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!
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