The Securities and Exchange Commission (SEC) (http://sec NULL.gov/) is a federal agency responsible for regulating the securities industry and for enforcing federal securities law. It is meant to protect the public against fraudulent and manipulative practices in the securities markets. While this is a simplification, you can think of them as the group that polices (or is supposed to police) Wall Street.

The SEC was created by the Securities Exchange Act of 1934 to regulate the securities industry. This law was passed in the wake of the 1929 crash, which led to the Great Depression. As Investopedia writes (http://www NULL.investopedia NULL.com/university/credit-crisis/credit-crisis1 NULL.asp), in the time before the crash, “commercial banks were accused of being too speculative in the pre-Depression era…. Unsound loans were issued to companies in which the bank had invested, and clients would be encouraged to invest in those same stocks.“ The spirit of the Exchange Act was to address the abuses of the past.

The authority this Exchange Act gives the SEC includes “the power to register, regulate, and oversee brokerage firms (http://www NULL.sec NULL.gov/about/laws NULL.shtml), transfer agents, and clearing agencies as well as the nation’s securities self regulatory organizations (SROs).”  The SEC does not have criminal authority, and primarily enforces its rules through the imposition of fines. It can refer cases to the Department of Justice for criminal investigation.

What are the maximum fines the SEC can charge for violations?

Fines against individuals are capped at $150,000 per violation. Penalties for firms are capped at $725,000 per violation.

At the end of November, SEC Chairman Mary Schapiro requested (http://news NULL.businessweek NULL.com/article NULL.asp?documentKey=1376-LVFLQR0YHQ0X01-1C4PPFMIQ2SB5H4ATCOBQ3M553) that these caps be raised to $1 million per violation for individuals, and $10 million per violation for firms, but these requests have not yet been addressed by Congress.

How is the SEC funded?

The SEC is funded each year by Congress.

You might think the SEC could be self-funded, given that “in some years, the agency has taken in almost twice the regulatory fees as Congress has provided it in funding (http://online NULL.wsj NULL.com/article/SB10001424052702304510004575185992343231872 NULL.html?KEYWORDS=sec+fees).” But the SEC is not allowed to keep the fees and fines it receives through settlements or through the courts. Instead, any fees in surplus of their expenses go to the Treasury.

What are the laws the SEC enforces?

• Securities Act of 1933 (summary (http://www NULL.sec NULL.gov/about/laws NULL.shtml)) (full text (http://www NULL.sec NULL.gov/about/laws/sa33 NULL.pdf))
• Securities Exchange Act of 1934 (summary (http://en NULL.wikipedia NULL.org/wiki/Securities_Exchange_Act_of_1934)) (full text (http://www NULL.sec NULL.gov/about/laws/sea34 NULL.pdf))
• Trust Indenture Act of 1939 (summary (http://en NULL.wikipedia NULL.org/wiki/Trust_Indenture_Act_of_1939)) (full text (http://www NULL.sec NULL.gov/about/laws/tia39 NULL.pdf))
• Investment Company Act of 1940 (summary (http://en NULL.wikipedia NULL.org/wiki/Investment_Company_Act_of_1940)) (full text (http://taft NULL.law NULL.uc NULL.edu/CCL/InvCoAct/index NULL.html))
• Investment Advisers Act of 1940 (summary (http://en NULL.wikipedia NULL.org/wiki/Investment_Advisers_Act_of_1940#Summary)) (full text (http://taft NULL.law NULL.uc NULL.edu/CCL/InvAdvAct/index NULL.html))
• Sarbanes-Oxley Act of 2002 (summary (http://en NULL.wikipedia NULL.org/wiki/Sarbanes%E2%80%93Oxley_Act)) (full text (http://www NULL.gpo NULL.gov/fdsys/pkg/PLAW-107publ204/pdf/PLAW-107publ204 NULL.pdf))

Read more at: http://www.sec.gov/about/whatwedo.shtml#laws (http://www NULL.sec NULL.gov/about/whatwedo NULL.shtml#laws)

How many people work at the SEC?

The SEC has approximately 3,500 employees and 11 regional offices (http://www NULL.sec NULL.gov/about/whatwedo NULL.shtml#org) in the United States.# For context, the NYPD employs 34,500 (http://www NULL.nyc NULL.gov/html/nypd/html/faq/faq_police NULL.shtml).

Criticisms of SEC’s Effectiveness

Many argue that the SEC is under-staffed and under-funded, leaving them unable to adequately police the US financial system. Bartlett Naylor of Public Citizen, a consumer rights advocacy group, pointed out back in March 2011 that:

”The SEC also deals with a more basic asymmetry in the cat-and-mouse game against market fraudsters: Veteran staff enforcement attorneys at the SEC may earn $125,000, whereas first-year attorneys at elite private firms begin at $160,000. The lure of such huge compensation adds an additional challenges for the SEC as astronomical paychecks siphon many talented people into the business of perpetuating frauds and fomenting financial crises.”

Prior to Dodd-Frank’s Wall Street reform law, the SEC oversaw some 6,400 public companies.
 The Dodd-Frank Wall Street reform law adds to the SEC’s responsibilities, requiring it to oversee an additional 30,000 institutions (http://thehill NULL.com/blogs/congress-blog/economy-a-budget/149563-a-failure-of-funding).

