Sunday, July 28, 2013

House Appropriations Committee Approves Legislation Funding SEC and Ensuring Privacy Protection for E-Mails

The House Appropriations Committee has approved legislation for financial services agencies recommending an appropriation of $1,371,000,000 for the SEC for fiscal year 2014, which is $303,000,000 less than the request. The Committee designates not less than $7,092,000 for the Office of Inspector General and $44,353,000 for the Division of Economic and Risk Analysis. An amendment introduced by Rep. Kevin Yoder (R-KN) that would prohibit funding for the SEC to require the disclosure of political activity on company filings was adopted by a vote of 28-18.

Another amendment offered by Rep. Yoder, and unanimously adopted by the Appropriations Committee, prohibits funding to require the disclosure of private e-mail information by internet service providers without a criminal warrant. The Yoder Amendment affirms that the IRS and SEC and other agencies under the jurisdiction of the Financial Services and General Government appropriations bill must extend the same Fourth Amendment privacy protections to e-mail and other electronic communications as they do to hard mail and other private documents. Rep. Yoder said that the amendment means that government agencies must obtain a search warrant to obtain and view e-mails from third-party service providers.

According to Rep. Yoder, the IRS, SEC, and other government agencies have stated that there is no expectation of privacy with e-mail, a position with which he completely disagrees. By passing this amendment, he noted, the Appropriations Committee is taking a critical step towards Fourth Amendment protections in mail and private e-mails. While communication methods have dramatically changed over the past twenty years, he observed, the electronic communications laws have not kept pace.Congressman Yoder’s Email Privacy Act continues to gain significant and broad bipartisan support in the House. H.R. 1852 currently has 120 co-sponsors; including 90 Republicans and 30 Democrats.

In the Committee Report accompanying the legislation, the Committee said it was supportive of the SEC’s prioritization of robust and effective information technology systems within the Commission. The SEC has indicated the use of the Dodd-Frank mandatory Reserve Fund to support the Commission’s IT initiatives. This fund is not overseen by Congress and it is left to the discretion of the Commission as to its use. The Committee believes emergency reserve funds should be used for natural disaster emergencies and other crises, not discretionary priorities within a Federal agency. While the Committee does not support the use of the Reserve Fund, an increase to IT funding is provided through the Commission’s overall appropriation. The Committee’s recommended funding level for the SEC increases the overall funding level by $50,000,000 specifically to support IT funding priorities. The Committee has restricted funds from the Reserve Fund from being used in Section 618.

Economic Analysis in Rulemaking. Since 2001, the SEC’s budget has increased almost 300 percent. Based on the increases Congress has provided, the Commission should be able to provide for comprehensive economic analysis before promulgating rules that affect the capital markets. It appears that thorough economic analysis has not always been done before Commission rulemakings, said the Committee Report, and courts have overturned SEC rules due to insufficient economic examination. As the agency in charge of overseeing capital markets, economic analysis should be a cornerstone to all agency rulemaking. The Committee’s recommended funding level for the SEC fully funds the Division of Economic and Risk Analysis to support increased hiring of economists and economic analysis within the Commission to enhance the understanding of the economic impacts of SEC rulemakings. The Committee expects the Commission to expand this division and prioritize nonpartisan economic analysis as a fundamental part of the Commission’s rulemaking process.

Cross Border Derivatives. The Committee believes that the rules regarding cross border derivatives should be promulgated jointly by the SEC and the Commodity Futures Trading Commission (CFTC). The current lack of regulatory coordination between regulators does not provide a cohesive landscape for investors and foreign regulators. The Committee strongly encourages the SEC and CFTC to work swiftly toward rules that mirror one another and provide certainty to the financial markets.