In America, regulating the public capital markets is primarily a responsibility taken up by the United States Securities and Exchange Commission, also known as the SEC, a federal government agency.
According to the law prevailing in the United States, the Securities and Exchange Commission has been bestowed with the power to not only dictate the structure but also manage the content of financial statements that are submitted to the said commission.
Throughout the years, it has been seen that the said body of power has relied on the private sector to establish standards for financial reporting. However, it deems it highly crucial to put forth that the Securities and Exchange Commission also specifies the formats and disclosures for financial statement presentations and sets accounting recognition and measurement principles.
Diving deeper into the aforesaid line of thought, it is important to emphasize the idea of the applicants that the commission deals with.
The Securities and Exchange Commission exercises its superior and apt supervision over a vast number of registrants, which takes into account over 30,000 entities which range from 12,000 publicly traded companies, 4,600 mutual funds, 11,300 investment advisers to 600 transfer agencies, and 5,500 broker-dealers.
To undergo the process of registration with the Securities and Exchange Commission before the sale is made to investors has been marked as an essential step for all the securities that are offered across state lines or via mail or the Internet.
Not only that, but the fact that financial service companies that stand inclusive of broker-dealers, advisory firms, asset managers, as well as their professional representatives, are required to complete Securities and Exchange Commission registration to operate legally serves as an aspect of importance.
1. The Mission of the Securities and Exchange Commission
At the Securities and Exchange Commission, being able to collaborate amicably to create a beneficial influence on the United States economy, the financial markets, and the well-being of citizens of the country lies as the number one goal.
Since the establishment of the aforesaid body of power in 1934, which was during the peak of the Great Depression, to remain steadfast in the commitment made them, which emphasizes their mission, is what makes them one of a kind.
From safeguarding investors, upholding the integrity and smooth functioning of markets, to facilitating the process of raising capital, what falls under their ambit of mission demands unwavering dedication and specialized knowledge from the Securities and Exchange Commission’s team of devoted public servants, which the body of authority thoroughly fulfills.
1.1. The Protection of Investors
From enforcing federal securities laws to ensuring accuracy and equity, one of the main goals of the Securities and Exchange Commission is to safeguard their investors.
Not only the aforesaid, but they also function in the aspects of deterring unethical behavior, holding wrongdoers accountable, and furnishing resources that empower investors to assess their investment options and protect themselves from fraudulent practices.
The federal securities laws that the Securities and Exchange Commission supervises follow a fundamental and uncomplicated principle that solely revolves around bringing into play the idea of bestowing fairness upon everyone as well as granting access to essential information pertaining to investments, coupled with those involved in their sale.
On the same lines, the Securities and Exchange Commission requires the companies that offer securities to the public to provide accurate information about their operations, the securities they are marketing, and the associated investment risks.
Not only the aforementioned, but individuals and entities engaged in selling and trading securities, in addition to guiding investors that stand inclusive of broker-dealers, investment advisers, and exchanges, are mandated to ensure the said individuals are treated with integrity and transparency.
1.2. The Maintenance of Fair, Organized, and Efficient Markets
The fact that the United States has the world’s most extensive, dynamic, and liquid capital markets also comes with the development of the idea that it has evolved into a realm of remarkable speed and intricacy.
To remain adaptable and a pioneer in response to substantial market shifts and trends serves as a responsibility of the Securities and Exchange Commission as they oversee securities trading exceeding $100 trillion annually under the ambit of the United States equity markets.
On the same lines of thought, it is essential to highlight that the ever-changing landscape of technological progress has immensely transformed the functioning of the country’s securities markets.
To maintain its effectiveness as a regulator, the Securities and Exchange Commission must not only be consistent in observing the market dynamics but also, when necessary, update and modernize the rules, regulations, oversight mechanisms, and practices.
1.3. Facilitating Capital Formation
The regulatory framework of the Securities and Exchange Commission offers numerous channels for companies and entrepreneurs that allow them to tap into the capital markets of the United States.
From enabling them to foster job growth, curating transformative innovations, bringing into play the aid of technologies, and offering financial prospects for investors, the Securities and Exchange Commission does it all.
2. History of the Securities and Exchange Commission
In October 1929, when the United States stock market crashed, it not only resulted in the devaluation of securities issued by countless companies but also rendered them essentially worthless.
