If you are someone who is well-rehearsed on the ins and outs of investing in equities in the stock market, you’ve problem heard the term SEC before. But what exactly is the SEC? The SEC stands for the Securities Exchange Commission, which is a federal civil regulatory agency independent from the US government that regulates financial activities within the companies that are registered with any of the stock exchanges within the United States. The SEC’s goal is to ensure that these companies are transparent with their finances to public stockholders and are not participating in any illegal financial activity regarding federal securities laws.
The SEC in essence is an auditor for a lot of these companies, and they are required to publish a lot of their financial information on the SEC website called EDGAR. This includes quarterly, annual, notices of offering additional shares, and any record of a major institution buying large volumes of shares, such as a merger. The SEC also requires disclosure of any major insider trading activities from shareholders within an institution, by filing SEC insider trading forms.
The SEC has been around since the 1930s when the Securities Exchange Act of 1934 prompted the creation of the commission in response to the stock market crash of 1929 that led to the great depression. The primary goal of SEC is to enforce orderly and timely disclosure of financial statements of a company so that shareholders have access to credible information at the same time. There are been numerous times when shareholders lost money because they received delayed information against other shareholders who were able to sell on bad news or buy on good news for a stock price. This has led to numerous lawsuits over the years when there is a belief that these insider activities still occur.
The SEC not only requires disclosure of financial activity but in an age where social media has enabled access to information faster than ever, they must monitor company officials leaking unsubstantiated or unofficial information prior to SEC approval that could cause volatility in pricing markets. An example was in 2018 when Tesla CEO Elon Musk tweeted about taking his company private on April 20th, an act that sends Tesla’s share price up ten percent instantly. The tweet was an unofficial announcement by the CEO that was not approved by the SEC. This led to the SEC filing a lawsuit with the company. While these activities are generally acceptable for a private institution, there are certain communication restrictions that publicly traded companies must respect, and the SEC has grounds to sue them if they violate.
The SEC has always been a highly active agency and usually is able to crack down on illegal activity most of the time in the form of whistleblowers and anonymous tips. This can come in the form of competitors, individual shareholders, or even former company employees who were aware of illegal activities going on while employed with the company. While in some cases the tip may not be credible, there are been numerous cases where employees have been terminated over the threat of disclosing to the SEC or even hush money given out to those employees.
The SEC has always enabled those with credible information to cooperate with them, and in return may receive compensation for their acts. So far in 2020, nearly 40 whistleblowers that have come forward, received compensation totaling 175 million, with one whistleblower receiving 114 million according to the New York Post. This shows how much power the SEC holds and is given the full reigns by the US government to monitor financial activity.
It is important to note that while the SEC regulates a lot of these financial practices, they do not prosecute for criminal activities. The SEC has no jurisdiction to prosecute criminal activities but can disclose to the Federal Bureau of Investigation (FBI) or the United States Department of Justice of any criminal wrongdoing they discover in any investigation. It is quite common during civil suits brought down by the SEC, they uncover criminal activities associated with it such as embezzlement, fraud, and money laundering. Overall, the SEC has a lot of power in today’s world over US corporations and is an important tool for any investor to have confidence in the stock market.