The Securities and Exchange Commission’s Congressional Budget justification for 2020 and the president’s budget offers lots of information to consider.
The trick is, rather than getting mired in the weeds, one should review four top-line numbers provided by the reports. To wit, the executive summary of the 2020 budget appropriations document says the agency expects to oversee $97 trillion in securities trading, a 29-percent jump from the $75 trillion it saw supervising in 2019.
By comparison, the budget increase request for fiscal year (FY) 2020 is $1.746 billion, just 5.3-percent greater than the $1.658 billion budgeted for FY 2019.
While much greater than the rate of economic growth and inflation, combined, the stark comparison of these two rates of increase shows the difficult position the SEC faces as it attempts to fulfill its mission to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation.
These numbers reiterate the point we made back in July of 2018: The notion of investor protection is starving on the vine.
As we pointed out at the time, the SEC is vastly outgunned by the companies it oversees. With all of the 2018 10-K reports now filed, we can see the combined tech and communications spending for Morgan Stanley, JP Morgan Chase and Citigroup topped $18 billion, an increase of 12.5 percent over 2017.
Granted, much of this investment by banks is allocated to protect their investors, depositors and others customers and staff from cyber theft, and much of this spending is mandated by their regulators, which in a way extends the SEC budget.
But these tech and communications allocations also fund the efforts of these systemically important banks to trade more nimbly and to develop evermore exotic securities. In substance, then, these figures demonstrate that the SEC is gravely outmatched and that private industry is increasing its spending at a rate more than twice that of its regulator.
Finally, these numbers represent a fraction of comparative spending in the investment sector. Large hedge funds like Bridgewater Associates, with $125 billion under management, or mutual fund complexes like Vanguard, with $5 trillion under management, or discount brokers like Charles Schwab and TD Ameritrade are also spending billions on technology.
No doubt, some portion of this is directed toward high-tech trading algorithms, which is keeping the banks, hedge funds and high-frequency traders one step ahead of the SEC.
When viewing this budget through the prism of investor protection, we find it highly dissatisfying not just for what the top-level numbers say, but more broadly what it says about a lack of ambition on the part of the commission.
For instance, the SEC’s Division of Enforcement contemplates opening 870 investigations in FY 2020, the same as projected for FY 2019.
In the Division of Trading and Markets, full-time personnel is budgeted to grow from 243 employees to 255, a 4.9-percent increase, again well short of the expected growth of trading volume under the SEC’s purview.
Also, the Division of Investment Management anticipates reviewing 810 enforcement matters in FY 2020, the same as it reviewed in FY 2019.
Moreover, the budget fails to provide any nuanced strategy for maintaining the agency’s most critical asset: its people. Approximately 69 percent of the 2020 budget represents compensation for its 4,500 employees.
In particular, the securities industry welcomes former regulators with open arms, and often with much higher compensation. Not only do these employees take their institutional knowledge with them, they also use this knowledge to the detriment of the SEC and investor interests and to the advantage of their new employers.
The appropriations documents are encouraging in one way. They are well-organized and point to an agency that has a clear mission and well-developed programs to accomplish that mission.
At first blush, the appropriations documents paint a picture of government as one might hope it would be. Unfortunately, they also show how difficult effective regulation is without the proper level of funding.
Kurt N. Schacht, JD, CFA, is managing director of the advocacy division of CFA Institute, a global association of investment professionals.