Securities and Exchange Commission
The SEC is the primary U.S. regulator of securities markets, responsible for protecting investors, maintaining fair and efficient markets, and facilitating capital formation. Created in 1934 after the 1929 crash, the SEC oversees stock exchanges, broker-dealers, investment advisers, and public company disclosures.
The SEC's enforcement powers and rulemaking authority make it central to how capital markets function globally. However, the agency has been criticized for a 'revolving door' between regulators and the industry they oversee.
SEC enforcement is largely reactive - they investigate after fraud is discovered, often by short sellers or journalists. The Madoff Ponzi scheme ran for 17 years despite multiple tips to the SEC. Staff shortages mean most violations go uninvestigated; the SEC has roughly 4,500 employees to oversee markets with trillions in daily volume.
Key Facts
Power Dynamics
Independent agency with broad rulemaking and enforcement authority
Industry lobbying shapes rules; revolving door means staff often plan to work for firms they regulate; Congressional appropriations limit resources
- Industry lawsuits against rules
- Congressional appropriations
- Court challenges (Chevron deference limits)
- Wall Street firms
- Congressional oversight committees
- Industry law firms
Revenue Structure
Securities and Exchange Commission Revenue Sources
- Congressional appropriations 80%
- Registration/filing fees 20% ↻
Budget controlled by Congress where financial industry has significant lobbying power
Unlike FDA which collects user fees, SEC mostly dependent on appropriations
Decision Dynamics at Securities and Exchange Commission
Emergency rules during 2008 crisis (short-selling ban in days)
Climate disclosure rules took years of development, still being litigated
Notice-and-comment rulemaking is slow; industry litigation delays implementation
Failure Modes of Securities and Exchange Commission
- Missed Madoff scheme (17 years)
- Missed Enron fraud
- 2008 crisis regulatory failures
- FTX collapse
- Revolving door incentives
- Resource constraints vs market size
- Reactive rather than proactive enforcement
If major market manipulation or fraud occurs in crypto or AI trading, SEC may again be caught flat-footed
Biological Parallel
Like an immune system weakened by the very pathogens it should fight. The 'revolving door' means the SEC's 'immune cells' (staff) are often planning to join the 'pathogens' (regulated firms). This creates tolerance for borderline behavior and slow response to novel threats. The system can still respond to obvious, large-scale fraud but struggles with sophisticated or systemic issues.
Key Agencies
Investigates and prosecutes violations
Oversees company disclosures
Regulates exchanges and brokers