U.S. Securities and Exchange Commission (SEC)

by learnEditor · June 12, 2012

The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

SEC Address:
SEC Headquarters
100 F Street, NE
Washington, DC 20549
(202) 942-8088

The Securities and Exchange Commission has twelve offices across the country

New York, New Jersey
Connecticut, Maine, Massachusetts, New Hampshire, Vermont, Rhode Island
Delaware, Maryland, Pennsylvania, Virginia, West Virginia, District of Columbia
Florida, Mississippi, Louisiana, U.S. Virgin Islands, Puerto Rico
Georgia, North Carolina, South Carolina, Tennessee, Alabama
Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, Ohio, Wisconsin
Colorado, Kansas, Nebraska, New Mexico, North Dakota, South Dakota, Wyoming
Texas, Oklahoma, Arkansas, Kansas (except for the exam program which is administered by the Denver Regional Office)
Utah
Arizona, Hawaii, Guam, Nevada, Southern California
Washington, Oregon, Alaska, Montana, Idaho, Northern California

As more and more first-time investors turn to the markets to help secure their futures, pay for homes, and send children to college, their investor protection mission is more compelling than ever.

As US securities exchanges mature into global for-profit competitors, there is even greater need for sound market regulation.

And the common interest of all Americans in a growing economy that produces jobs, improves our standard of living, and protects the value of our savings means that all of the SEC’s actions must be taken with an eye toward promoting the capital formation that is necessary to sustain economic growth.

The world of investing is fascinating and complex, and it can be very fruitful. But unlike the banking world, where deposits are guaranteed by the federal government, stocks, bonds and other securities can lose value. There are no guarantees. That’s why investing is not a spectator sport. By far the best way for investors to protect the money they put into the securities markets is to do research and ask questions.

The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security. Only through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions.

The result of this information flow is a far more active, efficient, and transparent capital market that facilitates the capital formation so important to our nation’s economy. To insure that this objective is always being met, the SEC continually works with all major market participants, including especially the investors in our securities markets, to listen to their concerns and to learn from their experience.

The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. Here the SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud.

Crucial to the SEC’s effectiveness in each of these areas is its enforcement authority. Each year the SEC brings hundreds of civil enforcement actions against individuals and companies for violation of the securities laws. Typical infractions include insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them.

One of the major sources of information on which the SEC relies to bring enforcement action is investors themselves — another reason that educated and careful investors are so critical to the functioning of efficient markets. To help support investor education, the SEC offers the public a wealth of educational information on this Internet website, which also includes the EDGAR database of disclosure documents that public companies are required to file with the Commission.

Though it is the primary overseer and regulator of the U.S. securities markets, the SEC works closely with many other institutions, including Congress, other federal departments and agencies, the self-regulatory organizations (e.g. the stock exchanges), state securities regulators, and various private sector organizations. In particular, the Chairman of the SEC, together with the Chairman of the Federal Reserve, the Secretary of the Treasury, and the Chairman of the Commodity Futures Trading Commission, serves as a member of the President’s Working Group on Financial Markets.

This article is an overview of the SEC’s history, responsibilities, activities, organization, and operation. More detailed information about many of these topics is available throughout their website.

Creation of the SEC

The SEC’s foundation was laid in an era that was ripe for reform. Before the Great Crash of 1929, there was little support for federal regulation of the securities markets. This was particularly true during the post-World War I surge of securities activity. Proposals that the federal government require financial disclosure and prevent the fraudulent sale of stock were never seriously pursued.

Tempted by promises of “rags to riches” transformations and easy credit, most investors gave little thought to the systemic risk that arose from widespread abuse of margin financing and unreliable information about the securities in which they were investing. During the 1920s, approximately 20 million large and small shareholders took advantage of post-war prosperity and set out to make their fortunes in the stock market. It is estimated that of the $50 billion in new securities offered during this period, half became worthless.

When the stock market crashed in October 1929, public confidence in the markets plummeted. Investors large and small, as well as the banks who had loaned to them, lost great sums of money in the ensuing Great Depression. There was a consensus that for the economy to recover, the public’s faith in the capital markets needed to be restored. Congress held hearings to identify the problems and search for solutions.

Based on the findings in these hearings, Congress — during the peak year of the Depression — passed the Securities Act of 1933. This law, together with the Securities Exchange Act of 1934, which created the SEC, was designed to restore investor confidence in our capital markets by providing investors and the markets with more reliable information and clear rules of honest dealing. The main purposes of these laws can be reduced to two common-sense notions:

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.

