Stock Market Regulation in the U.S

Individual investors, purchase, sell, and trade stocks with confidence. But there is a way to get compensated if a company deceives its investors. The stock market is not without regulation.

The Securities and Exchange Commission (SEC) is an independent federal regulatory organization charged with safeguarding investors, ensuring the fair and orderly operation of securities markets, and enabling capital formation.

It was established by Congress in 1934 as the first federal securities regulator.

The Securities and Exchange Commission (SEC) encourages full public disclosure, protects investors from market fraud and manipulation, and oversees corporate takeovers in the United States.

It also certifies book-runner registration reports among underwriting companies.

In general, securities sold in interstate commerce, by mail, or via the Internet must be licensed by the Securities and Exchange Commission (SEC) before they can be offered to investors.

To negotiate deals, financial services firms including broker-dealers, advisory firms, and asset managers, as well as their professional representatives, must file with the SEC.

The SEC's History

When the stock market in the United States crashed in October 1929, many companies' holdings became worthless.

The public's confidence in the securities markets plummeted as a result of numerous people providing inaccurate or misleading information in the past.

To restore trust, Congress approved the Securities Act of 1933 and the Securities Exchange Act of 1934, which established the Securities and Exchange Commission (SEC).

The SEC's main responsibilities included ensuring that firms made accurate representations about their businesses and that brokers, dealers, and exchanges handled investors fairly.

Additional laws have supported the SEC in its work over the years, they include:

• Trust Indenture Act of 1939.

• Investment Company Act of 1940.

• Investment Advisers Act of 1940.

• Sarbanes-Oxley Act of 2002.

• Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

• Jumpstart Our Business Startups (JOBS) Act of 2012.

Every year, the SEC files civil enforcement actions against companies and individuals who violate securities laws.

It is engaged in every major financial fraud case, either directly or in collaboration with the Justice Department. Accounting fraud, which could be the transmission of misleading or incorrect information, and insider trading are all common SEC crimes.

Following the Great Recession of 2008, the SEC played a key role in penalizing the financial institutions that triggered the crisis and reimbursing investors billions of dollars.

It charged 204 businesses or people in total, collecting about $4 billion in fines, disgorgement, and other monetary compensation.

Goldman Sachs, for instance, paid $550 million in fines, the largest ever paid by a Wall Street corporation and the second-largest in SEC history, trailing only WorldCom's $750 million.

Nonetheless, many critics have faulted the SEC for failing to do enough to assist in the prosecution of the crisis' brokers and senior management, almost all of whom were never convicted of substantial crimes.

Just one Wall Street executive has been imprisoned for crimes relating to the financial crisis thus far. The others either agreed to pay a monetary fine or accept administrative penalties.

The SEC's first five commissioners under President Franklin D. Roosevelt were:

• Joseph P. Kennedy (Chair).

• George C. Mathews.

• James M. Landis.

• Robert E. Healy.

• Ferdinand Pecora.

The Securities and Exchange Commission (SEC) and Its Functions

The Securities and Exchange Commission's major responsibility is to regulate securities exchanges, brokerage firms, dealers, investment advisors, and investment funds.

The SEC encourages the disclosure and dissemination of market-related information, as well as fair dealing and fraud prevention, through established securities laws and regulations.

Its electronic data-gathering, analysis, and retrieval database, known as EDGAR, gives investors access to registration statements, periodic financial reports, and other securities documents.

The SEC is led by five commissioners, one of whom is appointed as chair, who are selected by the president.

Every commissioner's tenure is five years. However, they can stay on for another 18 months if a successor is not found.

Gary Gensler, the current SEC chair, assumed office on April 17, 2021. The statute stipulates that no more than three of the five commissioners can be from the same political party to encourage nonpartisanship.

There are five divisions and 23 offices that make up the SEC.

Their objectives include interpreting and enforcing securities laws, issuing new rules, overseeing securities institutions, and coordinating regulation across levels of government.

The five divisions and their functions are shown below.

• Corporate Finance Division. Guarantees that material information, this is information essential to a company's financial prospects or stock price, is supplied to investors for them to make better investment decisions.

• Enforcement Division. Investigates cases and prosecutes civil actions and administrative proceedings to enforce SEC regulations.

• Investment Management Division. Investment companies, variable insurance products, and federally licensed investment advisors are all regulated by this agency.

• Economic and Risk Analysis Division. Incorporates economics and data analytics into the SEC's fundamental purpose.

• Trading and Markets Division. Establishes and upholds market standards that are fair, orderly, and efficient.

Only civil actions can be brought by the SEC, either in federal court or before an administrative judge.

Criminal cases are handled by the Department of Justice's law enforcement agencies. However, the SEC frequently collaborates with them to provide evidence and aid with court processes.

The SEC seeks two types of penalties in civil lawsuits:

• Injunctions. These are court orders that prevent future violations from occurring. Contempt can result in penalties or jail if a person or company disobeys an injunction.

• Penalties in the form of civil money penalties as well as the confiscation of illicit gains. The SEC may also seek a court order prohibiting or suspending persons from serving as corporate officials or directors in certain circumstances.

The SEC may also file administrative proceedings, which are examined by internal officers and the commission. Cease-and-desist orders, registration revocation or suspension, and employment bans or suspensions are all common actions.

The SEC also acts as the first level of appeal for actions taken by self-regulatory bodies in the securities sector, such as FINRA or the New York Stock Exchange.

The Office of the Whistleblower, among the SEC's offices, is one of the most powerful tools for enforcing securities laws.

The SEC's whistleblower program, which was established as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, pays eligible people who share genuine information that leads to successful law prosecutions with monetary sanctions of over $1 million.

Individuals are eligible to collect 10% to 30% of the overall sanctions profits.

What is the need for Regulation?

The stock market is a major financial institution with both large and small investors.

The market allows for public ownership of firms while also giving a diverse range of job opportunities in the trade industry.

Much of the stock market's activity is regulated by the federal government in order to safeguard investors and promote a fair exchange of business ownership in free markets.