The regulations that form the backbone of American financial markets are crafted by the U.S. Securities and Exchange Commission (SEC), a federal entity. Emerging in the aftermath of the Great Depression, this agency navigates the intricate realm of securities, bolstering the safeguarding of millions of U.S. citizens’ savings and overseeing other financial domains.

Chair of the SEC, Gary Gensler, emphasized, “Our markets must operate transparently and free from deceit, while investment advisories fulfill their public obligations. It’s crucial to protect investors, uphold market integrity, and promote capital creation.”

This article travels from the SEC’s 1930s inception to its current cryptocurrency regulatory hurdles, shedding light on its authority, duties, and influence.

The SEC, a U.S. federal body, holds the responsibility of safeguarding investors and managing securities markets. Conceived by the Securities Exchange Act of 1934, the SEC emerged largely as a response to the 1929 stock market catastrophe that ushered in the Great Depression. Through legal action against alleged securities law violators, the SEC enforces its regulations. When criminal activity is suspected, the SEC involves the U.S. Department of Justice (DOJ) for potential prosecution.

As the U.S. economy floundered in the deep troughs of the Great Depression, the SEC was born in 1934—a consequence of the 1929 market collapse. Before this collapse, the 1920s were marked by a deficient federal oversight of securities, akin to a raucous party with no supervision.

The era, dubbed the “Jazz Age,” saw enormous speculative investments and negligible regulations, an inviting scenario for those seeking financial gains through misconduct. But just like any unrestrained celebration, the music halted, and the subsequent consequences were inevitable. Observing the aftermath, the survivors resolved to impose regulations and summon oversight.

Before the downturn, there was a speculative height. During the 1920s, Wall Street became a global financial juggernaut, with the New York Stock Exchange (NYSE) adjudicating 61% of U.S. securities transactions by 1929. Despite its economic significance, the NYSE operated more as a private consortium serving its affiliates’ interests rather than the public’s, with minimal financial introduction requirements. This environment enabled managers to obscure crucial financial disclosures, fostering an atmosphere ripe for manipulation and concealment of profit and loss details.

Pre-SEC times witnessed a stock price-to-earnings (P/E) ratio—an investment value indicator—doubling the typical 15 norm. The October 1929 crash then unveiled the market’s susceptibilities, obliterating wealth across America and demolishing public trust in financial markets for ensuing generations.

Fast Fact

Industrial output reached its peak in June 1929, but stock prices soon saw a decline. By October 23, the Dow dropped to 306, marking a 20% fall from its September zenith, instigating margin calls. The subsequent day’s sell-off incited mass panic, with banks led by J.P. Morgan intervening in about 20 stocks—a remediation that previously pacified fears but this time provided only a brief respite.

Termed later as “Black Tuesday,” the following Tuesday exemplified a colossal, frenzied sell-off, and the banks were preoccupied with self-preservation to intervene. By mid-November, the index had plunged almost 50% from its peak.

Half of the new $50 billion securities introduced in the 1920s became valueless in days. The Hoover administration advocated draconian austerity through the voice of Treasury Secretary Andrew Mellon, one of America’s wealthiest figures: “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate … purge the rottenness out of the system.”

Mellon enforced his purge. By 1932, the Dow’s value dwindled to nearly 10% of the 1929 figure. Many Americans saw their life savings obliterated, with up to 4,000 banks in the U.S. collapsing within a year. Whispers grew of those who flourished amid the crash.

Fast Fact

The inaugural SEC chair, Joseph P. Kennedy, built a vast fortune in the 1920s through trades designed to be stopped under his guidance, including a notorious “bear pool” during the 1933 short bull market, which partly inspired the Securities Exchange Act of 1934. Kennedy’s impactful yet brief 431-day tenure emphasized governmental supremacy over Wall Street.

The commission paraded several fraudsters for public testimonies, inadvertently giving the public antagonists. Post-congressional inquest, J.P. Morgan addressed reporters audaciously: “Eliminate the leisure class and you destroy civilization.” In a society where many had lost savings in his banks, these words resonated poorly, rallying support for substantial securities legislation.

‘s insensitive remarks—made even as many endured losses in banks he controlled—stoked societal unease, setting the stage for robust securities laws. During his prime, Morgan basked in reverence as a financial oracle, but now with misguided perceptions, he misrepresented the U.S. leisure class size in his public estimation.

