In a letter sent to Congress yesterday, POGO joined a coalition of national, state and local groups raising serious concerns about the funding cuts to the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) proposed last week by the House Appropriations Committee.
The SEC and CFTC are supposed to be the cops on the beat protecting investors from fraudulent and abusive trading practices in U.S. financial markets. However, the recent financial crisis made it painfully clear that these agencies have not done an adequate job of policing our markets. The Dodd-Frank financial reform law gave the SEC and CFTC new tools to protect the economy from another costly financial meltdown, including more authority to regulate credit rating agencies, hedge funds, and over-the-counter derivatives trading. But it’s up to Congress to follow through by giving these agencies the basic funding they need to do their jobs, including the implementation of the Dodd-Frank reforms.
Last week, the House Appropriations Committee introduced a Continuing Resolution (H.R. 1) to fund the federal government for the last seven months of the fiscal year. The CR included the following cuts for the financial regulatory agencies: for the SEC, a $25 million cut from its current budget of $1.1 billion; and for the CFTC, a $57 million cut from its current budget of $169 million. Meanwhile, President Obama has proposed increasing the SEC’s budget to $1.4 billion in FY 2012, and increasing the CFTC’s budget to $308 million. The President has also proposed giving the CFTC the authority to assess user fees on regulated entities to help pay for the agency’s oversight activities. In addition, Rep. Barney Frank (D-MA), Ranking Member of the House Financial Services Committee and co-sponsor of the financial reform law, has introduced an amendment to the CR to reduce the proposed cuts for the SEC.
In recent weeks, SEC and CFTC officials have made impassioned pleas for increased funding at their agencies. SEC Chairman Mary Schapiro pointed out that many Wall Street firms spend more on their technology budgets alone than the SEC spends on its total operating costs, and questioned whether we want “our market analysts to continue to use decades-old technology to recreate market events or to monitor trading that occurs at the speed of light.” Other SEC officials and personnel have reported that the budget cuts are preventing the agency from hiring more experts with Wall Street experience, paying for travel to conduct in-person examinations, and hiring expert witnesses for civil prosecutions. At a hearing last week, the SEC Inspector General predicted that the agency would have to cut some 600 jobs if its funding was rolled back to 2008 levels. Even Wall Street lawyers, many of whom previously worked at the SEC, are urging Congress to increase the SEC’s funding and to give the agency the authority to set its own budget.
Meanwhile, the CFTC is struggling to make do with its current $169 million budget, as it prepares to expand its regulation of domestic over-the-counter derivatives trading with a notional value of over $200 trillion. The agency has already restricted staff travel and cut $11 million from its technology budget, and is warning Congress that it may be forced to lay off at least 35 from a staff of about 700 unless it receives an emergency infusion of $31 million. At a hearing yesterday, CFTC Chairman Gary Gensler also made it fairly clear that his agency will not be able to carry out its new mandate to regulate over-the-counter derivatives unless it receives an increase in funding. Meanwhile, both the CFTC and SEC have missed and delayed deadlines for implementing the Dodd-Frank financial reform rules, due in large part to the budget uncertainties.
To be sure, there are many problems at the SEC and CFTC that cannot be fixed by a simple increase in funding. For instance, in its investigation of the failure to detect the Madoff and Stanford Ponzi schemes, the SEC Office of Inspector General revealed serious shortcomings in the agency’s examination and enforcement practices that can hardly be explained by funding shortages alone. In addition, the OIG’s audits have uncovered wasteful spending stemming from inadequate policies and procedures in the SEC’s procurement and real estate leasing functions. Meanwhile, the Government Accountability Office (GAO) has repeatedly faulted the SEC for material weaknesses in its internal control over information systems and its financial reporting and accounting processes.
In other words, the SEC and CFTC could clearly do a better job of utilizing their existing resources, and Congress needs to conduct routine oversight to ensure that the agencies are operating with transparency and accountability. But when you look at the staffing and funding levels at these agencies compared to the massive growth in the industries they oversee (for example, the CFTC's comparison below of its number of full-time equivalents to the volume of futures and options contracts), as well as their increased responsibility under the Dodd-Frank financial reform law, it seems clear that our financial regulators are simply outmatched. We urge Congress to provide the basic funding for these agencies to do their jobs, which will help to ensure greater integrity in our financial markets and to improve investor security and confidence.
Michael Smallberg is a POGO Investigator.
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