US Securities and Exchange Commission (SEC) and Its Role in AML

4 mins

The US Securities and Exchange Commission (SEC) is the world’s first regulatory body of the security industries that was formed in 1934 to protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation. In this article, we will talk in detail about who the SEC is, the purpose of the securities and exchange commission and what does the SEC regulate.


What is SEC?

  • An independent government agency of the United States that strives to promote a market environment which is worthy of the public’s trust

  • Focused on the securities’ markets and their regulations


What does SEC do

  • Inform and protect investors
  • Facilitate capital formation
  • Enforce the federal securities’ laws
  • Regulate the securities’ market
  • Provide data

The Securities and Exchange Commission was created in reaction to the stock market crisis of 1929, which caused the security sectors to lose public trust. The Securities Act of 1933 and the Securities Exchange Act of 1934 are the foundations of the SEC (1934). Here, the highest priority was placed on regulating the securities industry, which protects investors and encourages entrepreneurs to create and build their own enterprises.

The SEC Structure

The SEC is managed by five commissioners who are chosen by the president of the United States for staggered five-year terms with the advice and consent of the Senate. According to the structure, no more than three commissioners may belong to the same political party, so the commission remains non-partisan. The SEC, headquartered in Washington DC is organised into the following divisions:

  • Division of Corporation Finance – This division is concerned about the availability of material information (ant information about a company’s financial prospects) to the investors to ensure informed investment decisions.
  • Division of Enforcement – Investigates cases and prosecutes civil suits and administrative proceedings to enforce SEC regulations.
  • Division of Investment Management – Develops regulatory policy for investment companies (e.g., mutual funds, including money market funds, closed-end funds, business development companies, unit investment trusts, variable insurance products, and exchange – traded funds) and for investment advisors.
  • Division of Economic and Risk Analysis – Integrates financial economics and rigorous data analytics into the core mission of the SEC. The division is involved across the entire range of SEC activities, including policymaking, rule – making, enforcement, and examination.
  • Division of Trading and Markets – Regulates the major securities market participants, including broker-dealers, self- regulatory organisations (such as stock exchanges, FINRA, and cleaning agencies), and transfer agents.

How Does the SEC Work?

Security exchanges, brokers-dealers, investment advisors, and investment funds for both organisations and individuals in the securities’ markets are in the radar of the SEC. The SEC promotes disclosure and sharing of market related information, fair dealing, and protection against frauds through established security rules and regulations. The investors are able to access different financial reports, security forms, and registration statements through the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database of the SEC.

SEC and Money Laundering

The SEC is the statutory body dealing with money laundering matters involving broker-dealers and mutual funds. It has independent authority to enforce the Bank Secrecy Act on them. The SEC has also incorporated compliance with BSA requirements for broker-dealers and mutual funds into its regulations.

Section 17(a) of the Securities Exchange Act of 1934 prohibits fraud and misrepresentations in the offer or sale of securities, and Rule 17a-8 requires broker-dealers to comply with the recordkeeping, retention, and reporting obligations of the BSA. The the BSA and FINRA Rule 3310 requires broker-dealers to have an Anti-Money Laundering (AML)/BSA compliance programme.

The broker-dealers are required to file Suspicious Activity Reports (SARs) with the FinCEN for suspicious stock transactions. SARs should be filed if a broker-dealer “knows, suspects, or has reason to suspect” that the transaction under question:

  • involves funds representing ill-gotten gains
  • is intended to hide funds from illegal activities
  • is designed to evade the BSA
  • has no business or apparent lawful purpose

The SEC has been less aggressive with BSA enforcement. However, it has started filing suit against broker-dealers and other financial institutions for alleged BSA violations. In order to meet the new trend, the securities industry must be proactive and broker-dealers and other service providers should ensure effective AML compliance programmes.

In order to be effective with their compliance, it is important for security businesses to rely on new-age technologies such as artificial intelligence and machine learning. Tookitaki provides cutting-edge AML solutions that can improve compliance teams’ efficiency and effectiveness significantly.

To learn more about our solutions, speak to one of our AML experts.