Understanding the SEC

A Guide to the Securities and Exchange Commission’s History, Divisions, and Recent Developments

Fact checked by Katrina MunichielloReviewed by JeFreda R. BrownFact checked by Katrina MunichielloReviewed by JeFreda R. Brown

The U.S. Securities and Exchange Commission (SEC) produces the regulations that enable and govern American financial markets. Formed in the wake of the Great Depression, the federal agency oversees the complex world of securities, safeguarding millions of Americans’ life savings, among other parts of the financial world.

“The SEC was created to ensure that the markets worked free of fraud and manipulation—and that investment advisers carry out their duties to the public,” said Gary Gensler, chair of the SEC. “Our mission is about protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.”

From its 1930s origins to present-day challenges regulating cryptocurrencies, this article explores the market regulator’s roles, responsibilities, and reach.

Key Takeaways

• The U.S. Securities and Exchange Commission (SEC) is the U.S. federal agency responsible for regulating the securities markets and protecting investors.
• The SEC was established through the Securities Exchange Act of 1934, mainly in response to the stock market crash of 1929 that led to the Great Depression.
• The SEC enforces its provisions through lawsuits against individuals or entities it alleges have violated securities laws or regulations.
• In cases where criminal activity is suspected, the SEC refers these matters to the U.S. Department of Justice (DOJ) for possible criminal prosecution.

Why the SEC Was Created

The SEC was formed in 1934 when the U.S. economy was in the depths of the Great Depression, which was partly precipitated by the market crash of 1929. In the freewheeling 1920s before the crash, federal oversight of securities markets was hardly a priority. After all, who calls the cops when the champagne’s flowing and the party’s in full swing?

The “Jazz Age” had both vast speculative cash flows and lax regulation, a tempting cocktail for those eyeing profits through financial chicanery. But, as with any wild party where things have gotten out of hand, the music had to stop, and it wouldn’t be long before the hangover set in. Surveying the wreckage, those left standing decided it was time to set down some rules and call the cops.

The Boom Times

Before the fall, there was the speculative bubble. In the 1920s, Wall Street was a central global powerhouse, with the New York Stock Exchange (NYSE) handling 61% of American securities transactions in 1929. However, despite its economic import, the NYSE operated more as a private club looking after the needs of its members than that of the public, even as the NYSE was often pervaded by various forms of market manipulation, including stock pools, wash sales, and bear raids—all quite legal at the time.

The late 1920s bull market was driven by speculation and margin trading (trading on borrowed funds or securities), exacerbating volatility and risk. The NYSE’s club-like atmosphere encouraged minimal financial disclosure requirements, allowing corporations to offer shares with negligible transparency. Managers often exploited this opacity to manipulate and hide crucial financial information about profits and losses.

In the pre-SEC era, insider trading was as common as it was legal, with investment bankers often favoring select clients. Insiders made off; outsiders were usually treated to one scam or another. While some safeguards existed, including state regulations and voluntary audits, meaningful enforcement didn’t. Despite the appearance of some regulations through various agencies, few rules had much effect since, as the 19th-century philosopher Immanuel Kant argued, there’s no law without its enforcement.

The Dow Jones Industrial Average hit 386 in September 1929, a 500% increase from 1920. The average price-to-earnings ratio, a key measure of the value investors are getting, was double the then-historic norm of about 15. Soon, though, the market’s vulnerabilities became a national calamity with the October 1929 crash, decimating wealth across the U.S. and shattering public confidence in financial markets for a generation or more.

Note

Before the 1930s reforms that created the SEC, insider trading, secrecy about material facts for publicly traded companies, boiler rooms, wash trades, and conflicts of interest were not just legal but pervasive.

