SEC warns budget threats give swindlers upper hand

WASHINGTON Fri Feb 4, 2011 6:01pm EST

Mary Shapiro, chairman of U.S. Securities and Exchange Commission (SEC), speaks at the International Organization of Securities Commissions (IOSCO) conference in Montreal, Quebec, June 10, 2010. REUTERS/Christinne Muschi

Mary Shapiro, chairman of U.S. Securities and Exchange Commission (SEC), speaks at the International Organization of Securities Commissions (IOSCO) conference in Montreal, Quebec, June 10, 2010.

Credit: Reuters/Christinne Muschi

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WASHINGTON (Reuters) - Tighter budgets at the Securities and Exchange Commission could mean killing vital technology upgrades needed to catch swindlers, the agency's chief said on Friday in a blunt appeal for more funding.

With Republicans in Congress threatening to restrain her budget, SEC Chairman Mary Schapiro said the agency faces severe challenges in doing its existing job and in taking on new duties mandated under 2010's Dodd-Frank market reform law.

SEC enforcement head Robert Khuzami said budget constraints are hurting the agency, but nevertheless defended its record against critics who say too few Wall Street financiers have been held accountable for the 2007-2009 financial crisis.

"Credit crisis cases continue to be a priority," Khuzami said, citing cases brought against Goldman Sachs, Citigroup and former mortgage lending giant Countrywide Financial, which was acquired in 2008 by Bank of America Corp.

Schapiro said the SEC desperately needs resources to catch more bad guys.

Eliminating needed SEC budget increases could force "our market analysts to continue to use decades-old technology to recreate market events or to monitor trading that occurs at the speed of light," Schapiro told the SEC Speaks conference.

"We need to ask ourselves if we want our chief securities regulator to have to pull the plug on data management systems and on a digital forensics lab needed to recreate the data that sophisticated fraudsters leave on hard drives and iPhones."


Schapiro said some of the Wall Street firms regulated by the SEC spend more money on their technology budgets alone than the agency spends on its total operating costs.

Appointed two years ago to head the investor protection agency, Schapiro is caught between two powerful political forces. On the one hand, she must implement and enforce scores of market reforms that were approved last year after the worst financial crisis in generations. That costs money.

On the other, Republicans swept to power in November in the House of Representatives are demanding deep federal spending cuts, partly to address the budget deficit problem and partly to undermine the Dodd-Frank reforms that they opposed.

The SEC is scrutinizing stock-offering rules, Schapiro said, following the news that Goldman Sachs planned a special investment vehicle for clients to invest in Facebook, the red-hot online social network company.

Goldman last month said it would limit its private placement of Facebook shares to investors outside the United States, citing "intense media coverage.

In addition, Schapiro said the agency is working on reforms in response to the May 6 flash crash, when U.S. stock markets plunged about 700 points before staging a partial recovery, raising questions about computerized high-frequency trading.

"All of these tasks - all of these confidence-enhancing measures - require resources," Schapiro told the conference hosted by the Practising Law Institute.

Because Congress has not approved a new budget, the government is running under a stop-gap measure.

That is imposing "a strain that is already having an impact on our core mission - separate and apart from the new responsibilities that Congress gave us to regulate derivatives, hedge fund advisers and credit rating agencies," she said.

Keith Davis, principal and research analyst at Farr, Miller & Washington, said the agency's new responsibilities necessitate funds, despite black marks like the SEC's failure to stop Bernard Madoff's estimated $65 billion Ponzi scheme.

"The fact that they're already underfunded and consistently miss things like Madoff and others suggest that more resources should probably be devoted to them," Davis said.

Then again, a good chunk of additional funds is going to issues such as consumer protection and pay reform, which distracts the SEC from its core business, said Gary Townsend, chief executive of Hill-Townsend Capital, in Chevy Chase, Maryland.

"If we are forcing regulators to utilize resources on things that are not as important as safety and soundness and the safety of markets, then we're wasting taxpayers' money."

More details on the Republican fiscal hawks' goals may come soon. House Republicans are expected next week, likely on Thursday, to unveil specific proposals for funding the SEC and the Commodity Futures Trading Commission.


The "Volcker rule" aimed at curbing risky bank trading and new limits on the derivatives market are being targeted for review by House of Representatives Republicans, according to a draft oversight plan obtained this week.

The SEC's budget will also be examined, the document showed, by the House Financial Services Committee, which is now chaired by Representative Spencer Bachus.

House Capital Markets Subcommittee Chairman Scott Garrett told Reuters last week that budget restraint is just one way Republicans are trying to "throttle" parts of Dodd-Frank.

Unlike the Federal Deposit Insurance Corp and the Federal Reserve, both important regulators, the SEC has to ask Congress each year for its budget. The FDIC and the Fed pay for their own operations through fees they assess.

The SEC assesses fees, too, totaling more than enough to cover its budget. But the commission's fee income goes into the general revenue coffers.

Congress must adequately fund the SEC or let the agency fund itself, SEC Commissioner Elisse Walter, a Democrat, said at the conference. "Cutting or freezing the commission's budget ... especially when the SEC generates enough revenue through transaction and registration fees to fund itself, puts markets and investors at risk," she said.

Thomas Sporkin, chief of the SEC's Office of Market Intelligence, did note, however, that the agency is already reaping enforcement benefits from the reform law, which gives whistleblowers a payout for tips that yield penalties.

The number of "high value" tips on fraud and other violations of securities law numbered about two dozen a year before the law. Since July, the agency has been receiving about one a day, Sporkin said at the annual conference.

Commissioner Luis Aguilar called for stiffer sanctions against companies that violate securities laws and suggested the agency consider forcing defendants to admit wrongdoing in settlements.

(Sarah N. Lynch and Dave Clarke; Writing by Kevin Drawbaugh; Editing by Tim Dobbyn)