The financial crisis reminded us just how large, complex, and critical to our economy the securities markets have become. Over the last 20 years, the dollar value of the average daily trading volume in stocks, exchange-traded options, and security futures has grown by over 25 times, reaching approximately $245 billion a day. The number and size of market participants have grown as well. For example, since 2003, the number of registered investment advisers has increased by 49 percent, and their assets under management have jumped by over 57 percent, to $33 trillion.
Yet, while the markets were growing exponentially in size and complexity, the SEC was getting smaller and its technology was falling further behind. We are only just now returning to the budget and staffing levels of five years ago. As you know, between FY 2005 and FY 2007, the agency experienced three years of flat or declining budgets, losing 10 percent of its employees, which severely hampered our enforcement and examination programs. In the context of rapidly expanding markets, limited SEC staffing levels hindered the agency’s ability to effectively oversee the markets and pursue violations of the securities laws.
This commentary is excerpted from a copy of SEC Chairman Mary Schapiro’s scheduled testimony today before the House Committee on Appropriations’ Subcommittee on Federal Services and General Government.
Fortunately, thanks to support from the members of this Subcommittee, we have begun to rebuild our workforce and to invest in needed new technologies. Yet, the SEC is still responsible for overseeing more than 35,000 entities with just over 3,800 professionals. Additional resources are essential if we hope to make the SEC a dynamic and effective regulator of our financial markets.
The President is requesting a total of $1.258 billion for the agency in FY 2011, a 12 percent increase over the FY 2010 funding level. If enacted, this request would permit us to hire an additional 374 professionals, a 10 percent increase over FY 2010. That would bring the total number of staff to just over 4,200. The request also will permit us to continue expanding our investments in surveillance, risk analysis, and other technology, as well as in better training for SEC staff.
Of this total request, $24 million would be contingent upon the enactment of financial reform—so that if reform is passed, we would have the resources to begin implementing our enhanced authorities.
It is important to note that the proposed increase in spending would be fully offset by the fees we collect on transactions and registrations. In FY 2011, we estimate that we will collect $1.7 billion—an increase of $220 million over FY 2010.
Let me spend just a little time breaking out the numbers across the agency:
In the Enforcement Division, the budget request would enable us to add 130 new professionals so we can reinforce our investigations process, support more cases, and strengthen the intelligence analysis function. With these new staff resources – along with the Division restructuring and initiatives outlined above that will make the Division more efficient and effective – the Division projects that we will be able to open 75 additional inquiries, conduct 130 additional formal investigations, and file charges in 70 additional civil or administrative cases.
In addition to fully staffing the new Office of Market Intelligence and its critical risk assessment and strategic planning functions, we plan to use additional Enforcement Division resources in the following ways:
- Hire Individuals with Specialized Industry Experience: One of the SEC’s priorities is to seek persons with specialized financial industry experience. We intend to hire enforcement staff with specialized expertise in financial products, including structured products and hedge funds, trading strategies, risk, and financial analysis. Building upon the existing strengths of the Division, specialists will increase the Division’s depth of understanding of the patterns, links, trends, and motives of wrongdoers. Moreover, the specialists can utilize their unique experience to more quickly target, analyze, and bring to light unlawful activities.
- Hire Additional Trial Attorneys: It is essential that the SEC be able to act decisively on its growing caseload and that the Division have the resources to present effective cases at trial and to negotiate potential settlements from a position of strength. We intend to hire additional experienced trial counsel, not only to enable the Division to carry a caseload that includes increasingly complex cases, but also to allow the SEC and the Division to demand tough but appropriate sanctions with the confidence that we have the resources to litigate if necessary. It is critical that the Division convey to defendants that we are prepared to go to trial and to win. With our increased case load, our trial unit needs to expand to ensure that we are able to maintain a program of rigorous enforcement for the protection of investors.
- Increase Administrative Staff: Division lawyers spend too much time on tasks more efficiently handled by support and paraprofessional staff. We can leverage our resources by transferring document management, case filings, and other administrative tasks to support staff with the appropriate expertise, thereby freeing up our attorneys to tackle critical front-line work of investigating cases, bringing enforcement actions and allowing all levels of the staff to leverage their specialized knowledge.
