Updated January 8, 2019
Introduction to Financial Services: The Securities and Exchange
Commission (SEC)
Origins, Structure, and Market Oversight Securities Exchange Act of 1934 (Exchange Act; P.L. 73-
To help restore confidence in the securities markets in the
291). In addition to creating the SEC, this act established
wake of the stock market crash of 1929, Congress passed
self-regulatory organizations (SROs) in the securities
the Securities Exchange Act of 1934, which authorized the
industry, which are SEC-regulated entities, including stock
creation of the Securities and Exchange Commission
exchanges, with quasi-governmental authority responsible
(SEC). The SEC is an independent, nonpartisan regulatory
for policing their members and the attendant securities
agency responsible for administering federal securities
markets. Under the act, the Financial Industry Regulatory
laws. It has broad regulatory authority over significant parts
Authority (FINRA), a SEC-regulated SRO, is the principal
of the securities industry, including stock exchanges,
regulator of broker-dealers.
mutual funds, investment advisers, and brokerage firms.
Investment Company Act of 1940 (ICA; P.L. 76-768).
The federal securities laws overseen by the SEC are broadly
This act regulates the organization of investment
aimed at (1) protecting investors; (2) maintaining fair,
companies, including mutual funds. Investment companies
orderly, and efficient markets; and (3) facilitating capital
such as mutual funds are primarily engaged in investing in
formation. These laws provide clear rules for honest dealing
the securities of other companies. In an attempt to minimize
among securities market participants, including antifraud
the potential conflicts of interest that may arise due to the
provisions, and disclose information deemed necessary for
operational complexity of investment companies, the act
informed investor decisionmaking.
generally requires investment companies to register with
the SEC and publicly disclose key data on their investment
The SEC’s budget is set through the congressional
objectives, structure, operations, and financial status.
appropriations process. The appropriations are offset by
sale fees on stock and other securities transactions that the
Investment Advisers Act of 1940 (IAA; P.L. 76-768).
SEC collects from securities exchanges. Annual collections,
Investment advisers are firms or sole practitioners that are
which tend to exceed the SEC’s annual appropriations, go
compensated for advising others about securities
directly to the U.S. Treasury’s general fund. Over the last
investments, including advisers to mutual funds and hedge
few years, the SEC’s enacted annual budget has been in the
funds. In general, under the act, advisers managing a certain
$1.6 billion to $1.7 billion range. The agency is led by five
amount of assets must register with the SEC and conform to
the act’s
presidentially appointed commissioners, including a
regulations aimed at protecting investors.
chairman, all of whom require Senate confirmation.
Commissioners have five-year staggered terms and no more
Sarbanes-Oxley Act of 2002 (SOX; P.L. 107-204). Passed
than three commissioners may belong to the same political
in the aftermath of accounting scandals at firms such as
party.
Enron and Worldcom during 2001 and 2002, SOX sought
to improve the reliability of financial reporting and the
Significant Securities Laws Overseen by
quality of corporate audits at public companies. Among
the SEC
other things, it created the Public Company Accounting
The SEC oversees an array of securities laws, several of
Oversight Board (PCAOB) to oversee the quality of
which have been amended over time. Applicable significant
corporate accountants and auditors and shifted
securities laws include those described below.
responsibility for the external corporate auditor from
corporate management to independent audit committees.
Securities Act of 1933 (Securities Act; P.L. 73-22). This
act sought to ensure that investors are given salient
Dodd-Frank Wall Street Reform and Consumer
information on securities offered for public sale and to ban
Protection Act of 2010 (Dodd-Frank Act; P.L. 111-203).
deceit, misrepresentations, and other kinds of fraud in the
Enacted in the wake of the 2007-2009 financial crisis, the
sale of securities. The act requires issuing companies to
Dodd-Frank Act mandated sweeping financial regulatory
disclose information deemed germane to investors as part of
changes, many of which affected the SEC. The act required
the mandatory SEC registration of the securities that those
the SEC to adopt rules to help ensure that those who
companies offer for sale to the public. Potential investors
securitize certain debt retain a significant interest in assets
must be given an offering prospectus containing
that they transfer; reformed the regulation of credit rating
registration data. Certain offerings are exempt from such
agencies; required hedge fund advisers to register with the
registration requirements, including private offerings to
SEC; and created an interagency financial risk monitoring
financial institutions or to sophisticated institutions.
panel, the Financial Stability Oversight Council (FSOC),
with the SEC chair as a member.
