Which of the following is a federal regulatory agency whose task is to oversee stock trading and enforce federal securities laws?

The Securities and Exchange Commission (SEC) is a federal administrative agency tasked with monitoring markets, enforcing securities laws, and developing new regulations. Congress established the SEC in the Securities Exchange Act of 1934, which was passed in response to the market failures that precipitated the Great Depression. 

Structure of the SEC:

15 U.S.C. § 78d establishes the SEC and lays out its composition. It is a body of five commissioners, appointed by the President by and with the consent of the Senate. That is, the SEC is an independent agency with five department heads. Furthermore, so that the SEC would remain independent and apolitical, Congress requires that no more than three commissioners may be members of the same political party. The SEC is headquartered in Washington D.C., but also has many regional offices, the largest of which is in New York. The SEC also divides its staff into five main divisions: the Division of Corporate Finance, the Division of Investment Management, the Division of Enforcement, the Division of Economic and Risk Analysis, and the Division of Trading and Markets. 

According to their webpage, the Division of Corporate Finance “seeks to ensure that investors are provided with material information in order to make informed investment decisions, both when a company initially offers its securities to the public and on an ongoing basis as it continues to give information to the marketplace.” The Division of Investment Management, according to their webpage, “oversee[s] mutual funds and other investment products and services that investors may use to help them buy a home, send kids to college, or prepare for retirement.” The Division of Enforcement, according to their webpage, “conducts investigations into possible violations of the federal securities laws, and prosecutes the Commission's civil suits in the federal courts as well as its administrative proceedings.” The Division of Economic and Risk Analysis, per their webpage, “integrate[s] financial economics and rigorous data analytics into the core mission of the SEC,” and “is involved across the entire range of SEC activities, including policy-making, rule-making, enforcement, and examination.” According to their webpage, the Division of Trading and Markets “regulates the major securities market participants, including broker-dealers, self-regulatory organizations (such as stock exchanges, FINRA, and clearing agencies), and transfer agents.”

Regulation:

Overall, the SEC engages in rulemaking and adjudications to create and enforce its regulations. SEC regulations seek to further clarify or supplement the statutes which Congress tasked it with administering, namely the Securities Act of 1933, the Securities and Exchange Act of 1934, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Williams Act of 1968, and the Sarbanes-Oxley Act of 2002. The SEC rulemaking process usually begins with a rule proposal, public comment on the rule, and then publication and finality. Rule 10b–5, which creates a private cause of action for securities fraud, and the SEC gun-jumping rules are some of the most relied on SEC regulations by regulated entities and litigators. For certain causes of action, the SEC may also serve as an administrative adjudicatory body, and administrative law judges conduct hearings, find facts, and issue initial decisions. The SEC also has an appellate body. Opinions by the SEC appellate bodies may be appealable to federal circuit courts of appeal, however.

[Last updated in April of 2021 by the Wex Definitions Team]

The Securities and Exchange Commission, or SEC, is an independent federal regulatory agency tasked with protecting investors and capital, overseeing the stock market and proposing and enforcing federal securities laws. Prior to the SEC’s creation, oversight of the trade in stocks, bonds and other securities was virtually nonexistent, which led to widespread fraud, insider trading and other abuses. The SEC was created in 1934 as one of President Franklin Roosevelt’s New Deal programs to help fight the devastating economic effects of the Great Depression and prevent any future market calamities.

Stock Market Crash Sparks Criticism

After World War I, during the “Roaring 20s,” there was an unprecedented economic boom, during which prosperity, consumerism, overproduction and debt increased. Hoping to strike it rich, people invested in the stock market and often bought stocks on margin at huge risk without federal oversight.

But on October 29, 1929 — "Black Tuesday" — the stock market crashed, along with public confidence as investors and banks lost billions of dollars in just one day. The stock market crash caused nearly 5,000 banks to close and led to bankruptcies, rampant unemployment, wage cuts and homelessness which triggered the Great Depression.

To help determine the cause of the Great Depression and prevent a future stock market crash, the U.S. Senate Banking Committee held hearings in 1932, known as the Pecora hearings, named for the committee’s lead counsel, Ferdinand Pecora. The hearings determined that numerous financial institutions had misled investors, acted irresponsibly and participated in widespread insider trading.

