The Securities and Exchange Commission (SEC) is an independent agency of the U.S. federal government, charged with the regulation of the securities industry and its markets, and with the enforcement of federal securities laws. The Commission consists of five commissioners, appointed by the U.S. president with the approval of the Senate, and about 3,800 employees. The commissioners serve terms of five years, staggered so that a term ends every year; commissioners cannot be fired, ensuring their independence. As they are often appointed from among the ranks of Congress, no more than three of them at any given time may belong to the same political party.
The SEC was established by the 1934 Securities Exchange Act, which came amid a flurry of New Deal banking and finance legislation, and was a direct response to the stock market crash precipitating the Great Depression in 1929. A considerable body of subsequent legislation has shaped the SEC, notably 1940’s Investment Company Act and Investment Advisers Act, and the Sarbanes-Oxley Act of 2002. The most recent SEC-related legislation was the Credit Rating Agency Reform Act of 2006, which redefined the Nationally Recognized Statistical Rating Organization qualifications for credit rating agencies; the new rules were implemented in June 2007.
Seven of the SEC’s 18 offices are in Washington, D.C.; the remainder are regional offices throughout the country. The Commission’s operations and duties are divided among four divisions: Corporate Finance, Investment Management, Trading and Markets, and Enforcement. The Corporate Finance division operates EDGAR, the Electronic Data Gathering, Analysis, and Retrieval system, accessible online by investors in search of information about publicly traded companies—who can also file complaints and tips about potential violations of securities law. EDGAR has been in use since 1996. Corporate Finance is also responsible for overseeing company transactions and disclosures. The Investment Management division monitors investment advisers and mutual funds and administers the laws related to such.
The Trading and Markets division oversees investment houses, all brokerages and securities dealers, and the self-regulatory organizations like the Financial Industry Regulatory Authority (FINRA, to which much of T&M’s duties are delegated) and the Municipal Securities Rulemaking Board (MSRB).
The Enforcement division coordinates with the other divisions and all offices in the investigation of reported or suspected violations. The SEC can compel the production of documents and testimony in the course of an investigation, but lacks criminal authority. Criminal matters are referred to state or federal prosecutors, while civil actions are brought by the SEC in U.S. District Courts or administrative proceedings.
Apart from the regional offices and the SEC’s main headquarters in D.C., there is the Office of the General Counsel, representing the SEC in federal appellate courts and providing legal advice to the rest of the Commission; the Office of the Chief Accountant, responsible for the accounting and auditing policies set by the Commission; the Office of Compliance, Inspections, and Examinations, conducting the Commission’s general inspections; the Office of Economic Analysis, which keeps track of the costs and benefits of SEC regulations; the Office of International Affairs, liaising between the SEC and foreign powers; and the Office of Investor Education and Advocacy.
In the wake of the 2007–08 economic crisis, the SEC has been criticized for, and acknowledges, deep and multiple failures in the Bernard Madoff case. For years, Madoff operated a Ponzi scheme (paying old investors with the incoming funds from new investors) that by his own account represents a loss of at least $50 billion. Investigation of Madoff began in 1992 when a feeder fund that only invested with Madoff promised unlikely returns, but the investigation was never followed up, despite numerous tips over the years; Madoff was only finally arrested when the economic calamities of the day led to too many investors attempting to cash out, prompting a confession to family, who turned him in. In the subsequent criticism of the SEC, critics have alleged that the Commission was “too close” to Madoff, pointing out that his niece—a compliance attorney in his firm—is married to a former SEC compliance officer.
- Barbara Black, “Should the SEC Be a Collection Agency for Defrauded Investors,” Business Lawyers (v.63/2, 2008);
- Gretchen Morgenson, “Deafened by the SEC’s Silence, He Sued,” New York Times (May 28, 2006);
- Liz Moyer, “Could SEC Have Stopped Madoff Scam in 1992?” Forbes (December 2008);
- Joel Seligman, The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance (Aspen, 2003);
- David Serchuk, “Love, Madoff, and the SEC,” Forbes (December 2008);
- Fred Skousen, Steven Glover, and Douglas Prawitt, Introduction to the SEC and Corporate Governance (South-Western College Publishing, 2004);
- Linda Chatman Thomsen and John W. White, The SEC Speaks in 2008 (Practising Law Institute, 2008);
- United States, Securities and Exchange Commission: Programs and Operations (Nova Science Publishers, 2008).
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