Trends & Insights

What is the Securities & Exchange Commission (SEC)?

What is the SEC? What is the purpose of the Securities & Exchange Commission, and how does it help small businesses?

What is the purpose of the Securities & Exchange Commission?

The Securities and Exchange Commission (SEC) was created to ensure fair market activity, enforce financial regulations, and encourage capital formation.

For example, the SEC played a key role in helping the economy recover after the Great Recession of 2008 prosecuting the financial institutions responsible and returning billions of dollars to the market.

While this benefits investors and big organizations, small business owners are often left wondering what role the SEC plays in their day-to-day operations, and how the SEC can help them succeed.

In this piece, we’ll explore the history of the SEC, the role it plays in U.S. markets, and what this means for your small business.

Here’s what we’ll cover in this article

What are securities? What is an exchange?

What is the SEC?

What role does the SEC play in US markets?

How does the SEC help small businesses?

Final thoughts on the Securities and Exchange Commission

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What are securities? What is an exchange?

Before diving into the details of the SEC, it’s worth breaking down the basics: What exactly is a security, and what is an exchange?

Securities are broadly defined as financial instruments that are negotiable and hold some type of value. Common examples of securities include stocks, bonds, and options.

It’s also important to note that securities are fungible. This means they can be interchanged with assets of the same value and type. Consider currency.

While not a security, cash is fungible — one U.S. dollar bill can be exchanged with any other and retain the same value.

An exchange, meanwhile, is any marketplace where securities can be traded.

Historically, these marketplaces were physical — stock exchanges are a good example — but many of these marketplaces are now digital.

The SEC oversees securities and exchanges no matter where they’re located and no matter what form they take.

What is the SEC?

The SEC is a regulatory and administrative agency created by the U.S. government in 1934 under the Securities Exchange Act.

This Act was passed in response to the stock market crash of 1929, which sent the American market into a tailspin and led to significantly reduced investor confidence.

The SEC was given a three-part mission to help stabilize markets and encourage investor confidence:

1. Ensure fair market activity

According to the SEC, the U.S. capital markets “are the deepest, most dynamic, and most liquid in the world.

They also have evolved to become increasingly fast and extraordinarily complex.”

As of 2023, the SEC is responsible for the oversight of more than $100 trillion in securities trading across both digital and physical markets.

The primary goals of this oversight are fairness and transparency.

The SEC is responsible for ensuring that both buyers and sellers of securities are forthright and truthful about the value of securities, along with potential risks associated with these securities.

2. Enforce financial regulations

Part of ensuring fair market activity means enforcing financial rules and regulations.

As evidenced by the full text of the General Rules and Regulations of the Security Exchange Act, much of this enforcement comes down to reporting and review.

Case in point, under section 240.14c-3, security holders must provide the SEC with an annual report. Under section 240.15d-21, meanwhile, companies must provide reports for employee stock purchases, savings, and other similar plans.

The agency then reviews these reports to ensure both buyers and sellers are acting in good faith.

The SEC also recognizes that financial regulations aren’t static. As technology advances, the agency constantly evaluates current procedures and, where appropriate, modernizes rules to accommodate these changes.

Over the last 90 years, Congress has passed additional Acts that help the SEC maintain market stability. These include:

  • The Trust Indenture Act (1939)
  • The Investment Company and Investment Advisers Act (1940)
  • The Sarbanes-Oxley Act (2002)
  • The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)
  • The Jumpstart Our Business Startups (JOBS) Act (2012)

The SEC also creates and enforces new rules to help keep pace with changing economic conditions.

To illustrate, in February 2024, the SEC proposed a rule to help qualify venture capital funds inflation adjustment.

As part of the approval process, the SEC will ask for public opinion along with conducting internal evaluations and reviews.

3. Encourage capital formation

Finally, the SEC takes an active role in capital formation to help grow the U.S. economy.

In particular, the SEC offers an interactive capital navigator.

Owners can provide details about their business operations and get capital pathway recommendations to help streamline the funding process.

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What role does the SEC play in US markets?

While the primary mission of the SEC remains the same, the agency has diversified its role to keep pace with changing markets.

According to the SEC’s official website, the agency now performs five key functions:

1. Informing and protecting investors

Investors are kept informed about market trends with regular investor alerts and bulletins.

In addition, the SEC provides data on all registered investment professionals, including their current registration status and background.

2. Facilitating capital formation

The SEC facilitates capital formation with resources such as the Capital Raising Hub for small businesses and the FinHub for financial technology firms.

3. Enforcing federal securities laws

Securities laws are enforced through both digital and physical enforcement actions, and the SEC provides a list of the latest court actions and administrative proceedings.

The Office of the Whistleblower also allows members of the public to report unfair or fraudulent practices.

4. Regulating securities markets

The SEC helps regulate securities markets with both final and proposed rules, and actively seeks out investor feedback on current and future SEC rulemaking.

5. Providing data

Finally, the SEC provides market data such as Money Market Fund Statistics, information about active broker-dealers, and reports from registered investment advisers.

How does the SEC help small businesses?

There are multiple ways the SEC can help small businesses, including:

1. Capital formation

In 2019, the agency established the Office of the Advocate for Small Business Capital Formation (OASBCF).

The Office provides resources for small businesses to understand the capital raising process and navigate the SEC rules associated with this process.

Given the increasing volume and variety of potential capital sources, the SEC’s guidance can help small businesses avoid possible pitfalls and streamline capital generation.

The SEC also provides guidance for businesses that choose to raise capital by selling securities.

Specifically, the SEC’s small business publications contain information about how to register a public offering, how to report securities data, and where owners can find more information about the SEC regulations.

2. Rules and regulations analysis

The OASBCF also analyzes proposed rules from both the SEC and those from self-regulatory organizations (SROs) to determine their potential impact on small businesses and investors.

Armed with this information, the office can help SMBs effectively navigate these rules to both streamline processes and reduce the risk of non-compliance.

This type of assistance is critical for smaller businesses as the pace of regulatory change accelerates and compliance expectations evolve to meet global consumer demand.

Each year the Office releases an Annual Report which contains an analysis of current market trends, SEC rulemaking, and OASBCF recommendations.

3. Issue resolution

In addition, the OASBCF helps small businesses and investors resolve issues with the SEC and with SRO by recommending specific policy changes to both Congress and the Commission.

For instance, the organization has recommended changes such as scaling security disclosure requirements to match the size of the business, improving access to educational resources and tools for SMBs, and modifying the definition of an “accredited investor” to give owners more options in demonstrating financial sophistication.

Final thoughts on the Securities and Exchange Commission

What is the purpose of the Securities & Exchange Commission? To keep the country’s evolving financial markets honest, fair, and functional.

While the SEC often focuses on larger enterprises and financial institutions, it also plays a key role in the success of small businesses by offering advice for capital generation and assistance in remaining compliant as SMBs make the move into public securities exchange.