Wednesday, January 15, 2014

Starving the SEC

Starving the SEC

The U.S. Congress has found a sure-fire way to make sure that regulation is ineffective. First they increase the responsibilities and expectations of the agency, and then they fail to provide proper funding.  Congress has just set the SEC’s budget at $1.35 billion, an increase of $30 million over 2013 and $320 million less than the agency requested.[1]  Fiscal conservatives will justify the 2% increase as the SEC’s contribution to reducing the deficit.  There’s a big problem with that argument; the SEC get its revenues from industry fees not taxpayers.  



In addition to all of the agency’s traditional audit, enforcement, and rulemaking responsibilities, the SEC is in the process of implementing many provisions of Dodd-Franks as well as the JOBS Act.  The lack of an appropriate budget will hamper the SEC’s ability to retain its most talented professionals and its recruiting efforts to replace them.  Moreover, the SEC will be hard-pressed to maintain the technology needed to monitor and evaluate financial activity.  Meanwhile, Wall Street is coming off a record year and will have more resources than ever to contest the SEC.  The Commodity Futures Trading Commission received equally poor funding.

This budget will undoubtedly be good for Congress.  Wall Street has to be elated, and so will continue to heavily fund Congressional campaigns.  Congressmen will also have plenty of opportunities to get on television and lambaste the SEC.  Having saddled the SEC with a paltry budget, Congress will be able to rail about missed regulatory deadlines, tentative enforcement proceedings, and failed investigations.

Republicans in the House would like to go even further in restraining the SEC by repealing major sections of Dodd-Frank.   Given their action on the budget, there’s really no need to repeal Dodd-Frank.  The SEC will struggle to enforce it.

The SEC’s $1.35 billion budget may sound large to some folks.  However, it is tiny in comparison to the money management business.   Mutual funds and hedge funds alone manage about $15.5 trillion, so the SEC’s budget only represents 0.01% of just those two pools of assets.  The SEC’s purview is, of course, far greater.  On the one hand, we willingly pay mutual funds at least 0.25% just as marketing expenses known as 12b-1 fees. However, when it comes to overseeing the industry, we’re only prepared to pay 0.01%.   Shame on us and our elected representatives.





[1] http://dealbook.nytimes.com/2014/01/14/for-2-wall-street-regulators-more-belt-tightening/

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