Monitoring the securities industry requires a highly coordinated effort. Congress established the Securities and Exchange Commission in 1934 to enforce the newly-passed securities laws, to promote stability in the markets and, most importantly, to protect investors. President Franklin Delano Roosevelt appointed Joseph P. Kennedy, President John F. Kennedy’s father, to serve as the first Chairman of the SEC.

Organization of the SEC

The SEC consists of five presidentially-appointed Commissioners, with staggered five-year terms. One of them is designated by the President as Chairman of the Commission — the agency’s chief executive. By law, no more than three of the Commissioners may belong to the same political party, ensuring non-partisanship. The agency’s functional responsibilities are organized into five Divisions and 19 Offices, each of which is headquartered in Washington, DC. The Commission’s approximately 3,500 staff are located in Washington and in 11 Regional Offices throughout the country.

It is the responsibility of the Commission to:

interpret federal securities laws;
issue new rules and amend existing rules;
oversee the inspection of securities firms, brokers, investment advisers, and ratings agencies;
oversee private regulatory organizations in the securities, accounting, and auditing fields; and
coordinate U.S. securities regulation with federal, state, and foreign authorities.

The Commission convenes regularly at meetings that are open to the public and the news media unless the discussion pertains to confidential subjects, such as whether to begin an enforcement investigation.

Divisions

Division of Corporation Finance

The Division of Corporation Finance assists the Commission in executing its responsibility to oversee corporate disclosure of important information to the investing public. Corporations are required to comply with regulations pertaining to disclosure that must be made when stock is initially sold and then on a continuing and periodic basis.

The Division of Corporation Finance reviews documents that publicly-held companies are required to file with the Commission. The documents include:

registration statements for newly-offered securities;
annual and quarterly filings (Forms 10-K and 10-Q);
proxy materials sent to shareholders before an annual meeting;
annual reports to shareholders;
documents concerning tender offers (a tender offer is an offer to buy a large number of shares of a corporation, usually at a premium above the current market price); and
filings related to mergers and acquisitions.

These documents disclose information about the companies’ financial condition and business practices to help investors make informed investment decisions. Through the Division’s review process, the staff checks to see if publicly-held companies are meeting their disclosure requirements and seeks to improve the quality of the disclosure. To meet the SEC’s requirements for disclosure, a company issuing securities or whose securities are publicly traded must make available all information, whether it is positive or negative, that might be relevant to an investor’s decision to buy, sell, or hold the security.

Corporation Finance provides administrative interpretations of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Trust Indenture Act of 1939, and recommends regulations to implement these statutes. Working closely with the Office of the Chief Accountant, the Division monitors the activities of the accounting profession, particularly the Financial Accounting Standards Board (FASB), that result in the formulation of generally accepted accounting principles (GAAP). Increasingly, the Division also monitors the use by U.S. registrants of International Financial Reporting Standards (IFRS), promulgated by the International Accounting Standards Board.

The Division’s staff provides guidance and counseling to registrants, prospective registrants, and the public to help them comply with the law. For example, a company might ask whether the offering of a particular security requires registration with the SEC. Corporation Finance would share its interpretation of the relevant securities regulations with the company and give it advice on compliance with the appropriate disclosure requirement.

The Division uses no-action letters to issue guidance in a more formal manner. A company seeks a no-action letter from the staff of the SEC when it plans to enter uncharted legal territory in the securities industry. For example, if a company wants to try a new marketing or financial technique, it can ask the staff to write a letter indicating whether it would or would not recommend that the Commission take action against the company for engaging in its new practice.

How the SEC Rulemaking Process Works

Rulemaking is the process by which federal agencies implement legislation passed by Congress and signed into law by the President. Major pieces of legislation, such as the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Sarbanes-Oxley Act, provide the framework for the SEC’s oversight of the securities markets. These statutes are broadly drafted, establishing basic principles and objectives. To ensure that the intent of Congress is carried out in specific circumstances — and as the securities markets evolve technologically, expand in size, and offer new products and services — the SEC engages in rulemaking.

Rulemaking can involve several steps: concept release, rule proposal, and rule adoption.

Concept Release: The rulemaking process usually begins with a rule proposal, but sometimes an issue is so unique and/or complicated that the Commission seeks out public input on which, if any, regulatory approach is appropriate. A concept release is issued describing the area of interest and the Commission’s concerns and usually identifying different approaches to addressing the problem, followed by a series of questions that seek the views of the public on the issue. The public’s feedback is taken into consideration as the Commission decides which approach, if any, is appropriate.