Adding onto the same lines of thought is the fact that many of the aforesaid companies had disseminated inaccurate or deceptive information, which resulted in the public’s distrust pertaining to the aspect of reliability revolving around the securities markets.
To regain the trust of the citizens of the United States, Congress had brought into play two pivotal pieces of legislation, which were the Securities Act of 1933 and the Securities Exchange Act of 1934. These statutes were the reason for the existence and development of the Securities and Exchange Commission.
Not only to ensure that companies provided accurate and truthful disclosures about their operations but also to manage brokers, dealers, and exchanges to conduct themselves with honesty and fairness when dealing with investors were the primary objectives of the Securities and Exchange Commission.
It has been seen throughout history that there have been several additional laws brought into play to support the Securities and Exchange Commission in fulfilling its mission, which are stated below:
- Trust Indenture Act of 1939
- Investment Company Act of 1940
- Investment Advisers Act of 1940
- Sarbanes-Oxley Act of 2002
- Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
- Jumpstart Our Business Startups Act of 2012
Not only have these aforementioned laws been instrumental in enhancing the Securities and Exchange Commission’s regulatory framework, but they have also aided in expanding its authority to address various issues in the ever-evolving financial and securities landscape.
In today’s time, it deems it essential to mention that the Securities and Exchange Commission initiates numerous civil enforcement actions each year against both firms and individuals who breach any kind of laws pertaining to the field of securities.
The fact that the Securities and Exchange Commission plays a pivotal role in virtually all significant cases of financial wrongdoing, either taking direct action or collaborating with the Department of Justice, makes it one of the most powerful bodies to regulate the cases falling under the ambit of finance.
From dealing with fraud and putting into perspective the dissemination of deceptive or inaccurate information to acknowledging and regulating insider trading, there are certain common violations that are prosecuted by the Securities and Exchange Commission.
Such aforesaid actions not only demonstrate the Securities and Exchange Commission’s commitment pertaining to the maintenance of the integrity and fairness of the securities markets but also ensure that the interests of investors are safeguarded.
The Securities and Exchange Commission, post the Great Recession of 2008, had contributed immensely in pursuing legal action against the financial institutions that played a role in causing the aforesaid crisis.
Such an effort dropped an outcome that revolved around the idea of returning billions of dollars to the affected investors.
It was seen that, in total, the body of authority had put forth charges against 204 entities as well as individuals, which yielded in bringing into light nearly $4 billion in penalties and disgorgement of ill-gotten gains. Not to forget any other forms of monetary restitution.
Taking as an illustration is the case of Goldman Sachs. A prominent Wall Street firm, as the aforesaid is, it had paid a substantial penalty of $550 million, marking it as the largest fine ever imposed on a Wall Street institution at that time as well as the second-largest in the history of the Securities and Exchange Commission.
It was witnessed that it had surpassed only by the $750 million, which a fine imposed, that stood in comparison to WorldCom. Such aforementioned actions underscored the said authorities’ commitment that circled around holding those responsible for financial misconduct accountable, followed by seeking restitution for the aggrieved investors.
On the same lines of thought, a huge amount of criticism has been noticed which has been directed towards the Securities and Exchange Commission, for what some perceive as insufficient action in terms of prosecuting brokers as well as senior managers who were implicated in the financial crisis of 2008.
What is an intriguing aspect of the aforementioned is that very few of these individuals were found guilty of substantial misdeeds.
To date, a record of only one case, that is of the Wall Street executive, that has been termed to be incarcerated for offenses with regards to the issue, while the majority were either settled with monetary penalties or had accepted administrative sanctions.
Such aforesaid criticisms have brought into light the complexities coupled with the challenges that have been associated with incarcerating individuals who have engaged in financial crises, particularly when determining individual culpability, which can serve to be a formidable task.
Not only the aforementioned, but the fact that legal processes, evidence, and the burden of proof can influence the outcomes of such cases is a point of contention. It has been brought to the surface that some argue on the aspect of having more aggressive enforcement with regard to the said scenario.
The debate on the same continues, which circles around the idea of having adequate regulatory responses to financial crises and understanding whether they provide sufficient deterrence against future misconduct.
3. The Structure of the Securities and Exchange Commission
Serving as the foundational concept for the establishment of the Securities and Exchange Commission, as well as outlining its organizational structure, is the crux of Title 15 of the United States Code, Section 78D.
