The Securities and Exchange Commission gets funding in a way that should make everyone happy. Instead of being funded by tax revenues, its funding comes from a fee levied on transactions made by the entities that it oversees. Last year, that fee was $0.02 for every $1,000 in transactions. In addition, the SEC can't generate extra cash or overcharge, because as of last year, it has to make the amount it collects match an amount designated by Congress.
So it may come as some surprise to see that politicians are fighting over how much it should be allowed to raise in order to fund itself next year -- maybe that's not surprising as politicians are natural born fighters. Right now, the SEC's battle for funding is playing out on a small scale between the members of the House Committee on Financial Services. One side says one thing, and one says the opposite, but the summary is this: The SEC is going to be underfunded.
What the SEC wants
The SEC is asking for a 15% increase in funding that will add 560 full-time equivalent employees to help take on the tasks at hand. Those tasks include overseeing 1,400 new advisors that are required to register with the SEC along with its usual duties -- you know, keeping an eye on the 10,000 investment professionals with $44 trillion in assets under management.
That increase just isn't going to come. In fact, the agency will be lucky just to have the level of funding it saw last year -- keeping in mind, that funding has no impact on the deficit.
Ideology gone mad
The clash on Capitol Hill comes down to the disagreement on the level of regulation that should exist. Those in favor of cutting funding to the SEC argue that its rules make it harder for small banks, and increase the amount of paperwork and bureaucracy that little guys are subject to. Those in favor of increasing funding argue that the world is getting bigger and more complicated, and that regulation protects individuals.
Both sides have valid points, and the SEC is anything but perfect. Just this week, a federal judge admonished the SEC for its "regrettable inaction" in the Madoff case . But the commission isn't going to get better by not having the people or resources that it needs.
The past failures of the SEC don't mean that it's a worthless part of the U.S. regulatory landscape. While its detractors call for more focus on the JOBS Act and less on the Dodd-Frank Act, that's not really up to the agency. Those laws were passed by Congress, and handing them to an underfunded commission isn't going to make them go away or become a perfect piece of legislation.
The SEC is dealing with increased oversight and increasingly sophisticated financial instruments. On top of that, the institutions under the SEC's gaze are increasingly powerful. Banks like JPMorgan Chase (JPM -0.82%) and Bank of America (BAC -1.71%) can spend almost as much on litigation during a single quarter as the SEC receives in funding for an entire year. While the playing field will never be totally level, it would be nice to make it look less like a wall.
The bottom line
The SEC needs to be allowed to do its job. I can't sit back and say that it's done a perfect job in the past, but that's no reason to stop it from being better in the future. Regardless of your ideology, you should want to see the SEC do its job well. It protects consumers who are at both an information and a resources disadvantage. Spending money on the good guys may not stop another Madoff, but not spending money will guarantee one.