What is the SEC? Regulating the Securities Industry


The SEC stand for the Securities and Exchange Commission and it is the USA’s financial regulator. In the same way as financial regulators in other countries internationally, the role of the SEC is first and foremost to protect investors. It does so by maintaining what the body itself describes as “fair, orderly, and efficient markets, and facilitate(ing) capital formation”.

The SEC not only regulates securities and investment products and services based in the USA or offered by U.S.-domiciled financial services companies. Its rules and regulations apply to any security or investment product marketed to or bought buy U.S. citizens, regardless of where the provider or investment is located around the world. That broader jurisdiction has become increasingly important with the development of the digital economy meaning products and services, including those that can be considered financial securities, are bought and sold online.

History of the SEC

The SEC dates backs to 1934, just after the peak year of the Great Depression, a deep recession started by the spectacular crash of an adolescently wild Wall Street. Before the Great Depression, Wall Street was a Wild West of a financial market with no real regulations around what companies or stock brokers could, should or couldn’t and shouldn’t say to investors to convince them to buy their stock.

The post-war wealth and exuberance combined with easy credit and the inspiration of rags-to-riches stories of vast wealth accumulation saw 20 million Americans put money into the stock market. That inflow of cash led to $50 billion worth of new securities being offered to the public over a period of just a few years. When the market crashed in 1929, it is estimated that around half of these securities became worthless.

Amid the rubble of some of the darkest years in the USA’s economic history, the government of the time came to the conclusion that economic recovery would require the rehabilitation of public trust in capital markets. The result of that conclusion was the 1933 Securities Act and then the 1934 Securities Exchange Act. The SEC was created to oversee the new rules and regulations controlling the behaviour of companies issuing securities, acting as intermediaries or providing other services and infrastructure around their trade were adhered to.

What Regulations Does The SEC Enforce?

While the actual regulatory rulebook enforced by the SEC is extensive and sometimes complex, the Commission itself says that all of its details boil down to maintaining two general and ‘common sense’ principles:

  • Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing.
  • People who sell and trade securities – brokers, dealers, and exchanges – must treat investors fairly and honestly, putting investors' interests first.

Fullness and transparency of information is fundamental to the capital markets that the SEC’s is tasked with protecting. Investors being provided with easy and transparent access to basic facts about an investment, including its key qualities and those of the issuer as well as the level or risk involved is the pillar of what the Commission enforces. Any new information pertinent to the security must also be published in a timely manner and through particular channels. It is this information that means that investors can judge when to buy, sell or hold a security.

What Kinds Of Investments Does The SEC Regulate?

As its title suggests, the SEC regulates investments which are considered securities. A financial security is defined as a financial certificate that has monetary value and can be traded, usually via an exchange. The main categories of securities traded are:

  • Equities
  • ETFs
  • Funds
  • Bonds
  • Financial derivatives based on the above such as futures and swaps

Sometimes the SEC decides that investment categories not covered by these main categories possess the qualities of a security. If the SEC judges something to be a security and it is offered as an investment by a seller or intermediary that is not regulated by the SEC, or the information provided around the investment is not considered to meet its standards, the Commission will move to prosecute.

Recent high profile cases of this were SEC prosecutions of those involved in the sale or marketing of Initial Coin Offerings or ICOs. The ICO issuers and brokers claimed that the cryptocurrency ‘tokens’ sold to investors by blockchain projects raising finance did not constitute securities. The SEC disagreed and issued subpoenas to a large number of companies and individuals involved in the sector.

Sometimes the approach and regulations of the SEC is considered draconian and stifling of financial innovation. However, while market observers may not always be in full agreement with how it interprets the rules it was established to protect, fundamentally, the Commission has fulfilled its mandate – ensuring misinformation and aggressive marketing that doesn’t fully inform investors of risks has never again lead to a stock market crash comparable with that which triggered the Great Depression.

About the author

Kate Leaman

Kate Leaman

Kate Leaman is the Chief Analyst and author at InvestorGreg. She won the Sky News Fiona McDiarmad award and subsequently became a journalist for Sky News. Read more

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