Watchdogs would feel sequester’s bite

The federal government’s Wall Street watchdogs will feel the pinch of sequestration if Washington lawmakers cannot strike a deal by March 1 to avoid the across-the-board cuts.

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A trio of the nation’s top financial regulators would face millions of dollars in cuts under the sequester — a budget squeeze that could limit their ability to conduct examinations, purchase needed technology, and generally keep a close eye on Wall Street.

“We can’t travel, we can’t go to conferences, we can’t do the things we’re here and supposed to do and committed to do,” said Steven Adamske, spokesman for the Commodity Futures Trading Commission (CFTC).

Much of the debate over the sequester has focused on its impact on the defense industry, as half of the $85 billion in automatic cuts this year will impact that sector.

But the other half is spread across a range of domestic programs, and financial regulators would not escape unscathed.

According to the Office of Management and Budget(OMB), several of the nation’s top financial regulators would experience cuts of roughly 8 percent.

The Securities and Exchange Commission’s (SEC) $1.3 billion budget would fall by $108 million, while the CFTC would take a $17 million haircut to its $205 million budget.

The OMB’s report also states that the new Consumer Financial Protection Bureau (CFPB) — despite not having its budget set by Congress like the SEC and CFTC — would also face cuts totaling $34 million from its $448 million budget.

The SEC and CFTC are already operating under budgets the White House claims are insufficient for their expanding workloads, which have grown since the Dodd-Frank financial reform law was enacted.

The White House has requested hefty boosts for both agencies, but Republicans have argued their budgets should be cut rather than increased.

In the face of looming cuts, regulators pressed lawmakers on the need for more resources when they testified before the Senate Banking Committee earlier this month.

“We desperately need more resources,” said CFTC Chairman Gary Gensler. “It’s a hard ask when Congress is grappling with budget deficits, I know.”

However, there are reasons to expect that financial markets will not notice any major changes if regulators have to grapple with trimmed budgets.

For one, the nation’s banking regulators, the Federal Deposit Insurance Corporation (FDIC), Federal Reserve, and Office of the Comptroller of the Currency (OCC), are exempted from sequester cuts.

And the regulators facing the cuts say they are doing everything they can to protect their most essential functions, including keeping staff at work.

Adamske said the CFTC is “looking at various cost-cutting measures across the board that includes technology, staff expenses, travel, contractors and contracts, things that won’t be renewed … looking at all those things in order to avoid furloughs.”

“I imagine there would be less examinations,” he added.

The SEC does not expect to suffer furloughs or staff reductions if sequester occurs, according to John Nester, the agency’s spokesman.

However, he did not expand on how the SEC plans to address the shortfall.

A CFPB spokesperson declined to comment on how the agency is preparing for the sequester, saying it would be premature to discuss it.

Brian Gardner of Keefe, Bruyette and Woods said he expects the regulators will work to ensure their most vital operations, like examinations and enforcement of wrongdoing, will not be impacted by the cuts.

“You’ll never hear a regulator say, ‘We’ll get through this without a problem,’ but my guess is that there are creative ways to manage around it,” Gardner said. “I think it will be a bit of a non-event … I just don’t see the big impact.”

However, Dennis Kelleher, president and CEO of Better Markets, is more skeptical.

“They can barely do the job they’re supposed to do now … it would be a travesty if, on top of that, their resources were cut,” he said.

“I think it’s going to be extremely difficult for the SEC to take the cuts they’re talking about and still be an effective regulator.”

But even if regulators protect their most vital functions, most expect markets will feel the sequester hit one way or another when it comes to regulators.

For example, the SEC could divert resources it normally spends on registering new companies and use them for enforcement, which in turn could lengthen a company’s wait for approval.

Regulators are also still busy writing rules implementing key pieces of Dodd-Frank and have already missed several deadlines. If resources become tight, those rules will not get finished any faster.

“They’re already significantly behind schedule passing the rules that are supposed to protect the American people,” said Kelleher. “Having less resources is only going to make that worse.”



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