The Securities and Exchange Commission (SEC) is a federal agency created to oversee the U.S. securities market. The SEC has legislative, executive, and judicial authority over securities matters. It creates and amends securities laws, proposes new rules to address changing market conditions, and enforces existing rules and laws.
Under the Securities Act of 1934, the Securities and Exchange Commission was created as a response to the stock market crash in 1929, which is often called the starting point of the Great Depression. While the U.S. economy was already in a severe recession before the crash, the collapse of the securities markets contributed heavily to economic decline. Investors and banks, often with borrowed funds, purchased numerous securities based on speculative rumors and questionable prospectuses. When these securities became worthless, both individuals and financial institutions went bankrupt.
The Securities Act of 1934 required registration of securities offerings with the Securities and Exchange Commission unless an exemption applied. The act broadly defined securities as
Any note, stock, bond, debenture, evidence of indebtedness,
certificate of interest of participation in any profit sharing
agreement, ... preorganization certificate or
subscription, ... investment contract, voting trust certificate,
... fractional undivided interest in oil, gas, or mineral
rights, ... or, in general, any interest or instrument
commonly known as a “security.”
The act emphasized disclosure rather than approval. Thus, with proper disclosure, one may sell securities in nearly any activity. The federal goal was not to approve or disapprove but to inform investors and allow the public to make its own choice. Disclosure is accomplished through a registration statement that includes a prospectus and other information. The prospectus must be given to purchasers of securities. Certain securities and transactions are exempt from registration requirements, including private placements (sale of investment securities directly to institutional investors such as insurance companies) and the sale of securities by people other than issuers, underwriters, and dealers. This allows the resale of securities in secondary markets by investors without violation of Securities and Exchange Commission disclosure rules. The SEC has five members appointed by the U.S. president, with no more than three members from one political party. Joseph P. Kennedy, father of President John Kennedy, was the first chairman of the Securities and Exchange Commission. Commissioners are appointed for five-year terms, with one member rotating off the commission each year. The Securities Act excluded from disclosure requirements notes and drafts that mature in less than nine months from the date of issuance, but it increased anti-fraud provisions addressing insider trading, prohibiting “manipulative or deceptive” practices in connection with the sale or purchase of securities. The act imposed liability on those persons who make inadequate and erroneous disclosures of information. The Securities and Exchange Commission can impose civil penalties (fines) up to $500,000 and issue cease-and-desist orders. These orders, which must be enforced by federal district courts, direct defendants to stop violating securities laws. The 1934 act also mandated continual filing of information about companies and the securities they issued. Companies are required to file annually a Form 10-K financial statement report. Since 1934 the Securities and Exchange Commission’s role has continued to change. The commission oversees disclosure requirements for participants in stock exchanges, brokerdealers, investment advisors, mutual funds, and public utility holding companies. The Securities and Exchange Commission (SEC) requires public companies to disclose meaningful financial and other information to the public. In 2000 a controversial Securities and Exchange Commission ruling required fair disclosure, prohibiting advance communication to stock-market analysts.