Thursday, March 10, 2011

Key Senator Urges Appropriations Committee to Fully Fund SEC and CFTC

In a letter to the Appropriations Committee, Senator Robert Menendez (D-NJ) urged that the SEC and CFTC be funded for the balance of FY 2011 at the levels provided in S. 3677, the Senate Committee bill reported to the Senate in July 2010 and at the levels requested in the President's FY 2012 budget for the following year. Funding the SEC and CFTC at levels that will allow them to succeed in implementing the Dodd-Frank Act is critically important for the financial security of all Americans and for the international competitiveness of our financial markets, said the Senator, a key member of the Banking Committee. More funding will also allow these regulators to provide more financial benefits directly to the public. For example, last year the SEC returned $2.2 billion to harmed investors, twice the agency’s budget

According to the Senator, the federal deficit is not affected by the funding levels Congress sets for the SEC and possibly the CFTC. The SEC’s appropriation is already fully offset by collections from the financial industry. Under Dodd-Frank, the fees must be adjusted to match the appropriation. As a result, there is absolutely no deficit reduction benefit from cutting the agency’s funding. The President's budget also proposes that Congress allow the CFTC to off-set a significant portion of its budget with user fees like other financial regulators do.
President Obama’s proposed FY2112 budget requests $1.43 billion for the SEC and $308 million for the CFTC, increases of 28% and 82%, respectively. The FY11 Continuing Resolution proposed by House Republicans, however, would provide only $1.095 billion for the SEC and $112 million for the CFTC, decreases of 2% and 34%, respectively. In FY2010, the SEC’s budget was $1.12 billion, while the CFTC’s budget was $169 million.

The Senator noted that recently 41 prominent securities lawyers who represent banks and other companies that the SEC and CFTC regulate wrote to Congress calling for a budget increase at the SEC and stating that investors sidelined with decimated 401(k)s will be unwilling to again risk their capital if ``Wall Street’s cop-on-the-beat increasingly comes to be seen by the public as a cop-on-the-furlough.’’
In addition, said the Senator, Wall Street reform requires larger budgets at both regulators.

New responsibilities given to the SEC and CFTC include oversight of the derivatives market and hedge fund advisors; registration of municipal advisors and security-based swap participants; enhanced supervision of credit rating agencies and clearinghouses; greater disclosure and risk retention regarding asset-backed securities; and creation of a new whistleblower program. At the SEC, funding is needed for five important new offices, including the Office of Credit Ratings and the Office of Investor Advocate.

Further, he noted that there has been an explosion in the size of the markets that the SEC and CFTC are required to monitor over the past few decades, but their budgets have not even come close to keeping pace. For the CFTC, the number of actively traded futures and options contracts on U.S. exchanges has increased nine-fold in the last decade. The SEC is now responsible for overseeing approximately 35,000 entities, including 11,800 investment advisers, 9,500 public companies, 4,200 mutual funds, and 5,400 broker-dealers with 175,000 branch offices. The SEC also oversees 600 transfer agents, 12 national securities exchanges, 10 clearing agencies, 10 nationally recognized statistical ratings organizations, as well as the PCAOB, FINRA, the MSRB, and other self-regulatory organizations.

The SEC and CFTC computer systems remain badly out of date and unable to quickly process and analyze critically important market developments such as the “Flash Crash” of May 2010. The recent computer hacking attempts at NASDAQ also demonstrate the potential cybersecurity vulnerabilities at exchanges that require more technology and staff to effectively monitor.