For additional comparison purposes, here are the total number of employees at just five of the 6,400 U.S. companies the SEC oversees:

• Goldman Sachs: 35,700 (as of 2010) (http://en NULL.wikipedia NULL.org/wiki/Goldman_Sachs#cite_note-10K-0)
• Morgan Stanley: 62,542 (as of May, 2010) (http://en NULL.wikipedia NULL.org/wiki/Morgan_Stanley#cite_note-10K-0)
• JP Morgan: 250,095 (2011) (http://en NULL.wikipedia NULL.org/wiki/JPMorgan_Chase#cite_note-10K-1)
• Citigroup: 260,000 (2010) (http://en NULL.wikipedia NULL.org/wiki/Citigroup#cite_note-10k-1)
• Bank of America: 288,000 (2010) (http://en NULL.wikipedia NULL.org/wiki/Bank_of_America#cite_note-10K-1)

New Powers Under Dodd-Frank

Section 922 of the Dodd-Frank Act includes a new whisteblower program, which intends to “reward individuals who act early to expose violations and who provide significant evidence that helps the SEC bring successful cases.” (http://www NULL.sec NULL.gov/news/press/2011/2011-116 NULL.htm)

This whistleblower program includes a bounty (http://sec NULL.gov/whistleblower):

“The Commission is authorized by Congress to provide monetary awards to eligible individuals who come forward with high-quality original information that leads to a Commission enforcement action in which over $1,000,000 in sanctions is ordered. The range for awards is between 10% and 30% of the money collected.”

Settling vs Going to Court

The SEC has been criticized for routinely settling out of court with the banks that violate securities law. These settlements are often presented to judges for their approval.

Judge Rakoff’s Rejection of the November 2011 SEC/Citigroup Settlement

At the end of November, Judge Jed S. Rakoff (http://topics NULL.nytimes NULL.com/topics/reference/timestopics/people/r/jed_rakoff/index NULL.html?inline=nyt-per) of United States District Court in Manhattan threw out a proposed settlement between the SEC and Citigroup for $285 Million.

The settlement was over a case where Citi allegedly bundled up low-grade mortgage-backed securities, sold them off to investors, and then simultaneously shorted (i.e. bet against) the same securities. Citi made $160 million off the deal, and investors lost $700 million. (http://www NULL.forbes NULL.com/sites/danielfisher/2011/11/28/judge-who-rejected-citi-settlement-fights-business-as-usual/)

Settling would have allowed Citigroup to avoid admitting any guilt at all. All the SEC charged them with was “negligence.” The SEC did NOT charge Citigroup with outright fraud. This is despite the SEC having referred to Citigroup in a memo as a recidivist (a habitual criminal). Judge Rakoff states in the ruling (http://www NULL.nysd NULL.uscourts NULL.gov/cases/show NULL.php?db=special&id=138): “By the S.E.C.’s own account, Citigroup is a recidivist.”

Settling also would have allowed Citi to avoid going to court, where the case would be argued out in public and put before a jury. Had Citi lost in court, it would have been subject to FAR more in fines than the $285 million that it settled for.

Judge Rakoff threw out the settlement, insisting that the case must go to trial.

As Adam Sorensen noted in Time (http://swampland NULL.time NULL.com/2011/11/28/occupy-the-southern-district-court-of-new-york-judge-strikes-down-sec-citibank-settlebank/):

“Monday’s decision could have implications beyond Citibank. Settling out of court with no admission of wrongdoing has frequently been the SEC’s modus operandi in cases like this. If political momentum built in the wake of Rakoff’s ruling and other judges picked up his banner, Wall Street could face a level of scrutiny it has so far avoided.”

Notable SEC Employees

The current chairman of the SEC is Mary Schapiro (http://en NULL.wikipedia NULL.org/wiki/Mary_Schapiro). She was a Commisioner at the SEC from 1988-1994, and has worked at another regulatory agency, the CFTC, as well as FINRA, which is one of the self-regulatory organizations that oversee the banks. Schaprio worked at FINRA (then named NASD) from 1996-2008.

Schaprio, during her time at FINRA, was an example of a regulator who made nearly as much as a Wall Street execuitve. In her final year at FINRA, “Schapiro earned a regular compensation package of $3.3 million; on departure from FINRA, she received additional lump sum retirement benefit payments that brought her total package in 2008 to $8,985,334 (http://en NULL.wikipedia NULL.org/wiki/Mary_Schapiro#cite_note-10) (about the same as Goldman Sachs CEO Lloyd Blankfein made in that year).”

Robert Khuzami (http://www NULL.whorunsgov NULL.com/Profiles/Robert_Khuzami?loadTab=1) is the current Director of Enforcement at the SEC. Prior to working at the SEC, Khuzami worked at Deutsche Bank as the global head of litigation from 2002-2004, and as the General Counsel to the Americas from 2004-2009. His history as General Counsel at Deutsche Bank makes him a controversial figure at the SEC, as Deutsche Bank was a major issuer of CDOs (http://online NULL.wsj NULL.com/article/SB10001424052748704388304575202562283283500 NULL.html), a type of mortgage derivative central to the 2008 crisis. As noted by the Wall Street Journal, “Deutsche Bank has faced allegations of inadequate disclosure over its creation of CDOs. (http://online NULL.wsj NULL.com/article/SB10001424052748704388304575202562283283500 NULL.html)”

Richard Bookstaber (http://rick NULL.bookstaber NULL.com/) is a senior policy advisor at the SEC’s Division of Risk, Strategy, and Financial Innovation. Bookstaber had a long career on Wall Street before joining the SEC (http://www NULL.sec NULL.gov/news/press/2009/2009-238 NULL.htm), including serving as the head of firm-wide risk management at Salomon Brothers and as the first market risk manager at Morgan Stanley. Bookstaber is the author of Name Your Link (http://www NULL.amazon NULL.com/gp/product/0470393750/ref=as_li_tf_tl?ie=UTF8&tag=occupysec-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0470393750)