Outlining the SEC’s recent successes and highlighting challenges ahead, Chair Mary Jo White testified before the House Appropriations Financial Services Subcommittee about the need to increase the SEC’s budget to fulfill its mission of protecting investors and facilitating capital formation while maintaining efficient markets.
Ambitious agenda. In her prepared remarks summarizing the SEC’s case for funding of $1.781 billion in fiscal year 2017, White said that last year saw many accomplishments at the agency, including a record $4.2 billion in penalties and disgorgement from enforcement actions and tackling a robust rulemaking agenda, including rules promulgated under the Dodd-Frank Act and the JOBS Act.
Significant work remains, however, according to White. The SEC needs additional resources to increase its examination coverage of registered investment advisers and investment companies, she said, noting that investment advisers by 2017 are expected to grow to 12,500, managing more than $70 trillion in assets, up from 9,000 advisers managing $28 trillion only a decade ago.
The SEC also hopes to use the increased budget to modernize its technology systems and expand its data analytic tools. Other technology projects the SEC wishes to undertake include increasing investments in information security, redesigning the EDGAR system, using risk assessment and surveillance tools to improve examinations, modernizing the SEC’s website, and improving its Tips, Complaints, and Referral (TCR) system.
While the SEC had a record enforcement year in fiscal year 2015, more funds are needed to build on these efforts, White said. The SEC is requesting 52 additional positions for the Enforcement Division, including forensic accountants, industry experts, IT staff, and experienced trial attorneys. The funds would also be used to enhance the Division’s data analytics expertise and to bolster staffing for intelligence functions for following up on TCRs. In addition, the SEC would like to strengthen its economic and risk analysis functions, including adding new positions to its Division of Economic and Risk Analysis (DERA) that focus on exchange-traded funds (ETFs), microcap stocks, the derivatives market, and asset-backed securities.
Budget for new positions. Representative José Serrano (D-NY), the subcommittee’s ranking member, noted that the SEC’s is requesting an increase of 6 percent over the previous fiscal year and 250 new positions. He asked White about the impact of hiring, or not hiring, this new personnel. White said that over 100 of the new positions would be examiners, with most of them dedicated to the investment adviser space and the rest assigned to oversight of exchanges, SROs, and broker-dealers. She also said that failure to hire the desired enforcement personnel would result in a deterioration in the agency’s litigation capacity.
DOL fiduciary rule. Some subcommittee members voiced their concerns about the Department of Labor’s (DOL) proposed fiduciary rule and what they perceived as a lack of collaboration between the SEC and the DOL. White downplayed this alleged discord, assuring Rep. Tom Graves (R-Ga) that the staff provided substantial technical assistance to DOL in the crafting of the proposed rule. In response to subcommittee Chair Rep. Ander Crenshaw’s (R-Fla) inquiry about whether the SEC would proceed with its own rulemaking, White replied that the SEC should proceed under Dodd-Frank Act Section 913 to create a uniform fiduciary duty for broker-dealers and investment advisers. It will be “very hard, and not quick, to do this well,” she said.
White also clarified the SEC’s jurisdiction to Rep. Mark Amodei (R-Nev), who asked whether the SEC would enforce the DOL standard. White advised that although some conduct may overlap between the DOL rules and the SEC rules, the SEC’s enforcement authority derives from the federal securities laws, and not from the DOL regime.
Cybersecurity. Other subcommittee members inquired about the SEC’s approach to cybersecurity issues. Responding to a question from Rep. Nita Lowey (D-NY), White stated that in both the private sector and the government, she sees “no greater risk” than cybersecurity. She noted that the SEC has issued guidance for companies about risks to business in case of a cyberattack and whether it is considered material. She also said that examiners of investment advisers and broker-dealers have looked for cyber preparedness issues.
Representative Kevin Yoder (R-Kan) asked about the SEC’s own internal controls to prevent cyberattacks, noting that “nefarious actors” could obtain confidential information gathered by the SEC in the case of a cyberattack. White observed that part of the SEC’s plan to leverage technology includes using increased funds to improve its own information security to help prevent cyberattacks from occurring.
FSOC. Chairman Crenshaw expressed his concern about the transparency of the process of designating systemically important financial institutions (SIFIs) by the Financial Stability Oversight Council (FSOC), of which White is a member. White noted that there has been increased engagement between FSOC staff and the entities it reviews. FSOC publishes detailed reasons behind its SIFI designations, and the entities subject to the designations receive even more information than the public. She also emphasized that an annual review occurs of each SIFI designation, even if not requested by the institution. She pointed out that it has only been two years into the SIFI process, and that FSOC is becoming more exacting and improving the process in the meantime.
Market structure. Representative Sanford Bishop (D-Ga) brought up the “flash crash” that occurred on August 24, 2015 and inquired what the SEC is doing to prevent market volatility caused by overseas market events and panic buying of protection. White disputed that the August 24 event was a “flash crash,” particularly when compared to the flash crash of May 6, 2010, although she acknowledged that the two occurrences did have certain phenomena in common. That the market recovered actually shows the resilience of the nation’s critical market infrastructure, White said.
The staff has requested information from the exchanges and market participants on that day to determine what measures should be taken to deal with phenomena that did occur, including issues relating to the limit up/limit down rules that were put in place after the 2010 flash crash. The SEC is constantly examining these kinds of issues with a great deal of seriousness, White assured.
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