History of SEC

Air Date: January 29th, 2021

The US Securities and Exchange Commission is everyone’s favorite federal agency responsible for regulating the US markets. The SEC is located in Washington DC, this agency was created when Franklin D. Roosevelt signed the Securities Exchange Act in 1934.

Before the creation of the SEC, oversight of trade in stocks, bonds, and other securities markets was non-existent. Today everything a firm does is influenced in one way or another by the regulations passed down.

If you are familiar at all with history the 1934 timestamp tells you this follows the Great Depression. It was part of Roosevelt’s New Deal that was aimed to rejuvenate Americans. We’re talking about a time where unemployment rates soared above 20% with some parts of the country as high as 80-90%.

The stock market crash (Black Tuesday) on October 29, 1929, caused bank closures that led to homelessness, bankruptcies, unemployment. Before 1929 the market was in the longest bull run at that time – 1924-1929 with the DOW moving from 78 to 380.

The US Senate Banking Committee put their heads together in 1932 to determine the cause of the crash and ways to prevent a future catastrophic event. These meetings were known as the Pecora hearings (named for the lead counsel, Ferdinand Pecora). What were their findings? Financial institutions had deceived investors all while participating in rampant insider trading.

The Securities Act of 1933 – this predecessor to the SEC created Blue Sky Laws which put the responsibility in the hands of the states for regulation. At its core, the purpose was to provide investors with honest financial data about securities.

Due to a mostly failed regulation at a State level, FDR stepped in with the signing of the Securities Exchange Act of 1934. It granted the power to regulate the exchanges and the ability to bring civil charges to those who violated securities laws. Joseph P. Kennedy, JFK’s dad, was the first chairman of the SEC.

Five bipartisan commissioners are appointed by the U.S. president to oversee the five divisions of the SEC, including:

  • The Division of Corporation Finance, which oversees publicly traded corporations.
  • The Division of Trading and Markets, which safeguards fair and efficient trade markets.
  • The Division of Investment Management, which protects investors by overseeing and regulating the investment management industry and its players.
  • The Division of Enforcement, which investigates securities law violations.
  • The Division of Economic and Risk Analysis, which monitors changes in the economy and keeps markets efficient and fair.

The SEC continues to evolve as the world changes. Last year the Form CRS (Client relationship summary) became a staple at every firm. Just as the title says, this is a summary of things you should know when entering a relationship with an advisor or as you court multiple firms.