Securities & Exchange Commission (SEC)

Definition: The primary government agency responsible for ensuring that companies who offer securities such as stocks and bonds to the public, and the exchanges and places at which these are traded, treat investors fairly.

Example: On October 16, 2009, the SEC announced that it was charging Raj Rajaratnam and Galleon Management, the hedge fund he founded, with insider trading. Insider trading is just one of a host of activities that is illegal and which harms investors.

Investeach explains: Stocks and bonds are two of the most popular examples of a type of investments formally known as a ‘securities’. One of the best ways that SEC ensures that companies which sell investors securities (and receive their money in return) treat investors fairly is to ensure that companies are honest when they report their revenues, expenses and profits. Another is to ensure the companies never go more than one quarter (ie, three months) without reporting their performance. Yet another is to notify the investing community any time an important event occurs relating the company, such as it receiving notice that one of its products is causing consumers harm and must be recalled.

Another responsibility the SEC has is to ensure that exchanges such as the New York Stock Exchange and the NASDAQ also treat investors fairly. These exchanges match buyers and sellers so that trades can take place. It would unfair for an exchange to let the orders entered by certain investors move to the top of the list even though they were entered after those of other investors.

The SEC was formed with the passage of Securities Exchange Act of 1934. This Act, along with the companion Securities Act of 1933, were passed to remedy the many problems which were laid bare when, in 1929, the stock market crashed and the Great Depression ensued. Read more about the history of the SEC by clicking here.

The SEC has been subject of scathing criticism for its actions (or lack thereof) before and during the economic crisis that began in late 2007. Even though it has recently begun addressing some of the problems, its measures may not be substantial enough to prevent future meltdowns. Criticisms include:

* the SEC allowing Wall Street to create and sell securities that were so complex neither its customers nor the SEC even understood them. Without understanding, the SEC had no chance of properly regulating them

* credible proof that Bernie Madoff was running a ponzi scheme was given to the SEC numerous times but it never performed a thorough examination of Madoff’s firm because Madoff was so politically connected

* the SEC repealed the market-regulating ‘uptick rule’ for no apparent reason and later installed a new version that only kicks in when a stock has plunged 10% in a single day

* the SEC goes too lightly when it catches a bank or firm that has violated securities laws. Typically, the firm agrees to pay a fine and does so without having to admit any wrongdoing, even when it repeatedly commits the same types of infractions. Further, instead of holding individuals who committed wrongdoing responsible, it simply fines the firm.

* that it has allowed the market to become excessively volatile by permitting trading to be taken over by firms that conduct high frequency trading, or HFT

Why doesn’t the SEC tackle these issues head-on? Despite a $1 billion budget, the average SEC employee makes substantially less than if he or she worked for a Wall Street bank. Many SEC employees take jobs there to gain experience and learn how the agency works from the inside, only to leave for much better-paying private sector jobs a few years later. They don’t want to create bad feeling between themselves and the firms that they will one days work for, so they go easy. This ‘revolving door’ has greatly contributed to the SEC’s struggles.

Riddle me this:

1. What is the formal name for investments such as stocks and bonds?
2. What critical event lead to the creation of the SEC?
3. Identify two examples of the type of information issuers of securities must provide to investors.
4. Besides issuers of securities, which other type of business must treat investors fairly?
5. Identify at least three criticisms the SEC faced as the recession of 2007 unfolded.