At a March 6 House Appropriations Subcommittee hearing, Securities and Exchange Commission Chairman (SEC) Mary Schapiro defended the Obama administration’s proposal to increase the SEC’s budget in 2013 to $1.566 billion, which is an 18.5% increase over the SEC’s 2012 appropriation.
In her opening remarks, Chairwoman Jo Ann Emerson (R-Mo.) acknowledged the complicated mission that the SEC has been tasked with, but criticized its past performance. She said that despite a 200 percent growth in its budget since 2001, the SEC has failed to identify the Ponzi scheme operated by Bernie Madoff, did not foresee the 2008 financial crisis and has had noteworthy management lapses. Emerson said that she is “reticent” to approve the SEC’s new budget until the SEC has demonstrated its ability to address its “fundamental problems in organization and structure.”
Ranking Member José Serrano (D-N.Y.), the only Democrat present at the hearing, said the SEC’s mission is “vitally important.” He pointed out that the Dodd-Frank Act gave the SEC several new responsibilities that require the Agency to increase its staff and sophistication, justifying the Agency’s request for a budget increase. Serrano also touted the SEC’s efforts since the crisis, highlighting the Agency’s progress on its Dodd-Frank rulemaking responsibilities, its record number of enforcement actions in 2011, and the significant upgrades the Agency made to its information technology (IT) infrastructure.
In her opening statement, Schapiro said the Subcommittee’s past support for its budget requests has allowed the SEC to make “significant progress” in improving its core operations, but acknowledged that more improvements and refinements are needed to meet its obligations in the coming years. She said the SEC has been focused on revitalizing and restructuring the enforcement and examination functions of the Agency over the last three years and those efforts are beginning to pay off. Schapiro highlighted the record 735 enforcement actions the Agency took last year, and touted the success of the new whistleblower and examination programs, which completed over 1,600 exams in 2011 and introduced a new risk-focused approach.
In addition to improving its core operations, Schapiro said the SEC is making made significant progress on its new responsibilities under the Dodd-Frank Act. She said, the Agency has already proposed or adopted rules for more than three quarters of the more than 90 provisions in the Dodd-Frank Act that require SEC rulemaking and have finalized 13 of the more than 20 required studies. Despite that progress, the SEC’s new responsibilities under Dodd-Frank and its oversight of more than 35,000 entities necessitates its request for an increase of $245 million over its FY2012 appropriation, she said. In closing Schapiro said the FY2013 budget would allow the SEC to add approximately 676 new employees as well as prevent regulatory bottlenecks as new oversight regimes become operational and existing ones are streamlined, strengthen oversight of market stability, and expand the Agency’s information technology systems to better fulfill its mission.
Question and Answer
Emerson asked Schapiro how investors have benefitted from the SEC’s budget increases since 2001. Schapiro said the Agency was underfunded for several years and the budget increases have allowed the SEC to modernize, specifically allowing the Agency to: 1) restructure its enforcement division into separate teams, which are further focused on complex and risky financial products; 2) allowed for its examination system to switch to a risk-based approach, which has proven to be far more effective; and 3) has transformed its technology infrastructure.
Emerson followed up by asking if there were any areas where the SEC needs to be more efficient. Schapiro said that when she became Director, there was “a lot of fix,” and has addressed these problems by adding “effective” new talent and using the increased budget to modernize the SEC’s infrastructure. Despite that progress, she said the SEC is now focusing on improving its human resources department, its financial management systems and reviewing its regional infrastructure, to close gaps and eliminate inefficiencies. During the second round of questioning, Emerson asked how the regional offices will be reviewed. Schapiro said the SEC conducts yearly reviews of its regional offices, but this year’s review will be looking at each office’s productivity, proximity to investors and industry, coverage of the country, and a “range of other metrics” to judge each office’s effectiveness. She added that Robert Khuzami, the SEC’s enforcement director, will be spearheading the new review.
Emerson also asked Schapiro how the SEC reaches its budget figure. Schapiro said the budget is reached by asking senior leadership for their expected needs in the coming fiscal year and examining the costs of its new responsibilities. She added that she shares the budget justification with the Commissioners, but there is no formal approval vote.
