What is the SEC and What Do They Do?
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The Securities and Exchange Commission (SEC) is the United States’ primary financial regulatory body, established in 1934 after the stock market crash of 1929. Its mission is to protect investors, maintain fair and efficient markets, and facilitate capital formation. The SEC oversees securities exchanges, brokers, mutual funds, and publicly traded companies to ensure they operate within the legal framework of U.S. securities laws.
The SEC has five divisions—Corporation Finance, Trading and Markets, Investment Management, Enforcement, and Economic and Risk Analysis—that cover different aspects of the financial markets.
The SEC’s enforcement powers include investigating and penalizing violations such as fraud, insider trading, and market manipulation. It works to prevent misconduct that could harm individual investors and destabilize the financial markets.
The Securities and Exchange Commission (SEC) plays a crucial role in safeguarding the financial markets and protecting traders. Through rigorous enforcement of securities laws, market monitoring, fraud prevention, and investor education, the SEC ensures that the financial system operates transparently and fairly. Traders benefit from the SEC’s efforts to maintain market integrity, protect them from fraud, and provide tools to make informed investment decisions. By regulating brokers, ensuring accurate disclosures, and holding violators accountable, the SEC plays an indispensable role in the functioning of U.S. financial markets.
SEC Regulated Brokers
How Does the SEC Protect Traders?
Examples of How the SEC is Working to Protect Traders
1. Enforcing Securities Laws
The SEC ensures that market participants, including companies, brokers, and individuals, comply with the Securities Act of 1933 and the Securities Exchange Act of 1934. By enforcing these laws, the SEC works against market manipulation, misrepresentation, and other illegal practices that could harm traders.
Among other things, these laws require publicly traded companies to disclose relevant information about their operations, financial health, and risks.
2. Preventing Fraud and Insider Trading
The SEC is vigilant in identifying and penalizing fraud and insider trading. Fraud and insider trading undermine market integrity and can cause significant losses to traders. The SEC regularly investigates suspicious trades and, if violations are discovered, imposes fines, freezes assets, or takes legal action to protect the public from financial crimes.
3. Monitoring Financial Markets
The SEC monitors financial markets through advanced surveillance systems, ensuring that markets operate efficiently and fairly. It closely watches for irregularities or manipulative trading patterns and takes quick action when fraudulent activity is detected. This surveillance helps maintain an even playing field for all investors, including retail traders and institutional investors.
4. Regulating Brokers and Investment Advisors
Applicable brokers and investment advisors must register with the SEC, and they are required to follow specific rules designed to protect their clients. This includes the Fiduciary Duty, meaning that advisors must act in their clients’ best interest. By regulating these professionals, the SEC ensures that traders receive fair treatment, honest advice, and transparent service, helping to reduce the chances of being misled or overcharged.
5. Promoting Transparency
The SEC mandates that public companies file detailed reports, including quarterly (10-Q) and annual (10-K) reports, which outline their financial performance, risks, and future plans. These reports are publicly accessible via the EDGAR database, allowing traders to make informed decisions based on accurate and comprehensive data. This transparency helps traders assess the risk and value of their investments, preventing reliance on rumors or incomplete information.
6. Investor Education and Protection
One of the SEC’s key roles is educating investors about their rights, the risks associated with various financial products, and how to avoid scams. Through initiatives like the Office of Investor Education and Advocacy, the SEC provides resources, tools, and alerts to help retail investors protect themselves. It also issues warnings about unregistered brokers or risky financial products. If you are a trader, it is a good idea to visit the official site of the SEC and take a look at the warnings before you sign up with any broker or financial advisor.
7. Dispute Resolution
The SEC works in conjunction with self-regulatory organizations, such as FINRA (Financial Industry Regulatory Authority), to resolve disputes between investors and financial firms. Investors can file complaints if they feel they’ve been wronged by a broker or investment advisor, and the SEC has the authority to impose penalties or recommend legal actions.
