The Regulators of Security Markets

The Securities and Exchange Commission (SEC), which was created in 1934, is the principal regulator of securities markets in the United States. Before 1929, individual states regulated securities activities. But the stock market crash of 1929, which triggered the Great Depression, showed that arrangement to be inadequate. The Securities Act of 1933 and the Securities Exchange Act of 1934 consequently gave the federal government a preeminent role in protecting small investors from fraud and making it easier for them to understand companies' financial reports.

The commission enforces a web of rules to achieve that goal. Companies issuing stocks, bonds, and other securities must file detailed financial registration statements, which are made available to the public. The SEC determines whether these disclosures are full and fair so that investors can make well-informed and realistic evaluations of various securities. The SEC also oversees trading in stocks and administers rules designed to prevent price manipulation; to that end, brokers and dealers in the over-the-counter market and the stock exchanges must register with the SEC. In addition, the commission requires companies to tell the public when their own officers buy or sell shares of their stock; the commission believes that these "insiders" possess intimate information about their companies and that their trades can indicate to other investors their degree of confidence in their companies' future.

The agency also seeks to prevent insiders from trading in stock based on information that has not yet become public. In the late 1980s, the SEC began to focus not just on officers and directors but on insider trades by lower-level employees or even outsiders like lawyers who may have access to important information about a company before it becomes public.

The SEC has five commissioners who are appointed by the president. No more than three can be members of the same political party; the five-year term of one of the commissioners expires each year.

The Commodity Futures Trading Commission oversees the futures markets. It is particularly zealous in cracking down on many over-the-counter futures transactions, usually confining approved trading to the exchanges. But in general, it is considered a more gentle regulator than the SEC. In 1996, for example, it approved a record 92 new kinds of futures and farm commodity options contracts. From time to time, an especially aggressive SEC chairman asserts a vigorous role for that commission in regulating futures business.

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This article is adapted from the book "Outline of the U.S. Economy" by Conte and Carr and has been adapted with permission from the U.S. Department of State.