From comprising five commissioners who are appointed by the President, complemented with the advice and assent of the Senate, to defining the Securities and Exchange Commission as an independent agency that is led by five department heads, the aforesaid body of power serves as a crucial power when speaking of the United States judiciary.
Diving into the aforementioned concept further, it has been deemed essential to put forth that to ensure there is independence and non-partisanship running in the commission; Congress had made it a point of importance that no more than three of the aforesaid commissioners can be a part of the same political party.
Though headquartered in Washington, D.C., the Securities and Exchange Commission also maintains and regulates several regional offices, the largest of which is in New York City.
Elaborating on the structure, it is essential to pinpoint the fact that the body of power is organized into five principal divisions, where each one of the Securities and Exchange Commission’s staff is tasked with specific responsibilities, which are stated below:
- Division of Corporate Finance
- Division of Investment Management
- Division of Enforcement
- Division of Economic and Risk Analysis
- Division of Trading and Markets
The aforesaid segregation of responsibilities not only plays essential roles in carrying out the commission’s regulatory functions but also works to manage and supervise various aspects of the securities industry as well as financial markets.
Running parallelly on the same lines of thought, failing to mention each department’s role and objectives will be unfair.
3.1. The Division of Corporate Finance
Aiming to ensure that investors have access to essential information that enables them to make well-informed investment decisions is the entire objective of the Division of Corporate Finance.
Not only does the aforementioned refer to the initial offerings of securities given to the public by a company, but it also emphasizes the continuous disclosure of information by the company to the marketplace.
From reviewing to overseeing the disclosure documents as well as the financial statements provided by public companies, the said division is responsible for maintaining transparency.
Working to ensure that the information bestowed upon the investors is accurate, valid, and stands in compliance with Securities and Exchange Commission regulations is the mission of the division.
Not to forget the essence that the division is also obligated to fulfill the aspects of maintaining the integrity and fairness of the securities markets.
3.2. The Division of Investment Management
The next of the most essential branches of the Securities and Exchange Commission is the Division of Investment Management. The aforementioned department has the responsibility of supervising mutual funds coupled with various other investment products and services that are made available to investors.
From buying a home and funding children’s education to preparing for retirement, the aforesaid investments are often taken up by individuals who have the desire to achieve substantial financial goals.
To focus on regulating investment companies, that stand inclusive of mutual funds, exchange-traded funds also known as ETFs, as well as investment advisers is the entire essence of the aforesaid division.
Not only the aforementioned, but it deems it essential to pinpoint their role in a nutshell as it involves the aspect of making sure that these investment products as well as services operate in the best interests of investors, followed by standing in compliance with laws and regulations revolving around securities.
The very fact that this division safeguards the interests of those who use these financial tools to secure their financial futures makes it a vital aspect of the commission.
3.3. The Division of Enforcement
The third department that contributes to the modus operandi of the Securities and Exchange Commission is the Division of Enforcement. Not only does it conduct investigations into potential violations of federal securities laws but also takes on the duty of prosecuting civil suits on behalf of the commission that births in federal courts.
Coupled with the aforementioned, the division is also obligated to fulfill the duty of managing administrative proceedings.
Upholding the integrity of the securities markets by scrutinizing the issue, followed by taking legal actions against individuals as well as entities who are suspected of violating securities laws, is the responsibility of the said division.
From making sure there is compliance with regulatory standards and protecting investors to maintaining market fairness, the division pursues enforcement actions to regulate the aforesaid.
3.4. The Division of Economic and Risk Analysis
Known as DERA commonly, The Division of Economic and Risk Analysis, as the fourth branch of the Securities and Exchange Commission, integrates financial economics as well as data analytics into the core mission of the commission.
From policy-making and rule-making to enforcement and examination, the aforesaid division has been involved in various aspects of the commission’s activities.
Along the same lines of thought, it is important to put forth that they use economic analysis complemented with data-driven insights to curate decisions and regulatory actions.
Not only the aforesaid, but the fact that by integrating financial expertise, they contribute to the commission’s mission of having an effective market oversight and protecting investors serves as a highlight.
3.5. The Division of Trading and Markets
Responsible for regulating key participants in the securities markets, including broker-dealers, transfer agents, and self-regulatory organizations, also known as SROs, such as stock exchanges and FINRA, is the fifth department that runs the commission.