Serrano asked Schapiro what would happen to the Agency if they were not able to hire the 676 new employees the new budget allows for. Schapiro said the SEC’s enforcement and examinations coverage would be “significantly reduced,” pointing out that the SEC is currently examining only eight percent of advisors and 10 percent of mutual funds. She added that if additional funds are not granted the SEC will be forced to postpone its modernization of the “EDGAR System” – the system the SEC uses to file registration statements and periodic reports from the companies it oversees – and it will significantly restrict the SEC’s investments in other IT infrastructure improvements. Schapiro also revealed that the SEC plans to build a “data warehouse” to consolidate the siloed data system that the Agency currently has in place.
Serrano asked how many of the SEC’s unfinished Dodd-Frank rules require coordination with the Commodity Futures Trading Commission (CFTC). Schapiro said most of the remaining Title VII derivatives rules require coordination with the CFTC. She said the SEC and CFTC have been slower to propose these rules because of their complex nature, but she said she expects the SEC to finish all Title VII rulemakings, and the municipal advisors rule, by the end of the year. She added that the SEC is also coordinating rules related to asset back securities with banking regulators and making good progress.
Serrano also asked about the SEC’s settlement policies, specifically asking her to explain the SEC’s policy of allowing settlement parties to neither admit nor deny guilt. Schapiro said that when there is a parallel civil proceeding during a settlement negotiation, parties to the settlement must admit guilt, reflecting a change in policy the SEC made several months ago. However, Schapiro defended the policy arguing that the SEC could not demand the settlements they do if the other party had to admit guilt. “If they were forced to admit guilt, more than likely they would opt for trial,” she said, which is a far more costly and resource intensive process.
Rep. Rodney Alexander (R-La.) asked for Schapiro to comment on the SEC’s announcement of new money market fund (MMF) regulations and whether the SEC has done an analysis to see if the MMF changes they made in 2010 were effective. Schapiro said she is “very proud” of the changes the SEC made to MMFs in 2010, but said even then, more worked needed to be done because MMFs are susceptible to runs. She assured Alexander that the SEC will be “very thoughtful” as they approach this issue and are starting to focus their work around capital requirements and floating the net asset value based on the administration’s MMF working group paper.
Rep. Steve Womack (R-Ark.) asked how last year’s budget increase was spent. Schapiro said the funds from last year’s budget increase were used to hire more than 400 new employees and upgrade its trial capabilities. However, Schapiro said the bulk of the increase went to enhancing the effectiveness of the Trading and Markets Division, which oversees over-the-counter derivatives, high frequency trading and securities markets.
Rep. Mario Diaz-Balart (R-Fla.) asked Schapiro to comment on the large number of comment letters and the recent remarks made by SEC Commissioner Luis Aguilar concerning the Volcker Rule. Schapiro acknowledged that the regulators have received over 17,000 comment letters on the Volcker Rule, but said what is more interesting is the significant number of substantive letters that have been received. She assured members that regulators will take the comment letters into account as they refine the rule. Schapiro added that the regulators are focusing on “getting the rule right” not getting it done quickly.
Diaz-Balart also asked about the SEC’s involvement with the MF Global investigation. Schapiro said the SEC is “deeply involved” in the investigation and has been working closely with the Securities Investor Protection Corporation trustee to find the missing funds. Schapiro also said the SEC has been told that “85 percent of customers will get 100 percent of their funds back. She added that the SEC is also looking into any enforcement actions it can bring against MF Global management.
Rep. Kevin Yoder (R-Kan.) asked how Congress and the SEC could work together to promote “regulatory certainty.” Schapiro said there is “always going to be a certain amount of uncertainty” because regulators want to “get the rules right rather than rush the rules out.” However, Schapiro did acknowledge that regulatory uncertainty has increased since the passage of Dodd-Frank due to the amount of rulemakings the law requires.
For testimony and a webcast of the hearing, please click here.
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