Investor Bulletin: An Introduction to The U.S. Securities and Exchange Commission – Rulemaking and Laws
Aug. 20, 2015
The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to provide investors with an overview of the SEC’s rulemaking functions and a brief description of the laws that govern the securities industry.
How the SEC Rulemaking Process Works
Rulemaking is the process by which federal agencies implement legislation passed by Congress and signed into law by the President. In addition, an agency may engage in rulemaking to update rules under existing laws, or to create new rules within existing authority that the agency believes are needed. Major pieces of legislation, such as the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the Jumpstart Our Business Startups Act provide the framework for the SEC's oversight of the securities markets. Rulemaking generally involves several steps that are designed to give members of the public an opportunity to provide their opinions on whether the agency should reject, approve, or approve with modifications a rule proposal. Three of the most commonly used steps in rulemaking include: concept release, rule proposal, and rule adoption. Here is a brief description of these rulemaking steps:
Concept Release: The rulemaking process usually begins with a rule proposal, but sometimes a topic presents unique issues or complications that the Commission wishes to seek public input on before formulating a proposal. A concept release is issued describing the area of interest and the Commission's concerns and usually identifying different approaches to addressing the problem, followed by a series of questions that seek the views of the public on the issue. The public's feedback is taken into consideration as the Commission decides which approach, if any, to propose.
Rule Proposal: The Commission publishes a detailed rule proposal for public comment. A rule proposal typically contains the text of the proposed new or amended rule along with a discussion of the issue or problem the proposal is designed to address. Typically the Commission provides between 30 and 60 days for review and comment. The Commission considers the public’s input on the proposal as it drafts a final rule.
Rule Adoption: If the Commission adopts a final rule, it becomes part of the official rules that govern the securities industry. The adopting release reflects the Commission’s consideration of the public comments.
Current Laws Governing the Securities Industry
Securities Act of 1933
Often referred to as the "truth in securities" law, the Securities Act of 1933 has two basic objectives: require that investors receive financial and other significant information concerning securities being offered for public sale; and prohibit deceit, misrepresentations, and other fraud in the sale of securities. The full text of this Act is available at: http://www.sec.gov/about/laws/sa33.pdf.
Securities Exchange Act of 1934
With this Act, Congress created the Securities and Exchange Commission. The Act empowers the SEC with broad authority over all aspects of the securities industry. This includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies as well as the nation's securities self regulatory organizations (SROs). The various stock exchanges, such as the New York Stock Exchange, and NASDAQ are SROs. The Financial Industry Regulatory Authority is also an SRO. The Act also identifies and prohibits certain types of conduct in the markets and provides the Commission with disciplinary powers over regulated entities and persons associated with them. The Act also empowers the SEC to require periodic reporting of information by companies with publicly traded securities. The full text of this Act can be read at: http://www.sec.gov/about/laws/sea34.pdf.
Investment Company Act of 1940
This Act regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. The regulation is designed to minimize conflicts of interest that arise in these complex operations. The Act requires these companies to disclose their financial condition and investment policies to investors when stock is initially sold and, subsequently, on a regular basis. The focus of this Act is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations. It is important to remember that the Act does not permit the SEC to directly supervise the investment decisions or activities of these companies or evaluate the merits of their investments. The full text of this Act is available at: http://www.sec.gov/about/laws/ica40.pdf.
Investment Advisers Act of 1940
This law regulates investment advisers. With certain exceptions, this Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors. Since the Act was amended in 2010, generally only advisers who have at least $100 million of assets under management or advise a registered investment company must register with the Commission. The full text of this Act is available at: http://www.sec.gov/about/laws/iaa40.pdf.
Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The Act mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud, and created the "Public Company Accounting Oversight Board," also known as the PCAOB, to oversee the activities of the auditing profession. The full text of the Act is available at: https://www.sec.gov/about/laws/soa2002.pdf. You can find links to all Commission rulemaking and reports issued under the Sarbanes-Oxley Act at: http://www.sec.gov/spotlight/sarbanes-oxley.htm.
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
On July 21, 2010, President Barack Obama signed into law The Dodd-Frank Wall Street Reform and Consumer Protection Act. The legislation set out to reshape the U.S. regulatory system in a number of areas including but not limited to consumer protection, trading restrictions, credit ratings, regulation of financial products, corporate governance and disclosure, and transparency. The full text of the Act is available at: http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf. You can find links to all Commission rulemaking and reports issued under the Dodd Frank Act at: http://www.sec.gov/spotlight/dodd-frank.shtml.
Jumpstart Our Business Startups (JOBS) Act
On April 5, 2012, President Barack Obama signed into law the Jumpstart Our Business Startups (JOBS) Act. The JOBS Act requires the SEC to write rules and issue studies on capital formation, disclosure, and registration requirements. The JOBS Act aims to help businesses raise funds in U.S. capital markets by minimizing regulatory requirements. For more information on the JOBS Act, see our Jumpstart Our Business Startups (JOBS) Act Spotlight page.
For additional educational information for investors, see the SEC’s Office of Investor Education and Advocacy’s homepage and the SEC’s Investor.gov website. For additional information about the SEC rulemaking and the laws governing the securities industry in general, also see:
- SEC Webpage: “The Investor’s Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation”