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Senate Banking Committee Leaders Urge More Funding for SEC in Light of Subprime Crisis

Following Chairman Christopher Cox's congressional testimony on the SEC's fiscal 2009 budget, Senate Banking Committee Chair Christopher Dodd (D-CT) has urged Congress to increase the SEC's funding to $963 million, an increase of $50 million over the President's budget request. In a letter to the Senate Appropriations Subcommittee on Financial Services, Dodd noted that the problems in the market as a result of the securitization and subprime lending crisis will require a thorough investigation and possible enforcement actions. The SEC needs more funding to do the job, he said. Dodd noted that the budget proposal is unchanged on a constant inflated adjusted dollar basis from the amount budgeted for the SEC in 2005. The letter was also signed by Senator Jack Reed (D-RI), chairman of the Subcommittee on Securities.

As the SEC strengthens its oversight of credit rating agencies in response to issues involving the ratings given to complex securities products, Congress must ensure that the SEC has sufficient staff to evaluate the performance of new regulations and the quality of information available to investors. Given the high-level expertise required to oversee credit rating agencies, the senators believe that it is critical for the Commission to have a strong and fully staffed oversight group.

Similarly, the SEC's consolidated supervised entity ("CSE") regime has been tested throughout the market crisis, Dodd said, and is clearly in need of additional resources. The Commission must be equipped to enhance its supervision of liquidity risk, risk management and the valuation of assets at the CSEs. In his testimony, Cox said that the CSE program is needed to monitor for, and act quickly in response to, any financial or operational weaknesses that might place regulated entities or the broader financial system at risk. The CSE program is also providing the basis for significant new SEC collaboration with the Federal Reserve Board. The law currently fails to provide for supervision of even the largest globally active firms on a consolidated basis, Cox noted, so without the CSE program there would not have been any consolidated information available to regulators, including the Federal Reserve Bank of New York, when Bear Stearns precipitously lost liquidity in mid-March 2008.

Dodd emphasized that, at a time when the subprime crisis has cast the regulatory compliance of market participants into stark relief, it is important that the SEC's Office of Compliance, Inspections and Examinations receive sufficient funding to fulfill its mission and its duty to investors. Ensuring that the SEC has sufficient experienced staff to review advanced risk models and complex securitized products is a priority, he said, especially given the failures in risk management and write-downs resulting from current market conditions. This critical office is currently budgeted to have fewer than 800 personnel for 2009, down from 880 at the end of fiscal 2006.

In his testimony, Cox noted that currently, neither the CSE program nor the credit rating agency programs receive dedicated funding from Congress. In his view, dedicated funding would help formalize and strengthen these two critical programs.

The senators also said it is critical that Congress increase staffing in the SEC's Office of Risk Management. In 2004, this office had 15 budgeted positions, but has only employed a third or fewer of this amount since its inception. Dodd emphasized his concern that this office, which identifies risks in the capital markets, has only two employees. The Division of Enforcement also needs a boost since it has seen a reduction of actual staffing by over 11% since 2005. Its funding would remain nearly frozen in the Administration's current budget request.