Rule Proposal: The Commission publishes a detailed formal rule proposal for public comment. Unlike a concept release, a rule proposal advances specific objectives and methods for achieving them. Typically the Commission provides between 30 and 60 days for review and comment. Just as with a concept release, the public comment is considered vital to the formulation of a final rule.

Rule Adoption: Finally, the Commissioners consider what they have learned from the public exposure of the proposed rule, and seek to agree on the specifics of a final rule. If a final measure is then adopted by the Commission, it becomes part of the official rules that govern the securities industry.

Division of Trading and Markets

The Division of Trading and Markets assists the Commission in executing its responsibility for maintaining fair, orderly, and efficient markets. The staff of the Division provide day-to-day oversight of the major securities market participants: the securities exchanges; securities firms; self-regulatory organizations (SROs) including the Financial Industry Regulatory Authority (FInRA), the Municipal Securities Rulemaking Board (MSRB), clearing agencies that help facilitate trade settlement; transfer agents (parties that maintain records of securities owners); securities information processors; and credit rating agencies.

The Division also oversees the Securities Investor Protection Corporation (SIPC), which is a private, non-profit corporation that insures the securities and cash in the customer accounts of member brokerage firms against the failure of those firms. It is important to remember that SIPC insurance does not cover investor losses arising from market declines or fraud.

The Division’s additional responsibilities include:

carrying out the Commission’s financial integrity program for broker-dealers;
reviewing (and in some cases approving, under authority delegated from the Commission) proposed new rules and proposed changes to existing rules filed by the SROs;
assisting the Commission in establishing rules and issuing interpretations on matters affecting the operation of the securities markets; and
surveilling the markets.

Division of Investment Management

The Division of Investment Management assists the Commission in executing its responsibility for investor protection and for promoting capital formation through oversight and regulation of America’s $26 trillion investment management industry. This important part of the U.S. capital markets includes mutual funds and the professional fund managers who advise them; analysts who research individual assets and asset classes; and investment advisers to individual customers. Because of the high concentration of individual investors in the mutual funds, exchange-traded funds, and other investments that fall within the Division’s purview, the Division of Investment Management is focused on ensuring that disclosures about these investments are useful to retail customers, and that the regulatory costs which consumers must bear are not excessive.

The Division’s additional responsibilities include:

assisting the Commission in interpreting laws and regulations for the public and SEC inspection and enforcement staff;
responding to no-action requests and requests for exemptive
reviewing investment company and investment adviser
assisting the Commission in enforcement matters involving investment companies and advisers;
advising the Commission on adapting SEC rules to new circumstances.

Division of Enforcement

First and foremost, the SEC is a law enforcement agency. The Division of Enforcement assists the Commission in executing its law enforcement function by recommending the commencement of investigations of securities law violations, by recommending that the Commission bring civil actions in federal court or as administrative proceedings before an administrative law judge, and by prosecuting these cases on behalf of the Commission. As an adjunct to the SEC’s civil enforcement authority, the Division works closely with law enforcement agencies in the U.S. and around the world to bring criminal cases when appropriate.

The Division obtains evidence of possible violations of the securities laws from many sources, including market surveillance activities, investor tips and complaints, other Divisions and Offices of the SEC, the self-regulatory organizations and other securities industry sources, and media reports.

All SEC investigations are conducted privately. Facts are developed to the fullest extent possible through informal inquiry, interviewing witnesses, examining brokerage records, reviewing trading data, and other methods. With a formal order of investigation, the Division’s staff may compel witnesses by subpoena to testify and produce books, records, and other relevant documents. Following an investigation, SEC staff present their findings to the Commission for its review. The Commission can authorize the staff to file a case in federal court or bring an administrative action. In many cases, the Commission and the party charged decide to settle a matter without trial.

Whether the Commission decides to bring a case in federal court or within the SEC before an administrative law judge may depend upon the type of sanction or relief that is being sought. For example, the Commission may bar someone from the brokerage industry in an administrative proceeding, but an order barring someone from acting as a corporate officer or director must be obtained in federal court. Often, when the misconduct warrants it, the Commission will bring both proceedings.

