Ill-Advised Budget Cuts Threaten the Integrity of U.S. Capital Markets


The Securities and Exchange Commission’s Inspector General David Kotz said the Commission needs more funding to shore up deficiencies underlying regulatory failures and wasteful decisions, according to Jessica Holzer’s Wall Street Journal article, “SEC Watchdog: More Cash Needed to Fix Problems.” While Mr. Kotz has been critical of the agency he investigates, he warned against the deep budget cuts proposed by U.S. House Republicans.

Mr. Kotz said that reducing the SEC’s budget to 2008 levels, as House Republicans have proposed to do across the federal government, would force the agency to terminate 600 staffers. This “would have an impact,” Mr. Kotz was quoted as saying, adding: “I don’t think there are 600 people in the SEC that are not providing value.”

The SEC is trying to persuade Congress to increase its funding so it can carry out the expanded duties mandated by the Dodd-Frank financial reform law. Last week Chairman Mary Schapiro warned that lack of funding was having a current impact on the SEC’s core mission to enforce U.S. securities laws.

House Subcommittee Chairman Jo Ann Emerson (R., Ill.) expressed concern that regulatory failures occurred despite the doubling of the SEC’s budget in recent years. “There’s some skepticism among my colleagues that the SEC can actually do its job,” she was quoted as saying.

Mr. Kotz conceded the agency’s failures but argued that cutting funding would further damage its ability to enforce U.S. securities laws.

“It’s important to understand what they’re up against. They are up against some heavily funded entities,” he was quoted as saying. Madoff, for example, was heavily funded via his Ponzi scheme.

Mr. Kotz, who did not flinch from holding the SEC accountable for its failures, expressed confidence that the SEC will not make the same mistakes twice. “We are confident that the situations we identified have been ameliorated and will not recur,” he was quoted as saying.

J. Boyd Page, the senior partner at Page Perry, a law firm that specializes in representing investors, said “It’s penny-wise and pound-foolish not to increase funding at the SEC. If Congress was serious about reforming Wall Street and preventing another financial crisis, it would make sure the SEC is not outgunned by the bad guys. But I’ve got my doubts about the judgment and resolve of some of those in power. This problem is compounded by the fact that many state securities departments are inadequately funded and unable to provide meaningful assistance in regulating the financial industry. At the rate things are going, our financial markets are going to become a free-fraud zone where anything goes.”