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Former Senior SEC Officials Urge Congress to Adequately Fund the Commission

By Jim Hamilton

In a letter to House and Senate leaders, a host of former SEC senior officials, including former Commissioners Annette Nazareth and Irving Pollack, urged Congress to substantially increase appropriations for the SEC through the Commission?s longstanding registration fee mechanism or allow the SEC the same funding model that Congress has used successfully for the nation s banking regulators. While acknowledging the different views in Congress concerning the implementation of Dodd-Frank, the former officials said that protecting investor from fraud, restoring market integrity, and encouraging capital formation are priorities that are too important to sacrifice. And the SEC, they warned, is ``running almost on empty.?? The letter was also signed by five former Directors of the Corporation Finance Division, two former Enforcement Directors, and four former Directors of the Investment Management Division.

They noted that the Enforcement Division is cutting back on its investigations, letting vacancies in important agency programs go unfilled, and cancelling technology upgrades needed to process the terabytes of data it gets each month. The Inspections Office is being forced to cut the number and frequency of its examinations of financial firms, which were already very infrequent due to historic underfunding of the agency. The acclaimed plan to bring in Wall Street trading experts with the sophistication to understand and appropriately respond to today?s complex trading and markets, including the new technologies and strategies that may have had a role in the flash crash, cannot achieve its promise without funding

This is not about funding Dodd-Frank, said the former officials, but is instead about maintaining at acceptable levels the core activities that have been at the heart of the SEC?s mandate for decades. The current SEC budget freeze has hit not only during the worst crisis the financial markets have faced in 80 years but also after years of effectively flat or declining SEC budgets, after adjusting for escalating fixed costs. And all the while, over a short period, trading volume has more than doubled, the number of investment advisers and the funds they manage have grown over 50%, investment products have become bafflingly complex, and split-second computer-driven trading has come to dominate the markets.

Over a decade ago, Congress put the SEC on an entirely self-funded program under which the Commission carefully calibrates its various securities registration and filing fees several times a year to assure that these user fees will always pay for 100% of the SEC's annual budget in the amount appropriated. Under Section 31(a) of the Exchange Act, as amended by the National Securities Markets Improvement Act of 1996, the SEC must collect transaction fees and assessments designed to recover the costs to the Government of the regulation of securities markets and securities professionals, and costs related to such regulation, including enforcement activities, policy and rulemaking activities, administration, legal services, and international regulatory activities.

The 1996 law requires the SEC to cover its budget solely through registration and filing fees. The amounts the SEC s enforcement staff collects in disgorgement of illegal profits and penalties are paid to harmed investors when they can be located and otherwise to the Treasury. Thus, the SEC s law enforcement determinations are made independent of any consideration of its budgetary needs.

According to the former officials, there has been no serious objection over the years to this 1996 Congressional determination to have the SEC fund its budget entirely through registration and filing fees, and the amounts assessed have been miniscule relative to the transactions involved. And, while a slight increase in these very small fees to cover needed SEC funding will in no way hinder capital formation, the alternative of a perception of inadequately regulated securities markets will deter investors from risking their capital and thereby stall economic growth.

Alternatively, the banking agency model should be adopted for the SEC. Over the years,many have suggested putting the SEC on the same footing as the federal banking agencies by adding to the SEC s existing self-funding the ability to self-budget. Self-budgeting, which the self-funded federal banking agencies have done for many years, permits the banking agencies to set their own budgets on a timely and adequate basis, and without getting lost in the inevitable complexities of the annual appropriations process. This lets the banking agencies in times of crisis respond quickly to changes in staffing and other program needs and to engage in long-range (multi-budget-year) planning by setting their own budget levels and then paying their own way through user fees.

While under a self-budgeting process, assured the former officials, the SEC will always remain subject to Congressional oversight. If Congress is concerned, it can call hearings to demand explanations, and if still not satisfied, legislate to correct any perceived problems. The banking agencies remain keenly aware that they must use their self-budgeting power prudently, they noted, or Congress will modify it or take it away entirely, and the SEC would be just as mindful of this reality.

Full post as published by Jim Hamilton's World of Securities Regulation on February 03, 2011 (boomark / email).