The Party Ends

Industrial production peaked in June 1929, but soon stock prices headed downward (see the chart above). By Oct. 23, the Dow had dropped to 306, a 20% decline from a September high, triggering a wave of margin calls (lenders calling in their loans). The following day saw a morning sell-off that sparked widespread panic. To calm the markets, a group of banks led by J.P. Morgan stepped in to stabilize the market, making major purchases across about 20 stocks—a move that had worked in previous decades and temporarily halted the panic.

The following Tuesday, soon infamous as “Black Tuesday,” saw another massive, panicked sell-off. This time, the banks were too busy saving themselves to step in. The Dow plummeted 13.5%, a record single-day decline until 1987. By mid-November, the index had lost almost half its value from its peak.

Half the $50 billion in new securities issued in the 1920s became worthless within days. The Hoover administration, spoken for by its Treasury Secretary, Andrew Mellon, one of America’s richest men, counseled extreme austerity: “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate … purge the rottenness out of the system.”

Mellon got his purge. In 1932, the Dow had lost almost 90% of its value from the 1929 high. Many Americans’ life savings were wiped out. Up to 4,000 U.S. banks failed in a single year, unemployment approached 30%, and gross domestic product halved from its $100 billion peak several years earlier. 

A temporary consensus formed that only radical changes to American financial markets could restore the investor confidence needed to help drive an economic recovery. The U.S. Congress convened the Percora Commission to look for the causes and solutions for the crisis, with many in Washington and on Wall Street conveniently blaming short sellers who profited from the crash.

Note

The first SEC chair, Joseph P. Kennedy, accumulated vast wealth in the 1920s through trades he was soon charged with preventing, including a well-publicized “bear pool” in the short bull market of 1933 that helped inspire the 1934 Securities Exchange Act. His short term as SEC chair—431 days—was among the most consequential, with Kennedy clarifying for a financial industry not used to hearing it that the government would be in charge of Wall Street, not the other way around.

The commission offered up a parade of fraudsters to testify and provide the public with ready-made villains. Some inadvertently nominated themselves for the role. After congressional testimony that included questions about why he hadn’t paid federal taxes in years, J.P. Morgan took a moment to lecture reporters daring to ask further about it: “If you destroy the leisure class, you destroy civilization,’ he said. Given a choice between a wealthy class rich enough to never work (hence the name) and civilization, the public was clearly in the mood to take the bargain.

Morgan‘s tone-deaf comments—many had lost their life savings in the banks he owned— further inflamed public sentiment, helping to build the support needed for the major securities laws to come. The banker, who was used to being fêted in the years before by reporters as an infallible financial oracle, continued, “By the leisure class, I mean families who employ one servant—25 million or 30 million families.” He was off by a factor of more than 1,000.

An era was over. An administration witness testified to the commission that Herbert Hoover, whose name a century later still stands for an unctuous approach to Wall Street, now “shared the average American’s view of Wall Street as a giant casino rigged by professionals.”

Soon, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934, which created the SEC. The acts aimed to give investors and markets more reliable information about publicly traded companies and transparent rules to bolster trust in securities trading. President Franklin D. Roosevelt appointed Joseph P. Kennedy, father of future President John F. Kennedy, as the SEC’s first chair.

SEC’s Founding Principles

The SEC still functions according to principles established at its founding through major legislation passed from 1933 to 1940. These include the following:

1. Transparency and disclosure: The SEC mandates thorough, accurate, and timely disclosures from those offering publicly traded securities.
2. Investor protections: The SEC is to ensure fair and honest treatment of investors by overseeing key players in the securities industry: securities exchanges, broker-dealers, registered investment advisers, investment funds, and agencies that rate securities and other financial products.
3. Special attention to retail investors: The SEC’s mandate requires special attention to the needs of retail investors, who are often less equipped to navigate the complexities and risks of the securities markets.
4. Market integrity: The SEC works to maintain fair, orderly, and efficient markets by detecting and preventing fraud and market manipulation.
5. Capital formation: The SEC also aims to promote the pooling of the investment capital needed to grow American businesses.
6. Enforcement: A law enforcement agency, the SEC pursues civil enforcement actions against those who violate securities laws.

