Dodd-Frank May Cost $6.5 Billion and 5,000 Workers

President Barack Obama proposed adding about $6.5 billion to financial regulators’ spending as they try to implement new mandates ranging from policing derivatives to unwinding collapsed firms deemed too big to fail.

The $3.7 trillion federal spending plan calls for eight agencies to hire more than 5,000 people as they implement the 2010 Dodd-Frank Act, according to the budget proposal Obama sent to Congress today and data compiled by Bloomberg. That includes 1,225 hires at the new Consumer Financial Protection Bureau, which is scheduled to formally begin work July 21.

The Dodd-Frank Act has become central to the spending and regulation debate in Congress. Republicans, who almost unanimously opposed the law, have said regulatory budgets are ripe for cuts.

“These funds will provide the SEC with the resources needed to carry out both our longstanding core mission as well as our new responsibilities for derivatives, hedge fund advisers and credit rating agencies,” Securities and Exchange Commission Chairman Mary Schapiro said in a statement today, adding that the agency’s spending is offset by transaction fees and doesn’t add to the deficit.

Overall, Obama’s plan for implementing the rules would add about $4.8 billion from taxpayers and another $1.7 billion at agencies that are self-funded through fees, according to a preliminary analysis by Bloomberg Government analyst Cady North. The cost would be roughly equivalent to adding another Army Corps of Engineers to the federal budget.

Photographer: Joshua Roberts/Bloomberg

SEC Chairman Mary Schapiro said, “These funds will provide the SEC with the resources needed to carry out both our longstanding core mission as well as our new responsibilities for derivatives, hedge fund advisers and credit rating agencies.” Close

SEC Chairman Mary Schapiro said, “These funds will provide the SEC with the resources... Read More

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Photographer: Joshua Roberts/Bloomberg

SEC Chairman Mary Schapiro said, “These funds will provide the SEC with the resources needed to carry out both our longstanding core mission as well as our new responsibilities for derivatives, hedge fund advisers and credit rating agencies.”

Core Mission

Agencies including the SEC and the Commodity Futures Trading Commission have been warning lawmakers that budget constraints could prevent them from implementing Dodd-Frank provisions. Schapiro said this month that tighter spending was already having an impact on the agency’s core mission of investor protection “separate and apart from the new responsibilities” under Dodd-Frank.

Obama’s proposal falls short of spending levels authorized for the SEC in Dodd-Frank by about $100 million. The law authorized an allocation of $1.5 billion for the SEC in fiscal 2012, with subsequent increases that would double the agency’s budget by 2015. Under Obama’s proposal, the SEC’s budget would increase 28 percent to $1.4 billion.

Today’s budget proposal would authorize the agency to add more than 600 new employees, a staffing increase of about 16 percent. Under Obama’s plan, SEC enforcement -- the agency’s chief cost -- would rise 27 percent to $460 million.

The president’s proposal for a budget beginning Oct. 1 sets apart $50 million for an SEC reserve fund to be used for spending “necessary to carry out the functions of the commission.”

User Fees

Barbara Roper, director of investor protection for the Washington-based Consumer Federation of America, said she was pleased to see the president’s proposal reflect the agency’s increased workload. “I think the SEC has been grossly underfunded for decades,” Roper said.

For the CFTC, the budget would jump to $308 million -- an increase of more than 80 percent over Congress’s 2010 allocation. Obama proposed that the agency introduce user fees on the derivatives industry to raise as much as $117 million in the 2012 fiscal year and $588 million through 2016.

House Republicans, who took power after the November elections, have pointed specifically to the CFTC’s derivatives rules as being too onerous and, in some cases, without merit.

‘Micro-Managing’

“The commission is currently headed down a path that extends well beyond the statutory requirements of Dodd-Frank and is attempting, at the request of no one, to micro-manage individual risk across all industries and sectors,” Representative Michael Conaway of Texas, a House Agriculture panel subcommittee chairman, said last week.

Representative Scott Garrett, a Republican from New Jersey, said the user fee proposal is “an off-budget accounting gimmick that will hide the true cost and scope of the federal government.”

Democrats, led by Representative Barney Frank of Massachusetts, the senior Democrat on the House Financial Services Committee, have said the Republicans are using cuts as a way to strangle the regulations before they go into place.

The CFPB, which will oversee consumer finance products offered by firms from large banks to small payday lenders, indicated in the budget request that it will spend $329 million for fiscal year 2012. That will allow it to hire as many as 1,225 people, according to the president’s budget request.

Fed Funding

The consumer bureau’s funding comes directly from the Federal Reserve’s own independent income stream, and Dodd-Frank authorizes it to spend as much as 11 percent of Fed operating expenses in 2012. That would allow the bureau to spend as much as $550 million in 2012.

Some banking regulators, including the Fed and the Federal Deposit Insurance Corp., set their own budgets and fund them through fees. The FDIC, which is required by Dodd-Frank to boost the fund that insures deposits, would add more than 1,700 staff under the president’s proposal.

The spending plan includes $19.5 billion to cover the FDIC’s new authority to unwind systemically significant financial institutions when they fail through 2021. While the total costs of any liquidation are supposed to be recovered in full, that recovery happens during the years following the liquidation, making the budget allocation necessary, the spending plan said.

The Financial Services Oversight Council and Office of Financial Research, which will hire an estimated 192 people combined, will be funded through transfers from the Federal Reserve, creating “no net taxpayer cost” for their operation, according to the proposal.

The Office of the Comptroller of the Currency, which oversees nationally chartered financial institutions, would hire 875 new staff under the proposal. The Office of Thrift Supervision is being merged with the OCC.

To contact the reporter on this story: Joshua Gallu in Washington at jgallu@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.

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