April 16, 2010
How Should the SEC be Funded? (Answer: Very Carefully)
Posted by Christine Hurt

On the blog we've talked about various aspects of the financial overhaul bill (Restoring American Financial Stability Act of 2010, numbered S.3217) that is wending its way through Congress.  Also in the bill (I hesitate to say "buried") is a provision (Section 991) that would fund the SEC not with government funds, but through fees it collects from those it regulates.  (WSJ article here.)  Instead of receiving an annual appropriation from Congress, the SEC would instead keep the fees it collects.  Apparently, these existing fees, which go to the general treasury, can be as much as twice what the SEC receives in appropriations.

So, a few things.  First, we all know that the SEC is underfunded compared to what the SEC is asked to do.  If we want the SEC to be on the ball, and it seems that we do from how much hue and cry there is when the SEC drops the ball a la Madoff, etc., then the SEC needs the funds to be competent at its task. 

However, isn't this the same as asking for double the usual appropriations?  This isn't exactly revenue-neutral or even a way to free up congressional funds by finding a new source of funding for the SEC.  The SEC is really asking the federal government to forego revenue it used to collect and funnel it to the SEC.  Given the fungibility of money, it's the same as asking for more appropriations money.  A lot more.  Which is fine, but let's not pretend that we're now requiring the SEC to be self-sufficient and not be a drain on the U.S. Treasury or pretend that it's just switching from one pot to the other.  This would be a raise for the SEC.  Perhaps a much-needed raise, but a raise.  Now, not having to go through appropriations may be a good thing in and of itself, aside from the increased funding.  So, increased funding and freedom to budget -- this seems pretty big.

But everyone seems to be implying that what's happening is something other than a big old raise.  The WSJ says:  "Most agencies that regulate the markets fund themselves," as if we're really making the SEC grow up and be responsible for itself.  Mary Schapiro, Chairperson of the SEC, says "Right now, however, the SEC languishes as one of the few financial regulators still subject to the annual appropriations process."  I think that may be because it's a governmental agency, unlike FINRA (or PCAOB, whatever that turns out to be).  "Languishes" is a pretty sad word.  Many readers would agree that the SEC may be languishing, and may be in need of more funds.  But let's not spin this as enforcing some sort of budget discipline on the SEC now that it is self-funded.  The general treasury will get less, and the SEC will get more, just as if it was appropriated more, but without the budget-discipline hassle.  I could make an argument that this is what the SEC needs, but I think it would be a more direct argument.

This funding apparatus seems to be the new trend.  I notice in Section 155 of the Act, the new Office of Financial Research and the Financial Stability Oversight Council will be "self-funded" through fees.

Note that the text of Bill S.3217 is not on Thomas as yet.  It emerged full-formed from the Senate Committee on Banking, Housing and Urban Affairs this week and is available from that committee's site.

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