These principles align with the SEC’s Congressional mandate from 1934: (1) protect investors, (2) maintain fair, orderly, and efficient markets, and (3) facilitate capital formation. 

“Each tenet of that mission is critical,” said former SEC Chair Jay Clayton. “If we stray from our mission, or emphasize one of the canons without being mindful of the others, investors, companies (large and small), the U.S. capital markets, and ultimately the economy will suffer.”

How the SEC Is Organized

The SEC has five commissioners, each appointed by the U.S. president with the advice and consent of the Senate. The president designates one commissioner to be chair of the SEC—currently, that’s Gary Gensler.

The commissioners serve staggered five-year terms, with a commissioner’s term ending on June 5 each year. Up to three commissioners may belong to the same political party in an effort, not always successful, to keep the SEC nonpartisan.

The SEC is headquartered in Washington, D.C., with five divisions, 25 offices, and more than 4,500 staff across the U.S. Here is a quick breakdown of how the SEC is organized.

Division of Corporation Finance

This division oversees corporate disclosures of important information to the investing public—the material details about profits and losses and more that were often a guarded secret before the SEC’s creation. It reviews public companies’ registration statements, annual and quarterly filings, proxy materials, and annual reports. The division also interprets securities laws and regulations for the SEC.

Division of Trading and Markets

The SEC’s Division of Trading and Markets oversees broker-dealers, self-regulatory organizations like the Financial Industry Regulatory Authority (FINRA), securities exchanges, transfer agents, and clearing agencies. It also develops and administers policies that govern the securities markets and market participants. The division also oversees the publication of market data.

Division of Investment Management

This division oversees the U.S. investment management industry, including mutual funds, professional fund managers, research analysts, and investment advisers to retail customers.

“[O]ur work is so critical to the average investor … The Division comprises … the Rulemaking Office; the Chief Counsel’s Office; the Disclosure Review and Accounting Office; the Analytics Office; and the Managing Executive’s Office,” said Natash Vij Greiner, director of the division of investment management. “Staff within each office play a critical role in … administering policy that impacts so many stakeholders.”

A major focus of the division is ensuring that disclosures about popular retail investments like mutual and exchange-traded funds are clear and helpful for retail investors and that the regulatory costs don’t grow too high for Main Street investors.

In recent years, the SEC has expanded the division’s oversight of fund disclosure requirements.

Cary Coglianese, a law professor at the University of Pennsylvania, points out that while there’s been a lot of focus on Supreme Court decisions and changes in how the SEC’s Division of Enforcement handles court procedures, most cases don’t end up in front of juries or administrative law judges. “Settlement is the name of the game in most cases,” he said.

Division of Enforcement

The Division of Enforcement is often considered the SEC’s most critical unit; it’s certainly the most feared. It investigates and prosecutes violations of federal securities laws.

The division has three ways of enforcing securities laws:

• Coordination with law enforcement: The Enforcement Division often works with and makes referrals to the Federal Bureau of Investigation (FBI), the DOJ, the U.S. Secret Service, and state and local authorities investigating and prosecuting securities-related crimes.
• Civil actions: The division can bring civil actions in federal court where defendants have the right to a jury trial.
• Administrative proceedings: It can also bring cases before an administrative law judge within the SEC. A June 2024 Supreme Court ruling in SEC v. Jarkesy could significantly affect how these are handled.

The Jarkesy decision required the SEC to pursue cases involving civil penalties for securities fraud in federal court. While the division post-Jarkesy can still conduct administrative proceedings, its ability to impose civil penalties administratively has been significantly curtailed, according to Cary Coglianese, Edward B. Shils professor of law at the University of Pennsylvania Carey Law School.

