The Securities and Exchange Commission: What is its Role in the Private Equity and Private Finance Marketplace?

19 Apr 2018·Articles

Enron. Bernie Madoff. WorldCom. Tyco International. Bre-X Minerals. Qwest Communications. Recognize these names? We’ve all heard the stories: rich schemers who deceive Investors, make false claims about their Companies, and pocket fraudulently generated profits while obliterating retirement savings from thousands of small (and large) Investors.

Who protects us from cons like these?

Nearly all the famous swindles highlighted above pertained to publicly traded Companies. But, irrespective of whether representing public or private Companies, scammers have taken advantage of Investors for centuries.

What role does the “Securities and Exchange Commission (‘SEC’)” play? Its primary function is to protect Investors and to oversee the market players – the “Securities Exchanges,” Securities “Brokers” and “Dealers,” “Investment Advisors,” and mutual funds dealing in public Securities.

Why Was It Created?

The excesses and rampant manipulations that led to the Stock Market Crash of 1929 and the ensuing Great Depression prompted the U.S. government to pass the “Securities Act of 1933”, with the “Securities Exchange Act of 1934” following on its heels which established the SEC.

The concept behind its formation is simple: all Investors, whether large institutions or small Investors, should be able to access accurate, timely and meaningful financial information about the Companies and Securities being offered to Investors. It is meant to enable Investors to judge for themselves whether to invest in and continue to own a security.

Its objective was to restore public confidence in the financial markets by living up to two principles:

  1. Companies offering Securities to the public must be truthful and transparent about their businesses and the risks involved in investing.
  2. Companies that sell and trade Securities (Brokers, Dealers and Exchanges) must treat all Investors fairly and honestly.

Powers of the SEC

The Securities Exchange Act of 1934 empowered the SEC to:

  • Interpret and enforce federal Securities laws;
  • Issue new rules and amend existing rules;
  • Oversee the inspection of Securities firms, Brokers, Investment Advisors, and ratings agencies;
  • Oversee private regulatory organizations in the Securities, accounting and auditing fields; and
  • Coordinate U.S. Securities regulation with federal, state and foreign authorities.

As a result, the SEC was granted enforcement powers over brokerage firms, transfer agents, clearing agencies, and the nation’s Securities “Self-Regulatory Organizations (‘SROs’),” including the “New York Stock Exchange (‘NYSE’),” the “NASDAQ Stock

Market,” the “Chicago Board of Options,” and the “Financial Industry Regulatory Authority (‘FINRA’).” It is up to the SROs to discipline members for improper conduct.

For more information about oversight of Broker-Dealers, see “The Financial Industry Regulatory Authority (FINRA).”