Should the SEC self-finance?

I haven't seen this issue receive much attention on the usual blogs (Yves Smith is one exception).  Here is one argument for self-finance:

The Obama administration has requested long overdue increases in both budget and staff for the S.E.C., and has plans to add as many as 374 employees. Those increases are vital, but because they’re dependent on Congress, there is no guarantee that they will be sustained.

Instead, the commission should finance itself – much as the Federal Reserve and the Federal Deposit Insurance Corporation do today through fees on banks. These two pivotal financial regulatory agencies thus have the flexibility to adjust their own staff.

And it appears easy:

Such a self-financing system would not mean higher fees; the commission collects far more in fees from corporate filings and stock market trading than it gets from Congress. But those fees go back into the federal coffers. In 2007, the S.E.C. brought in $1.5 billion, almost twice its 2007 budget.

This seems like a short-run improvement, but the idea nonetheless makes me a bit nervous.  What will it look like in practice, ten or fifteen years from now?  Was reliance on fees in every way beneficial for the FDA?  Admittedly, self-finance is one pathway to higher levels of finance, but the two issues are conceptually distinct and we might prefer to implement the appropriate level of finance directly through Congress.  I fear that in the longer run self-finance means that the SEC never wishes to see the financial sector shrink.  (Of course maybe it's not going to shrink anyway.)  A related question is what kind of internal controls the SEC would need to maintain its own fiscal discipline and prevent overspending, backed by an excess raising of funds and fees.  So whether self-finance is a good idea probably depends on what you are comparing it to.  A final question, and not a small one, is whether you think the SEC should be more independent from Congress.

Here is the SEC's own case for self-finance.  Here is a 2002 GAO study of the idea, very useful and it also discusses other cases of self-finance among regulatory authorities.

I don't have any strong conclusion here other than "maybe."  


Tyler says:

"I fear that in the longer run self-finance means that the SEC never wishes to see the financial sector shrink."

... while pointing out the the FDA and FDIC self-finance. Big news: the FDA and FDIC don't want the sectors that they regulate to shrink either. This is a fairly substantial problem that doesn't help us keep pharmaceutical costs low (to mitigate unnecessary research that gets passed along to consumers). We already see how the recent effects of the cozy relationship of the self-insuring banking industry has affected their behavior.

Incentives matter!

Self-finance is the surest path to even more regulatory capture.

Self financing can be a way to hide a tax increase, but it can also make sense when, in fact, the Agency does work that immunizes companies from subsequent private litigation challenges. Getting a filing reviewed prior to filing benefits the filer, even with comments from the SEC staff.

Filing fees impact incumbents differently from new entrants, however. So, if they do filings, it makes some sense to have fees increase with size of enterprise; this is not itself progressive taxation, but larger enterprises are often more complex and require more agency time.

But, I would not go entirely to filing fees for the reasons listed above; their is a public good also from the SEC's work, and the beneficiary of that work, the investor, needs to pay for some of it as well. Here again, though, should a low wage earner who does not participate in the market pay, or should the SEC fee be part of a financial services transaction fee. The problem with relying on a transaction fee is that it correlates to booms and busts, with lower fees impacting the agency when there is a bust, just at the time when they may need to do enforcement work.

An additional option is to have agency fees be collected as a percentage of fines. Currently, fines go to the US Treasury; having the agency be reimbursed from successful outcomes makes sense, but OMB and Treasury, I'm sure, like the slush fund from fines and would be unwilling to give it up.

So the SEC's revenue in fees is more than its budgeted expenses, and the extra ends up as general revenue? And the suggestion is to let the SEC keep the extra?

Here's another idea: reduce the fees.

374 new employees? Sound like a bailout for the porn industry to me.

Not sure that I agree that financial commentators are doing more than financial regulators to calm the market. Nonetheless, restoring faith in large banks and diluting their concentration of risk is key to instilling confidence in the market. The bulge bracket banks, however, may not win back all the business. Many of their high flyers have been recruited by, or have set up their own, boutique banks. In investment banking, expect to find most of the job growth in the middle market.

I write extensively on how the current economic and regulatory events affect the investment banking employment marketplace. Feel free to visit my blog:

The only way that Markopolos could do his investigation was to use SEC mandated and formatted data, so cutting back the agency on investigations seems a bit, shall we say, counterintuitive.

But, there is no doubt that the agency does not have the number of staff to devote to investigations as it did in the past--more staff is being devoted to the mundane as the mundane grows, and grows.

What I would be interested in is where the added staff is going, what grade of employee is being hired (eg. accountants, lawyers or is it secretaries and administators), and parameters of accountability--number of investigations opened/closed, number of complaints investigated, success rates of cases brought, oversight of previous decrees, interagency coordination to avoid gaps (e.g., CFTC, state regulators, and international regulation, improvement of IT infrastructure to improve efficiencies. Focusing on inputs without focusing on outputs and efficiency is stupid.

As a final note, last year one of the visiting profs in an adjacent department in the business school presented a paper on strength of regulatory oversight as a factor in why foreign firms choose the US for IPOs and stock registrations, even controlling for size of size of the capital market, etc. Brazillian and Indian firms, and firms from around the world, seek to file here because of our thorough regulation relative to the rest of the world. Being registered here is an asset to them, as it is an asset to our firms to the extent they wish to have their stock purchased abroad. In other words, regulation can be a valuable public good that differentiates you from other capital markets.

Thank you, BucketofFried, for citing my post.

Pace Mr. Cowen, I have been banging away at this very topic--in the context of the much more important topic of what the hell the SEC should look like and who it should be composed of--for donkey's years. But it appears that TED does not rise to the level of Tyler's "usual blogs," even though virtually no-one else has half as many interesting, thought-provoking, intelligent, and incendiary things to say about the subject. Let's just agree this topic is not in the center of Tyler's fairway.

To address his one interesting point, if one ties the finance of a regulator to fees derived from its regulatees, of course there will incentives toward preserving that relationship and hence the size of the industry as a second order effect. However, as I wrote in my cited post, properly applied the incentives go both ways:

Even better, you could fund such an agency with a levy indexed to the size of each financial institution under its jurisdiction. The larger and more complex a bank, the more fire-breathing, table-throwing, nail-spitting investment bankers and lawyers you could afford to throw at it. Talk about an incentive to shrink your balance sheet.

And, it should not need saying, but in this context I will: you do not compensate regulators directly based on the size of the institutions they regulate. Sheesh, people, setting behavioral incentives is nowhere near as hard as some of you might like to believe. Use some common sense.

Here's another thought: Why not abolish the SEC entirely?

Isn't this a moral hazard problem? Investors trust the wisdom of the SEC rather than their own judgment.

Yes, this worked out great in the 1920s.

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