The SEC acts as a watchdog for investors against disreputable players in investment markets. It devises safeguards to prevent white-collar crime such as fraud and devious investment schemes, such as pyramid or Ponzi schemes.

The Securities and Exchange Act of 1934[1] (also known as the “Exchange Act”) created the SEC to fulfill several objectives.

First, entities that sell public securities should offer accurate appraisals and evaluations about their business, the securities they sell, and the risks that investing in those securities may entail.

Second, the same entities that trade securities should treat their investors fairly and honestly, without preference or prejudice.

Note that the 1933 Truth in Securities Act preceded the 1934 landmark act. The earlier act laid out financial transparency in markets, while the 1934 Exchange Act only tasked a governing body with oversight of these markets[2].

The SEC’s mission revolves around protecting investors. To do so, they create rules and regulations that maintain an honest and organized trading investing environment, which leads to fair capital formation and competition.

The SEC observes three core principles[3]:

• Safeguard investors.
• Nurture the efficiency, fairness, and order of markets.
• Expedite capital formation.

The SEC requires all publicly listed companies in the United States to file factual reports regarding their finances and other relevant information about the state of their business. These reports, called SEC filings[4], are submitted periodically, either quarterly or annually. The SEC mandates these reports so investors and would-be investors know precisely the kind of business they want to invest in.

However, the SEC may also require private companies to submit such filings. Section 12(g) of the Exchange Act details that private entities with certain characteristics are required to submit such documents or be listed in exchange unless exempted under Regulation D[5].

In general, private companies with the following attributes[6] fall under this category:

• Companies with over $10 million in assets.
• Companies whose securities are “held in record[7]” by 2,000 or more individuals.
• Companies whose securities are “held in record” by 500 or more individuals who are not accredited investors.

Maintaining Filings

Accurate and timely filing of regulatory documents that describe a public company’s status is crucial because investors rely on them for relevant information. If the information in a filing is inaccurate, they are at risk of investing at a disadvantage or even financial ruin.

The SEC maintains a computerized system called EDGAR (Electronic Data Gathering Analysis and Retrieval). EDGAR allows the public to search for filings as they would use a regular search engine[8].

The SEC also outlines requirements to register or sell a security[9]. For example, before companies can engage in an initial public offering (IPO), they should satisfy all SEC requirements, such as registering the securities they want to sell.

In this case, companies that want to start an IPO need to furnish investors a prospectus that accurately describes the company’s current status, including audited financial statements. If a company fails to comply with these requirements, the SEC may yet clear the IPO registration under an exemption from the requirements registry (e.g., Rule 144 or Regulation S, among others[10]).

The SEC has its central office—along with its various divisions—in Washington, D.C. In addition, it runs 11 local offices across the United States.

Five commissioners head the SEC, all of whom are presidential appointees. However, the SEC itself is designed to be non-partisan, so no more than three commissioners from a single political party[11] are allowed to be on the commission at the same time.

The SEC operates multiple divisions with specific tasks. The main divisions in the SEC include investment management, corporate finance, enforcement, and economic and risk analysis.

As a branch of the federal government, the SEC itself is mostly independent, and it works closely with other self-regulated organizations, including the Financial Industry Regulatory Authority (FINRA)[12], among others.

A regulatory body to safeguard the general interest of American investors is necessary to keep bad players from overrunning and “gaming” the market. In addition, without the SEC to protect the integrity of financial markets as a whole and keep traders in line, it can spiral into a free fall, similar to the 1929 Wall Street crash.

To enforce these regulations, the SEC has the authority to sanction offenders by bringing civil suits. However, in instances of high-profile crimes, the SEC may collaborate with the Justice Department and the Federal Bureau of Investigation, especially in crimes of fraud, money laundering, or insider trading[13].

Without the SEC, investors would have no confidence to make investments. Startups or companies looking for expansion will also face an uphill battle to secure the necessary funds from investors.

The Securities and Exchange Commission or SEC is a government agency that administers the fair and honest trade of securities, such as stocks and bonds. The body primarily does this by enforcing the periodic submission of filings, which are regulatory documents that describe the current state of a company’s finances and businesses. The public can use this information to decide whether it is advisable to invest in them.

To help the commission run things smoothly, it operates several departments and divisions assigned with specific tasks. It can sanction offenders, but these are mostly civil in nature and are thus subject only to penalties and fines. However, for substantial federal crimes, such as fraud, money laundering, and insider trading, it can collaborate with the appropriate federal agencies like the Federal Bureau of Investigation to help them in their investigation.

1. Cornell Law School. (n.d.) Securities Exchange Act of 1934. Legal Information Institute. Retrieved from https://www.law.cornell.edu/wex/securities_exchange_act_of_1934
2. Investor.gov. (n.d.) The Laws That Govern the Securities Industry. Retrieved from https://www.investor.gov/introduction-investing/investing-basics/role-sec/laws-govern-securities-industry
3. Securities and Exchange Commission. (n.d.) About the SEC. Retrieved from https://www.sec.gov/about.shtml
4. Hayes, A. (2021.) SEC Filings: Forms You Need To Know. Investopedia. Retrieved from https://www.investopedia.com/articles/fundamental-analysis/08/sec-forms.asp
5. PPMFast. (n.d.) Regulation D Basics. Retrieved from https://ppmfast.com/regulation-d-basics/
6. Wilmer Cutler Pickering Hale and Dorr. (2001.) Private Companies Cannot Ignore SEC Registration Rules. Retrieved from https://www.wilmerhale.com/en/insights/publications/private-companies-cannot-ignore-sec-registration-rules-june-22-2001
7. MarketBeat. (2019.) What is meant by holder of record? Retrieved from https://www.marketbeat.com/financial-terms/what-is-meant-by-holder-of-record/
8. Chamber of Commerce. (n.d.) How to Use the SEC’s EDGAR Search Engine. Retrieved from https://www.chamberofcommerce.org/how-to-use-sec-edgar
9. PwC. (2017.) Roadmap for an IPO. Retrieved from https://www.pwc.com/hu/hu/szolgaltatasok/konyvvizsgalat/szamviteli-tanacsadas/kiadvanyok/roadmap_for_an_ipo.pdf
10. Corporate Finance Institute. (n.d.) The 1933 Securities Act. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/1933-securities-act-truth-securities/
11. Securities and Exchange Commission. (n.d.) Current SEC Commissioners. Retrieved from https://www.sec.gov/Article/about-commissioners.html
12. Brook, C. (2018.) Understanding the Financial Industry Regulatory Authority (FINRA) and FINRA Rules. Digital Guardian. Retrieved from https://digitalguardian.com/blog/understanding-financial-industry-regulatory-authority-finra-and-finra-rules
13. Friedman & Nemecek. (2019.) Can I Be Charged with a Crime by the SEC? Retrieved from https://www.iannfriedman.com/blog/2019/march/can-i-be-charged-with-a-crime-by-the-sec-/