“If we’re dealing with situations where we’re just revoking licenses or the like, that can go a lot more quickly” through the SEC’s administrative law judges. However, Coglianese said, “Those with penalties would be another matter, and I suspect we’ll see a shift and probably a decrease in the number of civil penalty actions that the SEC is pursuing because that’s also a bottleneck there.” Coglianese said the SEC could still use administrative proceedings for cease and desist orders, suspensions, industry bans, and other nonmonetary penalties.

Below is a table of the kinds of cases Coglianese said the SEC must bring to U.S. District Courts and those, at least until the courts say otherwise, it can try administratively:

Here are the most common penalties sought by the SEC’s Division of Enforcement:

• Bans and suspensions: The SEC can seek to bar or suspend individuals from the securities industry. It’s often a career death penalty in the sector.
• Civil fines: These are monetary penalties that the SEC seeks against those alleged to have violated securities laws.
• Criminal penalties: The SEC doesn’t bring criminal actions, only civil ones. Still, its investigators often work with those that do in different states (especially New York), the FBI, DOJ, and the U.S. Secret Service, all of which have different kinds of fraud under their remit.
• Disgorgement: This is an order for the violator to give up any ill-gotten gains from illegal activities.
• Injunctions: The SEC can seek court or administrative orders prohibiting individuals or companies from engaging in activities they believe are violating securities law.
• Restorative remedies: These are additional penalties, such as compliance, educational programs, or the appointment of independent monitors, meant to avoid future violations.

Most SEC cases that result in a settlement or verdict involve both disgorgement and civil fines. The SEC uses a tiered punishment system structured to reflect the severity of the misconduct:

• Tier 1 penalties: For individuals, up to $7,500 per violation; for entities, up to $80,000 per violation. Applied to less severe infractions or technical violations without fraud or significant investor harm.
• Tier 2 penalties: For individuals, up to $80,000 per violation; for entities, up to $400,000 per violation. Applied to violations involving fraud, deceit, manipulation, or deliberate or reckless disregard of regulatory requirements.
• Tier 3 penalties (most severe): For individuals, up to $160,000 per violation; for entities, up to $775,000 per violation. Reserved for serious acts resulting in significant losses.

SEC Office of the Whistleblower

The SEC Office of the Whistleblower, established under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, has grown to have a major role in the SEC’s efforts to punish securities violations. Whistleblowers can receive between 10% and 30% of the sums of money collected should their information result in a penalty exceeding $1 million.

This program not only motivates whistleblowers by providing financial rewards but also protects them from retaliation by employers. Individuals from any company can report violations, thus broadening the scope of enforcement beyond what the SEC’s own staff could achieve.

In fiscal year 2023, the program awarded almost $600 million to whistleblowers, including a record-breaking award of $279 million to a single person. The program received over 18,000 tips in 2023, a 50% increase from the previous year, highlighting its growing importance in the SEC’s enforcement efforts.

Division of Economic and Risk Analysis

The SEC’s Division of Economic and Risk Analysis is the SEC’s main data research arm. The division’s work includes assessing the potential economic impact of SEC rule-making, analyzing market risks and trends, using sophisticated data analysis to detect anomalous trading patterns, and advising the SEC on the economics of different enforcement activities.

“The Division of Economic and Risk Analysis with more than 100 Ph.D. economists is at the heart” of the SEC’s work, Gensler said. “They have a seat at the table for all of the SEC’s critical decision-making, whether it’s monitoring markets, enforcement, or policymaking.”

Recent Developments at the SEC

To critics, the SEC of the early 2000s was less an enforcement authority than one that enabled the worst kinds of financial and speculative excesses. These critiques have been rarer in recent years since the SEC hasn’t been shy under SEC Chair Gensler to bring its regulatory powers to bear on the crypto markets, private funds, and AI.

Gensler’s time as chair has brought significant pushback from industry insiders, crypto proponents, and conservative federal appeals courts. The federal Fifth Circuit Court of Appeals has issued several significant rulings in the 2020s pulling back the leash on—throttling, some would say—the SEC’s activities. One of its rulings became the basis for the Supreme Court’s decision in SEC v. Jarkesy (2024).

