SEC Fund Shortage Affected Oversight

The SEC’s fund shortage may have affected its oversight and may be partly the reason for the agency’s inability to prevent Bear Stearns’ collapse.

From 2005 to 2007, SEC spending declined 1.3 percent to $875.5 million and lost 386 full-time employees (10 percent of their force). Meanwhile, Wall Street firms were getting more complex with at least a 10 percent increase in headcount and climbing revenue largely derived from structured credit including bonds backed by mortgages.

Today, two months after the Feds rescued Bear Stearns, the SEC’s supervision of securities firms and the adequacy of its resources for monitoring them are being scrutinized in two hearings in the U.S. Senate. Erik Sirri, head of the SEC division of trading and markets, said in hearings today that the SEC wants to increase capital and liquidity requirements for investment banks and that the agency chairman plans to increase agency staff members who monitor risk at securities firms to 40 from 25.

In defense of their oversight on Bear Stearns, Christopher Cox, the current SEC Chairman, said last month that the agency tries to ensure firms have enough funds to meet expected obligations for at least a year during periods of market stress. However, the situation with Bear Stearns was “unprecedented” because they couldn’t even secure loans when it offered “high-quality collateral.” Still, Cox said the SEC’s oversight of Bear Stearns succeeded in accomplishing its intended purpose, which is ensuring that the firm’s brokerage clients didn’t lose any money.

Some in the Senate are suggesting an increase in the SEC’s budget to add more staff and boost risk assessment and securities law enforcement. The SEC supports that idea but in the past, it has left money unspent. The $906 million Congress granted the SEC in 2008 includes $63.3 million unspent from earlier years. Lynn Turner, former SEC chief accountant, compares that to the fire department laying off firemen as houses burn down.

John Nester, SEC spokesman, explains that more than 90 percent of the money carried over to the 2008 budget from earlier years cannot be used for staff salaries because it’s intended for contract work such as technology upgrades.

After the inadequacy in preventing the Enron and WorldCom debacles, Congress almost doubled the SEC budget to employ more accountants, enforcement lawyers and examiners. At its peak in 2005, the SEC had 3,851 full-time employees, including 1,232 in its enforcement division, which investigates fraud. After budget cuts in recent years, the agency’s full-time staff level dropped to 3,465 and staffing in the enforcement unit dropped to 1,111.