The Securities and Exchange Commission (SEC)
About This Lesson
The Securities and Exchange Commission sits at the very top of the U.S. securities regulatory pyramid. By the time you finish this chapter, you will be able to tell at a glance what falls under its authority and what does not, which is exactly how the SIE likes to test it.
What you'll cover
- what the SEC is and the legal authority it runs on
- the four foundational securities acts (1933, 1934, and the two 1940 acts)
- exempt securities and exempt transactions
- where SEC authority ends and other regulators (the CFTC, banking, insurance) take over
This material anchors the roughly 16% of the SIE devoted to capital markets and regulators, and almost every regulatory idea later in the course traces back to what you meet here.
The Foundation of Securities Regulation
The Securities and Exchange Commission sits at the top of the U.S. securities regulatory hierarchy. It is the federal government's primary securities regulator, and Congress gave it three jobs that still define everything it does: protect investors, keep markets fair and orderly, and help businesses raise the capital they need to grow. Hold onto those three, because nearly every specific rule you meet later is one of them in action.
So what does "primary regulator" actually cover? The SEC's reach runs across almost the entire securities industry:
- the securities exchanges themselves, such as the NYSE and Nasdaq
- broker-dealers and the people who work for them
- investment advisers and investment companies like mutual funds
- municipal securities, an area it shares with the MSRB
- the disclosures and financial reports that public companies are required to file
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Which federal agency has the broadest regulatory authority over the securities industry?
The Securities Acts That Built the System
The SEC did not invent its own powers. It enforces laws Congress passed, and four of them form the backbone of nearly everything the SIE tests. Watch for the pattern as you read: the 1933 Act is about issuing securities, and the 1934 Act is about trading them. Almost everything else hangs off that one split.
| Act | Year | Primary Focus |
|---|---|---|
| Securities Act | 1933 | Regulates new issues (the primary market). Requires registering new securities and delivering a prospectus to buyers. |
| Securities Exchange Act | 1934 | Regulates secondary market trading, and created the SEC itself. Governs exchanges, broker-dealers, and ongoing reporting. |
| Investment Company Act | 1940 | Regulates investment companies: mutual funds, closed-end funds, and UITs. |
| Investment Advisers Act | 1940 | Regulates investment advisers and the fiduciary duty they owe their clients. |
Almost every SIE has a question that turns on this one distinction, so make it automatic:
Securities Act of 1933, the "Paper Act": the rules for new securities. When a company sells fresh securities to the public, it registers them with the SEC and delivers a prospectus under the 1933 Act. Picture the company handing you a brand-new piece of paper.
Securities Exchange Act of 1934, the "People Act": the rules for trading what already exists. It created the SEC and governs exchanges, broker-dealers, insider trading, proxy solicitation, and periodic reports like the 10-K and 10-Q. Picture all the people and firms trading existing securities.
Quick sort: an IPO or any new issue points to 1933. A broker-dealer's duties, insider trading, or the SEC itself points to 1934.
The Securities Act of 1933 primarily regulates which of the following?
What the SEC Can and Cannot Do
The SEC has real teeth, but its power stops at a hard line the exam tests constantly: it is a civil regulator, not a criminal one. Knowing exactly where that line falls is worth easy points.
What the SEC can do
- Bring civil enforcement actions: sue in federal court for injunctions, disgorgement (forcing wrongdoers to hand back ill-gotten profits), and civil money penalties.
- Run administrative proceedings: hold hearings before its own administrative law judges, which can end in cease-and-desist orders, suspensions, industry bars, and censures.
- Revoke or suspend registrations of broker-dealers, investment advisers, and securities.
- Refer cases to the DOJ when a matter calls for criminal prosecution.
- Issue a Wells Notice: a formal heads-up that SEC staff intend to recommend charges, giving the target a chance to respond first.
What the SEC cannot do
- It cannot bring criminal charges. Only the Department of Justice can prosecute crimes and seek prison time; the SEC refers those cases over.
- It cannot guarantee an investment or vouch for whether a security is a good deal.
- It does not approve or verify the accuracy of a registration statement. It only checks that the required disclosures are actually there. A registered security is a disclosed security, not a safe or SEC-endorsed one.
The SEC discovers evidence of securities fraud. Which of the following actions can the SEC take directly?
Exempt Securities and Transactions
The default rule is that securities must be registered with the SEC before they are sold to the public. But the law carves out two kinds of exceptions, and the exam wants you to keep them straight: some securities are exempt no matter how they are sold, and some transactions are exempt because of how the sale is structured.
Exempt securities (the security itself is exempt)
- U.S. government securities like Treasuries
- Municipal securities, the bonds issued by state and local governments
- Bank securities, such as CDs and commercial paper issued by banks
- Insurance products like fixed annuities and whole life policies. Note the trap: variable annuities and variable life are not exempt, because they are securities.
- Commercial paper maturing in 270 days or less
Exempt transactions (the sale is exempt because of how it is done)
- Regulation D (private placements): sales to accredited investors without public advertising. Rule 506(b) permits up to 35 non-accredited (but sophisticated) investors; Rule 506(c) allows general solicitation but sells to accredited investors only.
- Regulation A (a lighter "mini-registration"): Tier 1 raises up to $20 million in a 12-month period, Tier 2 up to $75 million. Sometimes called Regulation A+.
- Rule 144: governs reselling restricted and control stock, with a 6-month holding period for reporting companies and 1 year for non-reporting ones.
- Regulation S: covers offshore sales made outside the U.S. to non-U.S. persons.
- Intrastate offerings (Rule 147): sold only to residents of a single state by an issuer doing business in that state.
Under Rule 506(b) of Regulation D, a private placement may be sold to a maximum of how many non-accredited investors?
Chapter Essentials
Two ideas from this chapter show up on the SIE more than any others. First, the SEC is the broadest securities regulator, but it is not the only one, and it does not reach everything. Second, the 1933/1934 split decides a large share of "which act?" questions.
Where the SEC's authority stops: it does not regulate banking (that falls to the Federal Reserve, OCC, and FDIC), insurance products (state insurance commissioners), or commodities and futures (the CFTC), though it does oversee securities-based swaps. The clean mental split: the SEC handles securities, the CFTC handles commodities and futures, and state regulators run the blue-sky laws. When a question asks who has the broadest authority over the securities industry, the answer is the SEC.
A handful of distinctions in this chapter trip up more test-takers than anything else:
• "Registered" is not "approved." The SEC never blesses a security or vouches that it is safe or fairly priced. It only confirms the required disclosures were made. An answer choice claiming the SEC "approved" or "guaranteed" an offering's merits is almost always wrong.
• The SEC is civil, not criminal. It cannot file criminal charges, make arrests, or send anyone to prison. Those powers belong to the DOJ, and the SEC refers criminal matters to it.
• Not all insurance is exempt. Fixed annuities and whole life are exempt, but variable annuities and variable life are securities and must be registered. The word "variable" is the tell.
• 1933 versus 1934. New issues point to the 1933 Act; trading existing securities, broker-dealers, and the SEC itself point to the 1934 Act. If the question involves an IPO, think 1933.
• Exempt security versus exempt transaction. A Treasury or municipal bond is an exempt security no matter how it is sold. A Regulation D private placement is an exempt transaction, exempt because of how the sale is structured rather than what is being sold.
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