Thursday, July 21, 2011

SEC Chair Schapiro Outlines Impact of Proposed Appropriations for SEC at Senate Hearings

In testimony before the Senate Banking Committee on the first anniversary of the enactment of the Dodd-Frank Act, SEC Chair Mary Schapiro said that if 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, since the Commission 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.

As an example of this, the implementation of regulations for the OTC derivatives markets will be delayed, depriving financial firms and market participants of the legal certainty they need to make routine investment decisions, upgrade systems and technology infrastructure, and improve risk management for manufacturers, pension funds and others. Even after the rules are eventually finalized, she continued, market participants will face further delays and uncertainty due to the lack of adequate SEC staff to timely process and review requests for registrations or other required approvals. Further, the Commission will be unable to conduct adequate oversight and examinations of registered swap market participants, or to use newly-available data to oversee the security-based swap markets for excessive risks.

Chairman Schapiro also noted that the SEC will have only a skeletal crew to handle analysis of complex issues that will increase significantly as more than 750 advisers to hedge funds and private equity funds begin to register with the Commission. The Division of Investment Management will be able to dedicate only a handful of staff to this area.

In response to a question from Senator Reed on the impact on the SEC of the budget proposal in HR 2434, Chairman Schapiro said that under that bill’s proposed SEC budget the modernization of EDGAR would be delayed. Also, the proposal would undermine the SEC’s ability to respond to SRO requests and no-action letters, thus severely impacting the Commission’s ability to provide exemptive relief and guidance to the financial industry. She also noted that it is in the interest of the financial industry to have expert people in the SEC, and the enactment of HR 2434 in its current form would be harmful in that regard.

HR 2434 would provide an appropriation of $1,185,000,000 for the SEC, which is the same as fiscal year 2011. The Obama Administration has indicated that the President would veto any spending legislation that would undermine implementation of the Dodd-Frank Act through funding limits or other restrictions. Such a bill appears to be the Financial Services and General Government Appropriations Act, HR 2434, which was recently approved by the House Appropriations Committee. In a statement released through OMB, the Administration strongly opposed the measure’s funding level for the SEC, which it believes would compromise the Commission's current market oversight and enforcement activities, including policing the securities and derivatives marketplace.

Chairman Schapiro also noted that the Dodd-Frank Act established a $50 million SEC Reserve Fund to allow the SEC to respond to unexpected market events, invest in multi-year IT projects, and manage authorized programs during continuing resolutions. If this fund is eliminated or the SEC is not permitted to access the fund, she cautioned, it would have significant consequences for important IT projects, such as building out the infrastructure to analyze the significant amounts of critical new data the SEC will soon receive from previously unregulated markets, including a segment of the $600 trillion OTC derivatives market and hedge fund and other private fund advisers. Without the appropriate IT infrastructure, the SEC’s ability to establish effective monitoring regimes will be significantly hindered, she warned.

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