Republicans advance the Madoff rational apparently because their first rhetorical efforts to defund the SEC didn’t play with America. Republicans first claimed they weren’t picking on the SEC in particular, but simply exercising general fiscal responsibility. They’re cutting everything. But that’s a specious argument at the SEC, which is self-funded through fees. Congress limits the fees it can then spend for operations. In fact, the SEC recoups investor funds from fraud. Last year, that figure topped $2.2 billion, twice the SEC’s annual budget.
 
It’s obvious that America desperately needs Wall Street reform.


Even sober private sector attorneys who represent corporate clients before the SEC understand the need for full funding. Forty such attorneys recently appealed for sanity to congressional leaders in a letter. “In an economy desperately needing investor confidence to promote capital formation and economic growth, the regulator of our capital markets is running almost on empty,” penned the counselors, led by K&L Gates partner Stephen J. Crimmins. 



No ones denies that the SEC missed the colossal Madoff fraud that ripped some $18 billion out of the some of the nation’s most worthy charities.
 
However, it is clear that an already under-resourced SEC figured prominently. Madoff said he could have been caught in 2003. “I was astonished. They never even looked at my stock records.” According to an Inspector General’s report, the SEC lacked experienced staff for a rigorous review.

Examination of the SEC’s Madoff failures can and must help sharpen the teeth of our Wall Street watchdogs. But with the nation digging out from an entire recession born of financial fraud, we need to confront the real and daunting budget obligations of responsible supervision. At a Senate hearing last week, Sen. Jack ReedJohn (Jack) Raymond ReedArmy leader on waiver report: 'There's been no change in standards' 15 Dems urge FEC to adopt new rules for online political ads Monopoly critics decry ‘Amazon amendment’ MORE (D-R.I.) noted that “Between 2005 and 2007, just as the markets were reaching a critical stage, the SEC's budget was frozen or cut. … The SEC lost ten percent of its staff, which severely hampered its enforcement and examination programs, effectively taking cops off the streets just when they were most needed. Even now, frozen at its 2010 funding levels, the number of SEC staff is only just returning to where it was prior to 2005.”
 
At a House hearing last week Rep. Maxine Waters (D-Calif.), also shared her concerns about congressional Republicans basing their funding levels on 2008, as that was, “the year the nation’s financial markets collapsed and … when lawmakers realized that the resources we had provided to the regulators of those markets had been sadly lacking.”

And at a Senate hearing two weeks ago, SEC Chair Mary Shapiro lamented her agency’s information resources. “Our market analysts continue to use decades-old technology to recreate market events or to monitor trading that occurs at the speed of light.”
  


The Dodd-Frank Wall Street reform law adds to the SEC’s responsibilities, requiring it to oversee an additional 30,000 institutions with its 3,800 staff. For context, the New York City police number 34,500. Already, the SEC must oversee some 6,400 public companies.
 


The SEC also deals with a more basic asymmetry in the cat-and-mouse game against market fraudsters: Veteran staff enforcement attorneys at the SEC may earn $125,000, whereas first-year attorneys at elite private firms begin at $160,000. The lure of such huge compensation adds an additional challenges for the SEC as astronomical paychecks siphon many talented people into the business of perpetuating frauds and fomenting financial crises.
 
The SEC faces a more than daunting responsibility. Those attempting to defund this agency betray any claim to a sincere interest in cracking down on Wall Street fraudsters.
 
Bartlett Naylor is financial policy advocate for Public Citizen’s Congress Watch division.