Updated January 13, 2022
Introduction to Financial Services: The Securities and Exchange
Commission (SEC)
To help restore confidence in the securities markets in the
transactions on the secondary market and gives the agency
wake of the stock market crash of 1929, Congress passed
regulatory oversight over self-regulatory organizations,
the Securities Exchange Act of 1934, which authorized the
including stock exchanges such as NASDAQ, that have
creation of the Securities and Exchange Commission
quasi-governmental authority to police their members and
(SEC). The SEC is an independent, nonpartisan regulatory
attendant securities markets. The Financial Industry
agency responsible for administering federal securities
Regulatory Authority (FINRA), the principal regulator of
laws. It has broad regulatory authority over significant parts
broker-dealers, is also a self-regulatory organization.
of the securities industry, including stock exchanges,
mutual funds, investment advisers, and brokerage firms.
Investment Company Act of 1940 (P.L. 76-768). This act
regulates the organization of investment companies,
The SEC oversees federal securities laws broadly aimed at
including mutual funds. Investment companies are
(1) protecting investors; (2) maintaining fair, orderly, and
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 (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 past few years, the SEC’s enacted annual
amount of assets must register with the SEC and conform to
budget has been in the $1.6 billion to $1.7 billion range.
the act’s regulations aimed at protecting investors.
The SEC is led by five presidentially appointed
commissioners, including a chair, subject to Senate
Sarbanes-Oxley Act of 2002 (P.L. 107-204). Passed in the
confirmation. Commissioners have staggered five-year
aftermath of accounting scandals at firms such as Enron and
terms, and no more than three commissioners may belong
Worldcom during 2001 and 2002, Sarbanes-Oxley sought
to the same political party.
to improve the reliability of financial reporting and the
quality of corporate audits at public companies. Among
Significant Securities Laws Overseen by the SEC
other things, it created the Public Company Accounting
The SEC oversees an array of securities laws, several of
Oversight Board to oversee the quality of corporate
which have been amended over time. Applicable significant
accountants and auditors and shifted responsibility for the
securities laws include those described below.
external corporate auditor from corporate management to
independent audit committees.
Securities Act of 1933 (P.L. 73-22). This act sought to
ensure that investors are given salient information on
Dodd-Frank Wall Street Reform and Consumer
securities offered for public sale and to ban deceit,
Protection Act (P.L. 111-203). Enacted in the wake of the
misrepresentations, and other kinds of fraud in the sale of
2007-2009 financial crisis, the 2010 Dodd-Frank Act
securities. The act requires issuing companies to disclose
mandated sweeping financial regulatory changes, many of
information deemed germane to investors as part of the
which affected the SEC. The act required the SEC to adopt
mandatory SEC registration of the securities that those
rules to help ensure that those who securitize certain debt
companies offer for sale to the public. Potential investors
retain a significant interest in assets that they transfer;
must be given an offering prospectus containing
reformed the regulation of credit rating agencies; required
registration data. Certain offerings are exempt from such
hedge fund advisers to register with the SEC; and created
registration requirements, including private offerings to
an interagency financial risk monitoring panel, the
financial institutions or to sophisticated institutions.
Financial Stability Oversight Council, with the SEC chair
as a member.
Securities Exchange Act of 1934 (P.L. 73-291). In
addition to creating the SEC, the act governs securities
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Introduction to Financial Services: The Securities and Exchange Commission (SEC)
Jumpstart Our Businesses Startup Act (P.L. 112-106).
preserves the inadequate suitability standard, exposing
This 2012 act was broadly aimed at stimulating capital
investors to harm from unaddressed broker-dealer conflicts
formation for companies, particularly newer and smaller
of interest. On December 4, 2020, after the 2020 election
firms. It also eases regulatory requirements for certain
and before Joe Biden was sworn in as President, Chair
initial public offerings through the creation of a new entity
Maxine Waters of the House Financial Services Committee
called an emerging growth company and through
urged Biden to rescind Reg BI.
Regulation Crowdfunding, which permits companies to
provide securities to retail investors through regulatory
On May 6, 2021, responding to questions during a House
exemptions under the Securities Act of 1933.
