December 22, 2014
Introduction to Financial Services: The Securities and Exchange
Commission (SEC)
Origins, Structure, and Market Oversight Securities Exchange Act of 1934 (P.L. 73-291). In
addition to creating the SEC, this act established self-
To help restore confidence in the securities markets in the
regulatory organizations (SROs) in the securities industry,
wake of the stock market crash of 1929, Congress passed
which are SEC-regulated entities, including stock
the Securities Exchange Act of 1934, which authorized
exchanges, with quasi-governmental authority responsible
creation of the Securities and Exchange Commission
for policing their members and the attendant securities
(SEC). The SEC is an independent, nonpartisan regulatory
markets. The Financial Industry Regulatory Authority
agency responsible for administering federal securities
(FINRA), an SEC-regulated SRO that is the primary
laws. It has broad regulatory authority over significant parts
regulator of the nation’s broker-dealers, is also regulated
of the securities industry, including stock exchanges,
under the Exchange Act.
mutual funds, investment advisers, and brokerage firms.
The federal securities laws overseen by the SEC are broadly
[T]he job we are trying to do here in the Securities and
aimed at (1) investor protection; (2) maintaining fair,
Exchange Commission [is] to reassure capital as to its safety
orderly, and efficient markets; and (3) facilitating capital
going ahead and reassure the investor as to the protection
formation. They do so by providing clear rules for honest
of his interests… by making available adequate information
dealing among securities market participants, including
to the public. Joseph P. Kennedy, first SEC Chair, 1934
antifraud provisions, and a disclosure regime that requires
the various entities involved in securities markets to
disclose information deemed necessary for informed
Investment Company Act of 1940 (P.L. 76-768). This act
investment decision making.
regulates the organization of investment companies,
including mutual funds. Investment companies are
The SEC’s budget is set through the congressional
primarily engaged in investing in the securities of other
appropriations process. The appropriations are offset by
companies. In an attempt to minimize the potential conflicts
fees the SEC collects from securities exchanges on the sales
of interest that may arise due to the operational complexity
of stock and other securities transactions. Annual
of investment companies, the act generally requires
collections, which tend to exceed the SEC’s annual
investment companies to register with the SEC and publicly
appropriations, go directly to the U.S. Treasury’s general
disclose information about their investment objectives,
fund. The agency’s FY2014 and FY2015 budgets were and
structure, operations, and financial status.
are, respectively, $1.35 and $1.50 billion. The SEC is led
by five presidentially appointed commissioners, including a
Investment Advisers Act of 1940 (P.L. 76-768).
chairman, all of whom require Senate confirmation.
Investment advisers are firms or sole practitioners that are
Commissioners have five-year staggered terms, and no
compensated for advising others about securities
more than three commissioners may belong to the same
investments, including advisers to mutual funds and hedge
political party.
funds. Generally, under the act, advisers managing a certain
amount of assets must register with the SEC and conform to
Major Securities Laws Overseen by the
regulations under the act aimed at protecting investors.
SEC
Sarbanes-Oxley Act of 2002 (SOX; P.L. 107-204). Passed
Securities Act of 1933 (P.L. 73-22). This act sought to
in the aftermath of accounting scandals at firms such as
ensure that investors are given salient information on
Enron and Worldcom during 2001 and 2002, SOX sought
securities offered for public sale and to ban deceit,
to improve the reliability of financial reporting and the
misrepresentations, and other kinds of fraud in the sale of
quality of corporate audits at public companies. Among
securities. The act requires issuing companies to disclose
other things, it created the Public Company Accounting
information deemed germane to investors as part of the
Oversight Board (PCAOB) to oversee the quality of
mandatory SEC registration of the securities that those
corporate accountants and auditors and shifted
companies offer for sale to the public. Potential investors
responsibility for the external corporate auditor from
must also receive an offering prospectus containing
corporate management to independent audit committees.
registration statement data. Certain offerings are exempt
from such registration requirements, including private
Dodd-Frank Wall Street Reform and Consumer
offerings and offerings made to a limited number of
Protection Act of 2010 (P.L. 111-203). Enacted in the
sophisticated persons or institutions.
wake of the 2007-2009 financial crisis, the Dodd- Frank
Act mandated sweeping financial regulatory changes, many
of which affected the SEC. The act required the SEC to
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Introduction to Financial Services: The Securities and Exchange Commission (SEC)
adopt rules to help ensure that those who securitize certain
uniform fiduciary standard for broker-dealers and
debt retain a significant interest in assets that they transfer;
investment advisers or (2) harmonizing current rules for
reformed the regulation of credit rating agencies; required
broker-dealers and investment advisers to reduce confusion
the registration of advisers to hedge funds; and created an
among retail clients.
interagency financial risk monitoring panel, the Financial
Stability Oversight Council, with the SEC chair as a
Officials at the Securities Industry and Financial Markets
member.
