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News April 27, 2015 Issue

MJW Testifies: Why the SEC Needs More Money

To hear SEC chair Mary Jo White tell it, $1.722 billion is barely enough.

The leader of the SEC testified before a House subcommittee on April 15, making the case for additional funds in its FY 2016 budget to bring on board, among others, 225 new examiners, 93 new Division of Enforcement employees, six new economic and risk analysis staff, and 12 new Division of Investment Management positions.

"The U.S. securities markets are complex and constantly evolving, and the activities within our jurisdiction are not static," White told the Subcommittee on Financial Services and General Government Committee on Appropriations. From fiscal year 2001 to the start of the current fiscal year, she said, SEC-registered adviser assets under management increased approximately 254 percent, from $17.5 trillion to approximately $62 trillion; mutual fund AUM increased by 143 percent, from $6.4 trillion to $15.6 trillion; and annual trading volume in the equity markets "more than doubled" to over $67 trillion.

"During this same period, the SEC’s responsibilities have also dramatically increased, adding or expanding jurisdiction over securities-based swaps, private fund advisers, credit rating agencies, municipal advisers and clearing agencies, among others," she said. While White acknowledged that improvements to technology and operations have made the agency "more efficient and effective," she said that "to continue to meet our mission, we must be able to keep pace with the current and growing size and complexity of our markets and the entities participating in them."

The additional funding the SEC is requesting for FY 2015 would help it keep up with these changes by bringing in an additional 431 staff in "critical, core areas," she said. Specifically, she said, the requested budget would allow the Commission to:

  • Increase examinations of investment advisers and others,
  • Further leverage technology to help the SEC "keep pace with the entities and markets we regulate,"
  • Protect investors by expanding the agency’s enforcement program’s investigative capabilities and strengthening its litigation ability,
  • Strengthen the SEC’s economic and risk analysis ability, and
  • Hire additional market experts "to enhance the agency’s capability to fulfill its expanded and increasingly complex responsibilities."

"The Investment Adviser Association is pleased that the administration is planning to dedicate significant additional resources to the SEC’s oversight of investment advisers," said IAA president and CEO Karen Barr. "We believe that the SEC must also continue the progress it has made in using its existing resources more efficiently. More strategic allocation of existing SEC resources together with additional funding will enable the SEC to fulfill its critical missions of protecting investors and fostering capital markets."

"Overall, the name of the game is balance," said Perkins Coie partner Jesse Kanach. "The SEC wants to be equipped both in terms of quantity, given the growth in the securities industry, and quality, in order to keep up with the pace of innovation in the marketplace. Should the Commission set rigid rules, step out of the way, or choose an approach in between? Given the effort required to decide, the fear is that a lack of resources could leave the SEC steamrolled." The assignment of new staff to diverse functions, including as examiners and risk analysts, he said, is an attempt to address that concern.

New examiners and more

Here’s how White said some of the new personnel would be assigned and what they would do:

  • Examiners. Even with efforts to focus its examination staff on areas posing the greatest risk, which helped increase the number of investment adviser exams approximately 20 percent since FY 2013, "the SEC was only able to examine 10 percent of registered investment advisers in FY 2014. A rate of adviser examination coverage at that level presents a high risk to the investing public." With the 225 new examiners on board, the Commission expects to examine approximately 14 percent of advisers each year.
  • Division of Enforcement staff. Twenty of the 93 new employees would continue enhancements to the Division’s data analytics; "review and triage" an expected increase in the number of incoming tips, complaints and referrals; and increase the number of staff to whom tips, complaints and referrals are sent for further investigation, White said. Fifty of the positions would help the Division’s investigative efforts. "These new positions will help the Division continue progress on existing investigations and handle its increasing case load," among other things, she said. Finally, 23 new positions would reinforce the Division litigation operations, something she said is needed as the volume of trials is expected to grow.
  • Economic and risk analysis staff. The Division of Economic and Risk Analysis, which helps the SEC find firms and funds that are high risk, is the agency’s fastest-growing division. The six new positions, on top of 14 new ones created in the current fiscal year, will "expand the agency’s capability to provide high quality economic data in support of risk assessment and policy initiatives across the SEC" and "provide economic analytical capabilities to support enforcement litigation, particularly in the SEC’s regional offices," White said.
  • Division of Investment Management positions. These 12 new employees would "operationalize new rulemaking requirements, offer enhanced guidance to registrants, expand the disclosure review program’s ongoing analysis of industry trends, and provide additional oversight of private fund advisers," White said. The SEC began overseeing private fund advisers when Dodd-Frank required it in 2012. The new staff would also "assist in adopting – and ultimately operationalizing – the package of measures for enhancing the asset management  industry’s risk monitoring and regulatory standards," she said.

The past year

Like any agency head requesting an addition to its budget, White let the subcommittee know that last year’s dollars were well spent. "Since I testified before this subcommittee last April, the SEC has accomplished a great deal in many areas important to our mission and in fulfilling Congressional mandates," she said, noting that the Commission adopted new rules that "protect the integrity of our markets" following the financial crisis, including rules required by the Dodd-Frank Act and the JOBS Act. Among the new rules she listed were those affecting asset-backed securities, credit rating agencies, money market funds and security-based swaps.

Enforcement results were, of course, also touted. The Division of Enforcement filed 755 enforcement actions and obtained orders for more than $4.16 billion in disgorgement and penalties in FY 2014, White said. "Notable actions include the first series of cases involving violations of the ‘market access’ rule, the first action enforcing the rule against investment advisers participating in ‘pay to play’ arrangements, the first action against a private equity firm relating to its allocation of fees and expenses, and the first anti-retaliation case to protect a whistleblower who reported improper trading activity," she said.

White also noted that its examination division, the Office of Compliance Inspections and Examinations, became more effective and efficient as the result of "structural and strategic enhancements," including the recruitment of industry experts, the "augmentation of data analytics capabilities," and "bolstered" new training programs.

But these achievements aside, she testified, "there is much that the SEC still needs to do," and proceeded to delineate the improvements and new positions that the increased budget would provide.