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What the SEC Does and How It Affects You

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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.

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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.

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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.

SEC Divisions

The SEC has five different divisions that serve distinct roles in regulating the markets. They are headquartered in Washington, D.C.

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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.

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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.

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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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Last updated: April 26, 2021