Head of commission says GOP proposal would lead to big reduction in number of firm audits
Securities and Exchange Commission Chairman Mary Schapiro told a congressional panel Tuesday that spending reductions of the magnitude sought by Republicans would force the agency to cut back investment adviser examinations substantially.
In her appearance before the House Appropriations Subcommittee on Financial Services and General Government, Ms. Schapiro said that the SEC would have to reduce its budget by about $241 million to return to its fiscal 2008 level, a benchmark that Republicans are seeking for the federal budget in general. That would require eliminating about 1,000 of the agency's 3,800 staff members.
One of the areas that would take the brunt of the impact is investment adviser examinations, Ms. Schapiro said. She noted that the SEC reviews only about 9% of the 11,800 advisers that are registered with the agency. Those advisers have $38 trillion assets under management.
“I would expect to see [adviser exams] cut very dramatically,” Ms. Schapiro said. “We would have very few inspected and many more assets at risk.”
In an unusual twist, the head of the appropriations subcommittee, Rep. Jo Ann Emerson, R-Mo., offered a somewhat sympathetic ear. She said that she does not think the SEC budget should be rolled back to its fiscal 2008 size.
“Of all agencies, it's critical that they be able to perform all the functions they've been asked to do,” Ms. Emerson told reporters after the hearing, citing the SEC's increased responsibilities under the Dodd Frank financial reform law. “There's the potential that they need more people.”
Ms. Emerson emphasized that she does not necessarily support the Obama administration's request in its fiscal 2012 budget for a $300 million boost to the SEC's current funding level of $1.1 billion.
She may be open to some reduction in SEC funding but wouldn't say what level is appropriate. First, she said, House Republicans must settle on a budget resolution that outlines funding ceilings for each agency.
“I think [Ms. Schapiro] makes a good case,” Ms. Emerson said. “The 2008 level, I think, is too drastic for the SEC.”
Ms. Emerson acknowledged, though, that she may not have much influence on House Republican officials. They in turn are being spurred in their budget-cutting zeal by freshmen conservatives who are following through on promises to Tea Party supporters to slash federal spending.
“I don't run the House,” Ms. Emerson said. “I'm not the leadership.”
Like other agencies, the SEC is tightening its belt right now. It has been operating at its fiscal 2010 funding level since Oct. 1, when Congress failed to pass a fiscal 2011 budget.
Lawmakers are barely avoiding impasses that would shut down the government by approving short-term continuing resolutions that fund the government. The current continuing resolution runs out Friday, but another one is in the works that would keep the government running until April 8.
Meanwhile, the Obama administration in February rolled out its fiscal 2012 budget proposal, which has been dismissed by Capitol Hill Republicans and is the focus of numerous Capitol Hill hearings, including the one where Ms. Schapiro appeared Tuesday. The Obama budget would begin to fulfill the Dodd Frank law's promise of doubling the SEC budget by 2012.
Many congressional Republicans, however, are resisting giving the SEC more money, citing its failures leading up to the financial crisis, such as the inability to catch the multibillion-dollar Ponzi scheme perpetrated by Bernard Madoff.
Last week, in a hearing of a House Financial Services subcommittee that featured SEC division directors, Rep. Scott Garrett, R-N.J., argued that the SEC has received yearly 10% budget increases over the last 10 years and shouldn't get more money now. Democrats — and SEC officials — pointed out that the agency more than pays for its budgets through the fees and penalties it brings in.
In prepared testimony for her Capitol Hill appearance Tuesday, Ms. Schapiro said that the agency's budget was frozen or cut between fiscal 2005 and 2007, forcing it to reduce staff by 10%. The SEC staff level had just recently returned to fiscal 2005 levels before the continuing resolution went into effect.
Since then, the SEC has limited hiring to must-fill positions, cut back on information technology investments, limited staff travel, zeroed out bonuses, reduced overtime pay and curtailed the use of expert witnesses, among other moves, according to Ms. Schapiro.
She said that she is leery of whacking the agency's IT budget, because it must monitor and analyze increasingly complex and rapidly moving markets.
At the same time, she is trying to strengthen the SEC staff by adding people who have background in areas such as the algorithms used by hedge funds and in the workings of credit-rating agencies.
“For us, it's always going to be a trade-off between people and technology,” Ms. Schapiro said. “We will make very, very hard choices” that have the potential to affect “investor confidence in the markets.”
Ms. Schapiro reiterated that the agency needs to hire about 780 people in order to implement Dodd Frank. Until then, the SEC can write rules — many of the more than 100 assigned by Dodd Frank must be promulgated by July — but won't be able to enforce them.
“No matter how strong the rules are,” Ms. Schapiro said, “we will have non-compliance.”
