President Reagan, speaking on nationwide television three weeks ago, asked Congress to reduce drastically the budgets of nearly all federal agencies. One hopes that this latest round of cuts will be made according to some plan that gives due recognition to the agencies that are contributing to the achievement of important national priorities, and that makes allowances for agencies that historically have carried out their missions effectively and held their own waistlines in check.
Unfortunately, it appears that such a plan is not yet in place. The intent currently seems to be that virtually all agencies will be forced to suffer a 12 percent cutback, regardless of how close to the bone they already have been cut and--with few exceptions--regardless of how important their missions may be to the nation as a whole.
Some agencies, perhaps many, may be able to sustain the proposed budget reductions without serious and permanent damage to their programs. For others this may in fact be an appropriate step and one which has been too long delayed. But for at least one agency, the Securities and Exchange Commission, a 12 percent cut will directly and severely affect its ability to continue functioning.
The SEC already is operating with a very lean staff. The entire commission today numbers only 1,930, a mere 15 percent larger than it was in 1941, when the agency was in its infancy. Indeed, the staff today is actually slightly smaller than it was in 1975, despite the fact that Congress that year amended the securities laws to increase substantially the commission's responsibilities in a number of areas. The commission has absorbed this increased workload by reorganizing and streamlining existing programs and by calling upon the unparalleled dedication of its staff, which last year donated some 90,000 hours of overtime service to the agency.
Furthermore, the commission's principal activities--reviewing corporate disclosures, inspecting broker-dealers and other market professionals, and investigating suspected violations of the securities laws--are all extremely labor-intensive. Seventy-three percent of the SEC's budget goes directly into staff salaries. The commission does not administer grants; it lets very few service and consulting contracts. To cut the commission's budget is to cut its operating staff, the only real instrument of its effectiveness.
Specifically, a 12 percent reduction in the commission's current budget, coming on top of the 5 percent reduction suffered in fiscal year 1981 and the 3 percent decrease already slated to occur in FY '82, will result in the following actions, among others:
* The commission will close a number of regional and branch offices, including those in Washington, Philadelphia, Fort Worth and San Francisco, and thus will no longer have a daily presence in many of the nation's financial centers. The Salt Lake City branch office, which currently plays a major role in the commission's efforts to police the highly speculative "hot issue" market in the western states, also would be forced to close.
* The commission's highly respected enforcement staff, which even the transition team dubbed "the envy of government," will be cut 16 percent beyond those cuts resulting from closure of regional and branch offices. Such a cut will impair significantly the commission's ability to pursue and prosecute those who engage in market manipulation, insider trading and other frauds on the investing public. These cuts become all the more significant because the commission is currently pursuing a vigorous program of deregulation. As the number of specific written rules declines, there is an increased need to monitor market activity and enforce general proscrptions against fraud.
* The commission will further reduce the scope of review for registration statments, periodic reports and other documents filed by corporate registrants. Before even factoring in the proposed cuts, statistics reveal that since 1962 the number of corporate filings at the commission has increased threefold while the staff utilized to process these documents has declined by 10 percent. As the commission continues to be forced to increase its selectivity in examining disclosure documents, the reporting process provides less protection to investors by becoming more vulnerable to frequent inaccuracies and omissions. The tax "audit lottery," which has resulted in significantly lower collection revenues for the IRS, illustrates this phenomenon. Simply put, as the risks of detection diminish, the instances of dereliction proliferate. Moreover, fraudulent statements discovered "after the fact" will require greater staff resources to remedy.
Were it not so tragic, this crippling of the SEC would be highly ironic. The nation is united in believing that economic recovery should be our first priority. But recovery will not occur without increased capital formation. Capital formation, however, will not occur unless the securities markets operate efficiently, and unless investors can have confidence in the honesty and fairness of those markets.
For nearly 50 years, the SEC has worked to maintain the efficiency and honesty of the securities markets. By all accounts, it has done the job extremely well. But inspection and enforcement are never-ending tasks, and investor confidence is a fragile commodity. If the SEC is forced to suffer the proposed cuts, they will cripple the commission's ability to continue these functions, and simultaneously will frustrate our national goal of economic recovery.
Beyond that, one must ask what the message of these cuts will be for program managers throughout the federal bureaucracy. If Congress reognizes the efficiency with which some agencies are run and spares them the ax, managers will learn that they need not be afraid-- indeed, they will be encouraged--to operate their agencies efficiently. But if all agencies are cut indiscriminately, the message to managers will be that if they wish to protect the muscle of their programs from future cuts, they should surround it with a thick layer of fat.