Should financial regulators fund themselves?

Tyler Cowen has this superb post on the subject.

Idea is that SEC should fund itself and not be dependent on the Government for funding. Lack of appropriate funds is seen as one reason for SEC not able to prevent crisis and being behind the curve. At the time the financial industry was going crazy in 2003-07, SEC’s budget was kinda frozen.  If it is on its own may be it is able to do things better.

Joel Selgman writes in NYT:

WHAT is the most effective way to prevent another financial scandal on the scale of Allen Stanford’s alleged securities fraud or Bernard Madoff’s Ponzi scheme? No other single reform would accomplish more than allowing the Securities and Exchange Commission — the federal agency responsible for full disclosure of corporate information and the regulation of stock exchanges, broker-dealers and investment advisers — to fund itself through corporate fees.

Because the commission is financed by Congressional appropriations, it has long been trapped in a budgetary vise, without enough staff members to police illegal activity. After a legendary start in the New Deal era, when the commission was considered a model independent regulatory agency, its staff declined from 1,678 in 1941 to 667 in 1955.

The S.E.C.’s capacity to review corporate filings and market activity deteriorated, and, predictably, the late 1950s were marked by a resurgence of fraud, particularly on the American Stock Exchange. In response Congress added 250 staff members in 1961 and broadened the commission’s jurisdiction, including a new program to investigate insider trading, which helped lead to a significant rebound in its performance.

Nevertheless, the binge-and-purge diet continued. From 1993 to 2000, the S.E.C. staff grew by about 1 percent per year, even though the value of securities traded on all exchanges tripled and initial public offerings approximately doubled. The result? According to a 2002 Senate report, between 1999 and 2002 the commission’s Division of Corporate Finance had failed to review 53 percent of Form 10-K annual reports — the single most important disclosure document for both investors and markets. The last full review of Enron’s Form 10-K was in 1991 — ten years before the company collapsed.

Obama should let SEC raise its own funds and it can be done:

The Obama administration has requested long overdue increases in both budget and staff for the S.E.C., and has plans to add as many as 374 employees. Those increases are vital, but because they’re dependent on Congress, there is no guarantee that they will be sustained.

Instead, the commission should finance itself — much as the Federal Reserve and the Federal Deposit Insurance Corporation do today through fees on banks. These two pivotal financial regulatory agencies thus have the flexibility to adjust their own staff.

Such a self-financing system would not mean higher fees; the commission collects far more in fees from corporate filings and stock market trading than it gets from Congress. But those fees go back into the federal coffers. In 2007, the S.E.C. brought in $1.5 billion, almost twice its 2007 budget.

However, Cowen raises some concerns and asks some important questions:

This seems like a short-run improvement, but the idea nonetheless makes me a bit nervous.  What will it look like in practice, ten or fifteen years from now?  Was reliance on fees in every way beneficial for the FDA?  Admittedly, self-finance is one pathway to higher levels of finance, but the two issues are conceptually distinct and we might prefer to implement the appropriate level of finance directly through Congress.  I fear that in the longer run self-finance means that the SEC never wishes to see the financial sector shrink.  (Of course maybe it’s not going to shrink anyway.)  A related question is what kind of internal controls the SEC would need to maintain its own fiscal discipline and prevent overspending, backed by an excess raising of funds and fees.  So whether self-finance is a good idea probably depends on what you are comparing it to.  A final question, and not a small one, is whether you think the SEC should be more independent from Congress.

He points to two more references: Shapiro’s recent speech advocating the idea and  a 2002 GAO study of the idea. The second one looks like a very useful read.

This of course has global ramifications as well. If applicable, could change the organisation structure of regulators. Take the case of RBI. RBI transfers surplus funds to government. This raises debate over whether RBI should be making profits? Can we debate this from a different perspective like the one above? Should govt allow RBI to use the surplus funds instead to shore up operations? How will the accountability of regulators look in such a scenario?

Very interesting food for thought.

One Response to “Should financial regulators fund themselves?”

  1. kramnaut Says:

    Please send me a site for the imprtance of savings and how a fall in savings affect the economy. What can be done to increase savings in an economy-first from household snd second enterprises.

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