Running on the same lines of thought is the essence that the Division of Trading and Markets has been brought to existence so it can maintain the fairness as well as transparency of securities markets.
Complementing the aforementioned, what makes them different from other aspects is the idea that they not only supervise but also regulate various market participants to make sure there is compliance with regulations circling the ambit of securities.
From monitoring the activities of broker-dealers, clearing agencies, and stock exchanges to supervising the actions of transfer agents to promote market integrity as well as safeguarding the interest of investors, The Division of Trading and Markets serves to be a highly essential aspect of the Securities and Exchange Commission.
4. The Securities Laws and Regulation
The Securities and Exchange Commission looks over various securities laws, many of which have been altered and modified over time. Some of the aforesaid laws as statutes are stated below:
4.1. The Securities Act of 1933
The Securities Act of 1933 is significant legislation that was brought into existence with the intention of ensuring that investors shall receive important and relevant information about securities that are being bestowed upon the public for sale while simultaneously prohibiting deceptive practices and misrepresentations, complemented with various other forms of fraud in the same ambit of the aforesaid.
Necessitating the idea that companies who are issuing securities are mandated to disclose material information to investors as part of the mandatory registration process with the Securities and Exchange Commission when offering those securities for public sale is the crux of the aforesaid statute.
The Securities Act of 1933, in addition to bringing into play the Securities and Exchange Commission and regulating the issuance of securities, extends its influence to the secondary market pertaining to securities transactions.
Not only does it grant the commission the power to look over the financial markets but also regulatory authority over Self-Regulatory Organizations, also known as SROs, that stand inclusive of major stock exchanges such as NASDAQ, which possess quasi-governmental authority to bring into play rules and regulations among their member organizations coupled with the associated securities markets.
Apart from the aforementioned, another prominent example of a Self-Regulatory Organization is the Financial Industry Regulatory Authority, also known as FINRA, which serves as the primary managing body that is equipped with the skill to supervise the functioning of broker-dealers in the United States.
4.3. Investment Company Act of 1940
A statute designed to oversee and manage the structure complemented with the operations of investment companies, particularly entities such as mutual funds, is known as the Investment Company Act of 1940.
On the same lines, it deems it essential to put forth the idea that the said investment companies, in particular, are bestowed with the responsibility to manage assets on behalf of institutions or investors in the field of retail.
Diving further into the said essence of the legislation, to address the potential conflicts of interest that can arise within the boundaries of complex operations prevailing in companies dealing with investments, it is the Investment Company Act of 1940 that sets out to enforce the idea that these entities are required to register with the Securities and Exchange Commission.
Not only the aforesaid but also the said companies are pushed to bestow upon the public the idea pertaining to the disclosure of essential information. Such aforementioned disclosure takes into account details about their investment objectives and organizational structure, as well as the operational processes and financial condition.
4.4. The Investment Advisers Act of 1940
Pertaining to investment advisers, which can be firms or individual practitioners, is the statute known as The Investment Advisers Act of 1940, which revolves around receiving compensation for providing advice on securities investments.
Not only the aforementioned, but such a suggestion, as stated prior, has an ambit that stands extended to advising on the ideas of mutual funds and hedge funds, coupled with other types of investment machinery.
4.5. Sarbanes-Oxley Act of 2002
Referred as Sarbanes-Oxley or SOX, the Sarbanes-Oxley Act of 2002 was brought into existence to solely cater to the accounting scandals that involved companies like Enron and Worldcom in the early 2000s, which not only had a significant impact on investor trust but also the financial markets.
Speaking of the said legislation’s mission, the act aimed to enhance the reliability of financial reporting as well as the quality of corporate audits which were executed by public companies.
With the assistance of the Sarbanes-Oxley Act of 2002, an independent board, known as the Creation of the Public Company Accounting Oversight Board or PCAOB, was established to oversee regulating the activities of corporate accountants and auditors, serving solely with a focus pertaining to improving quality and reliability of the audit.
Running on the same lines of thought is the idea that the legislation also shifted the authority already in force. This means that, for overseeing external corporate auditors, the statute drifts from corporate management to independent audit committees within public companies.
A federal government agency that has been brought into force to regulate the public capital markets is the entire essence of the United States Securities and Exchange Commission. From bringing various changes into play to strictly fulfilling its mission, the commission sets out to prevent fraud from occurring in the financial markets, as well as safeguard investors from being victims of such aforestated potential wrongdoings.