Refunding The SEC

Senator Charles Schumer believes that the SEC is underfunded. Statistics tend to support his case. The SEC’s staff of approximately 3,650 oversees 35,000 entities.  Securities trading volume has increased 261% between 2003 and 2008, but the SEC staff grew only 15% during that time.  Over that same time frame the number of tips and complaints received by the SEC has increased by 146%, but the enforcement staff has expanded by only 23%.

Congress and the Administration have obviously been aware of these problems, which predate 2003. Each new scandal on Wall St, raises the question of why the SEC cannot get additional funding. The answer may change from year to year, but the reality is always the same. Other agencies and departments of the government are considered higher priorities and the SEC allocation rarely grows. The issues of the commission’s staff and resources only become a priority, at least temporarily, when the news media is overflowing with stories like the Madoff scandal. Then the taxpayer wants to know what happened to the enforcement system.

Schumer has used the Madoff matter to question how the government can put more money into the SEC. His solution is clever. He wants the SEC to keep the fees its collects each year instead of them going to the Treasury while Congress decides what the commission will get. In 2007, though the SEC brought in $1.54 billion in fees, it secured just $881.6 million in funding. The commission turned in more than $650 million than it collected.

Schumer’s general idea is hard to argue. The SEC cannot do its job in a growing financial industry if its resources remain unchanged. What Schumer does not take into account is that the SEC should not have to rely on fees, which can vary from year to year. Congress is aware of the budget issue. The Congressional appropriations process should increase the amount of money available to the commission to $1.5 billion, if that is indeed the sum that the agency can demonstrate it needs. The financial and public company system is now so complex that the SEC may need substantially more than it collects. It makes little sense to tie its activities to the amount that it brings in each year.

The other significant flaw to Schumer’s plan is that part of the money the SEC brings in comes in the form of penalties. Some years these sums are substantial. The SEC needs to have an arm’s length relationship with its funding source so it does not have a financial incentive to become too aggressive. The investigation into the Madoff SEC actions shows very clearly that the commission was short of staff, but the laws were on the books so that the swindler could have been caught and tried. The SEC does not have a dearth of laws to enforce. It has a lack of resources. Any incentive to tie resources to investigations confuses the two issues.

The Madoff matter may end up having a silver lining. Scandals consistently encourage Congress to consider giving the SEC a larger budget. Perhaps this scandal has been serious enough so that this time appropriate funds will actually be appropriated.

Douglas A. McIntyre