February 4, 2011 / 6:12 PM / 7 years ago

Outgunned by Wall St, U.S. SEC warns on fraud

WASHINGTON, Feb 4 (Reuters) - Tighter budgets at the U.S. 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.

The Wall Street sign is seen outside the New York Stock Exchange, March 26, 2009. REUTERS/Chip East/Files

With congressional Republicans threatening to restrain her agency’s 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.

Denying needed 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 annual 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.”

She added that 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, she 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.

Congress has been unable to approve a new budget. The government is operating under a stop-gap “continuing resolution” that “has hampered our ability to do what investors and capital markets deserve,” she said.

“It is 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. It is a strain that will intensify the longer the budget remains at existing levels.”


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.

Garrett, a Republican, said he knows that Democrats are accusing Republicans of trying to undermine Dodd-Frank by restraining the budgets of agencies that must implement it. “That’s probably true too. We’re trying to throttle it in ways other than this,” Garrett said in an interview.

He called for spending restraint at the SEC and the Commodity Futures Trading Commission, both of had been promised big budget increases to pay for scores of new duties.

“Every agency of government is being asked to make some hard decisions with regard to budgets,” Garrett said.

In line with the opposition of Wall Street and big banks, almost all House Republicans last year voted against Dodd-Frank, which was drafted and passed by Democrats as a response to the 2007-2009 financial crisis that rocked world markets and devastated the economy.

SEC Commissioner Kathleen Casey, a Republican, said at the conference that regulators are moving too fast on implementing Dodd-Frank and could face legal challenges in the future.

“The real threat here is we are not able to fully consider the rules here we are adopting,” Casey said.

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

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