By MICHAEL SMALLBERG
As part of our ongoing breakdown of President Obama's Fiscal Year (FY) 2013 budget request, we took a look at the proposed funding for agencies tasked with maintaining the integrity of U.S. markets and protecting the economy from another financial crisis.
Here’s how two of those agencies—the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC)—fared in the FY2013 request.
Securities and Exchange Commission
SEC’s budget by the numbers: FY2011 (actual): $1.2 billion | FY2012 (est.): $1.3 billion | FY2013 (request): $1.6 billion
Analysis: There are plenty of reasons why the SEC might have missed or failed to act on warning signs leading up to the 2008 financial crisis (see, for example, the discussion of the SEC’s Consolidated Supervised Entities program in the report by the Financial Crisis Inquiry Commission). SEC critics and supporters often have vastly different perspectives on the problems facing the agency. But they tend to agree on one thing: if Congress wants the SEC to be a tough cop on the beat, it needs to give the agency enough resources to do its job.
There’s no shortage of evidence pointing to the SEC’s resource challenges. SEC Chairman Mary Schapiro told Congress last year that the agency experienced three years of frozen or reduced budgets from FY2005 to 2007, leading to a 10 percent staff reduction. The agency’s IT investments also declined by about 50 percent from FY2005 to 2009.
Meanwhile, there has been significant growth in the number and size of firms overseen by the SEC. The latest budget request describes how the agency is often outmatched by the firms it regulates:
Seven years ago, the SEC’s funding was sufficient to provide nineteen examiners for each trillion dollars in investment adviser assets under management. Today, that figure stands at ten examiners per trillion dollars. A number of financial firms spend many times more each year on their technology budgets alone than the SEC spends on all of its operations. Similarly, our enforcement teams bring cases against firms that spend more on lawyers’ fees than the agency’s annual operating budget.
Congress also added to the SEC’s workload in the 2010 Dodd-Frank financial reform law. In the short-term, this required the agency to issue more than 100 new rules and conduct more than 20 reports and studies. In the long-term, the SEC is now responsible for regulating a wider array of firms and revamping its whistleblower program, among other things. A recent study by the Boston Consulting Group found that the SEC faces a shortage of 375 to 425 full-time equivalent (FTE) employees, largely as a result of the Dodd-Frank requirements.
In addition, former SEC Inspector General David Kotz has told Congress that the agency often must incur additional expenses in order to implement the IG’s recommendations. For instance, the SEC has spent over $20 million to create a new system for handling tips and complaints, in response to the IG’s finding that the agency failed to appropriately respond to tips about Bernard Madoff’s Ponzi scheme.
We’ve also argued that Congress should provide adequate funding to the SEC rather than delegating more of its work to an industry self-regulatory organization such as the Financial Industry Regulatory Authority (FINRA).
The SEC is requesting $1.566 billion for FY2013—an increase of $245 million above its FY2012 appropriation. It’s important to keep in mind that the SEC’s budget is offset by its collection of securities transaction fees.
There are many other steps Congress could and should take to make the SEC more transparent and accountable (see, for example, our recommendations for addressing the SEC revolving door). But as a first step, Congress needs to ensure that the SEC has at least as much funding as what the Administration requested.
Commodity Futures Trading Commission
CFTC’s budget by the numbers: FY2011 (actual): $203 million | FY2012 (est.): $205 million | FY2013 (request): $308 million
Analysis: In addition to bolstering the SEC's regulatory powers, Dodd-Frank expanded the CFTC's authority to oversee the $300 trillion U.S. swaps market, which had been notoriously under-regulated and played a central role in the financial crisis. (The CFTC is also responsible for regulating the $40 trillion U.S. futures market.)
By providing a comprehensive regulatory framework for the swaps marketplace, Dodd-Frank put the CFTC in a much stronger position to protect investors and crack down on abusive trading. Unfortunately, the agency's funding simply hasn't kept up with its expanded mission. CFTC Chairman Gary Gensler has repeatedly raised this concern with Congress:
In FY 2012, the Commission expects to utilize 710 staff-years. At this size, we are but 10 percent larger than our peak in the 1990s. Since then, though, the futures market has grown fivefold, and Congress added oversight of the swaps market, which is far more complex and eight times the size of the futures market the agency currently oversees.
At times, the CFTC hasn’t been able to afford travel and office supply expenses for its staff. Last year, the agency wasn’t able to examine CME Group—the primary regulator of MF Global—the Chicago Board of Trade, or ICE Futures U.S. to ensure that these exchanges were following core principles relating to trading surveillance, audit trails, and disciplinary programs. Now the CFTC is reassigning its enforcement staff to handle new registration applications, which “creates risks in [the agency’s] critical oversight roles.”
The CFTC is requesting $308 million for FY2013—an increase of $103 million over its FY2012 appropriation. As it has in years past, the Obama Administration is also seeking authority for the CFTC to impose controversial user fees on its regulated entities. CFTC Commissioner Bart Chilton explained why this may be a necessary reform:
What the CFTC does in market oversight and enforcement is a public good and should be funded publicly. But, if that’s not likely to happen at the levels we need—levels required to do our jobs—then resorting to user fees to fund the agency’s work makes sound sense. Our financial markets are too important to the nation and to consumers to let them run wild and break the heart of our economy like they did a few years ago.
Investors, consumers, shareholders, and taxpayers are still paying a steep price from the 2008 financial crisis, which resulted in large part from lax regulation. Dodd-Frank gave the SEC, CFTC, and other regulators more authority to crack down on Wall Street abuses. Now it’s up to Congress to give these agencies the funding they need to get the job done.
Michael Smallberg is a POGO Investigator