange Commission

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The Securities and Exchange Commission (SEC) is a governmental organization created by Congress. The purpose of the SEC is to protect investors and to keep securities markets fair and functional. The SEC advocates for full disclosure to the public, protects investors from fraudulent and manipulative practices, and oversees corporate takeovers that occur within the U.S. To explore this concept, consider the following Securities and Exchange Commission definition.

Definition of Securities and Exchange Commission

Noun

  1. A governmental organization tasked with protecting investors.

Origin

1934                Created by the Securities Exchange Act of 1934

History of the Securities and Exchange Commission Act of 1934

Taking a look at the history of the Securities and Exchange Commission Act of 1934, its origins are rooted in the time of the Great Crash of 1929. Back then, there was really no support for the federal government becoming involved in the regulation of securities markets. Proposals were made, but were never seriously followed, with regard to the government requiring companies to submit financial disclosures, as well as to prevent the fraudulent sale of stock to unsuspecting investors.

During the 1920s, about 20 million shareholders invested in the stock market. However, of the estimated $50 billion in securities that were being offered during this period, half of them became valueless. This was due to the stock market crashing in October of 1929, which caused the public’s confidence in the stock market to understandably plunge. Investors and banks both ended up losing massive sums of money during the Great Depression. It was decided that the only way for the economy to recover was to find a way to restore the public’s faith in the market.

Congress then decided to hold hearings to identify and address the problems and to find solutions for them. Such begins the early history of the Securities and Exchange Commission Act of 1934, with the Securities Act of 1933. These two laws together worked to create the SEC, and were aimed at restoring investors’ confidence in the market. This was done by providing both investors and markets with reliable and honest information, and procedures to guide them during their regular operations.

There are two main ideas at the heart of the Securities and Exchange Commission Act:

  1. Truth – Companies that publicly offer securities must inform the public of the truth about their businesses, the securities they sell, and the risks investors could suffer by choosing to invest with them.
  2. Fair and Honest Treatment – Anyone selling and trading securities, such as brokers, dealers, and exchanges, must treat their investors fairly by being honest with them, and putting the investors’ interests first.

Purpose of the Securities and Exchange Commission

The purpose of the Securities and Exchange Commission is to protect investors, as well as to keep markets fair and efficient and enable the creation of capital to encourage economic growth. This involves protecting the savings of American citizens so they can feel more secure when they invest in things like stocks, bonds, and other securities.

Another purpose of the Securities and Exchange Commission is to keep current, accurate, and understandable information readily available so that people can make the best possible decisions when attempting to make an investment. The SEC believes that people should have access to the basic facts of an investment, both before they buy it and for as long as they hold it. This goal is accomplished by the SEC requiring that public companies disclose the relevant financial information to the public, and by double-checking that the information released is current, accurate, and understandable.

The purpose of the Securities and Exchange Commission is fulfilled via the resources the SEC offers to the general public that allows them to access this kind of information. Investors can go on the SEC’s website to access the EDGAR, or the Electronic Data Gathering, Analysis, and Retrieval system.

The EDGAR is an online database that investors can access in order to review the disclosure documents that companies are required to keep on file with the SEC. Investors are encouraged to do this so that they know everything there is to know about an investment before investing their hard-earned savings in something that may not be able to deliver.

Divisions of the Securities and Exchange Commission

The headquarters for the Securities and Exchange Commission is located in Washington, D.C. There are 5 divisions of the Securities and Exchange Commission, as well as 11 regional offices situated throughout the United States.

The divisions of the Securities and Exchange Commission are:

  • Corporation Finance
  • Trading and Markets
  • Investment Management
  • Enforcement
  • Economic and Risk Analysis

What follows is a brief description of each of the divisions of the Securities and Exchange Commission.

Corporation Finance

The Corporation Finance division oversees public company disclosures. It also monitors registrations of transactions that are made by companies, such as mergers. This division is also in charge of operating the EDGAR.

Trading and Markets

The Trading and Markets division oversees organizations like the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB), as well as broker-dealer firms and investment houses. The FINRA in particular is an important organization because the SEC entrusts FINRA with a majority of its enforcement and rule-making responsibilities. The Trading and Markets division also interprets changes that are proposed with respect to regulations. It also monitors operations within the industry.

Investment Management

The Investment Management division is in charge of registered investment companies, such as mutual funds and investment advisors. This division also assists the SEC in interpreting laws and regulations for the public, as well as for SEC inspection and enforcement staff. The Investment Management division reviews filings made by investment companies and advises the SEC on how to adapt current rules to new situations.

