By: Nathan Hakakian | Business  | 

The SEC: A Double-Edged Sword

The partial government shutdown has caused a ripple effect that has been felt through various government branches, and although some sectors such as Social Security, Medicare and the U.S. Postal Service are still in service, other departments such as the Security Exchange Commission (SEC) — run by Jay Clayton —have shut down. According to their official website,, the SEC’s mission is to “protect investors, promote fairness in the securities markets, and share information about companies and investment professionals to help investors make informed decisions and invest with confidence.”

But what role does the SEC really play, anyway? What’s its importance? When a company decides “to go public,” it will launch an Initial Public Offering (IPO), with the goal being to raise capital, by selling pieces of their company, known as “shares.” Within that long procedure, companies must be extensively vetted to ensure that the information listed in the documents is accurate. The SEC will then issue a document called an S-1, which details what the company is doing and why. The SEC will then take a few months to conduct further diligence, and will eventually approve or deny the motion. After receiving approval, the company will then choose an exchange — such as the New York Stock Exchange — on which to trade. Once listed publicly, anyone can buy or sell as many shares as they please.

But is the SEC’s involvement in the economy really beneficial?

The SEC’s heavy hand is both beneficial and detrimental. On one hand, the SEC works tirelessly to regulate the market to prevent fraud. This includes a free, detailed database (named EDGAR) which is accessible to everyone. Investors can analyze companies’ balance sheets, income and cash flow statement, and formulate theses regarding the future movement of a given company’s stock. Additionally, because the SEC is a government-funded organization, it plays an essential role in stabilizing the economy. Lastly, in an effort to establish a fair-trading market, the SEC began awarding settlements to “whistleblowers” or informants, who reported illegal activity. According to their website, the SEC has awarded over $262 million to 53 whistleblowers since 2012.

On the other side, many corporations, financial institutions, and investors in particular, view the SEC as too powerful and controlling. Companies must spend countless hours and allocate significant resources to fulfill the SEC’s mandated quarterly, annual and other filings. If the SEC suspects that securities are being bought or sold with nonpublic information, or insider trading, a ban is imposed. Until the ban is lifted, a process called suspended trading is in place. This process can be burdensome for a company, hurting both the stock price and reputation of a company. Furthermore, scheduling a hearing with the SEC can be a lengthy process.

Even when the SEC does flex its muscles and exerts its power, some argue that its punishments are oftentimes too lenient; following the Great Recession, only one banker went to prison! A more current example is that after Tesla CEO Elon Musk falsely announced that he would be taking Tesla private, increasing the stock price by over 10 percent in one day; the SEC was outraged. This “outrage” led them fining the billionaire a mere $20 million and forcing him to cede his Tesla Chairmanship. Many felt that the punishment did not fit crime, and that this was merely “a slap on the wrist.”

SEC involvement in our markets is a necessary evil; the agency is almost like an overprotective parent that must monitor its many millions of children. Although the United States encourages a free-trade market, basic guidelines must be created to ensure this possibility. Without the SEC, companies could mislead countless investors, and the rate of fraud would dramatically increase. Even though the SEC’s policies can be frustrating at times, at the end of the day the benefits outweigh the detriments. Despite the controversy surrounding the importance of the SEC, one thing is clear: The SEC is the best possible way to monitor public companies and their investors.


Photo Credit: Wikimedia Commons

Photo Credit: Jay Clayton, Head of the SEC