Headline:  The SEC.  You can’t spell security without it.

Date: 8/1/2021

Body: The next body that is very important to the functioning of the securities markets is the SEC.    They also have a large mandate, and this body is an agency of the Federal Government.

What Is the Securities and Exchange Commission (SEC)?

The Securities and Exchange Commission (SEC) is a Federal Government agency with the responsibilities of:

  1.  Protecting investors.
  2.  Keeping the financial markets fair (and worthy of faith)
  3.  Facilitating Capital Formation

This regulatory body was started in 1934 in an attempt to create more faith in the fairness of the capital markets within the Great Depression.  Usually, to sell a security, the brokers must register with the SEC.    

If the SEC sees a civil infraction, they are empowered to assert:

  1.  Monetary penalties.
  2.  Issue injunctions to ensure that the infraction is not repeated.   If it is, then “contempt of court” charges might apply, and that’s a criminal offense.  People go to jail over this.

You’ve mentioned “Faith” twice already.  How do they do this?

One large purpose of the SEC is to force reporting requirements upon the publicly traded companies.   They must offer annual reports, and (usually) quarterly reports to the SEC (10-K and 10-Q respectively.)   Also, when there is a significant change in something, they must publish this on an 8-K.   These forms are all searchable at the  SEC site called EDGAR.  This added transparency should serve to bolster the faith in the securities markets.

What does the organization look like?

There are 5 commissioners who each serve a 5-year term.  By Law, not more than 3 commissioners can come from the same political party.  There are 5 divisions to the SEC:

DivisionWhat do they do?
Corporate FinanceMakes sure that investors have enough information to make informed investment choices.  This division has responsibility for EDGAR.
EnforcementThis division enforces civil penalties and works with the DOJ if there are criminal offenses to prosecute.
Investment ManagementRegulates Investment companies and federally registered investment advisors.
Economic & Risk AnalysisPresents information on economics of the current markets and data analytics.
Trading & MarketsMaintains standards to ensure fair, orderly and efficient markets.  (If this is not done, nobody would feel secure enough to trade, and the securities markets would dry up.)

The SEC is related to FINRA as it provides oversight.  Further, when an entity wishes to appeal a FINRA decision, the SEC is the first-level appeal for that entity.  They also are in charge of a Whistleblower program that can award bounties of up to 30% to an individual.

There were nearly 2,500 reported public offerings in 2019 at a median size of $300 million and an average amount raised of $489 million.  To make this happen in an efficient manner, people, (regular people like me and you) must have faith in the markets and trust in the numbers reported.

The Verdict

One may be excused for thinking that I went all metaphysical on you with the repeated mentions of the word “faith.”   But at root, that is the foundation of an efficient marketplace.  If you go to the supermarket and pickup a TV dinner to have for supper, it is faith in that brand (and secondarily the retailer) that the product that you are taking into your body is safe (and hopefully semi-nutritious.)   THAT is why you deem it acceptable to trade your hard-earned cash for that meal.   In a similar manner, the financial markets have much branded information for us to consume.  The SEC serves as a check to ensure that the information provided is helpful and accurate in making investment decisions.   Is the SEC perfect?   No, but it’s a far-sight better than an unregulated market.






 Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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