The SEC's Budget Blues Are Something to Celebrate

EXPERT COMMENTARY

The SEC's Budget Blues Are Something to Celebrate

By Hester Peirce |
Dec 19, 2012

In a National Public Radio interview shortly before stepping down from the Securities and Exchange Commission last Friday, Chairman Mary Schapiro was asked about her greatest disappointment during her stint with the SEC. Ms. Schapiro responded that she wished that she had secured the ability for the commission to write its own budget without the input of Congress. Given the agency's track record, we should be happy that her wish did not come true.

The SEC currently levies fees on securities transactions to cover its expenses, but its budget is subject to the standard appropriations process covering most government agencies. The appropriations process gives Congress the ability to make the ultimate determination about how much agencies can spend and what their priorities should be. To address the SEC's concerns about the appropriations process, the Dodd-Frank Act created a special reserve fund for the SEC to use as necessary to carry out its functions.

Even with the current level of congressional oversight in place, the SEC has made some dubious spending decisions. Recently, for example, the Inspector General reported on the questionable use of SEC funds for a computer security lab. The Inspector General found that the SEC had not placed reasonable limits on the lab's expenditures. The commission approved a training budget of approximately $20,000 per staffer per year. One employee told the Inspector General it was difficult to fit work into a schedule packed with training classes. The report also found that the lab staff-with minimal oversight- "spent hundreds of thousands of dollars on computer equipment and software," "a significant portion" of which was never used for official commission work. As one example, the lab's four staffers shared 28 laptops, some of which were used primarily for personal purposes such as downloading books and music. The lab itself was also used for personal purposes, including gaming.

To make matters worse, the staff failed to protect the laptops with antivirus software and encryption, left the computers unattended outside of the office, and connected them to unsecured public wireless networks. Sensitive stock exchange data may have been compromised as a result. The careless use of SEC computers is particularly troubling because the lab's function is to inform the SEC about information technology and information security issues in the industry and help assess technology issues at entities regulated by the commission.

In addition to specific instances of waste and abuse, the SEC's broader management troubles solidify the argument against giving the Commission greater budget autonomy. Despite the many millions of dollars the SEC has paid to outside management consultants in recent years, problems persist.

For example, the SEC has had recurrent troubles with its internal controls over financial reporting, which are meant to ensure that the agency is keeping its own books properly. Although the SEC in fiscal year 2012 did not have any so-called "material weaknesses"-problems severe enough to call into question the accuracy of its financial reports-a Government Accountability Office audit of the Commission's books "identified continuing and new deficiencies in SEC's internal control over financial reporting relating to budgetary resources and property and equipment." These problems make it difficult for the SEC to keep track of whether it is staying within its budget and how it's spending its money.

With a budget of more than $1.3 billion, average staff salaries of $150,000, and average senior officer salaries of approximately $225,000, the SEC ought to justify how it's spending its money and how its employees are spending their time. It is true that some other financial regulators avoid the appropriations process. Revisiting those agencies' ability to set their own budgets might be wise. In the meantime, it is certainly not wise to give the SEC the power to write its own budget. The SEC needs accountability and oversight-the kind that comes with financial strings attached.

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