Extreme Makeover: SEC

When you weigh the Securities and Exchange Commission’s manpower, technology and budget against the securities industry’s size and complexity, it’s easy to imagine gaps in the regulatory system. With or without an increased budget, the SEC wants to make up for its shortcomings.

When you weigh the Securities and Exchange Commission’s manpower, technology and budget against the securities industry’s size and complexity, it’s easy to imagine gaps in the regulatory system. With or without an increased budget, the SEC wants to make up for its shortcomings.

In her testimony before the subcommittee on Financial Services and General Government Committee on Appropriations this morning, Mary Shapiro, chairperson of the SEC, put it this way: “The SEC oversees more than 30,000 registrants including 12,000 public companies, 4,600 mutual funds, 11,300 investment advisers, 600 transfer agencies, and 5,500 broker dealers. We do this with a total staff of 3,600 people.” (By comparison, Citigroup alone has a compliance staff of 2,200 compliance employees)

Not only that, but the SEC does this with a budget of about $943 million. And despite the growing regulatory challenges of the current market, the previous Administration gave the SEC a budget increase of less than 1 percent for fiscal year 2009. At that rate, Shapiro says, the agency would have to lay off nearly 100 staff people. No wonder the tips about Bernie Madoff’s fraudulent operations slipped through the cracks.

Shapiro says she’s already made some significant changes that will help restore investor confidence and protect investors. But she wants the SEC to do more. In light of the recent Madoff and Stanford Financial cases, that includes working on a system that will recognize valuable tips and whistleblower information. The SEC receives more than 700,000 tips each year. “The SEC has a number of different processes to track this kind of information, but there is no central repository or system through which this information comes together to ensure it is handled consistently or appropriately,” she says. Over the next couple years, the SEC plans to invest in new systems to organize this kind of information.

For some time now, Shapiro has been pushing to take a closer look at the way credit ratings agencies like Moody’s and Standard & Poor's operate. Next month, the agency will host a roundtable on oversight of ratings agencies, as well as the transparency of and accountability for the ratings process. It’s likely one of the main discussions will be about how to change the way these agencies are paid. In general, financial institutions pay the agencies to rate them.

Regarding short selling, Shapiro and the SEC are expected to reinstate the “uptick rule”, or something similar, as early as next month. The rule requires short sellers—those who profit from a stock’s decline by selling borrowed shares—to enter their orders at a price that is higher than price of the previous trade. The rule is intended to prevent short-sellers from fueling greater downward momentum, by requiring that the short “sale” actually happens on an uptick in price.

Janaya Moscony, president and founder of SEC Compliance Consultants, Phoenixville, PA-based compliance consultancy, says the SEC’s new motto could be, “No excuses and be prepared.” Moscony says the SEC’s new approach is a far cry from its previous “friendly regulator” style. “The SEC reacted to this call for a friendlier regulator, but what the industry really needed over the past several years was a stricter enforcement agency that focused its efforts on relevant issues and spent more time and effort when examining troublesome firms,” she says.

But those are exactly the types of things Shapiro says the SEC hasn’t been able to do because of monetary and staff constraints. In fact, the agency’s resources were getting squeezed even as the number of firms and offices it needed to supervise were growing. As the agency’s examination staff shrank by 7 percent and its enforcement staff narrowed by 10 percent, the number of investment advisors registered with the SEC increased 32 percent and their assets jumped over 70 percent to more than $40 trillion. The number of b/d branches, meanwhile, jumped 67 percent.

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