Civil action: The Commission files a complaint with a U.S. District Court and asks the court for a sanction or remedy. Often the Commission asks for a court order, called an injunction, that prohibits any further acts or practices that violate the law or Commission rules. An injunction can also require audits, accounting for frauds, or special supervisory arrangements. In addition, the SEC can seek civil monetary penalties, or the return of illegal profits (called disgorgement). The court may also bar or suspend an individual from serving as a corporate officer or director. A person who violates the court’s order may be found in contempt and be subject to additional fines or imprisonment.
Administrative action: The Commission can seek a variety of sanctions through the administrative proceeding process. Administrative proceedings differ from civil court actions in that they are heard by an administrative law judge (ALJ), who is independent of the Commission. The administrative law judge presides over a hearing and considers the evidence presented by the Division staff, as well as any evidence submitted by the subject of the proceeding. Following the hearing the ALJ issues an initial decision that includes findings of fact and legal conclusions. The initial decision also contains a recommended sanction. Both the Division staff and the defendant may appeal all or any portion of the initial decision to the Commission. The Commission may affirm the decision of the ALJ, reverse the decision, or remand it for additional hearings. Administrative sanctions include cease and desist orders, suspension or revocation of broker-dealer and investment advisor registrations, censures, bars from association with the securities industry, civil monetary penalties, and disgorgement.

Division of Risk, Strategy, and Financial Innovation

The Division of Risk, Strategy, and Financial Innovation was established in September 2009 to help further identify developing risks and trends in the financial markets.

This new Division is providing the Commission with sophisticated analysis that integrates economic, financial, and legal disciplines. The Division’s responsibilities cover three broad areas: risk and economic analysis; strategic research; and financial innovation.

The emergence of derivatives, hedge funds, new technology, and other factors have transformed both capital markets and corporate governance. The Division of Risk, Strategy, and Financial Innovation is working to advise the Commission through an interdisciplinary approach that is informed by law and modern finance and economics, as well as developments in real world products and practices on Wall Street and Main Street.

Among the functions being performed by the Division are:

(1) strategic and long-term analysis;
(2) identifying new developments and trends in financial markets and systemic risk;
(3) making recommendations as to how these new developments and trends affect the Commission’s regulatory activities;
(4) conducting research and analysis in furtherance and support of the functions of the Commission and its divisions and offices; and
(5) providing training on new developments and trends and other matters.

Office of the Chief Operating Officer

The Office of the Chief Operating Officer assists the Chairman in developing and executing the management policies of the SEC. The Office formulates budget and authorization strategies, supervises the allocation and use of SEC resources, promotes management controls and financial integrity, manages the administrative support offices, and oversees the development and implementation of the SEC’s automated information systems. The Office has five main functional areas:

The Office of Administrative Services assists the Chairman and the Executive Director in managing the agency’s facilities and assets, and provides a wide range of support services to the SEC staff. The Office serves the Headquarters Office and all Regional Office locations on matters including procurement and contracting, property management, office lease acquisition and administration, space renovation, supplies and office equipment management, transportation, mail distribution, publications, printing, and desktop publishing.

The Office of Financial Management administers the financial management and budget functions of the SEC. The Office assists the Chairman and the Executive Director in formulating budget and authorization requests, monitors the utilization of agency resources, and develops, oversees, and maintains SEC financial systems. These activities include cash management, accounting, fee collections, travel policy development, and oversight and budget justification and execution.

The Office of FOIA, Records Management, and Security (OFRMS) is responsible for the processing of requests under the Freedom of Information and Privacy Acts, the management of all agency records in accordance with the Federal Records Act, and maintaining the security and safety of all SEC facilities.

The Office of Human Resources assists the Chairman in recruiting and retaining the best and the brightest professional staff in the federal workforce, and in ensuring that the SEC remains the employer of choice within the federal government. The Office has overall responsibility for the strategic management of the SEC’s human capital. In addition, it is responsible for ensuring compliance with all federal regulations for the following areas: recruitment, staffing, retention, and separation; position management and classification; compensation and benefits counseling and processing; leadership and employee development; performance management and awards; employee relations; labor relations; the SEC’s disability, work/life, and telework programs; employee records processing and maintenance; and employee financial disclosure. The Office also represents the Commission as the liaison to the U.S. Office of Personnel Management and other Federal Government agencies, various public and private-sector professional human resources organizations, and educational institutions in matters relating to human capital management.

The Office of Information Technology supports the Commission and staff of the SEC in all aspects of information technology. The Office has overall management responsibility for the Commission’s IT program including application development, infrastructure operations and engineering, user support, IT program management, capital planning, security, and enterprise architecture. The Office operates the Electronic Data Gathering Analysis and Retrieval (EDGAR) system, which electronically receives, processes, and disseminates more than 500,000 financial statements every year. The Office also maintains a very active website that contains a wealth of information about the Commission and the securities industry, and also hosts the EDGAR database for free public access.

