More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
At press time, the Senate was preparing to vote on competing Democratic and GOP bills to fund the government for the rest of the year. Caught up in the budget debate are funds for the Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC), and the Consumer Financial Protection Bureau (CFPB). While House Republicans are attempting to significantly cut those agencies’ budgets, Senate Democrats are vowing to ensure that adequate funding for these agencies will be a negotiating tool on any federal budget deal.
Senator Tom Harkin, D-Iowa, chairman of the Senate Health, Education, Labor and Pensions (HELP) Committee and a member of the Senate Appropriations Committee, said on March 8 that lawmakers “are tied in knots” over how to resolve their budget differences, and that there is a “real possibility” that the nation could again face the prospect of a government shutdown.
On March 11, the House and Senate agreed to a continuing resolution (CR) to fund the government for another three weeks; the CR expires on April 8.
Harkin, who was speaking at the National Institute on Retirement Security’s (NIRS) policy conference in Washington, told Investment Advisor after his prepared remarks that he’d like to see a continuing resolution (CR) “at last year’s level” to fund the government until year-end, so lawmakers can focus on crafting “a budget for next year.”
But SEC chair Mary Schapiro, (left), told lawmakers during a round of hearings held on the agency’s funding status in mid-March that the CRs are hampering the agency’s ability to hire and attract knowledgeable and experienced personnel.
Senate Democrats have vowed to fight the budget cuts for the SEC, the CFTC and the CFPB as laid out by House Republicans’ budget plan. During a conference call held by consumer advocate groups in March, Sen. Dick Durbin, D-Ill., chairman of the Senate Appropriations Committee’s Subcommittee on Financial Services and General Government, said he would “fight to ensure House Republicans lose this fight” to cut these agencies’ budgets, “just as they lost” on trying to stop the passage of Dodd-Frank itself. “House Republicans have fought the Dodd-Frank bill every step of the way,” he said. “All three of these agencies’ [budgets] will be part of the negotiation” as lawmakers try to hammer out a long-term budget resolution.
Under the House’s short-term budget resolution, which the Senate passed in early March by a vote of 91–9, the SEC would see a $231 million budget cut from what was requested under Dodd-Frank, Durbin said. The CFTC would face a $174 million budget cut, or 69%, of what was to be allotted to the agency under Dodd-Frank, he said, while the CFPB’s budget would be cut from $143 million to $80 million, a 40% drop.
As the budget debate dragged on, lawmakers held hearings in mid-March on the SEC’s funding condition. Rep. Steve Garrett, R-N.J., chairman of the House Financial Service Committee’s Subcommittee on Capital Markets and Government Sponsored Enterprises, and Sen. Jack Reed, D-R.I., chairman of the Senate Banking Committee’s Subcommittee on Securities, Insurance, and Investment were scheduled to hold hearings the week of March 7 on the SEC’s budget, while the House Appropriations Committee was scheduled to dissect the agency’s budget the following week. Like other House Republicans, Garrett has been using the SEC’s mishandling of the Bernie Madoff Ponzi scheme to justify not awarding the securities regulator extra funds. (See Melanie's column, GOP's End Game in Nixing SEC Funds: Stopping Dodd-Frank.)
But Stephen Crimmins, a former deputy chief litigator at the SEC who’s now a partner at K&L Gates in Washington, says having a sufficiently funded SEC is “critical” to pulling the nation out of the worst financial crisis since the Great Depression. The SEC remains “in a period of risk” as to whether it will see the budget boost it needs, Crimmins says. “Things [on Capitol Hill] are still fluid” regarding SEC funding, he says, adding that members of Congress are still debating where they stand on a funding increase for the agency.
Kurt Schacht, managing director of the CFA Institute, says that a poorly funded SEC equates to poorly functioning capital markets. “If investors don’t feel there is a policeman on the beat” then the “capital markets aren’t going to function very well,” he says.
Further fodder to support the numerous outcries from those within the SEC, lawmakers and industry officials that the SEC is running on empty came in the Boston Consulting Group’s (BCG) top-to-bottom analysis of the SEC, mandated by the Dodd-Frank Act, which found that the securities regulator needs 400 more employees to manage its current workload. The completed BCG report was due to be handed to members of Congress and the SEC by March 14.