More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
The Securities and Exchange Commission’s reputation as a credible regulator may never fully recover from the Bernie Madoff Ponzi scheme. Granted, missing Madoff was a colossal blunder that cost investors dearly, and the agency should take extraordinary steps to ensure such a mistake is never repeated. But Congressional Republicans’ use of the Madoff fiasco—and now the latest turmoil involving ethical issues surrounding the SEC’s former general counsel, David Becker, and his ties to a Madoff account—as excuses to not award critical funds to the SEC is perplexing, if not downright frustrating.
Without a doubt, the real end game for Republicans’ continual bashing—and rehashing—of the SEC’s past mistakes is clear: they want to stop the Dodd-Frank Act in its tracks.
While Republicans have fought the Dodd-Frank Act since inception to eventual passage, lawmakers on both sides of the aisle have conceded that the current SEC chair, Mary Schapiro, inherited an agency with serious flaws. Even Schapiro was quick to remind lawmakers during a mid-March hearing held by the House Committee on Oversight and Government Reform regarding the SEC’s budget that she took the helm of an agency that was basically “in ruins.” In her defense, Schapiro told members of the Committee that she has “worked hard over the last two years to put this agency back on track.”
Schapiro went on to say that “it isn’t fair” to the SEC’s 3,800 employees when Congress targets specific issues—like, for instance, the SEC Inspector General report that found certain agency employees were viewing pornography during work hours—and then paints a picture that the entire agency is up to no good. “Most people there [at the SEC] are working their hearts out to do the right thing,” she said.
Pitt: Contrary to the Needs of Investors
Indeed, former SEC Chairman Harvey Pitt told me in mid-March that under its current leadership, “the SEC is doing thousands of things right every day.” Congress, he said, “must decide whether it wants the SEC to do all the things it has asked the SEC to do, or whether it simply enjoys criticizing the SEC and making it even more difficult for it to succeed.” Depriving the agency of necessary funding, he continued, “as a supposed punishment for alleged past failures is counter-intuitive, counter-productive and contrary to the needs of American investors.”
The enduring problem with the SEC: The agency is not self-funding, Pitt argues.
When asked by lawmakers during the House Oversight hearing what the agency would do with increased funding, Schapiro stated bluntly that more funding is needed “to transform the agency, and add the people we need so that we have a fighting chance to stay on top of what’s happening on Wall Street.”
Republican lawmakers have also repeatedly tried to make the case that the SEC wouldn’t need so much in added funding if it weren’t for Dodd-Frank. Rep. Darrell Issa, R-Calif., chairman of the House Oversight and Government Reform Committee, asked Schapiro at the mid-March hearing how much of a budget increase the SEC would need “without piling on new regulations” under Dodd-Frank?
Schapiro replied that in FY 2012, the agency is requesting $1.407 billion, an increase of $264 million over the continuing resolution (CR) level under which the SEC is currently operating. If enacted, she said, this request would allow the securities regulator to hire an additional 780 positions. Forty percent, or 312, of the new positions requested for FY 2012 would be used to “strengthen and support core SEC operations,” while 60%, or 468, of the new positions would be used to implement the Dodd-Frank Act.
Many of these new positions to support Dodd-Frank, Schapiro went on to say, would be used to hire experts in derivatives, hedge funds, data analytics, credit ratings and other “new or expanded responsibility areas, so that the agency may acquire the deeper expertise and knowledge needed to perform effective oversight.”
Just days after Schapiro’s testimony, Sen. Tim Johnson, D-S.D, (lef), chairman of the Senate Banking Committee, released a statement saying that only a few years have passed since Ponzi schemes run by Bernie Madoff and Allen Stanford “were unearthed, and the economy is still reeling from risky bets made by Wall Street executives.” Given that the Wall Street reform passed by Congress last year via Dodd-Frank “gave the SEC and CFTC new authorities to protect investors and prevent future crises, it is reckless and irresponsible to gut funding for these critical new protections.”
SEC Review: Budget Doesn’t Even Match Inflation
Even the Boston Consulting Group’s (BCG) top-to-bottom review of the SEC, which was mandated under Dodd-Frank, found that despite gains in its budget in 2008 and 2009, the agency’s budget has not kept pace with inflation since 2005. BCG noted the fact that the SEC is operating under last year’s budget via the CR until Congress hammers out an appropriations compromise. BCG also noted that over the past 11 years, the SEC has waited an average of three months beyond the start of its fiscal year to receive its budget allocation.
As of March 11, Congressional Democrats and Republicans had agreed to extend the current CR for another three weeks, which included $6 billion in cuts. Stephen Crimmins, a former deputy chief litigator at the SEC and a partner at K&L Gates in Washington, says that “It’s critical for all involved to maintain focus on what’s really important as we come through the worst financial crisis in years.” Adequate SEC funding, he says, “is needed for recovery and future growth.”