What does the SEC do?
An explainer on the role of the Securities and Exchange Commission in fintech
The U.S. Securities and Exchange Commission (SEC) is the regulating force that oversees and controls the U.S. securities market. In many ways, the SEC is critical to ensuring that the nation’s economy runs smoothly—it’s the agency charged with requiring U.S. companies to be more transparent, which in turn empowers investors to trust the stock market with their money. Absent this, sudden shifts could threaten the economy, take down major companies, and thwart consumers’ confidence in the system (remember Enron?).
What does the SEC do?
The SEC works to make businesses and markets more transparent by focusing on three primary areas: protecting investors, maintaining fair and efficient markets, and facilitating capital formation (for example, by improving access to public capital markets for emerging businesses or creating new channels for fundraising).
In practice, the SEC does several things. First, the agency requires that public companies register their securities and that a company, its risks, and the stocks it’s selling are accurate and honestly represented, allowing investors to make informed decisions.
Another of the SEC’s major roles is to interpret and enforce existing securities laws including recent ones like Sarbanes-Oxley, Dodd-Frank, and the JOBS Act. Among other things, these laws allow the SEC to monitor the actions of—and bring civil suits against—companies or people who participate in insider trading, provide false or misleading information, conceal risks, or commit accounting fraud. While the SEC itself can’t impose any penalties, it refers hundreds of cases each year to the Department of Justice, which often punishes such crimes with lengthy prison sentences or high fines. Misconduct related to the financial crisis alone resulted in 204 suits against companies and nearly $4 billion in penalties and monetary relief for harmed investors.
The SEC can also issue new rules, oversee inspections of firms and brokers, and coordinate regulation with state and local authorities.
How did the SEC come to be?
The agency was actually established in response to a complete breakdown of the consumer confidence it now strives to maintain.
After World War I, Americans began making more money and took advantage of their new prosperity by investing in stocks. But when the stock market crashed in 1929, half of the $50 billion that had been invested in the post-war period became worthless, directly affecting nearly 10 million investors. Consumers lost faith in the stock market, but the government needed a way to restore it—after all, the stock market kept the economy afloat and enabled new business.
So came the Securities Act of 1933 and the Securities Exchange Act of 1934. Both pieces of legislation aimed to restore confidence by requiring that companies treat investors fairly. The 1934 act established the SEC as an organization to oversee and enforce the new laws.
How does the SEC affect fintech?
Startups don’t necessarily think about the SEC unless they have IPO ambitions. But most fintech companies obviously rely on investors. In 2015, investments backed by venture capital amounted to $13.8 billion, a 106-percent increase over the previous year’s. And a number of startups like Robinhood and Guideline also develop apps that help consumers better navigate the securities landscape. As the industry develops at a rapid pace, the SEC works to investigate new business models to make sure they comply with existing laws. Regulating fintech companies can also provide additional clarity to investors and provide an avenue for improvement in the industry.
Specifically, the SEC is currently interested in three areas of fintech that are poised to transform the industry: robo-advisors, blockchains, and online marketplace lenders and crowdfunding. Robo-advisors help automate investment products, in turn enabling consumers to get instant customer service and democratizes the process. In order for robo-advisors to work well, however, the SEC ensures that they comply with the Advisers Act, provide investors with enough information, and keep investors’ personal data secure. The SEC is also interested in blockchain technologies, which it thinks can improve the trading and settlement processes. However, the technology, which is popular in the use of cryptocurrencies or decentralized databases, must also comply with existing cybersecurity, data protection, and adoption regulations. For example, the SEC recently shot down a request to publicly list a Bitcoin ETF on the BATS stock exchange, reasoning that the ETF must operate in regulated markets — which the Bitcoin market is not. Finally, the SEC has been interested in crowdfunding since at least 2012, when it passed the JOBS Act, which provided more crowdfunding opportunities for startups, allowing individuals to donate money and become investors without necessitating an IPO. Currently, the SEC is interested in whether crowdfunding platforms are enabling informed decisions on the part of investors and providing adequate data protection.
How is the SEC organized?
The SEC is run by five presidentially appointed commissioners with staggered five-year terms. One of these commissioners is designated as the chair, who has the authority to allocate funds and resources throughout the organization and appoint personnel throughout the SEC’s five divisions and 23 offices. This means that the chair has significant influence over what the SEC prioritizes and what issues it dedicates staff and funding to. Nonetheless, some measures are in place to guard against complete partisanship: The five commissioners work together to enforce and interpret laws, issue new rules, and oversee firms and organizations. At least two of the commissioners must be from the opposite party of the president. There are currently three vacancies on the commission.
It remains to be seen how much of the SEC’s current practices will remain in place when the Trump administration’s new chair is confirmed. Jay Clayton, who comes from a Wall Street background, was nominated earlier this year and is expected to ease capital-raising rules, making it easier for companies to go public, and to take a more lax approach to regulating Wall Street. He is expected to go before the Senate for confirmation in early March.
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