Risk & Compliance

Bush Puts SEC Budget on a Diet

The Administration is asking Congress for a cost-of-living increase for the Securities and Exchange Commission, and no more.
Marie LeoneFebruary 6, 2007

President Bush is asking Congress for a 3 percent budget increase for the Securities and Exchange Commission as part of his $2.9 trillion government funding plan for fiscal year 2008. The increase brings the SEC budget request to $905 million, slightly higher than the 2007 continuing resolution level of $877 million under which the SEC is currently operating. Congress is expected to vote to make the FY 2007 budget permanent later this month.

Compared to the 2005 SEC budget request, the 2008 funding looks frugal. Three years ago, the President requested $913 million for FY 2005, a 12.5 percent increase above the 2004 budget of $893 million. That request was first crafted by then SEC Chairman William Donaldson, and gave the SEC the funding to hire 106 new employees. Congress eventually approved only $888 million as the final FY 2005 budget number. The budget request trimming came the next year when the President asked for a tiny $177,000 increase for FY 2006.

The relatively paltry $28 million increase for 2008 will be used to fund annual pay raises, as well as merit pay increases, for the SEC’s 3,800 staffers. Pay raises for 2007 amounted to a 2.2 percent bump to the $573 million that the SEC spent on salaries and benefits in 2006. Salaries and benefits represented about 32 percent of the SEC’s total 2006 budget.

The number of employees at the commission is expected to remain the same for 2007 and 2008. Currently, there is a 6 percent vacancy rate at the SEC, which is the historical average, according to the Diego Ruiz, the SEC’s executive director.

Ruiz noted in a conference call on Monday that the regulator will not be adding any new programs to its agenda in 2008. However, SEC staffers expect that next year, they will be taking on extra duties, particularly reviewing new applications for companies applying to be credit rating agencies and dealing with appeals from audit firms that disagree with the government’s assessment of their operations.

In September, President Bush signed the Credit Rating Agency Reform Act of 2006, which gave the SEC authority to regulate competition within the credit-ratings industry, as well as keep an eye on conflicts of interest. Part of that process will be accepting and review applications to become a ratings agency, or what the SEC calls a Nationally Recognized Statistical Rating Organization (NRSRO). Because the regulator does not know how many companies will apply to be an NRSRO, the staff would not comment on whether additional manpower and funds would have to be rerouted to support the registration effort.

In addition, the SEC budget proposal noted that the commission’s General Counsel Office will likely be busy supporting actions taken by the Public Company Accounting Oversight Board (PCAOB) — the SEC’s audit firm watchdog — that result in legal challenges. The SEC expects that the PCAOB will review about 225 audit firms in 2008, the same number of assessments it plans to complete in 2007. The comission’s Office of General Counsel is requesting $36 million for 2008 — a $3.4 million increase from what it spent in 2006, and a $1.3 million hike compared to 2007.

The SEC’s Division of Enforcement spent $311 million to fund analysis, investigations, and legal proceedings in 2006. The 2007 budget amount will remain relatively flat, but will jump to $321 million in 2008 to account for salary increases. The SEC predicts it will handle 2 million investor complaints, tips, and forwarded investor-related spam e-mail messages in 2008. In addition, the division believes it will open about 1,300 new matters under inquiry — which are considered preliminary investigations — and begin 925 more formal investigations. The division also plans to open about 360 administrative proceedings and to launch 220 civil proceedings next fiscal year. Conflicts of interest in the financial services sector, as well as “serious” financial accounting frauds will remain the enforcement divisions’ “the most important areas,” according to budget briefing documents.

Meanwhile, the commission’s Division of Corporate Finance, which spent $118 million in 2006, and is asking for $126 million for 2008, expects to complete about 4,500 reviews of corporations next year — representing about one-third of the public companies that file with the SEC. Rulemaking and staff interpretations of several key issues are also on the division’s calendar for 2008, including a possible rewrite of the Sarbanes-Oxley Act’s Section 404 for small companies, a review of the XBRL pilot program results, recommendations to implement electronic proxy statements, and mandates associated with the PCAOB’s revision of Auditing Standard No. 2, tentatively dubbed AS5.

The Bush budget, which called for $235 million to support military action in Iraq and Afghanistan in 2007 and 2008, has drawn early criticism from Democrats who regained control of Congress after the 2006 elections. Along with military spending, Bush’s plan is drawing ire from Democrats because it moves away from entitlement programs, including slowing the growth of Medicare.