Formation History
Congress created the SEC in 1934 to restore the public’s confidence in financial markets after the 1929 stock market crash. The first chairman was Joseph Kennedy, President John F. Kennedy’s father. The Securities Exchange Act of 1934 created the SEC itself. To succeed, public corporations had to register their stock sales. That meant they had to identify their major stockholders. Before the Act, a small group would hold a majority share of stocks. They could manipulate the markets without anyone knowing. The 1935 Public Utility Holding Company Act prevented holding companies from being more than twice removed from the utilities whose stocks they held. That meant holding companies could no longer obscure the intertwined ownership of public utility companies. The act allowed the SEC to break up large utility combinations into smaller, geographically-based companies. It also created the local federal commissions to regulate utility rates.
The SEC’s Current Role
The SEC gives investors confidence in the U.S. stock market. That’s critical to the strong functioning of the U.S. economy. It does this by providing transparency into the financial workings of U.S. companies. It makes sure investors can get accurate and consistent information about corporate profitability. This allows investors to have a basis for determining a fair stock price for the company. Without this transparency, the stock market would be vulnerable to sudden shifts as hidden information came out. This lack of transparency was the reason for energy giant Enron’s failure in 2001. That wasn’t a failure on the part of the SEC; it happened because Enron lied in its information submissions to the SEC and accounting firm Arthur Andersen LLP failed to see the deception in its audit. The Commission prosecutes offenders like Enron. It also punishes insider trading, deliberate manipulation of the markets, and selling stocks and bonds without proper registration.
Organization
The SEC has five commissioners, appointed by the U.S. president. They have the support of approximately 4,500 staffers located in the Washington, DC headquarters and 11 regional offices across the country. The SEC is made up of five different divisions:
Impact on the U.S. Economy
The SEC increases transparency, consistency, and trust in the U.S. stock market. That’s a big reason the New York Stock Exchange is the most sophisticated and popular exchange in the world. This transparency attracts much business to U.S. financial institutions—including banks and legal firms. It also makes it easier for companies to orchestrate their initial public offerings of stock. Many companies take their stock to the public markets when they have grown large enough to need equity financing for their next phase of development. The ease of going public helps U.S. companies grow larger and faster than those of other countries with less developed markets. The SEC Chairman sits on the Financial Stability Oversight Council. The Dodd-Frank Wall Street Reform Act established the council after the 2008 financial crisis. It looks for weaknesses in the financial markets that could create another crisis.
How the SEC Affects You
The SEC affects you by making it safer for you to buy stocks, bonds, and mutual funds. It does not regulate hedge funds or derivatives. The SEC provides a great depth of information to help you invest. Dodd-Frank required the SEC to study the financial literacy of the average American investor. It found that most investors don’t understand the basics of how the markets or the economy work. It suggested ways to improve investors’ knowledge. A useful SEC resource is Investor.gov. It serves as an advocate for investors, providing basic education on topics such as how the markets work, asset allocation, and a review of different retirement plans.
