Securities and Exchange Commission (SEC)

What it is:

The Securities and Exchange Commission, also known as the SEC, is a regulatory body that was established as a result of the Securities Act of 1934. Founded after the stock market crash of 1929, the SEC is the federal agency responsible for the oversight and enforcement of laws pertaining to the securities industry.

How it works/Example:

The SEC is a federal government agency that is led by five commissioners who are appointed by the President to serve staggered five-year terms. The persons holding these offices must be approved by the Senate, and in an effort to promote bi-partisan agreement, no more than three may be of the same political party. The commissioners are supported by a staff of more than 3,500 who work from 11 regional and district offices spread throughout the nation.

The SEC is organized into five distinct divisions:

Division of Corporate Finance: This division ensures that all publicly traded corporations fully disclose their financial results. Companies planning to issue securities for the first time must file registration statements, and those whose shares are already listed must submit quarterly updates (10-Q), as well as year-end filings (10-K). Public companies also must send out their annual reports to shareholders.

The corporate finance division protects the interests of investors by requiring companies to fully disclose all relevant financial information -- both positive and negative -- in a timely manner, thereby giving the public the data it needs to make prudent decisions on buying and selling.

Division of Trading and Markets: This division keeps the markets running on a fair and orderly basis by monitoring and regulating the activities of those who are actively involved in the process of buying and selling stocks or bonds, including broker/dealers, clearing agents and transfer agents. The division also keeps tabs on the Securities Investor Protection Corporation (SIPC), which safeguards investors' assets against losses arising from the bankruptcy of brokerage firms.

Division of Investment Management: This division oversees the investment management industry, which includes mutual funds and fund managers, analysts and investment advisors. The division responds to certain complaints about this industry, helps create and interpret laws governing the industry and reviews filings from members of the industry.

Division of Enforcement: This division recommends investigations, civil actions, administrative proceedings and prosecutions on behalf of the SEC. Because the SEC has the authority only to enforce civil penalties, it works with the U.S. Department of Justice to bring criminal actions in certain cases. This division also obtains the evidence used in these proceedings.

Division of Risk, Strategy and Financial Innovation: This division, established in September 2009, conducts analyses of hedge funds, derivatives markets and other markets to identify trends that might threaten the systemic risk in the U.S. economy. The division then recommends further research or other actions to mitigate these risks where appropriate.

Why it Matters:

Imagine trying to invest with confidence in a market where there was no protection from insider trading or accounting fraud or stock manipulation. Picture what it might be like to invest in a company that isn't required to disclose its financial results or one that could omit negative material information with impunity. Would you feel comfortable entrusting your retirement assets to a stockbroker or financial advisor knowing that there was no recourse in the event they suddenly left town with your money?

It is the responsibility of the SEC to ensure that investors can confidently and with good faith invest their money without fear of corruption, either from the brokers or exchanges that facilitate trading or from the companies that issue the securities. Nevertheless, even with stringent laws in place, we've still seen examples of corporate malfeasance (at companies like Enron), as well as market timing/late trading scandals within the mutual fund industry. These corporate misdeeds have wiped out millions of dollars and have caused some investors to lose faith in the system.

Fortunately, though, every year the vigilant efforts of the SEC result in civil actions against 400 to 500 individuals and corporations that attempt to skirt the law. By forcing strict compliance with regulations and swiftly dealing with those who fail to follow them, the SEC strives to maintain integrity and fairness in the markets.

Best execution refers to the imperative that a broker, market maker, or other agent acting on behalf of an investor is obligated to execute the investor's order in a way that is most advantageous to the investor rather than the agent.