Is the SEC outmatched, or just “inefficient”?

February 17, 2011

Philosopher and writer George Santayana said, “Those who cannot remember the past are condemned to repeat it.”

It’s hard to fathom that people are already forgetting what caused our economic crisis (the conclusions of the bi-partisan Financial Crisis Inquiry Commission are here), but some members of Congress make us wonder about that.

We listened to a telephone news conference yesterday convened by ShareOwners.org, Consumer Federation of America (CFA) and the Council of Institutional Investors (CII).

All three non-partisan, not-for-profit organizations say that a battle of “David v. Goliath” proportions is going on in Washington, and they want to educate Americans about the disastrous consequences that will occur if the budgets of Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are slashed.

The bottom line? Americans need to tell their legislators that they vociferously oppose any funding cuts, the groups say.

“The roughly $80 million in combined cuts proposed for these two agencies isn’t even pocket change in the context of the overall federal budget deficit,” said Barbara Roper, director of investor protection for Consumer Federation of America. “On the other hand, cuts of that magnitude would severely erode the ability of these two agencies to rein in the type of Wall Street excesses that helped to land us in our current fiscal difficulties.”

The proposal Roper is talking about would cut $25 million from the SEC’s $1.12 billion budget, and $56.8 million from the CFTC’s $168.8 million budget.

While the cuts would be “harmful” to the SEC, they would “decimate” the CFTC at a time when it is “taking on the gargantuan task of regulating a roughly $300 trillion U.S. over-the-counter swaps market,” Roper said. At its current funding level, she said the CFTC can write the rules needed for the implementation of the Dodd-Frank Act, but it won’t have the resources necessary to enforce those rules.

In President Obama’s proposed 2012 budget, funding for the SEC and the CFTC actually increase (an explanation is in this article); however, Roper said that user fees completely pay for the increase, which means the increase will have no impact on the federal deficit – a point that SEC Chairman Mary Schapiro confirmed on Feb. 14. Likewise, reducing the SEC’s budget won’t help to reduce the federal budget, because the Dodd-Frank Act mandates that any budget reductions be matched by reduced user fees.

The proposed funding cuts have their proponents, though. Late last month, Rep. Scott Garrett (R-NJ), the Chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, issued a press release stating:

—During our country’s current debt crisis, all branches of government — including Congress — have to tighten their belts and find ways to make their money go further. A dramatic spending increase to fund the SEC and CFTC, as envisioned by the authors of the Dodd-Frank legislation, would further the mindset that our nation’s problems can be solved with more spending, not more efficiency. Government agencies must learn to operate effectively within their budgets like American families and businesses do every day as we work to get our fiscal house in order.

Roper countered that the “efficiency” argument is fallacious; the agencies – which were underfunded for decades – are most inefficient when they lack the resources they need to effectively keep an eye on Wall Street. But that’s not easy: While the giant Wall Street firms can easily afford the latest, greatest technology, government agencies charged with their oversight are stuck with technology that is obsolete.

“One of the things that would make these agencies more efficient is if they could invest in technology,” Roper said. But one of the first things to go as a result of their inadequate funding is investment in technology that would make them more efficient.”

Roper believes that the efforts to cut funding to the SEC and the CFTC “…have less to do with promoting efficiency and more with gutting reforms.” She added, “There is no way that [the CFTC], with just a $168.8 million budget, can simultaneously take on responsibility for a market seven times the size of the one they currently regulate while cutting their budget on something of the order of 30 percent.”

We called Rep. Garrett’s office yesterday afternoon to get the Congressman’s response to some of these issues, but no one returned our call.

But to us, Roper’s warning sounds a lot like Santayana’s. “If we learned nothing else from the financial crisis, we should have learned that unless regulators have the authority and resources they need to rein them in, Wall Street will run amok, and average Americans will end up bearing the cost,” she said.

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