Enforcement

The Enforcement division works with the other divisions to investigate violations against securities laws and regulations. This division also brings actions against those who are alleged violators. The investigations are typically conducted by the SEC and in private. For example, the Securities and Exchange Commission can opt to bring a civil action before either a District Court within the U.S., or to an administrative law judge. The SEC does not have the authority to bring a criminal action, but if it is made aware of one, it can forward the matter to state or federal prosecutors, depending on the offense.

Economic and Risk Analysis

The Economic and Risk Analysis division was created to focus on financial economics and data analytics. This division is involved in a little bit of everything the SEC does, including policy and rule-making activities and enforcement.

Laws Governing the Securities Industry

There are two primary laws governing the securities industry: the Securities Act of 1933, and the Securities Exchange Act of 1934.

Securities Act of 1933

The first of the two major laws governing the securities industry, the Securities Act of 1933, is often called the “truth in securities law.” It is made up of two basic objectives:

  • It requires that investors receive significant information about securities that are being offered for sale to the public.
  • It prohibits deceit, fraud, and other misinterpretations concerning the sale of securities.

The point of these objectives is to ensure that important financial information is properly disclosed when securities are registered with the SEC. This information enables investments to make informed decisions about whether or not to purchase a company’s securities. Investors who end up purchasing a security and suffering a loss are protected by the recovery rights afforded to them by the SEC, so long as they can prove that there was an inaccurate disclosure of important information that would have potentially swayed their decision to purchase that security.

Securities Exchange Act of 1934

The second of the two major laws governing the securities industry, the Securities Exchange Act of 1934, is the law responsible for the creation of the SEC. This law gives the SEC its power to oversee all of the aspects of the securities industry. For example, the Securities and Exchange Commission has the power to register, regulate, and supervise everything from brokerage firms to self-regulatory organizations (SROs). SROs include the New York Stock Exchange and the Nasdaq Stock Market. This law also provides the SEC with the disciplinary powers necessary to identify and prohibit misconduct in the marketplace.

Securities and Exchange Commission Example Involving Citrus Groves

An example of the Securities and Exchange Commission appearing before the Supreme Court involved citrus groves in the state of Florida. W.J. Howey Co. and Howey-in-the-Hills Service, Inc. were two corporations formed in Florida, where Howey owned several citrus groves. Half of these groves he kept for his own use, while he sold real estate contracts for the other half in order to be able to finance any future developments that needed to be made.

This meant that he would sell a part of the grove to the investor, while also having them enter into a service contract that would allow farming on that particular plot of land. This service contract allowed Howey to continue to enjoy “full and complete” possession of the land due to the investor not participating in the farming in any way whatsoever. This was because those who purchased the land were typically not farmers, nor were they even Florida residents. Instead, they were business people who lacked the necessary experience in agriculture to be able to tend to the land themselves.

The benefit to the investor was that once the land was harvested, the investor would then be credited for the produce that was reaped from the parcel of land that he invested in. Howey, however, was the sole marketer of that produce and marketed the land through a resort hotel owned in the area by his corporation. In Howey’s sales pitch, substantial profits were promised to those who were interested in investing in the citrus groves.

Where Howey got into trouble was in failing to register the SEC-required paperwork in his frequent interstate commerce transactions. The SEC filed a lawsuit seeking an injunction against Howey’s participation in interstate commerce. The grounds for this request was that Howey had violated the Securities Act of 1933 by selling unregistered “securities,” the securities in this case being the plots of land that he had encouraged professionals to invest in.

The trial court denied the SEC’s request, holding that the contract arrangement did not actually provide the sale of those securities. The court of appeals affirmed the lower court’s decision, and so the case was brought before the Supreme Court, where certiorari was granted. The major issue for the court to decide was whether or not the contracts Howey was selling were, in fact, “investment contracts,” as defined by the Securities Act of 1933.

Ultimately, it was decided that yes, Howey did act in such a way that violated the Securities Act of 1933. The Court held that despite the fact that some of Howey’s investors chose to use services other than Howey-in-the-Hills Service, Inc. to tend to the groves, this was irrelevant due to the fact that Section 5 of the Securities Act of 1933 forbids the sale of unregistered securities. Therefore, whatever was done to the land after such a sale did not matter in the eyes of the law.

Related Legal Terms and Issues

  • Capital – Wealth in the form of money or assets owned by a person or organization or made available for a particular purpose, such as to start a company or make an investment.
  • Injunction – A court order preventing an individual or entity from beginning or continuing an action.
  • Writ of Certiorari – An order issued by a higher court demanding a lower court forward all records of a specific case for review.