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Go Fund Yourself, Congress Ought to Tell the SEC: Ann Woolner

Few could argue convincingly that the U.S. Securities and Exchange Commission has excelled at its duties.

Having failed to detect the largest Ponzi scheme in U.S. history, and with employees viewing Internet porn on the job, the SEC hasn’t exactly served as a shining star in the federal galaxy of regulators.

A solution is now before Senate and House conferees who are hammering out their differences in a mammoth financial reform bill. The remedy: Give the agency more to do and freer rein.

Counterintuitive? Yes. A bad idea? Not at all.

The Senate version of the optimistically named Restoring American Financial Stability Act would let the agency fund itself with the fees it collects from registrations and transactions. It’s an idea that SEC Chairman Mary Schapiro advocates and Senator Charles Schumer, a New York Democrat, has pushed.

The downside is that it would remove leverage that Congress and the president have over the SEC by keeping them away from the agency’s purse strings. As with the Federal Reserve, SEC budgets would still be submitted to Congress, but lawmakers couldn’t cut them.

If the agency is ever going to have the resources to catch up with the growing size and evolving sophistication of the financial markets, it has to have more money and a way to protect itself from the ever-swinging political pendulum.

Bear Follows Bull

As surely as bear follows bull, an anti-regulatory sentiment will settle over Washington once the current reform fever (such as it is) is spent. When that happens, regulators’ budgets drop or stagnate while the bravura of the industries they are supposed to track grows.

“It frees the SEC, at least a little bit, from the budgetary pressure” sure to accompany “the anti-regulatory pushback that will come,” says Peter Henning, a former SEC lawyer who teaches law at Wayne State University in Detroit.

It’s true that the Obama administration and Congress have now moved twice to boost annual SEC funding by more than 10 percent, but that still isn’t enough to make up for the starvation budgets of the Bush years.

Shrinking Agency

From 2004 to 2007, the agency’s enforcement and examination staff shrank by 10 percent while the number of investment advisers grew by 50 percent, according to leaders of the Federal Bar Association’s Securities Law Committee.

That group’s executive council, consisting of top securities lawyers drawn largely from the SEC, wrote key lawmakers last week urging self-funding for the agency. They called it “critical for the protection of investors.”

Already stretched thin, the SEC will be pulled in more directions under the bill conferees are now considering.

The SEC would get vast new authority and be forced to conclude investigations faster. It would begin registering large hedge funds, assign rating firms to evaluate new securities and get the power to go after those who merely aided or abetted securities fraud.

Oh, and the SEC would create and oversee an enhanced whistleblower program and set up an Office of Investor Advocate. There would be more reports to Congress, too.

Both chambers want to give the SEC more money. The House says funding should double over the next five years, though Congress would still have to appropriate it.

Still Chewing

The Senate version endorses self-funding. Congress could still haul future SEC chairmen up to Capitol Hill for a chewing-out. Lawmakers could still undertake whatever investigations they want. The administration and Congress would still get to see the SEC budget. They just couldn’t shrink it.

We’re talking about a lot of money here. The SEC took in about $7.4 billion in fees from 2005 to 2009, compared to the $4.5 billion that Congress appropriated to the agency, according to the New York Times.

You could argue that the agency needs to show it can better manage its resources before Congress gives it so much more money and so much more slack.

But there are ways to build in oversight, as shown by SEC Inspector General David Kotz, whose reports have repeatedly shamed the agency.

Madoff and Stanford

If it is going to understand and pursue the sort of tips it blew off about Bernard Madoff and Robert Stanford, the SEC must be able to hire smart, experienced people who know what they are doing.

Planning for the long term is pretty hard when you are living year to year, never knowing when you can breathe and when you have to suck it up.

If Congress is serious about restoring financial stability, it should start with giving the SEC some financial stability of its own.

(Ann Woolner is a Bloomberg News columnist. The opinions expressed are her own.)

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