Here are some other notable recent developments:

AI-Related Fraud

In March 2024, the SEC settled charges against two investment advisers for misleading investors about their AI capabilities, signaling the agency’s prioritization of enforcement in this much-focused-upon investment area.

“Looking ahead, where do we see potential risk? … While perhaps not quite yet a perfect storm, there’s certainly one brewing around AI,” said Gurbir S. Grewal, director of the Division of Enforcement.

Beneficial Ownership Reporting

The SEC has been bolstering its regulations on beneficial ownership reporting, which requires significant shareholders—those who own more than 5% of a company’s shares—to reveal any changes in their holdings. The SEC recently shortened the deadline for filing an initial Schedule 13D (the reporting form for such holdings) from 10 to five business days, with the aim of providing timelier information about significant shifts in ownership stakes to investors.

The SEC: A Profit Maker

For 2024, The SEC had a budget of about $2.2 billion. Congress determines the SEC’s budget through its appropriations process. The SEC collects fees from securities exchanges on stock and other securities transactions, which offset these appropriations. These collections have historically surpassed the SEC’s yearly budget, with excess funds going to the U.S. Treasury.

Cryptocurrency Oversight

In 2023, the SEC brought 46 enforcement actions related to cryptocurrencies, a 53% increase over 2022. High-profile cases included charges against Binance, Coinbase, and other major exchanges for operating as unregistered exchanges. These cases have been part of the SEC’s efforts to regulate the growing crypto market, especially as its assets have been brought within regulated exchanges through the holdings of mutual and exchange-traded funds.

The SEC has approved futures-based and spot ETFs for bitcoin and ether cryptocurrencies.

Environmental, Social, and Governance (ESG) Disclosures

In recent years, the SEC has made a significant push to get American public companies on board with ESG practices. In March 2024, the SEC also adopted new rules requiring public companies to disclose detailed information on climate-related risks, goals, and greenhouse gas emissions. The idea was that these risks are as damaging as those that already need to be disclosed by publicly traded firms. However, the U.S. Court of Appeals for the Fifth Circuit disagreed, blocking for a time a major SEC effort in this area.

Leadership Changes

Chair Gensler is widely viewed—vilified is often the better word—as a more aggressive regulator than many of his predecessors, with a more muscular approach to cryptocurrency oversight, climate disclosures, and retail investor protection. Yet the SEC rule-making numbers look about the same as historical norms—his SEC is not producing a regulation a minute, as one might assume from some media coverage.

Still, his assertive approach and choice of priorities have drawn praise for bolstering investor safeguards and criticism for massive regulatory overreach, leading to more legal challenges and industry pushback than recent SEC administrators have faced.

Recent years haven’t been a quiet time for the regulator. Few SEC chairs have gained as much public notice as Gensler—his name is all but shorthand in the crypto world for the kind of malevolent forces depicted in horror films.

T+1 Settlement Cycle

Working with regulators and exchanges worldwide, the SEC adopted a move from the T+2 (trade date plus two days) settlement cycle to a T+1 (trade date plus one day) settlement cycle in 2024.

Shortening the settlement period reduced the time for potential defaults by counterparties in securities trading (particularly a problem in volatile and fast-moving markets). It also frees up capital faster since funds and securities are transferred sooner.

Whistleblower Program Successes

The SEC’s whistleblower program has been remarkably successful—at least for the SEC and certainly those who’ve received millions in awards. The chart below shows the substantial rise in annual tips and awards (the latter being a fractional proxy for the rise in ill-gotten funds clawed back through the program):

“The data show that whistleblowers are increasingly incentivized to come forward with their information about potential securities law violations, which is a testament to the strength of the program,” said Creola Kelly, chief of the Office of the Whistleblower (OWB).

