Background

To understand the Securities and Exchange Commission (SEC), we first need to take a brief history lesson. I promise, we'll be quick and it'll help you remember the SEC's mission!

After the end of World War I in 1918, the United States entered a financial boom and a period of extreme market optimism. This gave the 1920s the title the "Roaring Twenties". However, in 1929, that boom would suddenly bust. For a number of reasons, including margin positions, speculation warnings from the government, and sliding growth of industrial and consumer markets, the U.S. stock market experienced a very sudden crash.

On October 24 1929, the market slid 11%, giving it the name Black Monday. There was such a large trading volume (primarily selling) that the ticket tapes, early electronic methods to track stock prices, couldn't keep up. They were delayed by several hours. As a result, no one knew accurate prices for stocks.

The following Monday, on October 28th 1929, termed Black Monday, the Dow Jones Industrial Average slid a further 12.82% as investors sought to exit their margin calls.

Finally, on Tuesday the 29th, titled the more famous Black Tuesday, the Dow lost an addition 11.73%. $14 billion dollars of shareholder value was erased and many stocks were simply unsellable.



This crash, The Wall Street Crash of 1929, is pointed to as the beginning of the Great Depression. The market did eventually recover, of course. However, it took 25 years, November 23, 1954, for the Dow to return to its peak, previously hit on September 3, 1929.

To understand the cause of the crash, the United States Senate issued an inquiry in 1932. The Pecora Commission, named after one of the four members, Ferdinand Pecora, investigated the underlying causes for two years and made appropriate recommendations to Congress.

The commission uncovered abuse in the market and led to the passing of the Securities Act of 1933, which regulates primary markets (more on primary and secondary markets later), and the Securities Act of 1934, which regulates the secondary markets and created the SEC to regulate the market and enforce both Securities Acts (among others).

Purpose

The SEC has three main roles:

• Protect investors
• Maintain fair, orderly, and efficient markets
• Facilitate capital formation

Protect investors

The SEC mainly protects the underdogs - the common retails investors (like you and me, personal investments). It protects us from unethical and abusive practices by those offering the sale of securities.

Notably, it doesn't provide as much protection for institutional investors (professional and businesses entities, like investment advisers or hedge funds, but more on those later). Players in this space have more weapons in their arsenal, to include legal and financial assets, to protect them from fraud and deceitful market practices.

Maintain fair, orderly, and efficient markets

The SEC oversees transactions exceeding $100 trillion dollars each year. To enable this, the SEC has to instill confidence in the market and respond to new technological developments.

Facilitate capital formation

As the saying goes, it takes money to make money. Companies, especially small businesses, typically need to raise capital in order to start or expand their business. The SEC facilitates access to this capital, for example, by regulating the sale of securities. The money raised then hopefully goes on to create more jobs, passing money back into job holders and perpetuating the exchange of money in the market.

There's a balance struck here between easy access to raising capital and protecting retail investors. It can't be too difficult to raise money, such that private offerings and small businesses are preventing from entering. At the same time, it can't be too easy so as to allow abuse and fraud. As a result, there are exempt and non-exempt securities, which we'll cover in Section 2.