The SEC desire to self-fund, revealed in an interview of SEC chairman Mary Shaprio in an interview with the Financial Times, is a far bigger deal than it might appear. One of the reasons for the agency’s less than impressive performance in pursuing fraud is that Congress kept it starved. For instance, Arthur Levitt, SEC chairman from 1993 to 2001, has been criticized, correctly, for having been far too friendly to the industry as far as derivatives regulation was concerned. And that was not simply his joining in hte assault against Brooksley Born’s efforts to regulate credit default swaps. Frank Partnoy tells in gory detail in Infectious Greed that Levitt also fought reform measures in 1995, when a wave of widespread derivatives losses (of which Orange County was on of many examples). Yet in his memoir, Take On the Street, Levitt describes how he was beaten back aggressively by members of Congress, particularly Joe Lieberman, on efforts to improve the transparency of accounting and analyst objectivity. Their weapon of choice? Cutting his budget.
Given the SEC’s de facto politicized role, it has to pursue cases that fit within an enforcement budget that is smaller than it should or could be, given the fees the SEC collects, and also forces it to justify the expenditures it does make. That means the SEC winds up pursuing cases that are easy to prosecute and have high headline value. Complex frauds do not fit that template, for they are resource intensive.
From the Financial Times:
The US Securities and Exchange Commission should fund itself directly from industry fees, a system that would allow it to tackle more complex investigations and invest more in technology and skilled people, Mary Schapiro, its chairman, told the Financial Times.
The SEC rakes in more than $1bn annually in registration and transaction fees but, unlike other US financial regulators, cannot spend any of it without going to Congress each year to have its budget approved. That has made it difficult to plan ahead and invest in multi-year information technology projects…
“Self-funding will help us to avoid periods of drought,” Ms Schapiro said. “Think about what the markets were doing in terms of growth and innovation at the same time the SEC was in a hiring freeze.”
US banking regulators, including the Federal Deposit Insurance Corporation and the Federal Reserve, can use what they collect in fees, deposit insurance premiums and interest income. The UK Financial Services Authority is entirely self-funded.
The SEC expects to collect $1.3bn in 2009 but may spend only the $960m authorised by Congress. For 2010, the administration has asked for a budget of $1.026bn, though the SEC expects to collect $1.5bn in fees.
Senior Democrats in Congress are divided on the regulator’s future funding.