Looking Ahead

Despite the OWB’s impressive numbers, critics argue its success has had unintended consequences. The substantial rewards have created a lucrative industry for lawyers and resulted in an overwhelming influx of tips—about 50 each working day. This flood of tips inevitably raises questions about how staff prioritize which tips to pursue; there’s just not enough staff to hunt down each lead they get now.

In such information-rich, time-poor environments, people typically rely on trusted sources—much like how you have your go-to financial information site. However, in the OWB context, “trusted,” some argue, means a small group of law firms gaining outsized influence. These aren’t just firms with casual connections to the SEC. Many of them are staffed by former SEC officials whose deep knowledge of the agency’s culture and operations gives their tips an inherent advantage. This goes beyond mere familiarity; it’s a systemic advantage that could skew which cases receive attention, undermining the program’s intended broad reach and fairness.

Why conclude our exploration of the SEC with this example, summarizing the concerns of some over an almost universally praised government program that has clawed back billions for defrauded investors? The concerns encapsulate the broader challenges the SEC has faced since its inception and continue to grapple with today. The agency has always struggled to create effective regulations that don’t inadvertently distort market dynamics or generate new problems. Moreover, it highlights the “revolving door” phenomenon between the SEC and the financial industry, where expertise and connections are double-edged swords—valuable assets and potential liabilities, and seemingly ineradicable.

It’s also a potent reminder that the SEC’s effectiveness in regulating an industry often resistant to oversight will depend on its ability to remain vigilant, flexible, and unwavering in its commitment to investor protection and market integrity. Even a program that has brought major frauds to justice and has been raining money down on whistleblowers might need further examination—and the endless meetings and white papers that go with it. This reflects the often self-critical nature of the SEC’s mission and derives from the fact that nothing in regulating the world’s largest financial markets ever comes with simple answers or remains straightforward for long.

What Is the Difference Between the SEC and FINRA?

Both play an important part in regulating the securities markets but have different responsibilities and authority. The SEC is the federal agency that oversees the entire securities industry, including public companies, investment advisers, and securities exchanges. FINRA, meanwhile, is a self-regulatory organization that operates under the oversight of the SEC. It regulates brokerage firms and their registered representatives.

Why Doesn’t the SEC Regulate Commodities and Futures?

Regulating these falls to the Commodity Futures Trading Commission (CFTC), not the SEC. The SEC regulates markets for stocks, bonds, and other investment instruments. The CFTC oversees the commodity futures and options markets. This division of responsibilities allows each agency to specialize in and better regulate their respective markets.

What Is the SEC’s Role in Regulating Cryptocurrency?

The SEC regulates cryptocurrency primarily through its authority over securities laws. While most cryptocurrencies aren’t classified (yet) as securities, those that do fall under the SEC’s jurisdiction. The SEC has brought actions against crypto exchanges it thinks are operating unregulated securities exchanges.

How Does the SEC Decide What’s a Security?

The answer derives from a 1946 U.S. Supreme Court case, SEC v. W.J. Howey Co., which established the “Howey test” to determine if a transaction qualifies as an “investment contract” and thus a security under the Securities Act of 1933. According to this test, an asset is a security if all the following apply:

1. Something of value is invested.
2. The investment is in a joint enterprise.
3. There’s an expectation of profits.
4. The profit expectation comes primarily from others’ efforts, meaning investors rely on third-party management or entrepreneurial efforts for returns.

The Bottom Line

The SEC was established to protect investors, ensure fair and efficient markets, and facilitate capital formation. Through its regulatory, enforcement, and data analysis units, the SEC oversees the largest capital markets in the world.

The SEC’s Division of Enforcement and the Division of Economic and Risk Analysis are crucial in investigating securities violations, prosecuting offenders, and providing the analysis the SEC needs for its regulatory decisions. The SEC has long had its critics—too beholden to Wall Street for some; too powerful for others. Yet it remains the central bulwark keeping the U.S. position as an economic powerhouse.

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