Monday, February 14, 2011

President’s Proposed Budget Would Significantly Increase SEC and CFTC Funding to Enable Dodd-Frank Implementation

President Obama’s proposed FY 2012 budget would significantly increase SEC and CFTC funding so that the Commissions can properly implement the mandates of the Dodd-Frank Act. Moreover, for the first time, the CFTC would be permitted to fund some activities through user fees.

Under the proposal, the SEC budget would be $1.4 billion, up from the current $1.1 billion. The SEC is funded through offsetting fees collected pursuant to section 31 of the Exchange Act. The budget proposes to allow the SEC to use $1.4 billion of the fee collections to finance its base operations in FY 2012.

The budget message notes that the Dodd-Frank Act assigns significant new duties to the SEC and will have a considerable impact on the Commission's jurisdiction and resource needs in FY 2012. Dodd-Frank includes over 100 rulemaking provisions applicable to the SEC, many of which require action within one year of enactment.

Further, it also requires the SEC to conduct more than twenty studies and issue numerous reports, some on a periodic basis. In terms of new duties, Dodd-Frank gives the SEC regulatory authority over advisers to hedge funds; enables the SEC, with the CFTC, to regulate OTC derivatives; provides the SEC with additional responsibilities and sets timetables for oversight of credit rating agencies and provides greater disclosure and risk retention regarding asset-backed securities. Dodd-Frank also enhances disclosure around matters of corporate governance, enables the SEC to study and adopt a uniform fiduciary duty for investment advisers and broker-dealers, and provides the SEC with significantly more tools to enforce the securities laws, including a new fund with which the Commission can reward whistleblowers whose information leads to successful prosecutions against securities law violators.

In FY 2012, the SEC will continue its implementation of new rules promulgated under the Dodd-Frank Act. Toward this end, the Administration expects the SEC to augment enforcement and examination staff levels in order to focus on compliance with the new rules for the derivatives markets and hedge fund advisers. The agency also will bolster staff in the Divisions of Trading and Markets and Investment Management, mostly to develop programs to oversee OTC derivatives, hedge fund advisers, and clearing agencies. The SEC is also expected to increase staff in the Division of Risk, Strategy, and Financial Innovation to develop and analyze data repositories for the new markets under the agency's jurisdiction. Also, personnel in the Division of Corporation Finance will conduct disclosure reviews related to asset- backed securities and corporate governance.

As part of the Shelby Amendment on SEC funding agreed to during the Dodd-Frank House-Senate conference, Section 991 of the Dodd-Frank Act created the SEC Reserve Fund, which is a separate fund established in the Treasury from which the Commission may obligate amounts up to $100 million in any one fiscal year that it determines are necessary to carry out its functions. The Reserve Fund provisions take effect on October 1, 2011. The Reserve Fund is financed by deposits from registration fees collected by the Commission.

In any one fiscal year, the amount deposited in the Reserve Fund may not exceed $50 million and funds deposited will remain available until expended. The remainder of registration fee collections for each fiscal year will be deposited in the General Fund of the Treasury and will not be available for obligation by the Commission. Funds deposited in the Reserve Fund are not subject to appropriation or apportionment. However, the SEC must notify Congress of the amount and purpose of any obligation made utilizing funds from the Reserve Fund.

The President’s budget proposes to increase the CFTC’s funding to $308 million, up from the current $168 million so that the Commission can properly carry out its Dodd-Frank duties. The Administration expects that these increased resources will ensure proper oversight of the futures and swap markets through the maintenance of adequate staffing levels, which generally were held constant for years in the face of substantial market growth.

Additional resources will allow the CFTC to make improvements in information technology by upgrading hardware and software, by enhancing existing systems, and by developing critical new systems to automate market oversight. This investment will permit the CFTC to implement reforms under the Dodd-Frank Act that require swap dealers and major swap participants to register and come under comprehensive regulation, including capital standards, margin requirements, business conduct standards and recordkeeping and reporting requirements, as well as ensure that dealers and major swap participants bring their clearable swaps into central clearinghouses. The increased funding will also deal with the requirement that dealers and major swap participants use transparent trading venues for their clearable swaps and provide the CFTC with authority to impose position limits in the swaps markets and develop important new enforcement tools to detect, investigate, and litigate violations of the CEA and CFTC regulations.

Importantly, the budget proposes to fund CFTC non-enforcement activities through user fees. This user fee proposal brings the CFTC into line with all other Federal financial regulators, which are funded in whole or in part through user fees. A full legislative proposal will be transmitted to Congress this year.

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