https://crsreports.congress.gov
Introduction to Financial Services: The Securities and Exchange Commission (SEC)
The Jumpstart Our Businesses Startup Act of 2012
The SEC’s Reg BI proposal would also generally apply to
(JOBS Act; P.L. 112-106). The act was broadly aimed at
investment advice broker-dealers give to ERISA-based
stimulating capital formation for companies, particularly
retirement account holders (ERISA, the Employee
newer and smaller firms. It also eases regulatory
Retirement Income Security Act of 1974; P.L. 93-406).
requirements for certain initial public offerings (IPOs)
through the creation of a new entity called an emerging
SEC Chair Jay Clayton lauded the proposal as a significant
growth company and through Regulation Crowdfunding
advance that would prohibit broker-dealers from placing
that permits companies to provide securities to retail
their interests before their clients’ interests, an “essential”
investors through regulatory exemptions under the
part of the “fiduciary standards.” Supporters of the rule
Securities Act.
include the Securities Industry and Financial Markets
Association, known as SIFMA, a group of broker-dealers
Selected Policy Issues
and asset managers. Supporters argue that Reg BI’s
Congress has an ongoing oversight and legislative interest
principles-based and non-definitional approach will provide
in a range of securities-related regulatory issues involving
greater regulatory flexibility when gauging a broker-dealer
the SEC. This In Focus highlights two recent SEC
client’s best interest in the future.
initiatives that have drawn significant congressional
interest.
Critics of the Reg BI proposal has come from various
entities, including investor and consumer advocates such as
The Best Interest Proposal
the Consumer Federation of America. Among their
SEC-registered investment advisers, who are directly
concerns is that it does not contain the word fiduciary; that
overseen by the agency under the IAA, are generally
it is not analogous to such a standard; and that it leaves
subject to a fiduciary standard, requiring them to act solely
“best interest” undefined, raising potential compliance
in the interests of their retail clients. By contrast, broker-
concerns.
dealers, regulated by the Exchange Act and largely
overseen by FINRA, are generally subject to a less
The Maker-Taker Pilot
demanding retail client standard, the suitability standard.
Regulated by the SEC, the maker-taker regime permits
The suitability standard requires broker-dealers to
securities brokers to receive size-limited rebates from
reasonably believe that their investment advice is suitable
certain domestic securities exchanges for providing market
for their clients with respect to factors such as a client’s
liquidity in the form of executed limit orders (i.e., an order
financial goals and needs.
to buy or sell a stock at a specific price or better) to the
exchanges. Supporters of the voluntary maker-taker regime
Propelled in part by the perception that many retail
argue that it enhances both exchange trading and off-
investors do not understand the differences in the standards
exchange trading venues such as dark pools, which unlike
of client care broker-dealers and investment advisers owe to
exchanges are unimportant in the critical securities’ price
retail investors, the Dodd-Frank Act required that the SEC
discovery process. Others, however, criticize the maker-
conduct a study on various aspects of standards of client
taker regime for incentivizing brokers to make trades on fee
care for retail investors. Released in 2011, the SEC staff
providing exchanges, potentially discouraging their use of
study recommended a uniform fiduciary standard for the
other trading venues that may provide the best trade
retail advice given by all types of financial professionals,
execution and securities’ prices more favorable to their
including broker-dealers.
clients.
On April 18, 2018, the SEC commissioners adopted (with
In December 2018, the SEC approved a proposal to
one dissenting vote, Commissioner Kara Stein, who
implement a two-year pilot program that would assess the
asserted that the proposal was a wasted opportunity to
impact of the maker-taker regime via three stock test
achieve meaningful progress) a package of proposals
groups. One test group will prohibit rebates altogether.
related to the duty of care financial professionals owe to
Another will be subject to a limited rebate regime. The third
retail investors. Arguably, the most significant and most
will be a control group subject to the current rebate regime
contentious part of the package is Regulation Best Interest
(Reg BI), which would require a broker-dealer “to act in the
CRS RESOURCES
best interest of a retail customer when making a
CRS In Focus IF11062, Introduction to Financial Services:
recommendation of any securities transaction or investment
Capital Markets, by Eva Su
strategy involving securities to a retail customer.” Among
other things, a broker-dealer would discharge this best
CRS In Focus IF11073, The SEC’s Best Interest Proposal
interest mandate by (1) informing its retail clients about key
for Advice Given by Broker-Dealers, by Gary Shorter
facts germane to their relationship, including broker-dealer
material conflicts of interest; and (2) having reasonable
basis to believe that a recommended investment product or
a series of transactions are in the retail customer’s best
Gary Shorter,
interest.
IF10032
https://crsreports.congress.gov
Introduction to Financial Services: The Securities and Exchange Commission (SEC)
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https://crsreports.congress.gov | IF10032 · VERSION 6 · UPDATED