GOP budget cuts could end up declawing financial reform, the SEC boss warns
A developing stalemate in Washington over federal spending won't stop the Securities and Exchange Commission from adopting regulations called for by last year's financial reform bill – but it could prevent the agency from carrying them out.
“The real crunch comes after the rules are in place and we have to operationalize them,” SEC Chairman Mary Schapiro told a Senate Banking Committee hearing today. “We lack the resources to do that.”
The Dodd-Frank financial regulatory overhaul requires the SEC to issue more than 100 regulations and complete nearly 20 studies, with many of the deadlines falling later this year. So far, Congress hasn't provided the SEC any extra funding to take on these new responsibilities.
Congress failed to pass a new federal budget at the end of the last fiscal year in early October. That proposal would have given the SEC an 18% increase in funding, as authorized under Dodd-Frank. Instead, Congress approved a continuing resolution that is forcing the SEC and other federal agencies to operate at their current budget levels.
By the time the resolution expires on March 4, Congress must either pass a fiscal 2011 budget or extend the temporary funding measure. This week, the House is debating a bill written by its Republican majority that would excise $61 billion from the continuing resolution. The legislation would lop $25 million off of the current SEC budget and $189 million out of President Barack Obama's 2011 budget proposal.
Mr. Obama has threatened to veto the House bill. Furthermore, it's unlikely that the Democratic majority in the Senate will act on the House bill.
The budget battle became more intense this week, as Mr. Obama introduced his fiscal year 2012 budget, which would add $300 million to the SEC's current funding levels. But Republicans, who rode voter concern about the yawning federal deficit to a takeover of the House, dismissed it for falling far short of balancing the federal books.
With two budgets swirling around Capitol Hill and political passion on the issue running high, the SEC may have to forge on with its current $1.1 billion budget for the foreseeable future.
“It looks an awful lot like a game of chicken,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “It's difficult to see how the end game on all of this works out.”
Stephen Crimmins, a partner at K&L Gates LLP and a former deputy chief litigation counsel in the SEC's Division of Enforcement, said that the coming days are crucial. He and 40 other members of the Executive Council of the Securities Law Committee of the Federal Bar Association sent a letter to Congress in late January, urging increased SEC funding.
“The next two weeks will decide the SEC's fate,” Mr. Crimmins said. “It's too soon to tell what will happen. We're trying to have a conversation with folks on both sides of the aisle.”
In his 2012 budget, Mr. Obama expressed his support for following through on Dodd-Frank. Now, he needs to figure out a way to get the proposal through a legislative process where Republicans have enormous influence.
The administration is “putting its money behind the Dodd-Frank Act and the increased regulatory responsibility the SEC has to bear,” said David Tittsworth, executive director of the Investment Adviser Association. “There's going to be a potential train wreck between the administration and the House Republicans.”
Ms. Schapiro said that the budget crunch already has forced her agency to cut back hiring and travel, and delay updating technology required to keep pace with increasingly complex and deep markets. It all adds up, she said, to less investor protection.
“We are making some difficult choices,” Ms. Schapiro said. “That's having an impact on our ability to fulfill our core mission.”
While its budget is in limbo, the agency has to make resource-allocation decisions that investment advisers might feel. For instance, it might forgo risk-based exams and instead advance securities litigation cases.
“It is harder to move the trial schedule than it is to move the exam,” said R. Daniel O'Connor, a partner at Ropes & Gray LLP. “There will likely be some slowdown in the exam process.”
Mr. Crimmins and his colleagues are convinced the battle over the SEC budget is a diversion. In the letter to Congress, the group emphasized that cutting the commission's budget will have no impact on the federal deficit. The agency pays for its own operations through registration and filing fees charged to firms that it regulates.
“The SEC should not be part of the [congressional] appropriations process at all, because it uses not a dime of taxpayer money,” Mr. Crimmins said.
Ultimately, Mr. Crimmins would like to see Congress authorize the SEC to set its own budget levels, as do other banking regulators, such as the Federal Deposit Insurance Corp. A provision that would have done that was scuttled during House-Senate negotiations last summer on the Dodd-Frank bill.
“What is at issue here is America's prosperity and the vibrancy of its capital markets,” Mr. Crimmons said.
For now, though, the SEC has to make do.
