The SEC: why securities are regulated, and the SEC's definition, jurisdiction and authority

Why securities are regulated

Securities markets connect investors with businesses seeking capital. Prices also affect borrowing, collateral values, and confidence throughout the economy. Manipulation and misleading information can harm more than the parties to a trade. Federal securities regulation promotes fair and honest markets, meaningful disclosure, and protection of investors.

What the SEC is

The Securities and Exchange Commission, or SEC, is an independent federal agency created by the Securities Exchange Act of 1934. Its mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The statutory commission has five commissioners appointed by the President with Senate consent. No more than three may belong to the same political party. Regular terms are five years and are staggered.

Jurisdiction and authority

The SEC administers federal securities laws. Its responsibilities include securities offerings and issuer disclosure, securities exchanges, broker-dealers, investment companies, and investment advisers within its jurisdiction. Exchange trading and over-the-counter trading both fall within the federal securities framework. The SEC oversees self-regulatory organizations such as FINRA and securities exchanges; it is a government regulator, while FINRA is an industry self-regulatory organization.

The SEC adopts rules under authority Congress grants, examines regulated entities, investigates possible violations, and brings civil enforcement actions. It can also pursue administrative proceedings within its authority. Criminal prosecution belongs to criminal law-enforcement authorities, including the Department of Justice; the SEC may refer suspected criminal conduct to them. Congress enacts statutes, and the SEC administers and implements them.

Disclosure is not endorsement

For a securities offering subject to registration, filing a registration statement and having it become effective are different steps. An effective registration statement is required before sales under the registration process. A required prospectus provides disclosure to investors. Exemptions and permitted communications can change which offering requirements apply. SEC registration does not approve an investment's merits or protect its price from falling.

For example, an issuer planning a nonexempt public offering must follow registration requirements. A broker-dealer's compliance procedures may be examined, and suspected market manipulation may lead to an SEC investigation and civil action. These are different tools serving the same regulatory mission.