SEC Chair Schapiro: Budget freeze hurts ability to regulate financial markets
Saturday, February 5, 2011
Mary L. Schapiro, chairman of the Securities and Exchange Commission, said Friday that a budget freeze is compromising the agency's ability to police the financial markets.
"It is a strain that is already having an impact on our core mission," she said in a speech to securities lawyers, agency employees and others.
The freeze is especially difficult for the SEC because legislation enacted last year in response to the financial crisis has placed extensive new demands on the agency, Schapiro and other agency officials said at an annual symposium of the Practising Law Institute.
Just as the SEC has ramped up hiring to tackle an array of new responsibilities, it is unable to spend the money.
"So we need to ask ourselves if we want our market analysts to continue to use decades-old technology . . . to monitor trading that occurs at the speed of light," Schapiro said. "We need to ask ourselves if we want our chief securities regulator to have to pull the plug on data management systems and on a digital forensics lab needed to re-create the data that sophisticated fraudsters leave on hard drives and iPhones."
Schapiro's comments set the stage for a potential clash with congressional Republicans, many of whom oppose the Dodd-Frank legislation enacted to overhaul Wall Street regulation in the aftermath of the crisis. They could use their control of the federal purse strings to undercut the measure.
Critics of the agency say it failed to grasp the level of risk that had infected investment firms and allowed Bernard Madoff's massive Ponzi scheme to continue despite repeated warnings.
Schapiro, appointed by President Obama after the crisis with a mandate to strengthen the SEC, said the agency's workforce had been cut in the years preceding the crisis and had just been getting back to pre-crisis levels.
Under the new legislation, the SEC has expanded responsibilities for regulating hedge fund advisers, credit rating agencies and derivatives, the complex instruments that helped lead the financial system to the brink of collapse. The SEC is also tasked with translating the law into many new rules.
Schapiro said last year that the agency needed to add 800 employees to carry out the new mandates.
The SEC budget has been frozen at $1.1 billion, where it was for the fiscal year that ended Sept. 30. The Dodd-Frank bill called for an increase to $1.3 billion. House Republicans said this week that they plan to roll back overall federal spending to 2008 levels except for national security, and areas of the budget dealing with financial services would be targeted for even tighter restraints.
Other officials echoed Schapiro's theme.
"At a time when the SEC should be expanding its expertise to appropriately oversee the markets, it is operating with a serious handicap," said Commissioner Luis A. Aguilar, a Democrat.
The lack of funds has limited travel by examiners, the hiring of expert witnesses in complex cases and the taking of depositions, he said.
The SEC's director of enforcement, Robert S. Khuzami, compared the uncertain budget outlook to waiting for the cavalry - not knowing whether reinforcements would show up, how many would arrive or how long they would stay.
Commissioner Kathleen L. Casey, a Republican, said the challenge posed by the financial regulatory legislation "has less to do with resources" than with time, as the SEC tries to write a lot of new rules on a tight time frame.
"The real threat here is that we are not able to fully consider the rules we are adopting," she said.