Financial Services Committee hearing, SEC Chair Gary
Gensler said the agency would “through examination,
Policy Developments of Interest
enforcement, and guidance, ensure that the rule is fully
Regulation BI. Broker-dealers execute securities trades and
complied with as written … but we’re also going to
provide investment recommendations. They are licensed
evaluate. If it’s not serving the purpose of investors, then
and regulated by state securities regulators, the SEC, and
we will update and freshen that rule as well as other rules.”
FINRA, an SEC-regulated entity that broker-dealers must
also join. Traditionally, broker-dealers provided
Payment for Order Flow. The past few years have seen an
transaction-specific discrete investment recommendations
unprecedented surge in retail investor securities trading at
and were compensated via commissions for individual
major discount broker-dealers such as Robinhood, Charles
transactions. Broker-dealers have generally made
Schwab, TD Ameritrade, and E*Trade. Among the factors
investment recommendations under the suitability standard,
that have driven this are the zero trading commissions that
a FINRA rule requiring that recommendations are
many of them now charge for trades. The nonexistent
consistent with customers’ interests. By contrast,
commissions are often subsidized by a controversial rebate
investment advisers—another type of financial professional
paid to the broker-dealers of fractions of a penny per share
that typically offers more ongoing investment counsel (such
called payment for order flow (PFOF). Alphacution, a
as retirement planning) and is compensated by fixed fees or
research firm, reported that total PFOF revenue at four
a percentage of total assets managed—tend to follow the
major broker-dealers—TD Ameritrade, Robinhood,
fiduciary standard, a non-statutory and stronger client
E*Trade, and Charles Schwab—was $2.5 billion in 2020,
obligation derived from court rulings and SEC enforcement
up from $892 million in 2019.
case rulings.
At the center of policy debates over PFOF is the broker-
Section 913 of Dodd-Frank directed the SEC to evaluate
dealer’s duty of best execution with respect to the execution
existing regulations for advisers and broker-dealers and
of customer trades, a duty that is chiefly enforced by
gave the SEC authority to impose a fiduciary standard on
FINRA, the frontline regulator of broker-dealers. Best
broker-dealers akin to that already applied to advisers.
execution denotes the broker-dealer’s obligation to seek the
Dodd-Frank also required the SEC to study this issue. The
most favorable terms for a customer’s transaction in the
resulting 2011 staff study recommended that the SEC adopt
context of the prevailing circumstances. PFOF’s supporters
a uniform fiduciary standard.
assert that such trades do conform to best execution and
indirectly benefit investors by subsidizing low- or zero-
On June 5, 2019, then-SEC Chair Jay Clayton and other
commission rates and other services. Critics, however,
SEC commissioners voted 3-1 to adopt Regulation Best
argue that because broker-dealers do not generally pass the
Interest (Reg BI) under the Securities and Exchange Act of
PFOF rebates onto their clients, they may have economic
1934 (P.L. 73-291). Reg BI reforms requirements for
incentives to send retail orders to rebating market makers,
broker-dealers when they make investment
creating potential conflicts over their duty of best
recommendations to retail customers. According to the
execution. SEC Chair Gensler reportedly shares such
SEC, Reg BI is meant to “enhance the broker-dealer
concerns and has said that the agency is considering
standard of conduct beyond existing … obligations [by]
reforms ranging from greater disclosure to an outright ban.
requiring broker-dealers … to: (1) act in the best interest of
S. 3102 would prohibit the banning of PFOF.
the retail customer at the time the recommendation is made,
without placing the financial or other interest of the broker-
Related CRS Products
dealer ahead of the interests of the retail customer; and (2)
CRS Report R46115, Regulation Best Interest (Reg BI):
address [various broker-dealer] conflicts of interest” with
The SEC’s Rule for Broker-Dealers, by Gary Shorter.
those clients. Reg BI went into effect in June 2020.
CRS In Focus IF11800, Broker-Dealers and Payment for
SEC officials and various business groups argued that Reg
Order Flow, by Gary Shorter.
BI properly balances the need for an enhanced broker-
dealer standard of care with the need to preserve the broker-
CRS In Focus IF11062, Introduction to Financial Services:
dealer business model, a model deemed to have special
Capital Markets, by Eva Su.
appeal to less-affluent investors. Critics, including a
dissident commissioner and various investor advocates such
Gary Shorter, Specialist in Financial Economics
as the Consumer Federation of America, a consumer
advocacy group, argued that the regulation effectively
IF11714


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Introduction to Financial Services: The Securities and Exchange Commission (SEC)


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