How The US Securities and Exchange Commission (SEC) Protects Investors

Established in 1934, the Securities and Exchange Commission (SEC) is an independent agency of the U.S. Government, responsible for the administration and reinforcement of the federal securities laws. Aiming at protecting investors against fraud in the sale of securities, the primary role of the SEC is to ensure that corporate information is publicly available to investors so that they make informed investment decisions. In this context, the SEC is responsible for the regulation of the conduct of securities professionals and the orderly and efficient functioning of the markets to facilitate capital formation.

Because of the complexity of investing and the lack of any guarantee in regards to securities returns, stocks, bonds or other securities can lose their value unpredictably due to corporate developments or due to market manipulation practices. In either case, both individual and institutional investors should be given access to information about an investment prior to buying it and for the period they hold it. On the other hand, both individual and institutional investors who buy and sell securities in the stock market have a great responsibility to regulate their behavior through Self-Regulatory Organizations (SROs) such as the National Association of Securities Dealers (NASD), which operate under the supervision of the SEC.

 Ensuring disclosure of information to investors

A significant aspect of the SEC’s role is the disclosure of important financial and corporate information to the public. Through the Division of Corporate Finance, the SEC ensures that corporate information is made publicly available to investors as a result of compliance of corporations with the SEC regulations. Companies that are listed in stock exchanges are required to file certain documents with the SEC including 10-Q Quarterly Report, 10-K Annual Report, Schedule TO for tender offer, DEFM14A for merger or acquisition and so on. These documents disclose information about the financial strength of the corporation and its business practices assisting investors to make sound investment decisions. To that end, corporations that are publicly-listed or issue new securities are required to disclose all their financial data, positive or negative, in order to ensure transparent process and facilitate investment decision making.  

Through this process, investors are offered a pool of knowledge, which they can use to decide whether to buy, sell or hold a particular security. Besides, efficient flow of information facilitates capital formation and enables transparent capital markets. In this context, the SEC cooperates closely with all market participants to ensure that above objective is constantly met and that the flow of corporate information is not disrupted or manipulated by securities professionals.

Regulating conduct of securities industry professionals

In many cases, investors’ trust is violated by investment advisors, securities brokers and dealers and other securities professionals. The SEC is responsible for the conduct of securities professionals by establishing qualification requirements, regulating their conduct, and disciplining those who fail to abide by its rules. Generally, securities professionals should register with a SRO, meet certain qualification requirements in order to buy and sell securities and comply with the rules of conduct assumed by that SRO. Securities firms are obliged to register with the SEC and comply with its rules for the supervision of individual account executives.

Common violations of the SEC regulations may be securities price manipulation, unfair treatment of customers by securities brokers or dealers, manipulation or omission of important information about securities, insider trading and sale of unregistered securities. In case of violation of federal securities laws, the SEC can deny registration to securities firms after conducting inspections in cooperation with the NASD, the securities exchanges, and state securities commissions.

Under the federal securities laws, investors have the right to sue securities professionals if they feel their interests have been harmed as a result of violation of those laws. However, many brokerage firms require that they clients sign an agreement with an arbitration clause, which, in effect, settles any future disputes through binding arbitration. The SEC is responsible for overseeing the arbitration process, but has no authority to intervene, directly represent individual investors, or modify a final arbitration decision. In this context, further protection for investors is provided by state laws.

Ensuring orderly and efficient markets to facilitate capital formation

The SEC functions as a supervisory body to protect against fraud in securities sales, illegal sales practices and market manipulation in order to maintain market integrity and facilitate capital formation. Through the Division of Trading and Markets, the SEC oversees trading executed by securities exchanges, securities brokers and dealers, investment advisors, mutual funds, SROs, transfer agents, credit rating agencies, the Financial Industry Regulatory Authority (FInRA), and the Municipal Securities Rulemaking Board (MSRB) to ensure fair and orderly markets.

Besides, the Division of Trading and Markets, in cooperation with the SROs under the supervision of the SEC, is responsible for implementing the SEC’s financial integrity program for broker-dealers, reviewing and suggesting changes to existing rules filed by the SROs, and surveilling the markets.

Overall, the SEC is fundamental to the effective functioning of the U.S. economy as it ensures transparent markets and accurate information to individual and institutional investors. In that way, investors regain confidence in the U.S. stock market by being well informed about the profitability and the corporate development of the publicly listed companies in which they would like to invest. To a broader extent, the SEC contributes to a higher living standard offering to American society stability and confidence.