Member Perspective: Stop Suffocating the S.E.C!

Remember that infuriating high school teacher that assigned so much homework you couldn’t imagine finishing it all by the next day? The one that assigned you to read 150 pages, do a journal entry, and expected you to figure out complex equations at home all on top of your other classes? Even if you wanted to do a good job, time didn’t allow for it. This crazy overload of work is effectively what Congress and the President has done to the S.E.C. But instead of a single annoying teacher, it’s the slow gears of corrupt system that has laid one of its traps for a top watchdog. The trap? Designating more rules to write, more institutions to look after, more programs to create and more financial products to oversee all while keeping appropriations inadequate. The trap is to render the S.E.C. slower than molasses in January.

Take financial “reform” post-2008. Dodd-Frank alone “requires the agency to promulgate more than 100 new rules, create five new offices, and produce more than 20 studies and reports” on top of “considerable new responsibilities that will have a significant long-term impact on the agency’s workload, including oversight of the over-the-counter (OTC) derivatives market and hedge fund advisers; registration of municipal advisors and security-based swap market participants; enhanced supervision of nationally recognized statistical rating organizations (NRSROs) and clearing agencies; heightened regulation of asset-backed securities (ABS); and creation of a new whistleblower program.”[1] In 2010 and 2011, the SEC was given a modest bump in appropriations to $1,571 Million and $1,673 Million respectively, up from $970 Million in 2009. But in 2012, the numbers dipped to $1,321 Million with all those “considerable new responsibilities that will have a significant long term impact,” still there.

This would be a deeply cynical way to suffocate the SEC. Amidst a financial crisis load them up with responsibilities and give them a modest bump in appropriations to implement them. Then slowly but surely take away the money, leaving them desperate for more workers just to simply meet deadlines. The banks love it. They get delays on upcoming rules that affect profit and a scrambling inefficient watchdog that they can laugh at.

This isn’t even taking into account the growth of the financial services industry itself. As Barry Ritholz writes, “Over the past 30 years, the financial world has grown exponentially in size, breadth and complexity of products, trading volume, and total assets under management.  In terms of personnel, assets under management, numbers of trader, managers, sales people, and mathematical PhDs., who work on the street increased dramatically.”[2] The S.E.C. has not. That just shows you the shift in Congress’s priorities in the last 30 years.

Now I’m not claiming that S.E.C. is necessarily being tethered by all this and genuinely wants to go after the banks. Regulatory capture plagues it as well, Robert Khuzami being exhibit A. But even if in the off chance a guy like Neil Barofsky got in there, he couldn’t even go after all the fraud. He’s a great prosecutor, not a one-man army.

In response to these troubling facts, come appropriations time in March, Congress must fund the S.E.C. so that it can effectively “fulfill its mission to protect investors” and “maintain fair, orderly and efficient markets.” If lawmakers truly wanted to improve the economy (and hence their reelection chances) they would understand that rooting out fraud, which inflates bubbles and undermines the system, is essential and can only be effectively combated by funding the agencies tasked to do so. Also, with the increase in complexity in today’s financial world, it’s essential to bestow our regulatory agencies not only with manpower but quality manpower. Manpower with the knowledge and understanding to root out fraud nestled deep in an intricate synthetic CDO or potentially guised in an institution such as MERS. Furthermore, the S.E.C.’s ability to take in monetary settlements by institutions that have broken the law is capped by their budget. In other words, their incentive to go after criminality in the financial services industry is capped by what Congress throws their way. These are perverse incentives for a country claiming to be all about “equality under the law”. I would hope to see a reversal in this detrimental incentive by congressmen taking the morally correct move in increasing the funding of the S.E.C. for Fiscal Year 2013.

-Bob Roberts

[1] SEC Testimony on the President’s FY 2012 Budget Request for the SEC


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