In testimony before Congress Thursday, SEC Chairman Mary Schapiro made a case for an increase in the agency’s funding to $1.407 billion for 2012—describing the progress the SEC has made on internal reforms since she took the job two years ago, and enumerating the enormous increases in its responsibilities over the past six years.
She was given extra ammunition by the early release to Congress today of a Boston Consulting Group study of the SEC’s internal organization, which included recommended reforms for the agency. It was not due until Mar. 14. Schapiro said she was pleased with the results.
“I am pleased that the report recognizes the many initiatives we have taken over the past two years to increase the agency’s efficiency and effectiveness,” she said. “Yet, I know there is more to be done. Importantly, the report of the independent consultant confirms the concerns I have been expressing that the SEC does not have the resources to perform all the activities expected of us. As the report notes, despite the growth of our responsibilities and market complexities, the SEC’s resources have not kept pace. This capacity gap places our markets and America's investors at risk. I believe that investors need an SEC with added staff and better technology to properly police Wall Street.”
She added that the SEC would immediately ask for the authority to make some organization changes recommended by the report that would strengthen the authority of the SEC’s Chief Operating Officer.
Shrinking Budgets
The $1.407 billion the SEC is requesting for 2012 is below the $1.5 billion in funding for the agency authorized by Dodd-Frank, but well above the $1.1 billion appropriated for the agency in 2010. Congress has threatened to freeze the regulator’s budget at last year’s levels.
“A number of financial firms spend many times more each year on their technology budgets alone than the SEC spends on all of its operations,” said Schapiro in her testimony. Six years ago, SEC funding levels were sufficient to provide 19 examiners for each trillion dollars in assets under management by investment advisers. Today, that figure stands at 12 examiners per trillion dollars.
Schapiro took pains to point out that the SEC’s funding is deficit neutral, as it would be fully offset by matching collections of fees on securities transactions. Currently the transaction fees collected by the SEC are approximately two cents per $1,000 of transactions. Under the Dodd-Frank Act, beginning with FY 2012, the SEC will be required to adjust fee rates so that the amount collected will match the total amount appropriated for the agency by Congress.
So far, the SEC has begun implementation of the Dodd-Frank Act without any additional funding, Schapiro said. But this has only been possible because the initial stages of implementation mostly involved studies and rule writing. It will need more money for the next stage, though, which will require creating new oversight regimes, she said.
The budget increases would support 4,827 positions, an increase of 780 positions over projected 2011 levels. Of those, 312 positions (40 percent) would go to strengthen and support core SEC operations, continue internal operational reform and increase investor protections. The other 468 positions (60 percent) requested for 2012 would initially go to implement the Dodd-Frank Act.
The budget increase would also support investments of $78 million in technology—one area where the SEC has often been said to be weak. That investment represents an increase of $23 million over 2011 and would “help to address the technology gap that resulted between 2005 and 2009, when SEC investments in new IT systems dropped by more than half,” Schapiro said in her testimony.
In particular, the technology funding is needed for things like data management and integration, document management, EDGAR modernization, market data, internal accounting and financial reporting, infrastructure functions, and improved project management. It would also help the SEC develop risk analysis tools to manage the thousands of tips, complaints, and referrals received annually, and to complete a digital forensics lab so that enforcement staff can catch sophisticated fraudsters. It also includes funding for technology needed to facilitate registration of additional firms required under Dodd-Frank Act and to capture and analyze data on these new markets.
Budget Woes
Some critics of the SEC have pointed out that the regulator already has a much bigger budget than it did in 2001, but the regulator also has many more responsibilities than it did ten years ago. In addition, the SEC experienced three years of frozen or reduced budgets between 2005 and 2007 that forced a reduction of 10 percent of the agency’s staff, Schapiro said.
As a result of increased funding levels in 2009 and 2010, current SEC staffing levels are just now returning to the level of 2005, she said, despite the growth in the size and complexity of the securities markets over that time. “During the past decade, for example, trading volume has more than doubled, the number of investment advisers has grown by 50 percent, and the assets they manage have increased to $38 trillion,” said Schapiro.
Today, the SEC has responsibility for approximately 35,000 entities, including oversight of 11,800 investment advisers, 7,500 mutual funds, and more than 5,000 broker-dealers with more than 160,000 branch offices. The agency also reviews the disclosures and financial statements of nearly 10,000 reporting companies. It also oversees approximately 500 transfer agents, 15 national securities exchanges, 9 clearing agencies, 10 nationally recognized statistical ratings organizations (NRSROs), as well as the Public Company Accounting Oversight Board (PCAOB), Financial Industry Regulatory Authority (FINRA), Municipal Securities Rulemaking Board (MSRB), and the Securities Investor Protection Corporation (SIPC). In addition, the Enforcement Division has jurisdiction over any person or entity that violates the securities laws, regardless of whether they are associated with one of these 35,000 entities.