What Does the SEC Do? Here’s Everything You Need to Know

Savage Villoch Law, PLLC
22
Oct

As an investor, you want someone to protect you and maintain a fair and orderly stock market, right? That’s the role of the Securities and Exchange Commission or the SEC.

Whether it be your retirement savings, accounts to pay for college tuition, or investments just to build wealth, the SEC is there to make sure that investors are protected and that the market is fair.

Keep reading to learn more about the history of the SEC, their role, and why they are important. After reading this article, you’ll undoubtedly be able to answer the question “what does the SEC do?”.

What Does the SEC Do?

The SEC is a federal agency that is tasked with regulating the stock market. They also make that companies and investors follow rules when investing and selling shares of their companies.

The SEC also regulates investment advisers, ensuring that they meet specific requirements when advising their clients. Their goals include preventing fraud, uncovering illegal investment schemes, and investigating insider trading and other security crimes.

The SEC has five commissioners, appointed by the president. Each one has a staggered five-year term and one commissioner is designated by the president to be the Chairman of the Commission.

By law, no more than three of the commissioners may belong to the same political party, so the SEC can maintain non-partisanship. In addition to the five commissioners, there are different divisions and offices located in Washington, DC and in 11 regional offices throughout the US.

The responsibilities of the SEC include:

  • interpreting and enforcing federal securities laws
  • issuing new rules and amending existing rules
  • overseeing the inspection of securities firms, brokers, investment advisers, and rating agencies
  • coordinating US securities regulations with federal, state, and other authorities
  • overseeing private regulatory agencies in the securities, accounting, and auditing fields

They also hold regular meetings that are open to the public.

History of the SEC

There weren’t always laws and regulations of the financial industry. For a long time, investing was full of fraud, deceit, and poor decisions. It wasn’t until the stock market began to grow and investing became more popular that the government tried to regulate it.

In the early 1900s, the first laws mean to protect investors were created. These Blue Sky Laws were state laws created to protect investors against any type of fraudulent sales of securities and stocks. Blue Sky Laws also license brokerage firms, brokers, and investment advisers.

While well intended, the Blue Sky Laws were difficult to enforce. As the stock market continued to grow, many uninformed investors were buying stocks. To get more people to buy, companies inflated their stock prices to get more people to invest.

Black Tuesday

October 29, 1929, otherwise known as Black Tuesday, is when all of the shady practices of companies and investors came to a head. Brokers, company owners, and bankers were trading shares between themselves to drive stock prices higher and higher. Then they would sell those shares to the unknowing public.

Eventually, this practice led the great stock market crash of 1929, culminating in Black Tuesday. During this 4 day period, $14 billion was lost in the stock market and prices continued to drop into November.

Black Tuesday was the start of the Great Depression. Not only did the stock market crash, but banks also failed because they had been investing their clients’ deposits in the stock market.

The Glass-Steagall Act and the Securities Exchange Act

In an effort to try to regulate banks and the stock market, President Roosevelt signed the Glass-Steagall Act and the Securities and Exchange Act into law in 1933 and 1934. Glass-Steagall was meant to keep banks from investing their clients’ deposits in the stock market. The Securities Act was mean to create federal-level regulation on the stock market.

The Securities Exchange Act created the SEC, which had a great deal of power to change how Wall Street functioned. They required more disclosures and created strict reporting schedules. They also required that any publicly traded company had to register and regularly file with the SEC.

Companies and individuals who committed fraud or other security violations could face civil penalties as well.

Why Is the SEC Important?

The SEC is important because it helps protect investors and regulates the stock market so we don’t have a repeat of what happened in the 1920s.

The SEC has been involved in high-profile cases, such as the Bernie Madoff case, Enron, and investigating mortgage lenders and banks during the 2008 housing market crisis. Investors lost millions of dollars due to the pyramid scheme that Madoff was running.

When the housing market crashed in 2008, homeowners found themselves with mortgages that were far more than their homes were worth due to over-inflation of home values and predatory lending.

The SEC investigated these cases and prosecuted the offenders in civil court. They also worked with the federal government to regulate the housing industry.

Without the SEC, the stock market and investing would be a free-for-all, with no protections for those investing their money in stocks.

The Bottom Line

The answer to the question “what does the SEC do” is complex. It all boils down to the fact that the SEC is meant to protect us and help keep the stock market and US economy intact.

If you find yourself in a situation where you have suffered a great loss in the stock market, you might have a legal case against your stockbroker. Our firm is here to help.

We handle cases of investment loss recovery, especially in the case of stockbroker misconduct. Contact us today to discuss your case and get a free initial phone consultation.