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The Securities Act of 1933 and the Securities Exchange Act of 1934 were designed to help protect investors, not only from fraud but also from the problems of misunderstandings associated with inadequate or unusual data-reporting. Enacted during the Great Depression (1929-1940), these laws and others passed in subsequent years are administered by the federal Securities and Exchange Commission (SEC). Before the SEC was created in 1934, securities were regulated by the individual states. Federal laws were created to supplement, rather than to replace, what were often inadequate state laws.
The SEC has five commissioners who are appointed by the president. No more than three commissioners can be members of the same political party; the five-year term of one of the commissioners expires each year.
Companies issuing stocks, bonds and other securities to the public must file a detailed financial registration statement with the SEC, and the SEC determines whether the registration statement is complete and accurate. This ensures that buyers can make an informed and realistic evaluation of the worth of available securities. The SEC oversees trading in stocks after their distribution as well, administering regulations designed to prevent manipulation of the price of a stock traded on the market. Brokers, dealers in the over-the-counter market, and even the stock exchanges themselves must register with the SEC.
The SEC regulates interstate market securities and enforces laws against unfair and illegal practices. It also requires companies to provide information for the public about how many shares of their stock are being bought or sold by officers of the company. The SEC believes that, because these persons have privileged information about the company, which makes them "insiders," their buying or selling can indicate to other investors their degree of confidence in the future of the company. The laws have had some success in preventing fraud and secret dealings aimed at manipulating stock prices.
In its recent history the SEC has taken on the responsibility of overseeing corporate policies, particularly by requiring reports designed to uncover illegal company payments to political figures or others for the purpose of buying their influence. What may be common business practice in many countries is in some cases unlawful in America. Congress has charged the SEC with seeing that American corporations abide by American business ethics even when doing business in another country. The SEC is a good example of an agency created to protect the American public through the regulation of business enterprise.