Securities and Exchange Commission (SEC)

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023) presents the structure and functioning of Securities and Exchange Commission (SEC).

Introduction

The Securities and Exchange Commission (SEC) is a federal agency responsible for overseeing and administering the financial market’s laws and regulations in United States of America. It was created in 1934 under the Securities Exchange Act as part of a response measure to revive the financial markets in the USA following the Great Depression that took place after the stock market crash of 1929. The SEC’s primary objective is to monitor and regulate the financial markets in the country by imposing rules, guidelines, liquidity controls and ensuring safety of the markets by means of issuing sanctions in case of non-compliance of rules or any malpractices. They have the responsibility to monitor all the participants in financial markets including investment management firms, publicly listed companies, brokerage houses, dealers and investment banks. It is the backbone of the financial system in the USA and maintains the integrity and transparency of the system and ensures investors’ interest is taken care of adequately.

Organizational structure

The headquarters for the Securities and Exchange Commission is based out the Washington DC and the commission is led by a chairperson, selected from a group of five commissioners who are directly appointed by the President of the United States and work under his/her jurisdiction. Each commissioner is appointed for a tenure of five years and can stay for additional 18 months until a replacement is found. The team also consists of several lawyers, accountants, economists, analysts and engineers, who keep a check on the different market players to ensure investors’ interest protection and compliance with different federal security laws. Each commissioner oversees a specific division of the commission:

• Market and Trading Regulations
• Investment Management
• Law enforcement
• Economic and Risk Analysis (including strategy and financial innovation)
• Corporate Finance

Administration of security laws

The SEC monitors and regulates the financial markets by adhering to 7 laws that are essential for the smooth functioning of the system,

The Securities Act of 1933

The law ensures protection of investor rights by guaranteeing them the equal access to all financial information and records and prevent fraudulent misconducts and activities like insider trading, market manipulation etc.

The Securities Exchange Act of 1934

The law states the rules, regulations and guidelines that govern the American financial markets and states the various aspects of supervision that the market participants must adhere to.

Public Utility Holding Company Act of 1935

The law regulates the interstate public utility companies that are involved in the business of providing electric utility or distribution of natural or manufactured gases.

Trust Indenture Act of 1939

The law regulates the issue and sale of bonds, debentures, notes and other such debt instruments with a combined value of more than $5 million without the issue of a written formal contract. The contract is referred to as trust indenture and is signed between the debt issuer and an independent trustee to protect the rights of the debt holder.

Investment Company Act of 1940

This law helps SEC regulate the activities of private or public investment management companies whose primary business involves investing and trading in financial securities. However, the act is limited in its scope since it does not allow the SEC to supervise the day to day activities of the company.

Investment Advisors Act of 1940

The law helps SEC in regulating the activities of companies who act as an investment advisor to other investors and earn the income from the same business model. The SEC keeps a check on the functioning of these firms to ensure compliance with the rules and maintain market integrity.

Sarbanes-Oxley Act of 2002

The law was passed in 2002 after a series of financial accounting frauds and misconducts were discovered within the American financial system. The law gives SEC powers in terms of regulating the financial reporting standards and practices within the companies by making the corporate executives more responsible for the internal company controls and imposing heavy sanctions for any misconducts.

Sanctions and penalties

The SEC has been vested with the power to impose sanctions on participants within the financial markets by the following means:

Injunction

Statutory orders that governs the actions of the receiving party and prohibits the violations of rules and regulations in the future. By means of injunctions, SEC contains the future violation of regulations and maintains the smoothness and integrity of the financial markets.

Civil money penalties (CMP)

SEC has the power to impose civil monetary penalties on individuals or companies to make them pay back money made through illicit means and ensure the payment of damages to the harmed investors.

Whistle-blower Program

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Whistle-blowing program was put into place to encourage individuals to share information regarding malpractices and frauds by ensuring them confidentiality and monetary benefits amounting to 10%-30% of the total proceeds from the successful sanctions.

Relevance to the SimTrade Certificate

The activities of the SEC relate to many topics covered in the SimTrade Certificate:

• The different players supervised by the SEC (listed companies which issued stocks then traded on an exchange, investment services providers such as brokers which provide access to the market, asset management companies which buy and sell securities on the market) are the participants to the market introduced in Period 1 of the SimTrade certificate.
• Insider trading and market manipulations are linked to the concept of market efficiency introduced in Period 2 of the SimTrade certificate. These illegal activities have an impact on market prices.
• Short selling is introduced in Period 3 of the SimTrade certificate. Short selling allows to speculate on the market by making a profit when the stock price decrease.

Related posts on the SimTrade blog

   ▶ Akshit GUPTA Autorité des Marchés Financiers (AMF)

   ▶ Nithisha CHALLA Securities and Exchange Board of India (SEBI)

Useful resources

U.S Securities Exchange Commission (SEC)

About the author

The article was written in January 2021 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023).