- Train Strategically: It is critical that the Division invest in employee development to prepare its staff to respond to continuing changes in the securities industry, sophisticated new products and novel trading strategies. In addition, the Division needs to ensure that all staff have access to training to improve on the competencies and skills required for their jobs and to maximize individual potential.
- Information Technology: Information technology is also a priority for the Division. We are spending significant resources on a number of ongoing projects – improving the Division’s case management system, managing ever-increasing amounts of electronic evidence with sophisticated new tools, and establishing a more centralized system for reviewing and analyzing tips, complaints, and referrals. We intend to commit whatever resources are necessary and available to ensure a timely conclusion to these upgrades. We also anticipate major future projects, including a new state-of-the-art IT Forensics Lab, enhanced data and trading analytics, and improved document and knowledge management to further enhance efficiency and consistency across the Division.
In our Examinations unit, the budget request would allow us to add 70 staff to help us begin closing the gap between the number of examiners and the growing number of registered firms we oversee. With these new resources, OCIE expects to be able to expand the scope and coverage of examinations, conducting an additional 50 investment adviser exams and 25 mutual fund exams. We also anticipate using these resources to fully staff the oversight function for credit rating agencies, allowing us to examine half of them in FY 2011. If the financial regulatory reform legislation now under consideration requires hedge fund advisors to register, we will begin to build an inspection program.
It is important to note, however, that even with an increase in the number of exams these additional resources will enable us to conduct, we anticipate examining only nine percent of SEC registered investment advisers and 17 percent of investment company complexes in FY2011.
In the newly created Division of Risk, Strategy, and Financial Innovation, the budget request would enable us to add 20 new professionals. The new staff positions would allow the Division to establish a deeper reservoir of experts who can conduct risk and economic analysis and spot emerging trends and practices in support of rule-making and enforcement activities. We anticipate hiring professionals with significant knowledge and expertise in financial markets and products, including economists, academics, lawyers, and financial market professionals.
Among the other divisions, the budget request would permit us to add almost 50 positions to the Divisions of Investment Management and Trading and Markets. These positions will help us enhance oversight of money market funds, clearing agencies, broker-dealers, credit rating agencies, and, if brought under the agency’s jurisdiction, hedge fund advisers and OTC derivatives. The Division of Corporation Finance would add 25 professionals to allow it to focus more, and with greater frequency, on the financial statements and other disclosures of large and financially significant companies.
Finally, the FY 2011 budget request proposes to spend an additional $12 million on information technology investments, focused on several key projects. Our top priority, as I described earlier, will be the third phase of our new system for analyzing tips, complaints and referrals.
We also intend to continue our efforts to build a suite of surveillance and risk analysis tools that will substantially improve the agency’s ability to find connections, patterns, or trends in the data we collect. The agency has numerous internal information repositories which result from disclosure filings, examinations, investigations, economic research, and other ongoing activities. With better tools, we will be able to mine this data, link it together, and combine it with data sources from outside the Commission. This will enable staff to more effectively identify risks to investors, trends in the markets, and to identify patterns of activities meriting further examination or investigation.
We also plan to complete improvements to the case and exam management tools available to our enforcement and examination programs. We intend to modernize our financial systems and implement a new system to handle the significant increase in the volume and complexity of evidentiary material obtained during the course of investigations. We also need tools to significantly improve the efficiency of loading, storing, and archiving the roughly three terabytes of data received per month during the course of investigations in order to improve turnaround time to staff and to contain costs.
Managing Agency Growth
While the budget request anticipates significant growth in the size of the SEC, the agency is properly positioned to implement this spending plan. To accomplish the hiring of hundreds of new staff during the course of FY2011, the SEC is enhancing its human resources staff and, consistent with its current authorities, streamlining its hiring process. Improvements will include simplifying the application process and maintaining a searchable database of applicants, so that it is possible to interview for a vacancy as soon as it appears rather than having to go through the lengthy posting process each time. Being able to better tailor, target and speed recruiting will enhance the quality of applicants and help the agency acquire the necessary talent to perform effectively in an increasingly complex financial environment.