Office of Legislative Affairs and Intergovernmental Relations

The Office of Legislative Affairs and Intergovernmental Relations serves as the agency’s formal liaison with the Congress, other Executive Branch agencies, and state and local governments. The staff carefully monitor ongoing legislative activities and initiatives on Capitol Hill that affect the Commission and its mission. Through regular communication and consultation with House and Senate members and staff, the Office communicates legislators’ goals to the agency, and communicates the agency’s own regulatory and management initiatives to the Congress.

The Office is responsible for responding to congressional requests for testimony of SEC officials, as well as requests for documents, technical assistance, and other information. In addition, the Office monitors legislative and oversight hearings that pertain to the securities markets and the protection of investors, even when an SEC witness is not present.

Office of Public Affairs

The Office of Public Affairs assists the Commission in making the work of the SEC open to the public, understandable to investors, and accountable to taxpayers. It helps every other SEC Division and Office accomplish the agency’s overall mission — to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The Office coordinates the agency’s relations with the media and the general public, in this country and around the world.

In addition to publicizing the work of the Commission and its staff, the Office assists in the enforcement of the Commission’s policy concerning the confidentiality of law enforcement and investigative information, which is designed to protect the privacy rights of American citizens. The Office reviews and distributes within the agency press coverage of the SEC and of Commission-related issues, including the securities industry and the financial markets. It also provides limited research where policy and public affairs goals overlap.

Office of the Secretary

The Secretary of the Commission is appointed by the Chairman, and is responsible for the procedural administration of Commission meetings, rulemaking, practice, and procedure. Among the responsibilities of the Office are the scheduling and recording of public and non-public meetings of the Commission; the administration of the process by which the Commission takes action without a meeting (called the seriatim process); the administration of the duty-officer process (by which a single Commissioner is designated to authorize emergency action); the maintenance of records of Commission actions; and the maintenance of records of financial judgments in enforcement proceedings. The Office also provides advice to the Commission and the staff on questions of practice and procedure.

The Office reviews all SEC documents submitted by the staff to the Commission. These include rulemaking releases, SEC enforcement orders and litigation releases, SRO rulemaking notices and orders, and actions taken by SEC staff pursuant to delegated authority. In addition, it receives and tracks documents filed in administrative proceedings, requests for confidential treatment, and comment letters on rule proposals. The Office is responsible for publishing official documents and releases of Commission actions in the Federal Register and the SEC Docket, and it posts them on the SEC Internet website, www.sec.gov. The Office also monitors compliance with the Government in the Sunshine Act.

Office of Equal Employment Opportunity

Because the SEC’s employees are its most important resource, the Office of Equal Employment Opportunity works to ensure that the agency’s professional staff come from diverse backgrounds that reflect the diversity of the investing public. Equal employment opportunity at the SEC is a continuing commitment. To maintain neutrality in resolving disputes, the EEO Office is independent of any other SEC office. The EEO Director reports to the Chairman. The primary mission of the EEO Office is to prevent employment discrimination, including discriminatory harassment, so that all SEC employees have the working environment to support them in their efforts to protect investors, maintain healthy markets, and promote capital formation.

Office of the Inspector General

The Office of the Inspector General conducts internal audits and investigations of SEC programs and operations. Through these audits and investigations, the Inspector General seeks to identify and mitigate operational risks, enhance government integrity, and improve the efficiency and effectiveness of SEC programs.

Office of Administrative Law Judges

The Commission’s Office of Administrative Law Judges consists of independent judicial officers who conduct hearings and rule on allegations of securities law violations in cases initiated by the Commission. When the Commission initiates a public administrative proceeding, it refers the cases to the Office, where it is assigned to an individual Administrative Law Judge (ALJ). The ALJ then conducts a public hearing that is similar to a non-jury trial in the federal courts. Just as a federal judge can do, an ALJ issues subpoenas, rules on motions, and rules on the admissibility of evidence. At the conclusion of the hearing, the parties submit proposed findings of fact and conclusions of law. The ALJ prepares an initial decision that includes factual findings and legal conclusions that are matters of public record. Parties may appeal an initial decision to the Commission, which can affirm, reverse, modify, set aside or remand for further proceedings. Appeals from Commission action are to a United States Court of Appeals.