An era concluded. Testifying, an administration representative pointed out that Herbert Hoover, historically known for leniency toward Wall Street, now echoed a prevailing American sentiment comparing Wall Street to a massive gaming hub manipulated by elites.

Subsequently, Congress approved the 1933 Securities Act and the subsequent legislation establishing the SEC. These acts endeavored to provide investors and markets with accurate info on publicly traded firms and transparent guidelines to strengthen trust in securities trading. Joseph P. Kennedy, father to the future President John F. Kennedy, became the SEC’s first chair under President Franklin D. Roosevelt.

Today, the SEC adheres to the early principles set by significant legislation between 1933 and 1940, focusing on:

Transparency and disclosure: The SEC insists on precise and timely disclosures from publicly traded securities offerors. Investor protections: It ensures honest investor treatment by supervising key securities industry figures, often who find securities markets perplexing. Market integrity: By identifying and countering fraud and market manipulation, the SEC strives to maintain orderly, efficient, and equitable markets. Capital formation: Encouraging collective capital for American business growth is a core SEC pursuit. Enforcement: As a law enforcement entity, the SEC can initiate civil actions against those breaching securities laws.

These foundational concepts align with the SEC’s congressional mission since 1934: (1) safeguarding investors, (2) securing fair, orderly, and efficient markets, and (3) enhancing capital formation.

Emphasizing their critical mission, former SEC Chair Jay Clayton remarked, “Neglecting our objectives or highlighting one tenet at the expense of others can harm investors, enterprises (irrespective of size), U.S. capital markets, and consequently, the economy.”

The U.S. President appoints an SEC commissioner as its chair—currently holding this position is .

Commissioners serve staggered five-year terms ending on June 5, with a maximum of three commissioners from the same political party, striving for nonpartisanship.

The SEC, based in Washington D.C., encompasses five divisions, 25 offices, and employs over 4,500 staff members across the nation. Here’s an overview of the SEC structure.

This division supervises the disclosure of essential investment information—previously often clandestine before the SEC’s existence—concerning profits, losses, and more. It scrutinizes public companies’ disclosures, securities exchanges, transfer agents, and clearing agencies, setting policies that govern securities markets and participants while also overseeing market data publication.

This division regulates the U.S. investment management sector, including professional fund managers, research analysts, and advisers to retail clients.

“[O]ur efforts are vital to everyday investors … The Division encompasses the Rulemaking Office; Chief Counsel’s Office; Disclosure Review and Accounting Office; Analytics Office; and the Managing Executive’s Office,” shared Natash Vij Greiner, head of Investment Management Division. “Each office’s staff plays a pivotal role in policy administration, impacting numerous stakeholders.”

Significant division attention ensures understandable and beneficial disclosures regarding popular retail investments like mutual funds. The aim is to keep regulatory expenses manageable for everyday investors.

To better supervise fund disclosure mandates, the SEC has expanded this division’s oversight in recent years.

Tip

Legal expert Cary Coglianese from the University of Pennsylvania notes that, despite much attention on Supreme Court verdicts and alterations in SEC Enforcement Division’s court processes, cases rarely reach jury trials or administrative law judges. “Settlement is primarily the resolution method,” he observed.

The SEC’s Enforcement Division is regarded as the most pivotal and, undoubtedly, most intimidating unit. It investigates and pursues federal securities law infractions.

The division employs three enforcement mechanisms:

Law enforcement collaboration: The division coordinates closely with the FBI, DOJ, U.S. Secret Service, and state and local bodies in probing and prosecuting securities-related crimes. Civil litigations: The division can initiate civil proceedings in federal court, with defendants having a jury trial right. Administrative processes: It can prosecute cases before an SEC administrative law judge. However, a June 2024 Supreme Court ruling in SEC v. Jarkesy might influence these processes in federal court. Post-Jarkesy, while the division can still engage in administrative procedures, its authority to impose civil penalties in this mode is notably limited, said Cary Coglianese, a law expert at the University of Pennsylvania Carey Law School.

“When revoking licenses or similar actions, SEC administrative law judges can expedite processes.” However, Coglianese stated, “Cases with penalties pose a different scenario, likely reducing the number of civil penalty actions pursued by the SEC due to these hurdles.” He noted that administrative procedures can still impose cease-and-desist orders, suspensions, industry bans, and non-monetary penalties.

