Intro to the SEC

A well-informed investor not only understands the economic, political, and cultural environment of business, but the law as well. Investing in United States-listed securities without an understanding of the US Securities and Exchange Commission (SEC) is like driving without a license. You might be able to get the hang of it by following what others are doing, but you will always be in danger of breaking a law you never knew existed or otherwise putting yourself in danger. 

If you have ever read a financial statement while analyzing a stock, you have the SEC to thank for that information. Perhaps you have bought a security on the New York Stock Exchange. The SEC played a big part in that transaction too. Ever read a 10-K, 10-Q, or 8-K? The SEC got that information into your hands as well. 

The best way to understand what the SEC does is to understand the meaning behind its mission statement.

The SEC strives to promote a market environment that is worthy of the public’s trust. The mission of the SEC is to:

• protect investors

• maintain fair, orderly, and efficient markets

• facilitate capital formation.

It is divided into three parts. Let’s address each in order:

Protect Investors

The first section outlines the agency’s commitment to protecting investors, whether retail or institutional. The SEC protects your friend’s grandma, BlackRock, and every investor in between in certain ways. 

The primary way that the SEC protects investors is by enforcing federal securities laws meant to do just that. The SEC was established after Congress passed the Securities Act and Securities Exchange Act of 1933 and 1934, respectively. This legislation was designed to renew American’s trust in the financial system following the Great Depression. To restore investor confidence, the SEC was created to undertake two main, critical tasks in regulating the market:

1. Ensure that securities publicly available for purchase are offered by companies that disclose all the true and relevant information related to its business and those securities
2. Guarantee that all the entities that American investors interact with —brokers, dealers, and securities exchanges — act with honesty and fairness

In practice, this means that the SEC has a few critical duties. The first is to ensure that all public companies release accounting information for the use of its investors and potential investors. The second is to guarantee that that information is true. The third is to ensure that brokers, dealers, and exchanges treat investors fairly. And the final task is to enforce all of the above. 

Additionally, the SEC protects investors by investigating fraud, and prosecuting those companies that intentionally mislead investors in any way. In doing so, the SEC can guarantee, to some degree, that the financial products companies offer are legitimate and real. This is how you may already have heard of the SEC. They played the main role in prosecuting white-collar criminals like Bernie Madoff and Kenneth Lay of Enron. 

The main divisions/offices that perform these duties are the divisions/offices of:

• Enforcement
• General Counsel
• Compliance, Inspections, and Examinations

Maintaining Fair, Orderly, and Efficient Markets

Protecting investors makes markets safer. But it also makes them more fair. By ensuring that all of the information about companies is available to everyone, every investor can start with the same basic information. The SEC understands that the stock market has no financial guarantees. That is why investors must make sure they do their research, and have access to all of the information they need to make measured, responsible decisions. This is where the SEC comes in. 

Another way you may have already heard about the SEC is through its prosecution of insider trading. Insider trading, the buying or selling of securities based on the exclusive possession of material, non-public information about a company, is a serious crime and a threat to the integrity of financial markets. In order to guarantee that all investors do not feel cheated by those who have access to exclusive information, the SEC rigorously investigates suspects of insider trading, ensures that companies have systems in place to prevent it, and has systems in place to detect it when it occurs. Beyond its inherent unfairness, insider trading is one of the most dangerous things you can do as an investor. The SEC is watching.

As a result, these regulations, coupled with the complete and honest disclosure of financial information to all market participants, is the best way to keep markets efficient and orderly. Supply and demand do the rest.

The main divisions/offices that perform these duties are the divisions of:

• Corporate Finance
• Trading and Markets
• Enforcement

Facilitating Capital Formation

Beyond its regulatory duties, the federal government and American public expect the SEC to utilize its position in financial markets to provide data, economic analysis, and other information for decision-makers to utilize for the benefit of the whole economy. The SEC has a fiduciary duty to the public to continually enhance and optimize its processes while simultaneously remaining dedicated to its basic regulatory and enforcement duties. This means that the agency collects data, performs macroeconomic analysis, and works alongside other agencies and contractors to keep all of its methods up-to-date, and to help market participants do the same. 

The SEC has a wealth of data and analysis available to both policymakers and the general public. They offer this information so that the former have the opportunity to pass intelligent legislation, and the latter fully understand the market environment.

The best way to increase material prosperity is to facilitate capital formation. The SEC does this for the average investor, large firms, and the entire United States. 

The main divisions/offices that perform these duties are the offices/divisions of:

• Investor Educator
• Economic and Risk Analysis
• Investor Advocate
• Legislative and Intergovernmental Affairs. 

Final Statement

The SEC strives to promote a market environment that is worthy of the public’s trust.

The final sentence of the mission statement refers to the Agency’s founding directive and the economic environment of the Great Depression. As investors face uncertain decisions amidst the COVID-19 pandemic, the work of the SEC will be crucial in leveling the playing field and ensuring that the American assets survive the next few years of financial turmoil. Citizens can count on the SEC, in addition to other federal agencies like the Fed, FTC, and Treasury, to guide the United States out of this recession and into another long period of productive economic growth.

If you have any questions about this article, feel free to contact me at andreasmaass@berkeley.edu.