The Securities and Exchange Commission...Friend or Foe?

For those of us who consider ourselves novices when it comes to "the financial world", it is interesting to understand the impact of the Securities and Exchange Commission (SEC) and its role in the world of investment. The SEC touts as its mission statement, "...to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation." That's good because many of us need all the help we can get. As a part of the SEC's mission the belief is that in order to sustain and advance economic growth, capital formation must thrive. The SEC's actions protect the value of savings and advocate a growing economy. It is that growing economy that should improve our standard of living and should spur the creation of new jobs. The SEC offers investor protection that is especially needed by first-time investors planning for such things as home mortgages and college funds. Because of the complexities in the investment world, it is important that all investors do research and question what they do not understand. There are no guarantees when it comes to stocks, bonds and other securities that can go down in value. If a person wants security, one option is to just stick with the banking world where deposits are guaranteed by the federal government. One of the main functions of the SEC is that it requires public companies to disclose information to the public. The securities industry is governed by laws that follow a very simple concept - all investors should have access to certain basic facts prior to investing. The premise is that investors can only make sound decisions if they have timely, comprehensive and accurate information to help them judge whether to buy, sell, or hold. Because the formation of capital is so important to the nation's economy, the SEC works with major market participants and investors to address their concerns. The SEC is concerned about promoting disclosure of information, protection against fraud, and fair dealing. To that end it oversees the securities exchanges, brokers, dealers, mutual funds, and investment advisors. Every year hundreds of civil actions are taken against companies and individuals by the SEC for violation of the securities laws. The most common infractions are insider trading, accounting fraud, and false information about securities. How does the SEC obtain the information they need for enforcement? Most of it comes from investors themselves. This validates the emphasis on educated investors and providing information that keeps them current. In fact, the SEC offers information on its website that includes disclosure documents that the Commission requires to be on file. Does the SEC stand alone as the only overseer and regulator? Absolutely not. Congress, other federal departments and agencies, the stock exchanges, state securities regulators and other private organizations all work toward those goals. The President has established the President's Working Group on Financial Markets, which consists of the Chairman of the SEC, the Chairman of the Federal Reserve, the Secretary of the Treasury, and the Chairman of the Commodities Futures Trading Commission. What brought about the creation of the SEC? Prior to the 1929 Great Crash federal regulation for the securities markets was not support. During the post-World War I activity there was no support for regulation that would require financial disclosure, unfortunate because it cold have helped prevent fraudulent stock sale. During the 1920's the common goal of many investors was "rags to riches", This theme was rampant, and most investors turned a blind eye to the dangers in the lack of control of market operations. Looking to take advantage of the post-war prosperity, many sought to make their fortunes through the stock market. Unfortunately, many investors had heavy losses, and the eventual "run" on banks caused many bank failures. After the Crash of 1929 and during the depression, Congress looked to identify problems and find solutions through a series of hearings. The feeling was that the public trust in markets needed restoration. As a result of the hearings, the Securities Act of 1933 and the 1934 Securities Exchange Act were passed. What those acts accomplished were twofold: 1) companies were required to provide the truth about their business and securities to the public; and 2) exchanges, dealers, and broker must put investors' interest first and treat investors in an fair and honest manner. Today the SEC has 3,100 staff members and operates from 11 regional and district offices. There are five Commissioners appointed by the President after Senate consent. The President designates one of the five Commissioners as Chairman. No more than three Commissioners may belong to the same political party, which is intended to keep the Commission non-partisan. The functions of the Commissioners is as follows: 1) federal securities laws interpretation; 2) rules amendments; 3) address changing market conditions with new rules; and 4) enforce laws and rules. This Commission is, in deed, is an integral player in the protection afforded to investors. For the novice investor or the veteran investor, there is that on-going need for sound market regulation. The SEC does that and more. The SEC is not the enemy... it's those other guys. Happy trading! No permission is needed to reproduce an unedited copy of this article as long the About The Author tag is left in tact and hot links included. Questions and comments can be sent to floyd@TraderAide.com.