While members of Congress praised SEC Chairman Mary Schapiro July 14 for acting quickly to institute changes at the beleaguered agency, particularly since the Bernard Madoff scandal broke, lawmakers said more work needs to be done at the SEC to protect investors.

The SEC “must continue to take bold and assertive action as it moves forward to bring enforcement actions against wrongdoers and to rewrite the rules governing the industry to better protect investors,” Paul Kanjorski (D-Pennsylvania), chairman of the House Financial Services Capital Markets Subcommittee, said during his opening remarks at the July 14 hearing he held to assess the current state of the SEC and its agenda.

Indeed, Schapiro told members of the subcommittee that since her six months on board at the agency, SEC staff has moved with a sense of urgency to institute changes designed to protect investors and promote investor confidence. Schapiro listed the changes the SEC is taking, including:

o working to fill regulatory gaps exposed by the economic crisis;

o seeking to strengthen standards governing broker/dealers and investment advisors;

o enhancing disclosure provided to investors;

o streamlining enforcement procedures and focusing on cases that will have the greatest impact;

o revamping the system for handling the approximately one million tips and complaints the Commission receives annually;

o improving the SEC’s risk assessment capabilities;

o bolstering internal training; and

o bringing on new leadership and new skill sets throughout the agency.

  • Cleaning House; Maybe a Budget Hike?

    In less than six months, Kanjorski noted, Schapiro has replaced nearly all of the agency’s senior staff. The most recent departure was Lori Richards, director of the Office of Compliance Inspections and Examinations, who will leave the agency in early August

Schapiro also noted that the SEC inspector general should release its report in a matter of weeks on why the SEC failed to detect the Madoff Ponzi scheme.

During his opening remarks, Kanjorski said he’s now developing a bill on financial services reform using the “ambitious set of 42 legislative proposals” that Schapiro recently sent to Congress, as well as ideas offered by the SEC’s inspector general, and the Obama Administration’s reform proposal.

Kanjorski noted that one important proposal stands out: To put in place new standards that reward whistleblowers when their tips lead to catching fraudsters.

Kanjorski also said that the House will soon consider a bill providing for a modest increase of 8% in the Commission’s 2010 budget. However, he thinks the House should “seriously consider” the Commission’s request to raise its 2011 budget authorization by an additional 20%. Alternatively, he said, “we might decide to put the Commission on the same independent footing as other financial regulators by moving the agency outside of the appropriations process.”

On Budgets and an SRO

Schapiro noted in her testimony that for FY 2011, the Commission submitted to Congress an authorization request of over $1.2 billion, a 21% increase over the FY 2010 request. “This amount would support over 375 additional full-time equivalents and $30 million in new technology investments, mainly in the enforcement, examination, risk assessment, and market oversight functions,” Schapiro said.

When asked whether an increased budget would prompt the SEC to not further explore the option of a self-regulatory organization for advisors, Schapiro said that “even though our budget is growing, I am game to explore the SRO because I think it will allow us to do a better job.” Given the SEC’s limited resources, she said, “We have to consider leveraging third parties.” She said the key to a successful SRO would be strict oversight by the SEC.