01/06/2011 06:51 pm ET Updated May 25, 2011

Senate Dems Prepare For Financial Regulatory Funding Battles With House

WASHINGTON -- Senate Democrats are steeling themselves against an assault from the House GOP, which currently aims to starve financial-oversight agencies and effectively kill central tenets of the regulatory legislation signed by President Barack Obama in July.

The Dodd-Frank regulatory law called for an overhaul of the U.S. Securities and Exchange Commission, which serves as the top federal cop on Wall Street and was widely viewed as underfunded and ineffective in the years leading up to the 2008 financial crash. The legislation included increased funding for the SEC intended to bolster staff, purchase up-to-date tools needed to fight financial fraud and generally prevent future embarrassments like the botched handling of Bernie Madoff's $50-billion Ponzi scheme.

Congress, however, needs to continue providing them with the money to do that, and Republicans say they plan to try and halt funding for key elements of the regulatory law, some of them naming the SEC appropriations as a prime target.

Senate Democrats said Thursday they will attempt to protect the funding for the SEC and the Commodity Futures Trading Commission, which they said are crucial watchdogs for protecting investors and the broader economy.

"There are many Republicans who did not support Wall Street reform who believe they can starve the SEC into submission by refusing to put enough personnel monitoring the activities of the exchanges," Senate Majority Whip Dick Durbin (D-Ill.) said. "I will fight that, but I understand I'm up against big odds in the House."

The GOP voted last session to kill an appropriations bill that would have increased funding of the SEC and the CFTC. In this Congress, House Republicans have said they plan to return spending to 2008 levels.

For the CFTC, that would mean receiving about $112 million, less than half the $261 million Obama requested for fiscal year 2011. The SEC would also see a major funding cut, receiving $906 million in 2008 versus the $1.2 billion requested for FY 2011.

SEC Chair Mary Schapiro has battled to rebuild her agency's damaged reputation in high-profile cases against Goldman Sachs and other firms -- with mixed results. Last summer, Schapiro told Congress the SEC needs heftier funding in order to implement the Dodd-Frank reforms. She estimated that 800 new staffers would be necessary to carry out dozens of studies and regulations designed to protect investors.

Dodd-Frank also gave the CFTC authority over the shadowy market for derivatives -- the toxic financial products which brought down AIG. Insulated from regulatory scrutiny, the market for credit-default swaps ballooned to $40 trillion-- several times the annual output of the entire U.S. economy. The CFTC will need significant staffing increases in order to police the market, Chairman Gary Gensler told Congress in December.

New hiring at both agencies has been frozen since the death of the Senate omnibus budget bill during the December lame-duck session. Although the agencies were granted a modest boost in funding through March under a stopgap "continuing resolution," they have not been able to hire long-term, full-time employees with a three-month funding patch.

House Majority Leader Eric Cantor (R-Va.) said in November the lower chamber's Republicans intended to defund regulatory agencies upon returning to power. Although he did not specifically mention the SEC and the CFTC, they are the only major financial regulatory agencies whose finances are subject to congressional control.

Other influential House Republicans, including Rep. Jeb Hensarling (Texas) and Rep. Scott Garrett (N.J.) have said they hope to cut funding for the SEC to minimize its authority over markets.

Lisa Donner, director of Americans for Financial Reform, told HuffPost that denying funding for the agencies could lead to a "repeat of AIG."

"The absence of transparency and regulation in the derivatives market was a major contributor to the financial and economic crisis," Donner said. "We are dooming ourselves to the status quo if the CFTC and SEC don't have the resources to do their job, and the amount of money we're talking about here is not even a drop in the bucket."

The House controls appropriations, limiting the ability of Senate Democrats prevent defunding of the agencies. Still, Sen. Chuck Schumer (D-N.Y.) said he would push back against the effort.

"They're going to rue the day that they cut enforcement," Schumer said Thursday. "If you talk to most people in the markets, they want a strong SEC so the bad guys don't dominate the markets but the people who obey the rules and treat people fairly do."