Below is a table outlining the cases Coglianese indicated the SEC must pursue in U.S. District Courts and those, unless directed otherwise by courts, eligible for administrative resolution:

Some typical penalties the SEC’s Enforcement Division seeks include:

Bans and Suspensions: The SEC can bar or suspend individuals from the securities sector, often tantamount to career termination. Civil Fines: Financial penalties levied against those breaching securities laws. Criminal Penalties: Although the SEC doesn’t initiate criminal cases, it collaborates with bodies like the FBI and DOJ that do. Disgorgement: This involves compelling violators to relinquish profits from illicit activities. Injunctions: Court or administrative orders to halt activities believed to violate securities laws. Restorative Measures: Supplemental penalties like compliance programs or appointing independent overseers to prevent future violations.

Most SEC cases settled or resolved through a verdict include both disgorgement and civil fines. The SEC implements a tier-based penalty system to represent misconduct gravity:

Tier 1 penalties: For individuals, up to $7,500 per breach; for entities, up to $80,000 per breach—applied to minor infractions lacking fraud or significant harm. Tier 2 penalties: For individuals, up to $80,000 per breach; for entities, up to $400,000 per breach—pertaining to fraud, deceit, or regulatory noncompliance. Tier 3 penalties (most severe): For individuals, up to $160,000 per breach; for entities, up to $775,000 per breach—reserved for severe infractions causing substantial losses.

The SEC’s Office of the Whistleblower, launched under the , has greatly contributed to punishing securities violations. Whistleblowers receive 10%-30% of penalties over $1 million if their information leads to a hefty fine.

This program incentivizes whistleblowers financially while protecting them against employer reprisals. The scope of enforcement extends as individuals from any firm can report violations, far exceeding SEC staff’s capacities alone.

During the 2023 fiscal year, the program granted nearly $600 million to whistleblowers, setting a record with a $279 million award to one recipient. Tips swelled over 18,000 that year, a 50% annual increase, showing its uptick in SEC enforcement.

The SEC’s Economic and Risk Analysis Division acts as the chief data analysis branch. Its tasks include assessing rule-making economic impacts, evaluating market risks and trends, spotting unusual trading patterns, and advising on enforcement activities’ economics.

“The Division of Economic and Risk Analysis with over 100 Ph.D. economists is central to our work,” noted Gensler. “They partake in every essential SEC decision-making process, from market surveillance to policymaking.”

In the early 2000s, critics viewed the SEC as a body condoning financial and speculative excesses. However, under Chair Gensler’s leadership, criticisms have lessened as the SEC actively wields regulatory power, especially in crypto, , and AI domains.

Significant resistance has emerged during Gensler’s tenure from industry insiders, crypto advocates, and conservative federal appeal courts. Several important rulings in the 2020s by the federal Fifth Circuit Court of Appeals have limited—some might argue entirely restrained—SEC activities. One ruling underpinned the Supreme Court’s SEC v. Jarkesy (2024) decision.

Here are some noteworthy recent events:

AI-Induced Fraud

In March 2024, the SEC resolved charges against two investment advisers for fraudulent AI claims, emphasizing enforcement priority in this investment area.

“What’s the potential risk ahead? … While perhaps not an impending perfect storm, there’s definitely turbulence with AI,” said Gurbir S. Grewal, Enforcement Division Director.

Aiming for more prompt shareholder information, the SEC has tightened beneficial ownership reporting rules requiring major shareholders—holding more than 5% of company shares—to disclose changes. Filing deadlines were curtailed to five business days from ten for initial holding changes.

Environmental, Social, and Governance (ESG) Disclosures

Recently, the SEC pursued the integration of practices in U.S. public firms. In March 2024, rules mandating detailed disclosures on climate risks, goals, and greenhouse emissions were adopted. The premise rests on these risks’ similarity to those mandatorily disclosed by public companies, yet the U.S. Court of Appeals for the Fifth Circuit temporarily halted major efforts in this sphere.

Leadership Transformations

Gary Gensler, often described as an assertive regulator, has drawn acclaim for tough cryptocurrency, climate disclosure, and retail investor protection tactics. Despite perceived aggressive regulation, SEC’s rule production aligns with historical averages.

