As President Barack Obama readies to give his State of the Union speech Tuesday night, in which he is said to focus on jobs, innovation and cooperation, leading Democrats on the House Financial Services Committee gathered on Capitol Hill Tuesday morning to sound an alarm bell over the Securities and Exchange Commission’s (SEC) current lack of funding to police the securities market.

Rep. Paul Ryan, R-Wis., the new chairman of the House Budget Committee who will deliver the Republican response on Tuesday night to the State of the Union, will talk about his plan to privatize Social Security and Medicare. Republicans, who now control the House, have not only voted in favor of repealing healthcare, but they’ve also vowed to defund the Dodd-Frank Act during the 112th Congress and to freeze non-military discretionary spending at Fiscal Year 2008 levels.

This freeze will have a negative impact on agencies like the SEC. Rep. Maxine Waters, ranking member on the House Financial Services Capital Markets Subcommittee, said during the Tuesday morning press briefing regarding SEC funding that “it’s interesting that Republicans have chosen 2008 as the year on which to base their funding cuts,” seeing as that was the year the nation’s financial markets collapsed and that 2008 was also when lawmakers “realized that the resources we had provided to the regulators of those markets had been sadly lacking. This was especially the case at the SEC.”

Waters noted that from 2005 to 2007, the SEC lost 10% of its staff, and from 2005 to 2009 the SEC’s investments in information technology declined 50%.

Rep. Spencer Bachus, R-Ala., chairman of the House Financial Services Committee, released a statement after the Democrats spoke stating that his committee will "closely examine the Dodd-Frank mandated SEC organizational reform study and the SEC's formal budget request to identify wasteful, inefficient and outdated regulatory programs and operations to better allocate the SEC's financial and human resources."

Bachus continued that while he's "committed to ensuring" the SEC "works more effectively in the future" he's disappointed that with previous increases in funding, the SEC failed to detect and stop the Bernie Madoff Ponzi scheme.  

Waters went on to say that the Dodd-Frank Act “will prevent the next crisis by authorizing the SEC to regulate derivatives and credit ratings agencies and provide oversight of investment advisors and broker-dealers.” In order to do this, she said, “the SEC needs additional funding. Unfortunately, House Republicans don’t want the SEC to staff up or to even maintain their current staffing levels.” If funded at FY 2008 levels, Waters said, “the SEC would have to lay off hundreds of staff and cut its IT budget down to $86 million, a level that would not allow it to implement the new systems it needs to protect the nation’s securities markets.”

Congress failed to award the SEC self-funding in the recently passed Senate spending bill, and it looks as though any hopes of securing self-funding during the new Congress are fading. As Rep. Scott Garrett, R-N.J., the Chairman of the House Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, said in a statement after the leading Democrats spoke: “During our country’s current debt crisis, all branches of government–including Congress–have to tighten their belts and find ways to make their money go further.” A “dramatic spending increase to fund the SEC and CFTC, as envisioned by the authors of the Dodd-Frank legislation, would further the mindset that our nation’s problems can be solved with more spending, not more efficiency. Government agencies must learn to operate effectively within their budgets like American families and businesses do every day as we work to get our fiscal house in order.”

Lack of SEC funding also increases the chances that the securities regulator will have to appoint a self-regulatory organization (SRO) to help it oversee advisors. In its recently released report to Congress on the potential need for an SRO, the SEC gave lawmakers three options for advisor oversight—user fees, an SRO, and help from the Financial Industry Regulatory Authority (FINRA).

The 112th Congress has been sworn in—with its 106 new members, 87 of which are Republicans—and the Republican agenda of “breaking down” Dodd-Frank has already begun. As William Donovan, a partner in the financial services practice at the law firm Venable in Washington notes, Rep. Spencer Bachus, R-Ala., chairman of the House Financial Services Committee, intends on reviewing the Dodd-Frank Act “provision by provision” while Rep. Randy Neugebauer, R-Texas, the incoming chairman of the House Financial Services Subcommittee on Oversight and Investigations, “reportedly was considering the introduction of legislation that would push back all regulatory deadlines contained in the Dodd-Frank Act by one year.”

Given Republican control of the House and the fact that only three Republicans voted in favor of passing Dodd-Frank, Donovan says, “the Republican majority may well be able to push a roll back of effective dates through the House; however, with Democratic control (albeit by a slim margin) in the Senate and President Obama likely to veto such a roll back if it were to pass Congress, prospects for such a roll back being enacted into law are at best a very long-shot.”