Updated January 5, 2023
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).
Environmentally focused ESG-focused funds would also be
This 2012 act was broadly aimed at stimulating capital
required to disclose greenhouse gas emission data
formation for companies, particularly newer and smaller
associated with their portfolio investments, including Scope
firms. It also eases regulatory requirements for certain
1, 2, and 3 emissions data. Another subset of ESG-focused
initial public offerings through the creation of a new entity
funds, impact funds, which pursue specific ESG impacts
called an emerging growth company and through
(e.g., affordable housing), would also be required to
Regulation Crowdfunding, which permits companies to
disclose data on their annual progress toward such impact
provide securities to retail investors through regulatory
goals. Under the proposal, investment advisers who
exemptions under the Securities Act of 1933.
strategically incorporate ESG factors in their advice to
institutional and retail investors would have to disclose
Selected SEC Policy Developments of Interest
similar types of information with respect to their ESG
Enhanced Disclosure of Corporate Climate-Related
factors and strategies in client brochures. A central criticism
Risks. On March 22, 2022, citing the need for more
of the proposal by groups such as the Investment Company
consistent, comparable, and reliable information about how
Institute, a mutual fund trade group, is that the current SEC
SEC-registered public companies address climate-related
rules are effective as is, sufficiently requiring fund
risks, the SEC commissioners voted in favor of proposed
disclosure of investment objectives, principal investment
rules that would amend certain disclosure regulations. The
strategies, and main investment risks.
proposed rules would require companies to provide
information about their governance, risk management, and
Payment for Order Flow. The past few years saw an
strategy regarding climate-related risks in their registration
unprecedented surge in retail investor securities trading at
statements and annual reports. They would also be required
major discount broker-dealers such as Robinhood, Charles
to disclose targets, commitments, and plans to achieve those
Schwab, TD Ameritrade, and E*Trade. Among the factors
targets as well as attendant transition plans. Companies
that have driven this are the zero trading commissions that
would be required to add disclosures to their audited
many of them now charge for trades. The nonexistent
financial statements as footnotes when the climate risks are
commissions are often subsidized by a controversial rebate
likely to have a material impact on line items and the firms’
paid to the broker-dealers of fractions of a penny per share
related expenditures. Companies would also have to
called payment for order flow (PFOF) by entities such as
disclose their Scope 1 and Scope 2 greenhouse gas
Citadel and Virtu—alternately called market makers,
emissions—emissions that “result directly or indirectly
wholesalers and internalizers—that execute the trades.
from facilities owned or activities controlled by a
Reports indicate that aggregate PFOF revenue more than
registrant.” Some companies above a certain size would
tripled at four major broker-dealers—TD Ameritrade,
also be required to disclose Scope 3 emissions, the
Robinhood, E*Trade, and Charles Schwab—to $3.17
emissions from upstream and downstream activities in a
billion in 2021 from $892 million in 2019.
company’s value chain, if the emissions were material to
investors or if the company had commitments that included
At the center of policy debates over PFOF is the broker-
reference to Scope 3 emissions. A common critique voiced
dealer’s duty of best execution with respect to the execution
by critics such as the U.S. Chamber of Commerce is that
of customer trades, a duty that is chiefly enforced by
the proposed rules would impose burdensome firm costs
FINRA, the frontline regulator of broker-dealers. Best
with requirements that are not material to investors.
execution denotes the broker-dealer’s obligation to seek the
most favorable terms for a customer’s transaction in the
Enhanced Disclosures for ESG-Oriented Funds and
context of the prevailing circumstances. PFOF’s supporters
Investment Advisers. On May 25, 2022, citing concerns
assert that such trades do conform to best execution and
over lack of consistent, comparable, and reliable investor
indirectly benefit investors by subsidizing low- or zero-
disclosures regarding environmental, social, and
commission rates and other services. Critics, however, have
governance (ESG) fund and ESG investment adviser
argued that because broker-dealers do not generally pass the
strategies, the SEC voted 3-1 to issue amendments to
PFOF rebates onto their clients, they may have economic
regulations implementing the Investment Advisers Act of
incentives to send retail orders to rebating market makers,
1940 and the Investment Company Act of 1940 aimed at
creating potential conflicts over their duty of best
addressing such perceived inadequacies. If adopted, the
execution. In December 2022, six months after SEC Chair
proposals would require such ESG funds to give investors
Gensler expressed concerns over the fairness of PFOF, the
information in their prospectuses on what ESG factors they
SEC proposed a new set of market structure rules. One rule
consider and strategies they employ. These would include
would require broker-dealers to show how they obtained the
whether a fund tracks a securities index, excludes or
best execution for trades for which they receive PFOF.
includes certain asset types, engages in corporate
Another would require certain marketable orders for retail
governance conduct such as proxy voting in pursuit of
investors, orders seeking to trade immediately at the best
certain goals, or intends to achieve a specific impact.
available prices, to undergo auction-based competition by
market centers (including securities exchanges) before they
A subset of ESG funds, ESG-focused funds, would be
can be executed by a market maker.
defined as significantly focused on ESG factors. They
would also be required to disclose information on the
Gary Shorter, Specialist in Financial Economics
criteria and the data used to fulfill their investment goals
and details on the accompanying investment strategies.
IF11714
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Introduction to Financial Services: The Securities and Exchange Commission (SEC)


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