Securities Act of 1933

Prior to the creation of the SEC, so-called Blue Sky Laws were on the books at the state level to help regulate securities sales and prevent fraud; however, they were mostly ineffective. After the Pecora hearings, Congress passed the Securities Act of 1933, which required registration of most securities sales in the United States.

The Securities Act aimed to help prevent securities fraud and stated that investors must receive truthful financial data about public securities for sale. It also gave the Federal Trade Commission the power to block securities sales.

Glass-Steagall Act

The Pecora hearings also led to the passing of the Glass-Steagall Act in June 1933, which helped to restore the economy and public confidence by separating investment banking from commercial banking.

The Glass-Steagall Act created the Federal Deposit Insurance Corporation (FDIC) to oversee banks, protect consumers’ bank deposits and manage consumer complaints.

Securities Exchange Act of 1934

On June 6, 1934, President Franklin D. Roosevelt signed the Securities Exchange Act, which created the SEC. This Act gave the SEC extensive power to regulate the securities industry, including the New York Stock Exchange. It also allowed them to bring civil charges against individuals and companies who violated securities laws.

President Roosevelt appointed Wall Street investor and businessman Joseph P. Kennedy — father of future president John F. Kennedy — as the SEC’s first chairman.

Public Utility Holding Company Act of 1935

To keep utility costs down and reduce the hold a handful of utility empires had on the industry, Congress also passed the Public Utility Holding Company Act (PUHCA) of 1935. It required interstate utility holding companies to register with the SEC and provide operational and financial information.

PUHCA also gave the SEC the power to break up utility companies with pyramid-type structures in which a few investors controlled numerous subsidiaries, often leading to high costs, unfair practices and poor service.

SEC Restores Public Confidence

The Glass-Steagall Act and the creation of the SEC and PUHCA helped restore investor confidence after the Great Depression by reducing deceitful trading, ensuring the public received all pertinent information about investment risks and limiting the practice of buying stocks on margin.

The SEC put investors’ needs over those of brokers, traders and corporations, which helped bring people back to the stock market, especially after World War II boosted the economy.

Five Divisions of the SEC

Five bipartisan commissioners are appointed by the U.S. president to oversee the five divisions of the SEC, including:

• the Division of Corporation Finance, which oversees publicly traded corporations
• the Division of Trading and Markets, which safeguards fair and efficient trade markets
• the Division of Investment Management, which protects investors by overseeing and regulating the investment management industry and its players
• the Division of Enforcement, which investigates securities law violations
• the Division of Economic and Risk Analysis, which monitors changes in the economy and keeps markets efficient and fair

EDGAR

The SEC has developed a searchable online database known as EDGAR (Electronic Data Gathering, Analysis and Retrieval), which companies are required to use to file reports, forms and other information required by the SEC.

In 2017, the SEC announced that the EDGAR database had been hacked one year earlier, and private information was accessed that may have been used for illegal trading. EDGAR was also hacked in 2015, and false information about Avon Products was posted on the database. 

Infamous SEC Indictments

Since its inception, the SEC has helped bring stability to an ever-changing market by protecting consumers, maintaining fair markets and ensuring companies are transparent with their financial transactions.

Later acts of Congress kept it relevant, including the Securities Acts Amendments of 1975 and the Dodd-Frank Act (aka the Dodd-Frank Wall Street Reform and Consumer Protection Act) of 2010.

The SEC has worked closely with the U.S. Department of Justice to prosecute individuals and corporations for securities fraud at all levels. Some defendants have been high-profile investors, including businesswoman Martha Stewart, Kenneth Lay (of failed Enron Corporation), NFL quarterback Fran Tarkenton, fraudulent stock trader Ivan Boesky and disgraced investor Bernie Madoff.

Sources

A Brief History of the Securities and Exchange Commission. Fox Business.
The Laws that Govern the Securities Industry. U.S. Securities and Exchange Commission.
Timeline. Securities and Exchange Commission Historical Society.
What We Do. U.S. Securities and Exchange Commission.
“SEC reveals it was hacked, information may have been used for illegal stock trades.” September 20, 2017. The Washington Post. 

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