SEC Chair Seeks Funding Plan That Doesn't Rely On Congress

By Fawn Johnson for DOW JONES NEWSWIRES, November 6, 2009

Securities and Exchange Commission Chairman Mary Schapiro said Thursday that the SEC needs "sufficient, stable long-term funding" that doesn't rely on the congressional funding process.

"I think it is important that Congress address the issue of self funding, allowing the SEC to retain the regulatory fees it collects," Schapiro told a group of students at Harvard University's John F. Kennedy School of Government.

According to the text of her speech, Schapiro said, "We have to have the resources to hire the people we need" and noted that the agency's staff size and technology investments are less than they were in 2005.

Sen. Charles Schumer (D, N.Y.) has introduced legislation that would allow the SEC to fund itself based on the fees collected from financial institutions, claiming it would boost the agency's resources. In 2007 the SEC was granted a budget of $880 million by Congress, but the SEC took in about $1.5 billion in fees collected from financial institutions.

Other independent agencies, such as the Federal Reserve and the Federal Deposit Insurance Corp., fund themselves from fees collected from the industries they oversee.

Critics of giving the SEC the same authority are likely to say that it could cause the agency to go unmonitored.

The SEC has faced harsh criticism for its years-long failure to detect wrongdoing of the convicted Ponzi-scheme operator Bernard Madoff.

Schapiro said the SEC is trying to get out from under the bad name it inherited from of the Madoff debacle. She said she wants the staff to learn from the past, and she sent the inspector general's report about the SEC's behavior to all employees and encouraged them to read it.

In September, Schapiro also created a new unit aimed at identifying market trends and new financial products and brought in law professor Henry Hu to run it.

The unit combines two existing groups, the agency's office of economic analysis and risk assessment division, and take on new responsibilities to look for trends in the market, conduct research and train staff.

Separately Thursday, the SEC announced that three financial hotshots would be joining that division. Schapiro said the new hires have "modern capital markets expertise," something badly needed at the SEC.

Richard Bookstaber will be the senior policy advisor to Hu. He served as the managing director in charge of firm-wide risk management at Salomon Brothers, director of risk management at Moore Capital Management, and Morgan Stanley's ( MS) first market risk manager.

Adam Glass and Bruce Kraus will each will serve as counsel to the director. Glass comes from Linklaters LLP, where he founded its Structured Finance and Derivatives Practice. Kraus comes from Willkie Farr & Gallagher LLP, where he practiced corporate and securities law for more than 20 years.

Too Big to Fail: Closing the Barn Door to Late

Without exception, each of the regulators with responsibility for monitoring financial markets has spoken in favor of strong enforcement of financial regulation and policing market players. Unfortunately, little has actually changed in the past year since the collapse of Lehman Brothers and it appears that whatever regulatory regime gets passed by Congress will be a watered down version.

The debate of "Too Big to Fail" feels a little like closing and locking the barn door after the cows have escaped. Too little to late! The current debate surrounding the principle of Too Big to Fail has been interesting. Without taking sides, I find it interesting that much of what has occurred could have been prevented with simple enforcement of existing regulation. See posting by the FTC (http://www.justice.gov/atr/public/speeches/245711.htm).

Lax enforcement suggests that the regulatory markets; like politics, has become influenced by campaign finance. The conflicts of interest may be too great and may require new thinking altogether! To tackle this issue head on one could envision the creation of an independent oversight board that is funded through industry fees and enforcement revenues and staffed by professionals with multi-disciplinary expertise in financial services. This board would not be funded by Congress but would be accountable through legislative oversight committees. The members of the board would serve as the "Risk Regulator" and would provide market data on trends in emerging risks in banking, finance, and industry in general. The mandate of the board could include ensuring that regulators are sufficiently engaged in oversight, mitigate gaps in regulatory oversight, and draft policy recommendations to improve systemic risks.

One important service that this board could provide is an "early warning" on products that are high risk or not in the best interest of the public. The "early warning" reports should be available to investors and the public in general. The transparency of public disclosure of high risk behavior would serve to curtail or "chill" excessive risk taking for fear of "making the list" of bad actors. In the future, market participants would promote their risk management expertise by exclusion of their presence in the report. This strikes me as more effective than tying risk management to compensation given the challenges in calibrating compensation to risk taking.

There, no doubt, will be many variations on this theme. However, the reality is that the financial markets' ability to innovate new and potentially risky products exceeds regulators ability to keep pace. An independent Risk Regulator would be able to set a strategic agenda without the influence of industry or congressional mood shifts.

Too Big To Fail assumes "failure" is inevitable. Failure does and will happen however American taxpayers should not be expected to assume this risk. We should focus on getting back to the Prudent Man Rule of investing and overseeing one of our most important means to securing our future, the financial and economic markets.