On Tuesday, March 6, 2012, SEC Chairman Mary Schapiro appeared before the House Subcommittee on Financial Services and General Government to testify in support of the Administration's budget request for the SEC for the 2013 fiscal year. The SEC is seeking a budget of $1.566 billion, an increase of $245 million over the agency’s FY 2012 appropriation. In her speech, Chairman Schapiro identified four "high-priority initiatives," including a discussion where she foresees regulatory bottlenecks if adequate funding is not provided and areas where the Commission needs to strengthen its oversight of the markets.
Ms. Schapiro has previously warned members of Congress (on the first anniversary of the passage of the Dodd-Frank Act) that "the new responsibilities assigned to the agency under the Dodd-Frank Act are so significant that they cannot be achieved solely by wringing efficiencies out of the existing budget without also severely hampering our ability to meet our existing responsibilities." She further warned that Senate Committee at that time that: "[i]f the SEC does not receive additional resources, many of the issues highlighted by the financial crisis and which the Dodd-Frank Act seeks to fix will not be adequately addressed, as the SEC will not be able to build out the technology and hire industry expertise and other staff desperately needed to oversee and police these new areas of responsibility."
The Chairman began her comments this week with usual discussion of what the SEC had accomplished in the previous year (FY 2011). She emphasized the Commission's efforts to revitalize and restructure the Division of Enforcement, which resulted in "735 enforcement actions – more than ever filed in a single year in SEC history." She did not address in her prepared remarks the issues raised in a recent Bloomberg.com article (discussed here) that the increase in the number of enforcement actions was not supported by a detailed examination of the statistics, which revealed that 31% of actions filed in 2011 were not new, but were follow-on administrative proceedings to institute penalties in cases previously brought. In her testimony, she emphasized the SEC's restructured examination function, which resulted in "over 1,600 oversight exams designed to detect and prevent fraud, strengthen industry compliance, monitor new and emerging risks, and inform policy." She also described the new whistleblower program as "already providing high-quality information regarding otherwise difficult to detect wrongdoing and permitting investigators to focus resources more efficiently."
According to Ms. Schapiro, the $1.566 billion budget request for FY 2013 would allow the Commission "to achieve four high-priority initiatives: (1) adequately staff mission-essential activities to protect investors; (2) prevent regulatory bottlenecks as new oversight regimes become operational and existing ones are streamlined; (3) strengthen oversight of market stability; and (4) expand the agency’s information technology systems to better fulfill our mission."
With respect to the Commission's adequately staffing its activities, she testified that the budget request would permit the SEC "to add approximately 676 positions for both improvements to core operations and implementation of the agency’s new responsibilities." This would add resources to the enforcement program to improve the ability "to identify hidden or emerging threats to the markets and act quickly to halt misconduct, minimize investor harm, and maximize the deterrent impact of our efforts." It would also "bolster the agency’s ability to inspect and examine the expanding breadth of entities under our jurisdiction," which includes approximately 35,000 entities (including 11,700 investment advisers, 9,700 mutual funds and nearly 4,500 broker-dealers), 9,100 reporting companies, 450 transfer agents, 15 national securities exchanges, eight active clearing agencies, and nine nationally recognized statistical rating organizations, as well as the PCAOB, FINRA, and SIPC. She warned that without the resources requested under the budget, "the increasing complexity of registered firms and the disparity between the number of exam staff and the firms could compromise the effectiveness and credibility of the Commission’s inspection and examination program."
With respect to the issue of preventing regulatory bottlenecks, Ms. Schapiro described how the budget request "would enable the SEC to hire new subject matter experts to help make the transition to new rule regimes as smooth as possible and to streamline existing processes for market participants, while still maintaining essential protections for investors." She identified several areas where, under the Dodd-Frank Act, the Commission has expanded responsibilities and additional funding is needed under the budget:
• the SEC's oversight of over-the-counter derivates will be expanded to include security-based swap execution facilities, security-based swap data repositories, security-based swap dealers, and major security-based swap participants, and "additional staff with technical skills and experience" will be needed "to process and review on a timely basis requests for interpretations as well as registrations or other required approvals … [and] to help conduct risk-based supervision of registered security-based swap dealers and participants;"
• proposed rule changes for self-regulatory organizations (SROs have increased in number by 80% in the last five years) must be reviewed and processed by the Commission under new procedural requirements imposed by the Dodd-Frank Act;
• the Division of Corporation Finance expects "to continue to devote significant attention to development and consideration of possible rule changes designed to facilitate access to capital for smaller companies in a manner that maintains appropriate investor protections," and will receive assistance from the newly-formed Advisory Committee on Small and Emerging Companies;
• the Division of Risk, Strategy and Financial Innovation plans to hire additional economists and industry experts to provide data-driven economic analyses to assist in developing efficient rules and evaluating the effectiveness of existing regulations; and
• as new rules required under the Dodd-Frank Act are implemented, "there will be a need for additional staff to respond to the demand from companies, investors, and their advisors for interpretive advice about the new rules."
Chairman Schapiro projected that "the SEC will need to hire specialists in a number of areas to strengthen our oversight of the markets, protect against known risks, and best enable our markets to facilitate economic growth." The budget request is designed: to add staffing to provide oversight of clearing agencies; to increase resources to make market structure improvements (including changes to market-wide circuit breakers and the establishment of a consolidated system for tracking trading orders received and executed); to bring on additional staff with industry and data analysis expertise to expand and improve Division of Investment Management's monitoring and oversight of money market funds; and to hire additional staff to enhance a program that monitors cyber security at securities exchanges.
The final high priority initiative about which Ms. Schapiro testified was the goal of leveraging information technology. She explained that the budget request "would support IT investments of approximately $100 million" to be used in areas such as: data management, integration and analysis; document management; disclosure review; internal accounting and financial reporting; electronic discovery; and reporting tools. The Commission also proposes investing approximately $26 million to overhaul and modernize the EDGAR and SEC.gov websites.
Finally, Chairman Schapiro summarized the planned positions which the Commission sought to add:
• 191 positions in the enforcement program;
• 222 positions in the SEC's examinations program;
• 110 staff in the Divisions of Trading and Markets, Investment Management, and Risk, Strategy, and Financial Innovation;
• 46 positions in the Division of Corporation Finance;
• 20 additional experienced business analysts and certified project managers; and
• 48 administrative and support services.
One additional point made by Chairman Schapiro (which seems to be frequently overlooked by many) was that the budget request "would be fully offset by the matching collections of fees on securities transactions." In other words, "the SEC is deficit-neutral, as any increase or decrease in the SEC’s budget would result in a corresponding rise or fall in offsetting fee collections."