Brief History of Creation and Purpose
The United States Securities and Exchange Commission (SEC) was established during the Great Depression, as the necessity to introduce federal regulations of the stock market became particularly daunting.
Prior to the Great Crash of stock markets in 1929, the initiatives to introduce such regulations had never been properly pursued; however, as the economic depression progressed, it became evident that the lack of investor trust was a major problem, and to address the problem, it was necessary to establish a government agency that could oversee the securities market and protect investors by ensuring that public companies are not involved in fraud. This was a major driving force for the creation of the SEC in 1934; the first Chairman of the Commission was Joseph P. Kennedy, the father of President John F. Kennedy (“What we do,” 2013).
Today, the SEC declares three main purposes of its work, which are also the three major areas of the Commission’s activities: “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation” (“What we do,” 2013, para. 1). The protection of investors remained the main purpose, and the need for such protection is that investor trust and investor confidence are prerequisites for the successful functioning of markets and for economic development.
The Specific Powers of the SEC
The SEC’s powers are listed in several laws, the most important of which are the Securities Regulation Code, the Presidential Decree No. 902-A, as amended, and the Corporation Code (“Powers and functions,” 2017). The key power is to have jurisdiction and supervision over all organizations that have received licenses or permits for operation issued by the United States government. It means that the Commission is entitled to require various types of reports and documentation from organizations with the purpose of overseeing their activities and performance.
Another key power is to suggest legislative initiatives; the SEC is one of the government agencies that are entitled to advise Congress and propose amendments or additions to existing laws; however, it is specified in the regulations that the Commission can only advise other agencies and the legislature on issues associated with the securities market. An important tool that the SEC possesses and uses to execute its powers is the ability to approve and reject registration statements and licensing applications; also, the Commission can suspend such requests or require amending them.
It means that the SEC is extensively involved in the process of permitting various types of organizations to operate. An important aspect of the Commission’s operation is that it can conduct its own investigations; however, there is an inviolable policy that the SEC never publicizes the fact of an investigation in progress. In terms of judicial powers, the Commission is entitled to punish and impose sanctions on organizations for incompliance with the rules and regulations that the Commission enforces as well as for contempt of the SEC. Issuing subpoenas is among the SEC’s powers, too.
A particular division of the SEC is the Office of International Affairs (OIA), which is responsible, particularly for cross-border securities transactions. The Commission often has to deal with operations that do not entirely occur in the United States; the problem that arises in these cases consists of the differences among national legislation and regulations. The OIA cooperated with the international network of agencies involved in regulating the securities market, and the Office is entitled to propose regulatory measures to international regulators.
Also, the Office advises the Commission on all international cases and on compliance with national regulations; for this, the Office promotes mutual recognition, i.e. appropriate consideration of laws of each country that participates in a transaction. The Office is also responsible for promoting high standards of securities-related regulations in foreign countries.
Executive, Legislative, and Judicial Constraints
Although the SEC is an independent government agency, i.e. it is not part of federal executive departments or the executive office of the President, it still has a number of important constraints from the executive, legislative, and judicial branches of power. First of all, the President is entitled to nominate the Chair of the Commission; it is recognized that the President can nominate a person whose political views are close to those of the President, which may affect to a remarkable extent the policies of the SEC.
Further, the legislative constraint is that the Senate should approve the Chair nominated by the President. In terms of judicial powers, it should be noted that having the power to investigate cases and punish for incompliance, the Commission is restricted in its abilities to issue judicial decisions, and the involvement of the court is required. Similarly, the Commission does not make laws but only has the power to propose legislative measures and advise Congress.
A recent example of a discussion of SEC’s powers that underwent judicial review by the court in the case of reviewing the power of disgorgement in the Supreme Court. Henning (2017) called the power to require disgorgement, i.e. to require ill-gotten gains to be repaid, “one of the Securities and Exchange Commission’s most potent weapons” (para. 3). In this context, it is recognized that the Commission is entitled to take back any gains that it finds obtained illegally or dishonestly and turn them over to the government.
A major point in the discussion was whether disgorgement was an equitable remedy (since it basically requires a thief to give back what was stolen) or a penalty (since the purpose is not to compensate those who were harmed). The court ruled that disgorgement was a penalty and imposed new regulations on the SEC; the essence of the regulations is that the Commission will have to complete its investigations within a particular period, and if the deadline is not met, the SEC will not be entitled to require disgorgement. This decision is considered an important restriction imposed on the Commission in terms of its executive powers.
A major factor that allowed obtaining judicial review is that the executive measures that the SEC was entitled to impose were unclear. In 2017, Charles Kokesh claimed that disgorgement was a type of penalty, and, according to the federal legislation, any claim for this measure as part of the SEC’s enforcement activities must be commenced within five after the claim occurred. In the Kokesh v. SEC case, the argument of the Commission was that disgorgement could not be considered a penalty; however, the court ruled otherwise.
This example shows that the powers of the agency are still under question, and further conflicts can be expected that will require attention from the judicial branch of power for specifying what the Commission is entitled to do and what the conditions are of its executive activities.
Concerning the effectiveness of the judicial review, it can be assessed that the case contributed to the process of balancing the Commission’s powers and constraints. First of all, according to Henning (2017), it turned out that the federal laws that regulated the operation of the SEC did not mention disgorgement directly as a tool available to the Commission. However, the agency widely and routinely used the remedy, but the judicial review showed that, in securities cases, the practice of requiring repayment, which is a normal and rather just practice from the point of view of common sense, may not be applicable.
Since many cases investigated by the SEC involved disgorgement, the new decision can significantly change the operation of the agency. The shift is toward a higher level of protection for public companies and toward stricter regulations imposed on the SEC. Since the Commission had been using the power to require disgorgement under questionable terms, the review can be considered effective for balancing the work of the agency.
Conclusive Analysis of Criticism
A major point of criticism of the SEC is that the enforcement activities it conducts are not aggressive enough. The Commission has been repeatedly blamed for having imposed insufficient sanctions, having failed to hold executives accused of misconduct accountable for their action, and not being able to properly prevent negative processes in the securities market. These accusations were especially intensive during the global financial crisis of 2007-2008.
Critics claimed that improper work of the SEC was one of the factors in the failures of the financial system that caused extensive damage to the economy. The analysis of the Commission’s powers, on the other hand, demonstrates that, for years, the agency had been using executive tools that exceeded its powers specified in the relevant legislation. With these extensive tools, the Commission, according to critics, still failed to protect investors and security markets. Therefore, criticism has good grounds.
Henning, P. J. (2017). Supreme Court casts doubts on a potent S.E.C. weapon. Web.
Powers and functions. (2017). Web.
What we do. (2013). Web.