January 4, 2021
Introduction to Financial Services: The Securities and Exchange
Commission (SEC)
To help restore confidence in the securities markets in the
securities transactions on the secondary market and gives
wake of the stock market crash of 1929, Congress passed
the agency regulatory oversight over self-regulatory
the Securities Exchange Act of 1934, which authorized the
organizations (SROs), including stock exchanges like
creation of the Securities and Exchange Commission
NASDAQ, that have quasi-governmental authority to police
(SEC). The SEC is an independent, nonpartisan regulatory
their members and attendant securities markets . Financial
agency responsible for administering federal securities
Industry Regulatory Authority (FINRA), the principal
laws. It has broad regulatory authority over significant parts
regulator of broker-dealers, is also an SRO.
of the securities industry, including stock exchanges,
mutual funds, investment advisers, and brokerage firms.
Investment Company Act of 1940 (ICA; P.L. 76-768).
This act regulates the organization of investment
The SEC oversees federal securities laws broadly aimed at
companies, including mutual funds. Investment companies
(1) protecting investors; (2) maintaining fair, orderly, and
are primarily engaged in investing in the securities of other
efficient markets; and (3) facilitating capital formation.
companies. In an attempt to minimize the potential conflicts
These laws provide clear rules for honest dealing among
of interest that may arise due to the operational complexity
securities market participants, including antifraud
of investment companies, the act generally requires
provisions, and disclose information deemed necessary for
investment companies to register with the SEC and publicly
informed investor decisionmaking.
disclose key data on their investment objectives, structure,
operations, and financial status.
The SEC’s budget is set through the congressional
appropriations process. Sale fees on stock and other
Investment Advisers Act of 1940 (IAA; P.L. 76-768).
securities transactions that the SEC collects from securities
Investment advisers are firms or sole practitioners that are
exchanges offset the appropriations. Annual collections,
compensated for advising others about securities
which historically exceeded the SEC’s annual
investments, including advisers to mutual funds and hedge
appropriations, go directly to the U.S. Treasury’s general
funds. In general, under the act, advisers managing a certain
fund. Over the last few years, the SEC’s enacted annual
amount of assets must register with the SEC and conform to
the act’s regulations aimed at protecting investors.
budget has been in the $1.6 billion to $1.7 billion range.

The SEC is led by five presidentially appointed
commissioners, including a chair, subject to Senate
Sarbanes-Oxley Act of 2002 (SOX; P.L. 107-204). Passed
confirmation. Commissioners have staggered five-year
in the aftermath of accounting scandals at firms such as
terms, and no more than three commissioners may belong
Enron and Worldcom during 2001 and 2002, SOX sought
to improve the reliability of financial reporting and the
to the same political party.
quality of corporate audits at public companies. Among
Significant Securities Laws Overseen by
other things, it created the Public Company Accounting
the SEC
Oversight Board (PCAOB) to oversee the quality of
The SEC oversees an array of securities laws, several of
corporate accountants and auditors and shifted
which have been amended over time. Applicable significant
responsibility for the external corporate auditor from
securities laws include those described below.
corporate management to independent audit committees.
Securities Act of 1933 (Securities Act; P.L. 73-22). This
Dodd-Frank Wall Street Reform and Consumer
act sought to ensure that investors are given salient
Protection Act (Dodd-Frank Act; P.L. 111-203). Enacted
information on securities offered for public sale and to ban
in the wake of the 2007-2009 financial crisis, the 2010
deceit, misrepresentations, and other kinds of fraud in the
Dodd-Frank Act mandated sweeping financial regulatory
sale of securities. The act requires issuing companies to
changes, many of which affected the SEC. The act required
disclose information deemed germane to investors as part of
the SEC to adopt rules to help ensure that those who
the mandatory SEC registration of the securities that those
securitize certain debt retain a significant interest in assets
companies offer for sale to the public. Potential investors
that they transfer; reformed the regulation of credit rating
must be given an offering prospectus containing
agencies; required hedge fund advisers to register with the
registration data. Certain offerings are exempt from such
SEC; and created an interagency financial risk monitoring
registration requirements, including private offerings to
panel, the Financial Stability Oversight Council (FSOC),
financial institutions or to s ophisticated institutions.
with the SEC chair as a member.
Securities Exchange Act of 1934 (Exchange Act; P.L. 73-
Jumpstart Our Businesses Startup Act (JOBS Act; P.L.
