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Under Heat from Congress, SEC Still Seeks 18.5% Raise

A congressional appropriations committee expresses misgivings about allowing the securities regulator to spend more money next year.
Sarah JohnsonMarch 6, 2012

During a subcommittee hearing today where Securities and Exchange Commission chair Mary Schapiro was seeking an 18.5% budget increase, the chair of a congressional oversight committee contended that she would be “reticent to throw money at the SEC” until the regulator can prove it’s made significant improvements.

Rep. Jo Ann Emerson, a Missouri Republican who chairs the Committee on Appropriations subcommittee, expressed wariness about granting “another substantial funding increase” to the SEC and questioned Schapiro about whether the many pending rules on the agency’s docket will withstand scrutiny.

The commission has been widely criticized in recent years for missing the Bernard Madoff Ponzi scheme, renting office space it couldn’t afford and didn’t need, and destroying documents that may have helped investigations, Emerson noted.

The SEC is seeking a $1.566 billion budget for its 2013 fiscal year, which begins October 1. Schapiro, who has asked for a budget increase every year since she took over the agency three years ago, said the SEC needs the increase. Before she became chairman, the agency endured years of flat or reduced funding during a period of significant growth in the size and complexity of the markets the regulator oversees. “I believe we have been underfunded for many years,” she said.

Much of her justification comes from the 2010 Dodd-Frank Act, which has required the SEC to create new programs (such as whistle-blower bounties for securities-fraud informants), many rules and studies, and new oversight (over hedge funds and dealers of over-the-counter derivatives, for instance). Schapiro wants 676 new employees, including 191 more people in the SEC’s enforcement divisions, staffers to review public companies’ financial statements, and economists to evaluate new SEC rules.

New employees to help the SEC with its scrutiny of rulemaking could save the agency from some heartache in the long run, according to Schapiro. Last year a federal appeals court condemned the SEC’s cost-benefit analysis on a proxy-access rule that would have allowed some investors to directly nominate directors.

The ruling put more pressure on the commission to be more careful with future regulations just as it continues its work on its Dodd-Frank Act rulemaking. Emerson’s committee is reviewing the support for the SEC’s rulemaking under the 2010 law. “We want to have confidence the SEC is issuing regulations based on sound data and analysis that can stand up in court,” she said.

Schapiro estimates that the SEC has implemented or proposed 75% of the regulations assigned to it under Dodd-Frank. Among the more controversial proposals yet to be implemented by the SEC and other regulators is the so-called Volcker Rule, which will bar banks from proprietary trading in private-equity and hedge funds.

The commission has yet to propose a rule required under Dodd-Frank that would mandate that companies disclose the ratio between their CEO’s pay and that of their employees. The SEC has also not yet finalized a disclosure rule requiring companies to track the sources of minerals used in products or components that may come from the Democratic Republic of Congo.

The so-called conflict-minerals provision is likely to face similar cost-benefit scrutiny as the proxy-access rule. Schapiro said she expects the SEC will finalize a rule “in the next couple of months.”

Issued more than a year ago, the SEC’s original proposal would affect upward of 5,000 companies, which will have to pay more than $71 million to third parties to help them comply with the rule. At Tuesday’s hearing, Schapiro said the rule will have a phase-in period, but she did not indicate whether it would be based on companies’ size or the type of minerals they use in their products.

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