Securities and Exchange Commission (SEC)

Definition

The Securities and Exchange Commission (SEC) is a U.S. government agency responsible for enforcing federal securities laws, regulating the securities industry, and protecting investors. It ensures that companies provide transparent and accurate information about their financial performance, which is crucial for informed investment decisions and maintaining fair markets.

5 Must Know Facts For Your Next Test

1. The SEC was established in 1934 in response to the stock market crash of 1929 to restore investor confidence.
2. One of the SEC's main functions is to require public companies to disclose financial information regularly, ensuring transparency for investors.
3. The SEC oversees and regulates activities related to securities markets, including trading practices and mutual funds.
4. The agency investigates violations of securities laws, such as fraud and insider trading, and can impose penalties or fines.
5. The SEC plays a crucial role in auditing fair value measurements by ensuring that companies report accurate valuations for financial instruments.

Review Questions

• How does the SEC contribute to maintaining transparency and investor confidence in the financial markets?
  • The SEC enhances transparency and investor confidence by requiring public companies to disclose detailed financial information regularly. This disclosure includes quarterly and annual reports that provide insights into a company's performance and risks. By enforcing compliance with these regulations, the SEC helps protect investors from misinformation and promotes fair trading practices.
• What are some of the key regulations enforced by the SEC regarding fair value measurements, and why are they important?
  • The SEC enforces regulations that require companies to accurately report fair value measurements for their financial assets and liabilities. This is crucial because fair value reporting impacts how investors perceive a company's financial health. Accurate valuations help prevent misleading representations that could lead to investment decisions based on incorrect data, thereby supporting market integrity.
• Evaluate the impact of the SEC's role in regulating insider trading on market stability and investor protection.
  • The SEC's stringent regulation against insider trading significantly impacts market stability and investor protection by ensuring that all investors have equal access to material information when making investment decisions. By prosecuting insider trading cases, the SEC deters unethical practices that could undermine trust in the financial markets. This regulation promotes fairness, helping to sustain a healthy investment environment where all participants can compete equally based on available information.

Related terms

Securities: Financial instruments that represent ownership positions in assets (equities), creditor relationships with entities (debt), or rights to ownership as represented by an option.

Insider Trading: The illegal practice of trading on the stock exchange to one's own advantage through having access to confidential information.

Public Company: A company whose shares are traded freely on a stock exchange, subject to regulations set by the SEC regarding disclosure and reporting.