February 14, 2012

Budget Increases Should Require Accountability

Hester Peirce

Former Senior Research Fellow

The SEC and CFTC should be held accountable for how they have been spending the money they do have before they are given more resources to spend.

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The President’s 2013 budget request includes large increases for the financial regulators.  The Securities and Exchange Commission’s (SEC’s) budget would increase from $1.3 billion to nearly $1.6 billion and the Commodity Future Trading Commission’s (CFTC’s) budget would increase from $205 million to $308 million.  Under the proposed budget, the average SEC staff salary will be $159,110, and the CFTC plans to spend $145,000,000 on salaries.  Before granting their requests, it is worth looking at how they are spending the money they already have at their disposal.

Both regulators, at the same time they are citing resource constraints, have adopted rules that are neither mandated by statute nor necessary to solve a problem.  The SEC spent $2.5 million to adopt and defend the proxy access rule, a rule that was not needed and was ultimately thrown out by a court because it was improperly adopted.  The CFTC similarly adopted a position limits rule (to limit trading activity in certain markets), which former CFTC Commissioner Dunn described as “the sideshow that has unnecessarily diverted human and fiscal resources away from actions to prevent another financial crisis.”  That rule is now being challenged in court.

Moreover, both agencies have fundamental operational problems, which should be addressed before they are given large budget increases.  The SEC’s Office of Information Technology recently eliminated 91 percent of its policies, which suggests a history of poor spending decisions.  The CFTC, likewise, in its 2013 Budget and Performance Plan makes the shocking admission that it cannot receive electronic forms from the firms it regulates: “The CFTC needs to develop the capability to receive electronic forms from traders, reporting firms, and exchanges.  Currently the process is managed by the receipt of paper forms that require a significant manual process to ingest into CFTC systems.”  The CFTC should address this impediment to effective regulation before attempting to regulate a whole new set of market participants.  As CFTC Commissioners Sommers and O’Malia pointed out earlier this month in their dissent to the CFTC’s Performance and Accountability Report, the CFTC has failed to make necessary advances in critical areas, including technology, because it has directed resources away from those areas.  If the CFTC has not bothered to use its existing resources to shore up its core functions, will it really use additional resources to do so?  

The SEC and CFTC should be held accountable for how they have been spending the money they do have before they are given more resources to spend.