How Congress Is Setting Up The SEC to Fail - - Again

Congress planted the seed for the next financial crisis late last night, when it rejected a proposal that would have allowed the SEC to fund itself. Instead, our lawmakers set up an emergency reserve fund to be used by the SEC in "times of crisis". That's insane. What the SEC needs is the means to grow alongside the industry it's supposed to police, not a bit of cash to throw around after the next financial implosion. A quick look at the years leading up to the subprime crisis should put this into perspective. During the second half of the Bush Administration, from 2004-2007, the SEC saw its budget shrink by 10%. At the same time the industry it was supposed to be keeping tabs on grew by 50%.

If, during this crucial period, the SEC had been allowed to keep the money it collected from the explosion of activity in the financial sector, things might have looked different. From 2005-2009 the SEC collected $7.4 billion dollars in transaction and registration fees. But instead of plowing those funds back into the agency and improving enforcement, the SEC was forced to turn them over to the federal government, who allocated them just $4.7 billion in return.

Even before the deregulatory fever of the Bush years, this trend was evident. Check out this chart of fees versus funding from the Clinton years.

This is the kind of demoralizing reality that has led to an understaffed, under motivated agency. James Surowiecki recently wrote that the FDA has succeeded as a regulator by building an esprit-de-corps. But in 1992 Congress also gave the FDA the ability to keep the fees it collects from regulating new drugs. A 2002 review by the General Accounting Office found these fees were crucial to allowing the FDA to keep pace with the growth of the pharmaceutical industry.

The structure at the FDA has led critics to claim that the agency was rushing drugs through the safety review to collect more fees. But as the nation's top securities lawyers wrote earlier this month, the SEC isn't asking for the ability to levy new fees or keep investor funds recovered in fraud investigations. It's not asking to be exempt from oversight. Congress would still have control over a substantial portion of the SEC's annual budget and can always haul political appointees in for a scolding.

All the SEC wants is some mechanism for keeping pace with the industry its supposed to regulate. Because without the funds to enforce them, the new rules on derivatives and investment banking the House and Senate hammered out last night won't amount to squat.