What Is the Securities and Exchange Commission?

If you’re disoriented to see “insurance” and the “Securities and Exchange Commission” (SEC) in the same headline, then you’ve come to the right place. 

While a key feature of insurance products is typically that they’re devoid of the risk that’s inherent to the products regulated by the SEC, there’s still a sliver of crossover in this insurance/securities Venn diagram. If you guessed the crossover is variable lines insurance, e.g., variable annuities, registered index-linked annuities, and variable life insurance, then you chose wisely.

To get the scoop on the SEC, what it is, and why it matters, read on!

What is the SEC?

The SEC is a regulatory agency tasked with overseeing the U.S. securities market, encompassing companies, investors, investments, and everything in between.

The word “overseeing” does a lot of work in this context; the SEC makes rules and regulations for companies and brokers operating in the market, and it also investigates and enforces those regulations. 

Is the SEC part of the government?

Yes. Although the SEC touts its independence, Congress established the SEC and is ultimately subject to federal oversight. The president appoints the five SEC commissioners to five-year terms. Their terms are staggered so one commissioner’s term expires each year. Fun fact, to prevent partisan overreach, only three of the commissioners can belong to the same party at any given time. (No word on whether this strategy actually works, though.)

How is the SEC funded?

The SEC is funded via transaction fees, so every time a broker coordinates the sale of an investment, a stock, bond, or fund share, a tiny portion of that goes to keeping the SEC strong and regulatey.

History of the SEC

To understand the SEC, let’s take a time machine to the Great Depression. 

The Great Depression and the SEC

The Great Depression wasn’t a bundle of laughs. A long stock market crash in 1929 dropped consumer confidence to lows that infected every other area of finance. Most notably, of course, bank runs pushed banks into failure and dominoed through other banks.

Through the early 1930s, the stock market, and consequently, the banks, continued their pattern of climb, falter, collapse, climb.  The nation was incapable of making forward progress. Against this backdrop, Congress passed Glass-Steagal, which separated securities and banking into two distinct industries; and the Securities Act of 1933, which implemented things like securities broker registration and consumer disclosures. These new laws dictated brokers would have to register their businesses and sales, but where?

When was the SEC created?

The Securities and Exchange Act of 1934 created the SEC and gave it the authority to regulate the stock market, which helped to restore consumer confidence in the financial industry once again. 

More recent SEC history: the Great Recession

While the SEC has played a significant role in the capital market through the decades, very recent history spotlighted the federal commission.

After the Gramm-Leach-Bliley legislation of 1999 repealed Glass-Steagal, investment banks selling mortgage-backed securities caused massive market turmoil unseen since the Great Depression. 

As Congress grappled with gridlock, the industry implemented its own reforms, with the National Association of Securities Dealers, Inc (NASD) and the New York Stock Exchange (NYSE) Member Regulation organizations merging to form the Financial INdustry Regulatory Authority (FINRA), a non-governmental organization that self-governs the industry. Ultimately, FINRA’s authority comes from the SEC, and was formally approved by the SEC in 2007.

With economic stability teeter-tottering for a decade, Congress passed the Dodd-Frank reform in 2010 that maintained the ability of banks to also be investment firms, but gave the SEC a bigger role in investigating and regulating them as well as regulating credit rating firms.

What does the Securities and Exchange Commission do?

The Securities and Exchange Commission is responsible for regulating capital markets, which generally fall into the buckets of:

• Protecting investors from misinformation and misconduct
• Enforcing federal securities laws through investigations
• Regulating the market by creating rules and regulations that market participants must abide by
• Providing data to the public, the industry, or to Congress about the state of the securities market
• Facilitating “capital formation,” aka business fundraising

In the interest of data sharing, the SEC maintains the Electronic Data Gathering Analysis and Retrieval system, or EDGAR. This is the system where publicly traded companies and funds must disclose information such as inside trades, ownership interests, shareholder meetings, public offerings, etc.

What’s the difference between the SEC and FINRA?

The SEC is a government commission tasked with market regulation and helmed by federal appointees, and FINRA is a self-regulating industry group that’s deputized by the SEC. Ultimately, though, if you run afoul of FINRA regulations, there’s a large chance you’ll wake up to SEC agents auditing your business and filing a civil suit against you. If your missteps are egregious, the SEC will take its findings to law enforcement and you’ll get to sit through a full-blown criminal trial. 

What types of companies does the SEC regulate?

The SEC regulates all securities transactions. Publicly traded companies, publicly available bonds, stock exchanges, investment advisers, broker-dealers… all are subject to SEC regulation. It also regulates private trades. Even a private business owner selling a share of their company to a family member must either register the trade with the SEC or have a specific situational exemption – under federal law, all securities means all securities.

Granted, FINRA plays a heavy hand in the regulation of the kind of securities transactions that are more consumer-facing. Brokers and broker-dealers are most likely to deal with FINRA representatives. But, ultimately, FINRA takes its authority from the SEC.

How many companies does the SEC oversee?

According to the SEC, the commission is responsible for more than 28,000 various entities. 

Why does the SEC matter in insurance?

The SEC is ultimately responsible for regulating a specific line of insurance business: variable lines insurance. While FINRA, as a self-governing body, is the most involved with variable life insurance, variable annuities, registered index-linked annuities, and other securities+insurance instances, FINRA’s authority and responsibility all draw from the SEC. If a variable annuity contract gets out of hand, the broker, carrier, investment firm, and any other involved party may find themselves facing more than their state DOI; SEC agents could very well get involved if they suspect a grave harm.

So, because of the SEC’s interest in regulating securities, the SEC has a stake in regulating insurance products that rely on securities as a means of contract growth. The SEC also finds itself entangled in the insurance industry in two more important ways:

1. Insurance businesses as publicly traded companies

Since insurance carriers, MGAs/MGUs, and agencies can be publicly traded companies themselves, the SEC has an interest in regulating that aspect of their business to protect shareholders.

2. Insurance businesses as investors

Insurance carriers make money by investing a portion of their premiums into the market. In this way, insurance carriers are then consumers and investors in their own right, benefiting from SEC market regulation and protection. 

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