President Joe Biden’s budget request for the Securities and Exchange Commission is inadequate, advocates for financial-market oversight say, given the nation’s top financial regulator must oversee a record pace of companies going public this year, implement an ambitious agenda of new rulemaking and further regulate cryptocurrencies and special purpose acquisition companies.
Biden’s overall fiscal 2022 budget proposal calls for roughly $6 trillion in spending, a 35% increase from pre-pandemic, 2019 spending of $4.4 trillion, but requests only a 5% increase from the 2021 fiscal-year request for the Securities and Exchange Commission — below the average budget increase over the past 25 years.
Advocates for financial reform say that the nearly $2 billion budget request is unnecessarily miserly, given an overall willingness to spend more, and the fact that the SEC is self-funded by industry fees and nearly always sends back to the Treasury more than it spends, when accounting for the financial penalties it brings in through to process of penalizing firms and individuals who flout its regulations.
“The agency is facing pressure from every angle to do more,” Tyler Gellasch, executive director of Healthy Markets Association, said in an interview. He said that includes promulgating new disclosure rules on climate risks, enforcing rules for a rapidly growing universe of public companies, collaborating with its counterparts abroad and regulating the expanding cryptocurrency market.
“The agency is being asked to to a lot of things that it hasn’t traditionally done at the same time,” Gellasch added. “This is not a qualitatively different budget request than we’ve seen in the past — it’s hard to see how they’ll do all that new stuff in this budget.”
SEC Chairman Gary Gensler appears to agree with such an analysis, according to testimony submitted to a House Appropriations subcommittee last week. “Having started at the SEC last month, I have been struck by the scope of the capital markets and the agency’s work,” he wrote, noting the regulator oversees a $100-trillion capital market, including 28,000 registered entities, more than 3,700 broker-dealers, 24 national securities exchanges, seven clearing agencies, and more than 2,300 filings from self-regulatory organizations.
He said that during the past five years the SEC’s staff has declined by 4%, at the same time that the number of registered investment advisers under its purview increased by 2,000, while their individual clients jumped 20% to 48 million individuals. “As our capital markets have grown, the SEC has not grown to meet the needs of the 2020s.”
The SEC declined to comment on the president’s budget request.
Dennis Kelleher, president and CEO of non-partisan financial-reform organization Better Markets, said the SEC is in a unique position to ask for a larger budget because it brings in money through a small fee on financial-market transactions and through penalties assessed on market participants who run afoul of the agency’s rules.
“You can double the budget of the SEC and it wouldn’t even make a dent in the overall budget picture, and taxpayers wouldn’t have to pay a penny for it,” Keller told MarketWatch. “And the sad thing is financial regulation isn’t a super-hot topic until there’s a crash.”
A more substantial increase in the SEC’s budget would likely meet resistance from Republican lawmakers, given Gensler’s reputation for being a regulator willing to step on the toes of the financial services industry and their vigorous opposition to SEC efforts to promulgate new disclosure rules on climate change, workforce diversity and more.
Sen. Pat Toomey of Pennsylvania, the top Republican on the Senate Banking Committee, explained his vote in April to not confirm Gensler because of these efforts.
“The SEC’s mission includes facilitating capital formation and maintaining fair, orderly, and efficient markets. The SEC has neither the responsibility nor the authority to use its regulatory powers to advance a liberal social agenda on issues such as global warming, political spending, and diversity,” Toomey said in a statement. “Based on Gary Gensler’s record and statements during his nomination process, I’m concerned he will use the SEC in this inappropriate manner and stray from the SEC’s tradition of bipartisanship.”
Gensler’s nomination advanced to the full Senate with just two banking-panel Republicans voting to support it, compared with near-universal Republican support for the previous Democratic administration’s two nominees for the role. A substantial increase in the SEC’s budget would likely enable the agency to finalize more rules in the coming years that face strong opposition from the GOP.
Advocates of increased funding for the SEC struggle to understand a failure to request more money, even if Congress will ultimately refuse to approve the request.
“In the context of the overall proposed budget, an increase of less than 3% for both enforcement and inspections at the SEC is pretty meager,” Kurt Schacht, managing director at the CFA Institute, said in an email.
“Given that we are now behind by an entire year with full blown (in-person) examination of registrants and other regulated entities, combined with the huge uptick in IPOs and SPACs, social media disruptions and renewed market leverage issues, the agency will struggle just to catch up,” Schacht said. “We know what happens when the industry and market practices are one step ahead of the primary regulator, and it is never good.”