Key Examples of SEC Enforcement Actions
The SEC’s robust enforcement division investigates and prosecutes violations of securities laws. Over the years, it has taken significant actions to protect traders, such as:
- Ponzi Scheme Crackdowns
The SEC has been involved in dismantling major Ponzi schemes, like Bernie Madoff’s, to protect investors from losing their money to fraudulent schemes. - Insider Trading Cases
High-profile cases, such as those involving Raj Rajaratnam and Martha Stewart, have demonstrated the SEC’s commitment to cracking down on individuals who exploit confidential information for profit. - Corporate Fraud Investigations
The SEC has fined major companies for accounting fraud, false disclosures, and for misleading investors, such as in the cases involving Enron and WorldCom.
Examples of Specific SEC Cases
Elvent firms will pay combined civil penalties of $88,225,000
In September 2024, the SEC announced that eleven firms had aggreed to pay combined civil penalties amounting to a total of $88,225,000.
This comes as a result of the SEC bringing charges against twelve firms for widespread and longstanding failures by the firms and their personnel to maintain and preserve electronic communications; a violation of the recordkeeping provisions of the federal securities laws. Among the twelve firms were broker-dealers, investment advisers, and one dually-registered broker-dealer and investment adviser.
Investigations carried out by SEC unveiled, among other things, that all the firms except Qatalyst were involved in pervasive and longstanding use of unapproved communication methods, so called “off-channel communications”. The failures to comply involved personell at multiple levels of authority, including senior managers and supervisors.
The firms violated the recordkeeping provisions of the Securities Exchange Act or the Investment Advisors Act, or both. All firms except one failed to reasonably supervise their personnel to prevent and detect such violations.
The firms admitted to the facts in their respective SEC orders and eleven of them agreed to pay their respective civil penalties. The SEC will not require Qatalyst Partners LP to pay a penalty, since this firm self-reported, self-policed, and demonstrated substantial efforts at compliance.
All firms have started implementing improvements to their policies and procedures. Ten of the firms have agreed to retain compliance consultants.
The eleven firms and the amounts they have agreed to pay:
- Stifel, Nicolaus & Company, Inc.
$35 million - Invesco Distributors, Inc., together with Invesco Advisers, Inc.
$35 million - CIBC World Markets Corp., together with CIBC Private Wealth Advisors, Inc. $12 million
- Glazer Capital, LLC
$2 million - Intesa Sanpaolo IMI Securities Corp.
$1.5 million - Canaccord Genuity LLC
$1.25 million The penalty was reduced to $1.25 million because Canaccord self-reported communication violations to SEC. - Regions Securities LLC
$750,000 The penalty was reduced to $750,000 because Regions self-reported communication violations to SEC. - Alpaca Securities LLC
$400,000 - Focused Wealth Management, Inc. $325,000
eToro Reached Settlement With the SEC Regarding Crypto Assets
In September 2024, the SEC announced that it had reached a settlement with eToro USA LLC. The company had been charged with operating un unregistered broker and unregistered clearing agency in connection with its crypto trading platform.
The investigation carried out by the SEC showed that eToro operated as a broker and clearing agency by providing U.S. customers with the ability to trade crypto assets that were offered and sold as securities. This had been going on since at least 2020 and eToro did not comply with the registration provisions stipulated by federal securities laws.
eToro USA LLC did not admitt or deny the SEC´s findings, opting to intead enter into a settlement agreement. In accordance with the settlement, eToro USA LLC will pay $1.5 million, and also cease and desist from violating the applicable federal securities laws.
eToro will still make a limited set of crypto assets available for U.S. traders on its platform, but only Bitcoin, Bitcoin Cash, and Ether. As a provision of the agrreement, U.S. customers were permitted to sell off all other crypto assets for 180 days after the SEC order was issued. After 187 days, all remaining crypto assets was to be automatically liquidated and the payments transferred to the respective trader accounts.