The Securities and Exchange Commission (SEC) regulates the stock market in the U.S. In particular, it oversees stock exchanges, brokerages and dealers, investment funds and investment advisors.
Although the SEC’s responsibility is to regulate the markets, its actions have broad implications for the lives of both investors as well as everyday citizens. For example, it helps secure your retirement investments and prevent huge swings in the larger economy. Here, we’ll go through some of the specifics of what the SEC is and how it affects you.
Formation of the SEC
The SEC was established by the Securities Exchange Act of 1934 and was a response to the financial ruin of the Great Depression. The result of the Depression was consumer confidence at an all-time low, and that had to be addressed for the economy to flourish.
The first chairman of the SEC was Joseph Kennedy, President John F. Kennedy’s father. While he was friends with President Franklin D. Roosevelt, he was also a financier with Wall Street experience.
The SEC has five different divisions that serve distinct roles in regulating the markets. They are headquartered in Washington, D.C.
- Division of Corporation Finance: This division’s role is to help investors make informed investment decisions, both at the time of a company’s initial public offering (IPO) and on an ongoing basis. To help ensure transparency, it reviews filing and disclosure requirements.
- Division of Enforcement: The Division of Enforcement investigates possible violations of federal securities law. In such cases, it prosecutes civil cases in federal courts.
- Division of Investment Management: This division has a mission to protect investors and maintain fair, orderly and efficient markets. It regulates investment companies including mutual funds, money market funds and exchange-traded funds.
- Division of Economic and Risk Analysis: The Division of Economic and Risk Analysis (DERA) is tasked with analyzing complex economic and market data. DERA is involved across the whole range of the SEC’s functions, including rulemaking, examination and enforcement.
- Division of Trading and Markets: This division of the SEC helps maintain standards for a fair and orderly stock market. As such, it regulates brokerages as well as independent agencies such as the Financial Industry Regulatory Authority (FINRA).
What Does the SEC Do Today?
One of the problems before the Securities Exchange Act of 1934 was market manipulation. At that time, there was little regulation of the markets, and there was often little to no transparency in the sale of securities. As a result, the market was rife with fraud as companies looked to attract investors.
This was one of the factors contributing to speculative investments that led to the crash in 1929. Thus, the SEC promotes transparency and disclosure of information related to the markets to help prevent such wildly speculative investments.
How It Affects You
Remember that maintaining the confidence of the people is one of the most important components of a functioning economy and the SEC helps do exactly that. For example, part of the SEC oversees the Securities Investor Protection Corporation (SIPC), which insures stock portfolios for up to $500,000. This allows you to invest without worrying that you may lose your money if the brokerage goes bankrupt.
The other role the SEC plays is to ensure transparency in companies’ financial dealings and by regulating markets. Transparency and stability help you to be confident that you can invest your money without the worry that it will disappear overnight.
As FDR said in his 1933 speech about the banking crisis, “After all, there is an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people.”
This article is part of GOBankingRates’ ‘Economy Explained’ series to help readers navigate the complexities of our financial system.
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