Bates Research - 07-06-17
2018 House Appropriations Budget Offers Insight into SEC Priorities
On June 28th, the U.S. House Appropriations Committee published a proposed $20.2 billion financial services and government budget bill covering, in part, 2018 funding for the Securities and Exchange Commission. A day earlier, in testimony before the House Subcommittee on Financial Services and General Government, SEC Chair Jay Clayton set forth the independent agency’s 2018 priorities.
The 2018 House Budget for the SEC
The Committee bill allocates $1.6 billion for SEC salaries and expenses, a small $3 million reduction over the previous fiscal year. As a reflection of the Subcommittee’s concerns, and generally consistent with recent legislative proposals, the budget bill: (i) supports funding for the SEC’s Division of Economic and Risk Analysis (DERA) “to help the Commission better serve investors,” (ii) “rescinds the unobligated balances of the SEC’s Reserve Fund,” a fund created under Dodd-Frank free from congressional oversight, and (iii) “provides an additional $50 million for critical information technology initiatives” previously dispersed out of the Reserve Fund. In general, the appropriations bill has been characterized as placing "major restraints" on financial regulatory agencies by a greater assertion of Congressional budgetary control and by “bar[ring the agencies] from implementing certain rules passed in the Dodd-Frank Wall Street Reform and Consumer Protection Act.”
SEC Chair Sets Out Priorities in Budget Testimony
Overall, the House budget bill complements the priorities espoused by SEC Chair Clayton. In his request for year-over-year flat funding, Mr. Clayton reminded lawmakers that funding for the SEC is deficit-neutral and fully offset by transaction fees with no impact on the deficit or the funding available for other agencies. In fact, the SEC is a net contributor to the U.S. Treasury (to the sum of $570 million) through such fees. Mr. Clayton highlighted four areas of greatest priority for the Commission: agency management, protecting investors, capital formation and implementing technology. (See this Bates news report for an earlier articulation of Mr. Clayton’s priorities.)
After lauding the capabilities and expertise of SEC staff, and the broad agenda they oversee, Mr. Clayton asserted that in FY 2018, the agency will “work toward more efficient internal operations, including through automation, streamlined internal processes, and better use of data.” He argued the need to “develop and leverage” capabilities to provide for better “risk analysis to inform our decision making.” He stated that “given the pace of change in today’s capital markets, it is more important than ever that agency operations be nimble so that we can direct resources where they are needed most.”
Protecting Investors, Scrutinizing Registered Investment Advisers
Mr. Clayton prioritized the SEC’s ability to maintain “a robust program to monitor, investigate, and enforce compliance with the federal securities laws.” More than half the budget, he argued, will go toward enforcement and examination programs. Mr. Clayton affirmed his support for a strong Division of Enforcement and “vigorous efforts to investigate and bring civil charges against violators of the federal securities laws” by selecting two well-regarded prosecutors to head the Division. (See here for Bates News on the selection of Stephanie Avakian and Steve Peikin to co-head the Division of Enforcement.) Mr. Clayton also pledged to distribute disgorged illegal profits and penalties to harmed investors when possible.
Despite squeezing budgets for the Office of Compliance Inspections and Examinations, Mr. Clayton committed his support for conducting risk-based examinations of registered entities. He recognized that “registered investment advisers now manage more than $70 trillion in assets” and noted that efficiencies in staffing may be able to “deliver increases in the number of investment adviser exams.” He pledged to increase the number of inspections designed to ensure that “the cybersecurity infrastructure that is critical to the U.S. securities markets is secure and resilient.”
A signature priority for Mr. Clayton is enhancing capital formation for small and emerging companies and revitalizing the public capital markets. He claimed that his budget priorities “will enable the staff to develop and present to the Commission rulemaking initiatives aimed at promoting firms’ access to capital markets to generate economic growth while fostering important investor protections.” To that end, he announced the designation of Bill Hinman as new Director of the Division of Corporation Finance tasked with developing capital formation proposals for consideration. Also included in Mr. Clayton’s budget request is the creation of a new Office of the Advocate for Small Business Capital Formation. The new Office will provide assistance to small businesses and small business investors, conduct outreach to better understand their concerns, and recommend to the Commission ways that the regulatory environment might be improved.
Enhancing Technology: Analytics, Exam Programs, Cybersecurity
Mr. Clayton called for a “modest” additional funding investment of $240 million for information technology to address issues around “(1) the way that companies solicit investors and sell their securities to the public, (2) the channels through which individuals receive investment advice, and (3) the manner in which institutional and retail investors transact on our markets.” He stated the budget request will help the SEC “keep pace with the rapid technology advancements occurring in areas regulated by the SEC, as well as meeting emerging cybersecurity challenges.” Included in this priority are initiatives to: expand data analytics tools; improve examination programs through risk assessment and surveillance tools; increase investments in cybersecurity; expand the use of sophisticated algorithms to detect potential insider trading and manipulation; improve access and usefulness of information available to the public through the EDGAR electronic filing system; and invest in business processes automation and enhancements.
Alignment of Budget Priorities
Generally, Mr. Clayton’s budget priorities were met by the House funding bill. Successful outcomes for several of these priorities rest, however, on assumptions that Mr. Clayton can squeeze more efficiencies out of enforcement and examinations with fewer staff and also find adequate resources to advance his broader technology agenda. It is likely that Mr. Clayton’s unsuccessful attempt to preserve the “Reserve Fund” before the House Subcommittee will be revisited as the budgetary process continues in the Senate. Indeed, the loss of the fund will be a continuing challenge for Mr. Clayton’s general discretionary flexibility. That said, the House directed a $50 million dollar targeted technology allocation for 2018 which provides some relief for him to pursue his technology objectives. All in all, maintaining vigorous enforcement, strong regulatory support for capital formation, and regulatory attention to technology and data analytics as related to investor risk and cybersecurity are on the horizon. Bates will continue to keep you apprised of any developments in SEC priorities or focal areas.