how the sec enforces securities law
since the 1930s the sec has enforced securities laws and regulations through two primary mechanisms often in conjunction with criminal cases brought by doj and other prosecutorial authorities in civil suits the sec seeks three main sanctions below is a table of the most common results of the sec s successful enforcement actions the potential forums for the sec s enforcement actions changed significantly following a june 2024 supreme court decision in sec v jarkesy 12 the court ruled that the sec s practice of imposing civil penalties through administrative proceedings in cases of securities fraud violates the seventh amendment right to a jury trial the decision requires the sec to pursue such penalties in federal court potentially affecting the rapidity and scope of its enforcement actions thus while the sec can still pursue some administrative actions those involving nonmonetary damages cases involving civil penalties for securities fraud and similar matters insider trading accounting fraud and market manipulation must now be brought in federal court criminal cases continue to be referred to law enforcement agencies including the fbi doj and any relevant agencies in states where crimes are alleged to have occurred the sec also serves as the first level of appeal for actions sought by the securities industry s self regulatory organizations such as finra or the new york stock exchange in 2023 the sec awarded the most ever to whistleblowers 600 million out of that 279 million was awarded to one person another record the award was related to a 1 1 billion settlement with ericsson eric in 2019 over bribery allegations 13established in 2011 under the dodd frank wall street reform and consumer protection act the sec whistleblower office has become a significant part of the agency s enforcement efforts as the unit s name suggests the office administers a program that offers major incentives to those who come forward with high quality information about potential securities law violations since its inception the office of the whistleblower has been highly effective leading or developing further many successful enforcement actions and recovering billions for investors whistleblowers who voluntarily provide original information that results in fines and disgorgements exceeding 1 million are eligible for awards ranging from 10 to 30 of the amount collected 14in fiscal year 2023 the sec awarded almost 600 million to whistleblowers its highest yet this success directly benefits investors as whistleblower tips have contributed to enforcement actions resulting in orders requiring bad actors to disgorge more than 4 billion in ill gotten gains and interest said gurbir s grewal director of the sec s division of enforcement the awards show there is a significant incentive for whistleblowers to come forward with accurate information about potential securities law violations the sec office of the whistleblower couldn t function without efforts to protect whistleblowers from retaliation or too many would fear coming forward the sec thus also enforces rules prohibiting actions meant to impede those reporting to the sec or retaliating against them for doing so 15history of the secduring the u s stock market crash of october 1929 the stocks of many companies quickly became worthless bankrupting many because many had previously provided false or misleading information public faith in the integrity of the securities markets plunged to restore investor confidence congress passed the securities act of 1933 which aimed to ensure more transparency in financial statements so investors could make informed decisions about investments a year later congress passed the securities exchange act of 1934 which created the sec the sec was tasked with ensuring that publicly traded companies made truthful statements about the major aspects of their businesses and that brokers dealers and exchanges treated investors in an honest and fair manner 1 as such the act granted the sec broad authority to oversee the securities industry including the power to register regulate and oversee brokerage firms transfer agents and clearing agencies beginnings up to 1970sthe sec began operations on july 2 1934 joseph p kennedy the father of future president john f kennedy was appointed the first chair during its early years the sec played a major part in the rollout of the financial reforms of president franklin d roosevelt s new deal the investment company act of 1940 and investment advisers act of 1940 expanded the sec s regulatory scope to include oversight of investment companies and advisers the sec continued to evolve in the decades after world war ii as it responded to new challenges and a boom in u s capital markets during an extended period of expansion for the u s economy major legislation during this period included the securities acts amendments of 1964 which extended sec oversight to over the counter markets and increased disclosure requirements 16 during this time the sec began to focus on insider trading and cases of market manipulation reflecting the increasing complexity of financial markets the rise of the cftcin 1974 congress established the commodity futures trading commission cftc to regulate derivatives markets including futures options and swaps while the sec oversees securities and capital markets the cftc s purview encompasses commodities and their derivatives although the two agencies often collaborate on matters of overlapping jurisdiction such as security futures products their historical relationship has been characterized more by competition than cooperation