Views on improving the integrity of global capital markets
27 July 2018

Starving On the Vine – Our Protector of Investors Gets Short Changed

Posted In: US SEC

The most recent Securities & Exchange Commission budget request (for fiscal 2019) is $1.6 billion.

Is this a big number for our nation’s primary overseer of markets and investor protection?  Look at these comparisons.

The technology and communications budgets of just three Wall Street firms — Morgan Stanley, JP Morgan Chase and Citigroup — are $16 billion or 10 times the budget of the SEC.  Spending at large hedge funds, like Bridgewater Associates with ~$125 AUM, or mutual fund complexes like Vanguard with ~$5 trillion under management, or the discount brokers like Schwab and TD are magnitudes of the SEC budget.  The SEC is unable to spend even at its 2016-2017 levels, while markets and players have grown in leaps and bounds.

Dramatic as these numbers are, they don’t even tell the whole story.   The mandates facing the SEC are growing, and therefore further straining the resources available.  The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) added to the SEC’s existing budgetary burdens by mandating new responsibilities for the oversight of advisers to private equity funds (including registration of hedge fund advisers), creation of a new Bureau of Credit Ratings, oversight of security-based swaps, creation of a whistleblower program, and registration of municipal securities advisers.

Self-funding for the agency via charging registration fees and use of a portion of the enforcement fines collected is a wonderful solution for keeping pace with markets and technology. It was proposed, but ultimately stricken from Dodd-Frank. And significant challenges in the overall US budget process have reduced further the attention paid to the SEC and the willingness of Congress to fund it adequately.

What worries us greatly is that the lack of adequate resources has and will continue to impact the SEC’s ability to appropriately police the growing complexity of financial markets.  Let’s not forget what this lack has wrought in real financial costs.  The Great Recession was brought about in large measure by a securities industry that had become far more sophisticated than its regulator. Securities products and activities far outpaced the SEC’s ability to monitor, detect and modulate risky exposures and concentrations that cost our system dearly.  The costs to savers and our society were in the trillions.  We need to invest in our primary regulator, not starve it. At $1.6 billion for SEC operations, its looking dangerously undernourished.

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Photo Credit: ©Getty Images/woolzian

About the Author(s)
Kurt Schacht, JD, CFA

Kurt Schacht, JD, CFA, is managing director of the Standards and Financial Market Integrity division at CFA Institute, where he oversees all advocacy efforts and the development, maintenance, and promotion of the highest ethical standards of practice for the global investment management industry.

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