The Securities and Exchange Commission (SEC)

The SEC is the starting point for understanding securities regulation because every other regulator in this unit operates under its authority or alongside it.

Creation and Mission

  • The Securities and Exchange Commission (SEC) was created by the Securities Exchange Act of 1934 in response to the stock market crash of 1929 and the Great Depression
  • It is a federal government agency, not a self-regulatory organization (SRO)
  • The SEC's three-part mission:
    • Protect investors
    • Maintain fair, orderly, and efficient markets
    • Facilitate capital formation

Memory Aid: SCAM (Securities Exchange Act of 1934)

The '34 Act protects investors from scams by establishing:

  • S - SEC creation (§4) + Federal Reserve Board (FRB) margin authority + Reg T
  • C - Credit regulation (margin rules)
  • A - Antifraud (§10(b), Rule 10b-5)
  • M - Anti-Manipulation (§9 - wash trades, matched orders, painting the tape)

Distinct from the Securities Act of 1933, which governs new-issue registration, disclosure, and prospectus delivery.

Structure

  • The SEC is led by 5 commissioners appointed by the President and confirmed by the Senate
  • Commissioners serve staggered 5-year terms (one term expires each year on June 5)
  • No more than 3 commissioners may belong to the same political party, ensuring bipartisan governance
  • The President designates one commissioner as Chairman, who serves as the agency's top executive
  • A commissioner may continue serving up to 18 additional months past term expiration

Jurisdiction

The SEC has broad authority over:

  • Securities exchanges (NYSE, Nasdaq, etc.)
  • Broker-dealers and their registered representatives
  • Investment advisers and mutual funds
  • Public company disclosures and financial reporting
  • Enforcement of federal securities laws

Exam Tip: Gotchas

The SEC does not regulate insurance products, bank deposits, or commodities futures. Insurance is regulated at the state level. Commodities fall under the Commodity Futures Trading Commission (CFTC).

Enforcement Powers

  • The SEC can bring civil enforcement actions: lawsuits, injunctions, fines, and disgorgement of profits
  • The SEC cannot impose criminal penalties. It refers criminal cases to the Department of Justice (DOJ)
  • The SEC has ultimate oversight over all SROs. SROs must submit proposed rule changes to the SEC for approval

Exam Tip: Gotchas

The SEC brings civil actions only. Criminal referrals go to the DOJ. The SEC is a government agency, not an SRO. No more than 3 of 5 commissioners may be from the same party.