By Zachary A. Goldfarb
Washington Post Staff Writer
Thursday, March 12, 2009
Securities and Exchange Commission Chairman Mary Schapiro warned yesterday that the agency will "make significant cuts in its current operations" this year unless Congress authorizes it to spend more money.
Responding to concerns that the agency failed to detect the alleged Bernard L. Madoff fraud, Schapiro said the SEC is working to improve collection of tips and complaints and detect wrongdoing early on.
"I do not believe it would be wise for the SEC to retrench during such perilous times in our markets," she told a House appropriations subcommittee.
At the hearing, Schapiro also offered more detailed views on a variety of issues facing the agency than she has in the past. She expressed support for giving financial firms more leeway in valuing some distressed assets. She said the SEC is planning to consider new regulations for hedge funds and credit-rating companies as well as a proposal to curb short selling.
But without additional funds, Schapiro cautioned that the agency would be hamstrung. While the Obama administration has proposed boosting the agency's budget by 9 percent next year, Schapiro said the current budget of more than $900 million would leave the SEC unable to keep up with a technically advanced industry.
Schapiro asked lawmakers to allow the agency to use $17 million from previous budgets that went unspent. She said the money is needed to maintain adequate staffing levels and upgrade technology. Schapiro said the enforcement division would be expanded, the examination department would gain staff to inspect credit-rating companies and investment advisers, and the risk assessment office, charged with monitoring data and disclosures to find wrongdoing, would grow.
Rep. Jose E. Serrano (D-N.Y.), the chairman of the subcommittee that oversees SEC appropriations, said he recognized the need to address the funding shortfall. "The SEC can rest assured that we will do everything in our power to give them the tools they need to execute their vital mission," Serrano said, without committing to providing more money.
In her testimony, Schapiro said new guidance on mark-to-market accounting -- which should give firms holding distressed assets some flexibility in accounting for them -- should come in the second quarter. Many banks are suffering because current accounting rules force them to value their assets at market prices, which in many cases have fallen sharply because prospective investors are wary of buying them.
Her comments followed similar statements this week by Federal Reserve Chairman Ben S. Bernanke and House Financial Services Chairman Barney Frank (D-Mass.).
Schapiro said her agency has pushed the Financial Accounting Standards Board -- which, with the SEC, oversees corporate accounting -- to provide new guidance to accountants "that will help people understand how to value illiquid assets in distressed markets."
Some lawmakers have introduced legislation that would remove FASB's authority to set accounting standards. FASB Chairman Robert H. Herz is planning to defend the rules at a congressional hearing today and to signal that any changes that might come would be around the margins and provide only very modest relief to firms holding distressed assets.
"Calls for suspending or eliminating the fair value standards are misdirected. The standards are not the underlying cause of the write-downs in financial assets, but rather reflect the underlying problems with those assets," Herz wrote in prepared testimony.
Schapiro expressed an expansive view of the SEC's power at the hearing. She said the SEC should have carte blanche to regulate hedge funds, adding that funds should be inspected by the agency and be required to disclose trading practices and investments to the SEC.
Schapiro also said the SEC may request more authority from Congress to regulate credit rating agencies. These firms have been accused of misjudging the risk of many investments that have been at the center of the crisis. Finally, Schapiro said the SEC "hopefully" will propose a rule next month that would restrict when traders can short sell a stock, or bet that it goes down. Lawmakers have been pushing Schapiro to reinstate the uptick rule, a Depression-era rule the SEC ended in 2007. The rule prohibited short sellers from betting against a stock if the price was lower than its previous trade.