There is widespread agreement that regulators who failed to use their existing authority to rein in abusive and risky practices are partially to blame for the recent near collapse of the global financial system. In many cases an unwillingness to regulate was the primary cause. Think Alan Greenspan and subprime mortgages replicated on dozens or even hundreds of issues large and small across the federal financial regulatory agencies.
But in other cases regulators were also hamstrung by inadequate funding. Two agencies stand out in this regard -- the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Unlike the federal banking regulators, these critically important agencies are dependent on the appropriations process for their funding, and Congress has not always been forthcoming. Indeed, over the past three decades -- as financial markets have exploded in size, complexity and global reach and been transformed by technological innovation - these agencies have been funded at levels that didn't begin to keep pace with their skyrocketing workloads.
The situation at the CFTC is particularly dire. Its $168.8 million in funding -- less than the cost of a bridge to nowhere -- isn't even a rounding error in the overall federal budget. Until Congress provided a funding boost for this past fiscal year, the CFTC's staffing was stuck at the same level as when the agency was created in 1975. Meanwhile, in just the past decade, trading volume in the markets overseen by the agency has increased almost five-fold and the number of actively traded futures and options contracts has increased seven-fold.
The SEC, while many times larger than the CFTC, nonetheless faces significant funding challenges of its own. Since 1980, the agency has seen its staffing level increase roughly 85 percent, thanks in large part to a significant post-Enron increase. Based on our back-of-the-envelope estimates, however, the number of investment adviser firms overseen by the agency has grown by more than 150 percent during the same period, the number of mutual funds has grown more than 430 percent, and, while the number of broker-dealer firms has decreased slightly, the number of registered representatives they employ and the number of branch offices from which they operate have grown by roughly 225 percent and 2,100 percent respectively. Meanwhile, the securities markets have gone from being the purview of a wealthy few to the primary means by which Americans save for retirement.
Now, with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress has imposed vast new responsibilities on these already over-burdened agencies. The CFTC has been given the job of creating a regulatory regime for and providing oversight of the vast, multi-trillion-dollar over-the-counter derivatives market -- a market many times larger and more complex than those it already oversees. The SEC shares responsibility for swaps market oversight and has also taken on an expanded role in policing credit rating agencies as well as hedge funds and private equity funds.
These are essential functions if we are to close the regulatory loopholes that contributed to our financial system's vulnerability. But imposing new responsibilities without providing the funding to carry them out is a recipe for disaster. As the lame duck session winds down and Congress hammers out a FY 2011 budget agreement, it must ensure that these agencies are funded at levels commensurate with their new responsibilities.
We are encouraged that the latest draft of a full-year Continuing Resolution (CR) to emerge in the House appears to address this issue adequately - with a funding boost to $261 million for the CFTC and $1.25 billion for the SEC. That's less than appropriators had previously agreed to, but more than President Obama had reportedly proposed in the draft CR the Administration sent to the Hill earlier this week. As usual, what will happen in the Senate is still very much open to question.
If Congress comes through with the funding, it will have gone a long way toward giving regulators two of the essential components of effective regulation -- authority and resources. It will then be up to regulators to show that they also have the will to regulate.
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