Start Investment Club - What is the SEC?

What is the SEC?

The SEC is the Securities and Exchange Commission of the United States.

You may have heard about the SEC, a government entity, when researching the federal laws surrounding the formation and administration of an investment club. Questions may arise regarding the role of the SEC in the management and execution of your investment club's stocks and investment plans, and you may be worried that this in turn will affect the amount and timing of your earnings from the stock market.

Why did the SEC form?

Before the Second World War, the government had little control over the rise and fall of the finances of the United States. It was a "laissez-faire" economy, which many believed was the way capitalism was supposed to be. In the history books, this "hands-off" economy looks like it worked well - better than expected, even - until the finances of the US suffered an enormous setback, plunging the economy into the Great Depression of the 1930s. The Great Stock Market Crash of 1929 brought about a world of change in terms of finance.

The SEC was formed in section four of the Securities Exchange Act of 1934 to keep the stock market fair, to discourage individual banks from asserting too much influence over the prices at market, and to prevent firms from issuing bad loans.

What does the SEC regulate?

The Securities and Exchange Commission regulates the fiscal activity of companies listed in the stock market to protect the investors against a sudden and unfair loss of money at the hands of uncouth businesses. It is done as an attempt to keep insider trading and stock manipulation at an absolute minimum, if not to stamp it out entirely, and to investigate potential breaches of federal law surrounding the markets.

What about my investment club?

Your investment club will only have to worry about registering with the Securities and Exchange Commission if and only if the club itself is offered and traded publicly. That is, if it is listed on the stock exchange, the management of the club (which files its taxes as a company instead of as individuals) must provide the accounting numbers and a discussion of information pertinent to the club's activities.

Keeping the actions of a company moral is what, in theory, keeps the stock market from crashing the way it did in 1929.

If dishonesty or falsification of the company's books is discovered, such as it was in the Enron scandal, the issue will be swept into the courts and become a matter of public record.

If you would like to know more about the SEC's role in regulating investment clubs, write to this address:

Securities and Exchange Commission
Office of Investor Education and Assistance
100 F Street, N.E.
Washington, D.C. 20549-0213

Getting Started