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Congress Considers Hiking SEC Budget to Prevent More Madoffs

Image has not been found. URL: /wp-content/uploads/2009/07/durbin-mic.jpgSen. Richard Durbin (D-Ill.) (WDCpix)

During George W. Bush’s ill-fated push to privatize Social Security, conservatives condemned the use of surplus retirement taxes to help offset the deficit. But few Democrats or Republicans decry the government’s custom of padding its coffers with fees from an agency with a mission that’s more significant than ever: the Securities and Exchange Commission.

For two decades, the SEC has made more money in fees from the entities it regulates than it receives from Congress through the budget process – about $350 million more in this year alone. With the agency taking heat for its Bush-era enforcement lapses, most notably the failure to stop Bernie Madoff’s infamous fraud, lawmakers and advocates are debating the right amount to spend to ensure stronger financial cops on the beat.


Illustration by: Matt Mahurin

Sen. Dick Durbin (D-Ill.), chairman of the appropriations panel that funds the SEC, unveiled a bill Wednesday that would give the agency $1.13 billion for the next fiscal year – an increase of $100 million, or nearly 10 percent, above the Obama administration’s request.

Debating budgets for financial regulators may sound “as dry as dust,” Durbin acknowledged at a hearing of his subcommittee last month.

“But if you step back for a moment and translate their work into the real world,” he added, “you realize that their oversight … protects the savings and futures of American families, and ensures that economies in countries around the world will view our economy and the way we run it with respect.”

Given those stakes, the argument for beefing up enforcement spending at the SEC appears easy to make. Yet the tight fiscal times pose challenges; Sens. Chuck Schumer (D-N.Y.) and Richard Shelby (R-Ala.) won approval in April to give the agency an extra $20 million in 2010, but appropriators in the House have signed off on only half that number.

The money makes a real difference for SEC officials, who have seen their technology budget shrink by more than half since 2005 and their numbers of investigative attorneys remain more than 11 percent below 2004 levels, according to a recent Government Accountability Office study.

“It’s an ongoing problem the agency has dealt with,” Barbara Roper, director of investor protection at the Consumer Federation of America, said in an interview. “In the past couple of decades, there hasn’t been a careful review of the resources the agency needs to do its job effectively, what the real funding level of the agency should be.”

SEC Chairman Mary Schapiro told Senate appropriators last month that the White House budget request for 2010 would not allow her to hire more staffers than the agency has already brought on board this year.

Schapiro is seeking to add 1,000 positions for 2011 – nearly as many people as now work in SEC enforcement – which still would leave the agency smaller than the Federal Deposit Insurance Corporation.

The FDIC supervises about half as many financial institutions as the SEC.

Bill Black, who served as a senior banking during the 1980s savings-and-loan (S&L) scandal, offered a blunt assessment of the consequences of years of inattention. “Congress probably doesn’t know how” to appropriately arm financial fraud monitors, he said in an interview.

“I don’t mean this in an insulting way,” continued Black, now an associate professor of economics and law at the University of Missouri-Kansas City, “but to know what makes enforcement effective, it pays to know what’s going on at an institution, what goes on at the SEC. And they simply had not conducted meaningful oversight for most of the decade.”

After the S&L crisis, as Schumer and Shelby noted in their legislation, strike forces in 27 cities were set up to monitor financial fraud, backed by 1,000 FBI agents. Black recalled training federal prosecutors during that time on in the ins and outs of complex cases as well as serving as a free expert witness for the government.

Since Schapiro took the helm, the SEC has moved rapidly to restore its tarnished enforcement record. The agency has targeted 23 Ponzi schemes so far this year – with Allen Stanford’s alleged $8 billion fraud topping the list – and charged Angelo Mozilo, former CEO of Countrywide, with insider trading.

But the SEC is hardly the only agency with a checkered past to overcome.

Regulators at the Office of the Comptroller of the Currency and the Office of Thrift Supervision also have fallen down on the job of monitoring the health of the nation’s banks, advocates say. Recent weeks have been even harsher for the agencies, with the OTS on the brink of elimination under the Obama administration’s financial reform plan and the OCC losing a Supreme Court case in which it sided with the banks it policed – and against states that sought stricter consumer protections.

Unlike the SEC, the OCC and OTS are funded by fees they levy on banks. And though the SEC can face a rough road to securing more money from Congress, that fate is better than an agency getting cash from its regulated entities, U.S. PIRG consumer program director Ed Mierzwinski said.

“It’s the worst of both worlds,” Mierzwinski said in an interview. “They’re never dragged before appropriators. They don’t have to fight for their money.”

Regulators did fight over which would attract banks’ business, however, as “charter shopping” and lax enforcement became more common.

So should a financial regulator seek its budget in the politicized climate of Capitol Hill or from the companies it oversees? The question could be a central one as lawmakers take up legislation this month on the administration’s proposal for a Consumer Financial Protection Agency.

Mierzwinski supports funding the new agency through a combination of congressional appropriations and user fees paid by regulated entities.

That mix also appeals to Ira Rheingold, executive director of the National Association of Consumer Advocates. But ensuring proactive enforcement involves more than providing an independent revenue source, he added.

House Financial Services Committee Chairman Barney Frank (D-Mass.) introduced a bill late Wednesday that would fund the new consumer agency in a manner similar to the SEC, with Congress okaying a budget and the agency asked to “recover the amount of funds expended” through fees on the companies it regulates.

Those fees, like the SEC’s generated revenue, will go to the general Treasury – and potentially help balance the government’s books.

Still, ensuring proactive enforcement involves more than providing an independent revenue source, Rheingold noted.

“Moving forward, we need to recognize that these regulatory agencies – no matter how you structure them – may be captured, may be subject to political whims,” Rheingold said. “The way you build safety valves into the system is if you have multiple enforcement mechanisms.”

Frank’s plan would open up two potential enforcement paths. First, the new agency would have the authority to ban forced arbitration in banking contracts, allowing private citizens to pursue certain fraud claims in court instead of being forced into private dispute resolution.

The bill would allow states to set stronger limits on financial practices of national banks without the threat of federal preemption, taking the handcuffs off state attorneys general, such as New York’s Andrew Cuomo and Illinois’ Lisa Madigan, who have doggedly pursued fraud cases.

Some analysts have suggested using the financial overhaul bill to strengthen the SEC’s protections for whistleblowers who report alleged fraud, although this provision was not included in Frank’s draft.

In the end, however, the best way to help regulators elevate enforcement efforts may be a matter of cold, hard cash. The SEC’s budget for policing rule-breakers was lower last year than in 2005, and is still smaller than the amount of fees the agency sends, no questions asked, to the Treasury.

“If you look at what we’ve now spent on the bailout because we weren’t willing to spend money up front on proper regulation,” Roper of the Consumer Federation remarked, “the cost of poor regulation dwarfs the cost of actually funding these agencies.”

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