Association (SIFMA), a broker-dealer and asset manager
trade group, have advocated for a uniform standard via SEC
The Jumpstart Our Businesses Startup Act of 2012
rulemaking amending the Securities Act and the Investment
(JOBS Act; P.L. 112-106). The act was broadly aimed at
Advisers Act. Investment adviser groups, however, have
stimulating capital formation for companies, particularly
argued that such an approach would dilute the effectiveness
newer and smaller firms. Among other things, it eases the
of the current fiduciary standard and urged the SEC to
regulatory requirements for initial public offerings; expands
subject broker-dealers to the fiduciary standard in the
numerical shareholder thresholds for when private
Investment Advisers Act. Officials at SIFMA countered
companies are subject to public company disclosure
that doing so would unfairly disadvantage the many fee-
requirements; and creates a new corporate entity called an
based investment advisers, significantly harming less
emerging growth company that is subject to reduced public
affluent investors with limited access to lower-cost
company regulatory obligations.
financial options. In late 2014, an SEC staff report said the
agency would be evaluating the fiduciary standard
Selected Policy Concerns
recommendations in the 2011 report to facilitate likely
agency rulemaking in FY2015.
Equity Crowdfunding. Congress has considered several
legislative proposals to reduce the regulatory burden on
Regulation National Market System. The Securities Acts
small and emerging firms. One such effort involves
Amendment of 1975 (P.L. 94-29) amended the Securities
crowdfunding, funding ventures through small amounts of
Exchange Act. The law directed the SEC to coordinate with
capital provided by a multitude of individuals. In exchange
the securities industry to create a national market system to
for their funding, donors may receive anything from a
integrate the trading, clearance, and settlement of securities
thank-you item such as a t-shirt to a product produced by
transactions among the various trading venues. Over time,
the funded venture. Feature films, video games, scientific
the SEC adopted several rules to advance this national
research, and political action committees are among the
market system, including Regulation National Market
ventures and products that have benefited from
System (Reg. NMS) in 2005. One key part of the
crowdfunding. Under the Securities Act, donors cannot be
regulation, the order protection rule, sought to better
given ownership interests or stock (equity) in a
address the shift from human-based trading to electronic
crowdfunded enterprise. Crowdfunding raised an estimated
trading. Across trading venues, investors must receive the
$5 billion in 2013, and many say equity-based
best possible price for a given trade. If the best-priced offer
crowdfunding could greatly increase that figure.
to buy or sell a given security is available elsewhere, a trade
must then be routed there for execution.
The JOBS Act loosened the equity crowdfunding
prohibition, allowing crowdfunded ventures to issue
By various accounts, Reg. NMS has helped to shape a
securities. In October 2013, as required by the act, the SEC
market providing investors with historically low
published proposals for implementing equity crowdfunding.
tradeexecution costs and the opportunity to choose between
Some proposals have been criticized for being prohibitively
an unprecedented number of competing trading venues.
costly to comply with and perhaps pricing many
Some observers, however, say the market also has
enterprises out of equity crowdfunding. SEC officials,
significant problems. Critics allege that (1) some investors
however, say the proposals reconcile the agency’s mandate
may find accessing the many individual trading venues to
to implement the JOBS act with the its statutory investor
be burdensome and costly; (2) the market’s potential for
protection mission.
trading disruptions may have systemic implications; and (3)
the market has been conducive to the growth of dark pools
Fiduciary Rules. The Exchange Act of 1934 subjects
(alternatives to stock exchanges that do not reveal the size
broker-dealers to a suitability standard with respect to the
and price of trading orders to nonparticipants) and high-
financial advice they give their clients, a standard that is
frequency trading (using complex algorithms to analyze
primarily enforced by FINRA. The Investment Advisers
multiple securities markets and rapidly trading orders based
Act established a higher level of client care, a fiduciary
on that analysis), which have drawn criticism for harming
standard of care, for SEC-registered investment advisers
some investors. The role Reg NMS may have played in
that provide financial advice. Surveys, however, report that
helping to shape such a market has been a growing focus of
consumers are often unaware of such key distinctions.
various securities industry stakeholders and congressional
committees with SEC oversight. SEC officials have said the
In 2010, the Dodd-Frank Act granted the SEC broad
agency will be examining the regulation.
authority to impose a uniform standard of conduct for
broker-dealers and investment advisers when providing
Gary Shorter, gshorter@crs.loc.gov, 7-7772
personalized investment advice. A 2011 SEC report

required by the Dodd-Frank Act recommended two policy
options for the SEC: (1) adopting rules to establish a
IF10032
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