the tension between them quickly came to a head in 1982 forcing congress to intervene and compel them to agree to the shad johnson accord later written in legislation 17 the term accord was reminiscent of the camp david peace accords between long standing and bitter adversaries underscoring the contentious nature of the regulators relationship their rivalry affected the markets with investors often confused about which of the sec and cftc s competing regulations often for the same investments to follow to resolve this confusion the agreement granted the cftc exclusive authority over all futures contracts including those based on broad based stock indexes the sec received jurisdiction over options on securities and stock indexes while the accord provided far greater regulatory clarity for investors the interagency rivalry persisted for decades although largely defused in the aftermath of the 2008 financial crisis and subsequent legislation tensions between the cftc and sec have at times resurfaced most notably over the regulation of cryptocurrencies 1980s to 2008in the 1980s and 1990s the sec adapted to technological changes such as the rise of electronic trading platforms and the globalization of financial markets the national securities markets improvement act of 1996 was meant to bring greater consistency to state and federal securities regulations following major corporate scandals after the dot com bubble of the late 1990s and early 2000s burst such as those involving enron and worldcom the sarbanes oxley act of 2002 sox was passed to regain public confidence in the markets the law s changes were meant to be sweeping though it wouldn t be long before a far greater set of scandals rocked the markets sox required corporate executives to personally certify the accuracy of financial statements making them criminally liable for any misrepresentations sox also strengthened auditor independence by restricting the types of non audit services they can provide to clients therefore giving companies incentives to look the other way lest they endanger other parts of their firms and established the public company accounting oversight board pcaob to oversee the audits of public companies in 2007 the financial industry regulatory authority finra was born from the merger of the national association of securities dealers and the new york stock exchange s regulatory arm 18 finra has become the largest independent regulator overseeing broker dealers in the country while the sec continues to hold a broader mandate overseeing the entirety of the securities markets and ensuring fair treatment for investors finra focuses on regulating the specific activities of brokerage firms and registered representatives the sec s oversight of corporate finance economic analysis enforcement and trading activities is still central however finra s role in writing and enforcing rules for broker dealers examining firms for compliance and resolving disputes between investors and firms added another layer of protection for the investing public post crisis landscapethe financial crisis of 2007 to 2008 was the sec s most significant challenge since the great depression the dodd frank wall street reform and consumer protection act of 2010 aimed to prevent future crises by increasing transparency in financial markets and reducing risks within the financial system dodd frank significantly expanded the sec s authority to bring administrative proceedings against a broader range of individuals and entities 19before dodd frank the sec could only pursue administrative actions against those directly regulated by the commission such as registered investment advisors or broker dealers the act broadened this authority to include any person associated with securities law violations 20 this means the sec can now bring administrative actions against a broader range of individuals including those not directly regulated by the agency such as corporate officers employees and individuals associated with unregistered entities each year the sec brings many civil enforcement actions against firms and individuals that violate securities law and it s involved in every significant case of financial misconduct either directly or in conjunction with the doj typical offenses the sec prosecutes include accounting fraud disseminating misleading or false information and insider trading after the financial crisis of 2007 to 2008 the sec helped prosecute the financial institutions that caused the crisis returning billions of dollars to investors it charged 204 entities or individuals and collected almost 4 billion in penalties disgorgement and other monetary relief goldman sachs for example paid 550 million then the largest penalty ever for a wall street firm and the second largest in sec history exceeded only by the 750 million paid by worldcom 2122 given the wounds to the economy many in the public criticized the agency for not doing enough to bring those responsible to justice in june 2024 the supreme court s decision in sec v jarkesy brought a significant shift in the sec s enforcement powers 12 the ruling addressed the expanded authority granted to the sec by dodd frank the majority in jarkesy determined that the sec s practice of imposing civil penalties through administrative proceedings in fraud cases violates the seventh amendment right to a jury trial the ruling required the sec to pursue such penalties in federal court rather than through its in house administrative law judges the decision has far reaching implications for the sec s enforcement of securities laws potentially slowing its ability to bring enforcement actions 