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News February 26, 2018 Issue

SEC 2019 Budget Request Seeks to Restore Cuts from Previous Years

The hiring freeze for the SEC will be over if the Trump Administration and Congress approve the agency’s $1.658 billion budget request for fiscal year 2019. The request represents a 3.5 percent increase over FY 2018 budget of $1.602 billion and would restore 100 positions and 50 full-time equivalents that were lost since approximately FY 2016, after which the budget remained "essentially flat," according to the agency.

"The budget request seeks to restore 100 positions to address critical priority areas and enhance the agency’s expertise in key areas," the SEC said in its September 12 request, adding that the 100 restored positions (including 24 for examinations, 17 for the Division of Enforcement, seven for the Division of Investment Management, and four for cybersecurity) represent "approximately one-quarter of the positions lost" in a hiring freeze that began in FY 2017. It also said that its budget request "also aims to leverage technology and data to extend the agency’s capabilities, improve its cyber risk profile and further enable the SEC to manage the massive amounts of data submitted to us."

One item that stands out in the budget document is an additional $45 million "to restore funding for technology development, modernization and enhancement projects." When combined with financial support from the SEC reserve fund, the agency’s FY 2019 request would allow the agency to "continue implementing a number of multi-year deals," the SEC said.

"The story that has not gotten a lot of play is the increase in the number of examinations of investment advisers," said Kirkland & Ellis partner and former SEC Division of Investment Management director Norm Champ. "The agency got the number of exams up by more than 35 percent in fiscal 2017 and is aiming to increase the number again this year. That is why the increase in personnel in the budget is mostly for the exam program. I think the SEC would very much like to continue to increase its examination coverage of Investment advisers."

"The budget request highlights many of the themes already identified by the SEC as key priorities, including in the Office of Compliance Inspections and Examinations 2018 examination priorities that were released earlier this month, such as cybersecurity and protection of retail investors, including those saving for retirement," said Sidley Austin senior counsel Jonathan Miller. The agency characterized its overall spending priorities as investor protection, facilitating capital formation and market integrity.

The unveiling of the budget plan is just the beginning of an annual dance, in which that plan must first pass muster by the Trump Administration and then must be subject to Congressional approval. Given that this is a midterm election year, that process may well become somewhat muddied.

"This year’s budget request reflects our top priorities of protecting investors and making sure we continue to have the most vibrant and well-functioning capital markets in the world," said agency chairman Jay Clayton. "With the exceptional work and commitment of dedicated staff, the SEC will continue striving to maintain and expand an environment conducive to capital formation while ensuring investor protection."

Budget request breakdown

Following are some budget requests, as well as the SEC’s reasoning, for the agency’s divisions and its activities that might be of interest to advisers and funds:

  • Office of Compliance Inspections and Examinations. The SEC wants to fill 24 positions in FY 2019 to "partially restore critical staffing losses from the last two years and address those areas," the agency said. In regard to adviser examinations, OCIE expects the number of advisory firms to continue growing this year and next, resulting in approximately 20 advisers per examiner. "With the resources requested, the staff will continue efforts to improve overall coverage of investment advisers, including an emphasis on the nearly 35 percent of advisers who have never been examined," the agency said. Among other things, the additional resources would allow OCIE to address critical risks that impact market participants, including issues such as to enhance examinations of investment advisers (13 of the positions); cybersecurity and anti-money laundering; continue efforts to protect retail investors and those saving for retirement; further address the disparity between the number of exam staff and the growing number, size and complexity of registered firms, particularly in the investment management industry; examine new categories of regulated entities that are either already registered or will be registered, as a result of legislation; and enhance and expand quantitative and data analytic efforts throughout the National Examination Program.
  • Division of Enforcement. The budget request argues that this division "must be adequately staffed to address increasingly complex financial products and transactions; handle the increasing size and complexity of the securities markets; identify emerging threats; take prompt action to halt violations; and recover funds for the benefit of harmed consumers. "The volume of potential securities violations continues to rise, yet [the Division] presently employs fewer than 1,200 professionals to police the markets for wrongdoing," the agency said. It wants 17 enforcement positions restored. These include trial attorney positions and litigation support positions.
  • Division of Investment Management. Seven restored positions comprise the SEC request for FY 2019 here. Here’s how they would break out: one would be an ETF industry professional, who would, among other things, evaluate "novel and complex" ETF products, structures, trading mechanisms and index replication methodologies; another would be a derivatives professional to apply "sophisticated quantitative analysis techniques to the review of disclosure filings of investment companies;" two would work with the asset management industry to formulate policy recommendations in regard to issues involving the impact of new technologies on the investment management and investment adviser industries; another would have expertise specific to fixed income mutual funds and ETFs to help the Division analyze and address market structure issues involving bond funds and ETFs; one would strengthen the Division’s capacity to conduct ongoing analysis of data related to disclosure, regulatory and industry engagement programs; and another would be hired to improve oversight of private funds, their investment advisers, and business development companies.
  • Cybersecurity. The SEC would like to add four additional staff positions to "expand its cybersecurity protections, particularly with regard to incident management and response, advanced threat intelligence monitoring, and enhanced database and system security," the agency said. The additional positions would be information system security officers who would focus on the security of specific systems or programs. The budget request, if approved, would also "support increased investment in tools, technologies and services to protect the security of the agency’s network, systems and sensitive data." It was, after, all, only a little more than six months ago that the SEC learned that it itself had been the victim of a hack, one that compromised some personally identifiable information (ACA Insight, 10/9/17). "Priorities for FY 2019 include maturation of controls through continuous diagnostics and monitoring, and further enhancements to firewall technology," the agency said.
  • Leveraging technology, data and analytics. The agency has, in recent years, made it well known that in a variety of matters, including enforcement and determining risk trends, it increasingly is using data management. In its FY 2019 budget request, the SEC would use the money to, among other things, continue the development of advanced analytics solutions that provide new capabilities to detect and expose suspicious behavior in high frequency trading and other complex trading areas across markets; improve storage, processing, security and management of large volumes of data; modernize the SEC’s infrastructure and computing environment to enhance security, improve performance and streamline delivery; improve the agency’s ability to analyze fixed income market data; and update selected operational components of the agency’s EDGAR system.