The SEC: A Necessary Evil?

If you’re involved with funds at all here in America, you know about the SEC.

But how much do you know about them?

Do you know where they started? How about why?

Sure, everybody seems to hate them and they want to avoid any of their sometimes overbearing regulations…

But does the SEC serve an undeniably necessary purpose?

My answer? Read this article and you’ll find out. Let’s start from the beginning.

SEC Origins

In order to understand someone, you have to understand where they come from.

This principle is true with organizations as well, so here’s a little blast from the past.

As I referenced in my most recent article, the Securities and Exchange Commission came about thanks to the Market crash of 1929 which parlayed into the Great Depression.

The American people had lost all faith in the US markets, and action was needed for any hope of a restoration.

As with all things in government, it still took some serious time. In fact it wasn’t until four years later at the very end of 1933 and beginning of 1934 that legislation was passed to approve the creation of the SEC.

This new commission was split into four different branches, each serving a unique purpose.

  1. The Division of Corporation Finance, which ensures the corporate disclosure of important information to the investing public.
  2. The Division of Trading and Markets, which ensures fairness, order, and efficiency in market activities.
  3. The Division of Investment Management, which helps protect investors and encourages capital formation through oversight and regulation of the investment management industry.
  4. The Division of Enforcement, which is everyone’s favorite branch (not) that investigates securities law violations and initiates civil and criminal actions.

Basically the SEC has a mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

It was also determined that the SEC would have FIVE Commissioners. This is something that is simply not talked about enough because it’s kinda like the secret fourth branch of the government.

Chair Gary Gensler
Chair Gary Gensler

These Commissioners are selected through a similar process as the Supreme Court Justices.

The President will nominate someone that he believes qualifies for a role on the commission and the senate then approves it.

These Commissioners then serve terms (just like justices) that last five years.

The five members terms’ are staggered so that one term always ends on June 5th of every year. This allows for new blood and perspective to be inserted into the commission on an annual basis.

To prevent political agendas from getting in the way no more than three Commissioners may belong to the same political party.

The President also has the power to elect one Commissioner as the Chairman, and he/she serves as the SEC’s top executive.

To see the current Commissioners and read more information click here.

So the question here is, what exactly can the SEC regulate?

Securities

Yep, you guessed it, Securities.

But what is a security? It’s harder to define than what you might think.

Per Investopedia a Security is …

Securities are fungible and tradable financial instruments used to raise capital in public and private markets.

There are primarily three types of securities: equity—which provides ownership rights to holders; debt—essentially loans repaid with periodic payments; and hybrids—which combine aspects of debt and equity.

Investopedia

The most common securities are stocks, bonds, and futures or options.

Where you get into a gray area is when you’re dealing with things like Real Estate, which tend to be defined as a security on a very case by case basis.

So What?

So now you’ve got a little bit of an understanding of what the SEC is, however, not everyone agrees with what the SEC regulates.

Elon Musk once said in an interview for 60 minutes…

I do not respect the SEC

Elon Musk

Mark Cuban said…

SEC enforcement is worthless.

Mark Cuban

And there’s a whole bunch like them. They fundamentally disagree on how the SEC goes about regulating and enforcing their views on different legal issues.

With that being said it is largely thanks to the SEC that another “Great Depression” event is highly unlikely, and has helped with sustaining a positive trending market for decades.

In my opinion the SEC can overstep it’s bounds at times. A friend of mine once described it as “when you’re a hammer everything looks like a nail.

Perhaps more updates are needed for this nearly century old organization.

However, one thing is certain, if you’re looking at working in any sort of investment space, having someone on your team that is well versed in SEC compliance is a MUST.

Hope this was helpful!

Bridger Pennington

Want to get direct guidance for your fund? Schedule a time with my Fund Advisors!

DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.


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