291). In addition to creating the SEC, the act governs
112-106). This 2012 act was broadly aimed at stimulating
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Introduction to Financial Services: The Securities and Exchange Commission (SEC)
capital formation for companies, particularly newer and
are overstated. Critical responses to the proposal have come
smaller firms. It also eases regulatory requirements for
from some both inside and outside of Congress, including
certain initial public offerings (IPOs) through the creation
from the Consumer Federation of America, the U.S.
of a new entity called an emerging growth company and
Chamber of Commerce, NASDAQ, the New York Stock
through Regulation Crowdfunding, which permits
Exchange, and the Management Funds Association, an
companies to provide securities to retail investors through
investor trade group that includes hedge funds. Criticism
regulatory exemptions under the Securities Act.
includes arguments that (1) the proposal would restrict
corporate knowledge of their investors, impairing their
Recent Examples of SEC Regulatory
ability to engage with them; (2) the 1975 statutory mandate
Reform
for 13(f) disclosures gave the SEC authority to decrease
This section provides examples of recent regulatory actions
only the $100 million threshold; and (3) the proposal would
by the SEC under some of the aforementioned statutes.
make it harder for firms to tell whether activist hedge funds
are accumulating stakes in them. (There is, however, Form
Deregulating Fund of Fund Arrangements. A fund of
13d reporting, where within 10 days, investors must report
fund is a mutual fund that holds an investment in at least
when they have a 5% corporate equity stake.)
one other fund. According to SEC staff estimates,
approximately 40% of all registered funds hold an
The Consolidated Audit Trial (CAT). On May 6, 2010,
investment in at least one other fund. Total net assets in
the Dow Jones Industrial Average stock index (DJIA) fell
mutual funds that invest primarily in other mutual funds
by roughly 1,000 points (and then rebounded) in intraday
have grown to $2.54 trillion in 2019. Section 12(d)(1) of the
trading. The SEC’s subsequent attempt to analyze the cause
ICA generally limits how much a fund can invest in others.
exposed the existence of a critical dearth of available
market data. To address these concerns, in 2012, the SEC
Over the years, statutory and various exemptions and SEC
adopted Rule 613 under the Securities Exchange Act of
no-action relief granted to many fund families, have
1934 to create CAT. CAT is a trading data repository,
effectively relaxed these restrictions but have led to very
which enables securities regulators, such as the SEC, to
similar fund of funds arrangements being subject to varying
monitor and reconstruct trading activity for stocks and stock
regulatory requirements. To help address these regulatory
options in the National Market System (NMS). The NMS is
disparities, on October 7, 2020, the SEC commissioners
the domestic system for trading stocks and stock options,
adopted Rule 12d1-4 under the ICA. The rule generally
including the broker-dealers who fulfill the orders. In 2016,
codifies existing conditions in the SEC exemptive orders ,
the SEC approved the CAT NMS plan prepared by stock
eliminating the need for SEC exemptive relief for the funds.
and stock option exchanges and FINRA (all SROs).
For many observers, including the mutual fund trade group
Investment Company Institute, a major welcome change
CAT has frequently been delayed beyond its initial full
from the original proposal is that the adopted rule does not
implementation goal of March 2019. For example, in
restrict a fund from redeeming more than 3% of an acquired
February 2019, by the SROs who govern CAT replaced the
fund’s total outstanding shares in any 30-day period. The
contractor charged with building the CAT technology with
concern was that the restriction would have deprived fund
FINRA. CAT’s costs are to be paid for by exchanges. CAT
managers of the flexibility needed to act in their investors’
inaugurated reporting on s tock trades on June 22, 2020, and
best interests.
stock option trades on July 20, 2020. SEC officials have
observed that “substantial work remains.”
13F Reform for Asset Managers. In 1978, Section 13(f)
of the Exchange Act was added to the Securities Acts
The issues of data security and privacy with respect to CAT
Amendments of 1975 as P.L. 94-29. It requires managers of
have been of critical and widespread concern. On August 2,
institutional investors, such as mutual funds, hedge funds,
2020, to help address such concerns, the SEC approved a
trust companies, pension funds, insurance companies, and
proposal to amend the NMS plan governing CAT. The
registered investment advisors, to publically disclose the
proposal would no longer require CAT to contain the Social
entity’s equity holdings over $100 million on a quarterly
Security numbers and taxpayer identification numbers of
basis. On July 20, 2020, the SEC’s commissioners
individual investors. It would, however, collect data
approved a proposal that would amend Section 13(f) to
elements, including the individual’s name, address, year of
raise the threshold for reporting to $3.5 billion.
birth, role in the account, and account type. The proposal
earned praise from SIFMA, a major securities firm trade
In doing so, the SEC argued that (1) the updated amount
group, but the American Securities Association, a trade
represented the same proportional market value of domestic
group of regional financial service firms, said that the
equities that $100 million did in 1975; (2) the aggregate
permitted data elements would still benefit cybercriminals .
value of securities reported by applicable managers would
represent about 75% of the market value of domestic
Related CRS Reports
corporate equities; (3) smaller institutions would no longer
CRS Report R45957, Capital Markets: Asset Management
risk copycat investors front running their portfolio
and Related Policy Issues, by Eva Su
strategies via the disclosures; and (4) managers of some
4,500 smaller institutions or about 89% of current filers
Gary Shorter, Specialist in Financial Economics
would be exempt from 13(f) reporting compliance costs.
The SEC estimated that those costs range between $15,000
IF11714
and $30,000, figures that some experts and researchers say
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Introduction to Financial Services: The Securities and Exchange Commission (SEC)


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