Freaky Thursday? Schapiro gives nod to adviser SRO, top Republican endorses more SEC funding

It was a day of unexpected twists on Capitol Hill.

During a congressional hearing today, Securities and Exchange Commission Chairman Mary Schapiro voiced support for a self-regulatory organization to oversee investment advisers. Meanwhile, a leading Republican expressed support for increasing the SEC budget.

In an appearance before the House Financial Services Committee, Ms. Schapiro reiterated that the agency annually can examine only about 9% of the nearly 12,000 registered advisers. She said this is unacceptable given the fact that those advisers manage about $43 trillion in assets.

“Unless there is sufficient funding for the SEC to do this, I think we ought to look very seriously at an SRO, whether it’s Finra or not,” Ms. Schapiro told lawmakers, referring to the Financial Industry Regulatory Authority Inc., the broker-dealer self-regulatory organization that reports to the SEC. “We need to have better oversight” of advisers.

The hearing focused on SEC reform. Committee Chairman Spencer Bachus, R-Ala., has introduced a discussion draft bill that would force the SEC to undertake several structural changes, including folding the agency’s examination operations into the Division of Trading and Markets, and the Division of Investment Management.

His proposal echoes a study by The Boston Consulting Group, mandated by the Dodd-Frank financial reform law, that outlines ways for the SEC to streamline and improve its operations. The consultant’s study also was parsed at the hearing.

In a break with many other Republicans, Mr. Bachus expressed some sympathy toward the SEC’s pleas for a budget increase to carry out Dodd-Frank requirements as well as investor protection and market surveillance activity.

“An increase in funding is probably necessary as part of the reform process,” Mr. Bachus said. “A lot of Republicans and Democrats and others have said before the SEC obtains additional funding, there needs to be reform.”

On the other side of Capitol Hill today, the Senate Appropriations Committee was expected to approve a bill that would increase SEC funding by $222 million for fiscal year 2012 — the same amount called for in the Obama administration’s budget request.

In June, the House Appropriations Committee passed a bill that would freeze the SEC budget at $1.18 billion for the next fiscal year. With the end of the government fiscal year, Sept. 30, quickly approaching, Congress might not be able to complete agency funding bills and might have to resort to a so-called continuing resolution.

Republicans have been reluctant to increase the SEC budget, charging that it failed to stop the multibillion-dollar Ponzi schemes perpetrated by financial advisers Bernie Madoff and Allen Standford despite a tripling of its budget over the last decade.

“We need to be careful of rewarding bad behavior with more money and more regulations,” said Rep. Randy Neugebauer, R-Texas.

Since the enactment of the Dodd-Frank bill, most Democrats have gone to bat for the SEC. They argue that cost cutting will not produce the kind of resources required to fulfill the new demands it faces and that an underfunded agency endangers investors.

In addition, they point out that although the agency’s budget is set by Congress, it is funded by fees it charges regulated entities.

“You don’t penalize the American public further because agencies that were supposed to be protecting them didn’t do the job well enough,” said Rep. Barney Frank, D-Mass. “You can’t ‘efficient’ your way into modern technology and getting the kind of staff you need.”

Rep. Scott Garrett, R-N.J., suggested that the SEC should be doing less work, not more. Part of the hearing focused on a bill he introduced that would require the SEC to perform more-extensive cost-benefit analyses and to complete them before a regulation or order is issued, rather than after they’ve been proposed.

“Clearly, a stronger commitment to cost-benefit analysis by the SEC is absolutely essential to ensure reasonable rules that do not unduly burden registered companies or negatively impact job creation,” Mr. Garrett said.

Skeptics of a universal fiduciary duty rule for retail investment advice assert that the SEC did an insufficient economic analysis of the issue in a study it delivered to Congress in January. The Dodd-Frank law gives the agency the authority to proceed with such a rule.

Ms. Schapiro said that she has directed the agency to gather more economic data before promulgating a fiduciary-duty rule. But she said that Mr. Garrett’s bill goes too far.

“It layers so many analyses on top of what we already do,” Ms. Schapiro said. “We’re set up to fail.”