Gensler’s firm approach and priority selection have received acclaim for strengthening investor safeguards, but also criticism for perceived regulatory overreach, resulting in more legal disputes and industry resistance than faced by recent SEC leaders.

The regulatory landscape hasn’t been tranquil recently. Gensler’s notoriety is evidenced by his association with the 2024 (T+1) settlement cycle abbreviation.

Reducing the settlement timeframe curtails potential counterparties’ default risks in securities trades, especially in turbulent markets, while expediting capital release by quicker fund and security transfers.

Whistleblower Program Triumphs

The SEC’s whistleblower initiative—deemed hugely successful for both the SEC and award recipients—displays rising annual tips and awards, indicative of recovered illicit gains:

“Whistleblower data show increased motivation to report possible securities law breaches, showcasing the program’s efficacy,” stated Creola Kelly, Office of the Whistleblower (OWB) head.

Though OWB’s performance is praiseworthy, critics highlight unintended consequences. Substantial incentives have spawned a profitable attorney industry and a deluge of tips—around 50 daily—raising case prioritization queries amid inadequate staff to pursue every lead.

Amidst overwhelming details, individuals generally rely on trusted sources—akin to a reliable financial info site. In the OWB setting, “trusted” allegedly designates a few law firms wielding disproportionate influence. These firms aren’t randomly associated with the SEC; many employ former SEC staff whose insight into agency protocols affords them an edge, distorting the program’s breadth and impartiality.

Concluding our SEC analysis with this example encapsulates some critiques of an otherwise acclaimed government initiative recovering billions for duped investors. These issues represent the broader challenges confronting the SEC since its inception. The agency continuously battles crafting effective regulations while evading market disruptions or unintended consequences. Additionally, it illustrates the SEC-financial industry “revolving door” phenomenon, where connections serve as assets and liabilities, evidently enduring.

The SEC’s efficiency in supervising a frequently oversight-averse industry relies on sustained vigilance, flexibility, and unwavering dedication to investor safeguarding and market integrity. Even renowned programs unearthing substantial fraud and rewarding whistleblowers might merit additional scrutiny—and related endless discussions and documents. This echoes the SEC’s consistently self-critical mission: regulating the world’s largest financial markets lacks simple resolutions or sustained straightforwardness.

Cryptocurrency Oversight

In 2023, the SEC executed 46 cryptocurrency-related enforcement actions, marking a 53% rise from 2022, with prominent cases involving bitcoin and ether cryptocurrencies.

SEC Financial Performance

For 2024, the SEC had a $2.2 billion budget. As determined by congressional appropriations, this budget is supplemented by fees from securities exchanges on stock and securities transactions. Historically, fee collections exceeded the SEC’s annual budget, channeling surplus into the U.S. Treasury.

What sets the SEC and FINRA apart?

Both entities regulate securities markets but differ in remit and authority. The SEC, a federal body, supervises the entire securities sector, including public companies, investment advisers, and securities exchanges. Conversely, FINRA operates as a self-regulating organization under SEC oversight, managing brokerage firms and their agents, not SEC. The SEC oversees markets for stocks, bonds, and investment tools, while CFTC governs commodity futures and options markets. Such responsibility division enables each agency to focus and adeptly regulate their respective domains.

How does the SEC regulate cryptocurrency?

The SEC primarily oversees cryptocurrency regulation through its securities laws authority. Most of its actions rely on the “Howey Test” to determine if a transaction qualifies as an “investment contract” and, thus, a security under the Securities Act of 1933. This test considers an asset a security if these criteria are met:

• There’s a valuable investment.
• The investment occurs in a joint venture.
• Profits are expected.
• The profit expectation mainly arises from others’ efforts, indicating investor reliance on third-party management or entrepreneurial endeavors for returns.

Established to protect investors, maintain fair and efficient markets, and support capital creation, the SEC manages the world’s largest capital markets via regulatory, enforcement, and data analysis units.

The SEC’s Enforcement and Economic and Risk Analysis Divisions are instrumental in exposing securities violations, penalizing offenders, and offering analysis crucial for regulatory determinations. Despite enduring criticisms—being too indebted to Wall Street for some, too commanding for others—the SEC steadfastly supports the U.S. economic hegemony.