We saw a rare thing in the regulatory world on Friday: growth in the Securities and Exchange Commission.
To be clear, that “growth” was the hiring of precisely one person: Sean McKessy, who will direct the new Whistleblower Office in the SEC's Division of Enforcement. But growth it is. For anyone who deals with the SEC, that's worth noting—because McKessy's arrival may well be the last forward motion we see from the agency for quite some time.
Why? As always when discussing matters of Washington and common sense, blame Congress. For five months the SEC has limped along with a level-funded budget, delaying or shelving various projects while lawmakers spar about the proper amount of government spending for fiscal 2011. All agencies of the federal government, SEC and otherwise, are operating on a continuing resolution that keeps spending at 2010 levels through March 4. If Congress can't reach a deal on the budget by then—even simply to maintain the continuing resolution for a while longer—the federal government will shut down.
Anti-government knuckleheads might cheer the idea of a government shutdown. Compliance officers should not.
As much as we all like to gripe about dealing with the SEC, and as frustrating as those dealings might legitimately be—corporations need the SEC. It is the referee that stands between issuers and investors. It spells out rules, interprets actions, and decided outcomes. We might not always like the rules the SEC imposes nor how it enforces them, but it does provide a basic framework for how the capital markets operate in this country. It gives compliance officers the goals you use to do your job.
Unfortunately, one of the fastest ways to ruin a game is to appoint a bad referee, and that's precisely what Congress is doing with its current budget impasse. All the time these days I hear complaints from seasoned compliance officers that regulatory investigations take too long, or they sit down to argue their position with a 30-ish, newly minted staff attorney with no institutional knowledge or business experience. That is what happens with an under-funded agency. It will only get worse from here.
Let's quickly recap where the SEC's budget is. Right now the numbers still stand essentially flat at 2010 levels: $1.14 billion in spending and 3,848 employees. The Obama Administration has proposed a 28 percent increase to $1.4 billion and 4,460 employees. Most of that increase, the agency says, will go to reverse several years of flat budgets in the latter years of the Bush Administration, revive investments in IT, and bring staffing levels back to where they stood in 2005—long before the financial crisis and the Dodd-Frank Act ever entered the public conversation.
That 28 percent increase is a pipe dream, most likely. The newly elected Republican majority in the House has proposed cutting the SEC budget by $25 million right now, halfway through fiscal 2011, plus another $189 million more in the next fiscal year. And all of this assumes that Republicans and the Obama Administration can agree on any new budget spending at all, rather than shut down the government next week.
The Republicans' game is this: starve the SEC of the money it needs to do its job well, and then argue that because the SEC can't do its job well, it should get less money and do fewer things. Put more simply: they're using a budget crisis to steer policy decisions, since arguing Republican regulatory policies on the merits—that Wall Street needs less regulation after the financial crisis, not more—won't sell with voters.
It's a disingenuous argument at best. And compliance officers will end up paying the price, in dealing with regulators who can't do their jobs well.
One tale to close this week's post: Recently I had a beer with a friend at the SEC, who readily describes himself as “usually leaning more rightward on the political spectrum”—and even he complained about Washington's senseless approach to managing the SEC. Give the agency fewer duties and tasks to oversee, my friend argued; that's what limited government is. But don't give the agency more responsibility and then cut its funding to fulfill those duties; that's just stupid.