With its latest budget request for the SEC, the Biden administration is signaling it wants the Wall Street regulator to emphasize enforcement amid market turmoil caused by cryptocurrency scandals and bank collapses.
But some securities industry players worry the Securities and Exchange Commission is too distracted by its ambitious rulemaking agenda to dedicate time and energy to holding bad actors accountable.
SEC Chairman Gary Gensler
Even with more officers, the request would fall far short of being proportional to the 22% increase in registered investment advisors over roughly the same period. From 2017 to 2022, the number of RIAs grew to roughly 15,000 from 12,500. The number of clients of investment advisors grew even faster, going to 53 million from 34 million, a 60% increase, during the same period.
"Such growth and rapid change also means more possibility for wrongdoing," Gensler told the House subcommittee. "As the cop on the beat, we must be able to meet the match of bad actors. Thus, it makes sense for the SEC to grow along with the expansion and increased complexity in the capital markets.
Aggressive agenda
The need for more policing of a fast-growing industry comes as the SEC embarks on its most ambitious rulemaking agenda in years. That in turn is giving rise to questions over whether the regulator's reach is exceeding its grasp.
But if there has been any slowdown in enforcement, it's not revealed in the SEC's numbers. Last November, the regulator
Bill Singer, a securities lawyer, said the SEC could be doing more if it concerned itself primarily with enforcing existing rules rather than proposing new ones.
In his industry-tracking Broke and Broker blog, he reported on March 16 that the
Thomson Reuters has found that the regulator plans to
Federal agencies have a tendency to overshoot their self-imposed deadlines. But Singer said such an ambitious agenda can't help but take away from other priorities, including enforcement.
"Every time you propose one of these, the SEC's divisions are drafting the proposal and reviewing the proposal and making sure the footnotes are correct," Singer said. "And then each of the SEC commissioners task their staff to write a statement. That's not regulation. That's marketing. We don't need so much social media. We need more social impact."
Despite frequent complaints of overreach — mainly from Republicans in Congress — the SEC's budget has grown steadily over the years. It increased every year, for instance, from 2016 to 2022, going from about $1.6 billion to $2.2 billion.
The SEC is largely self-funded. Its revenue comes almost entirely from transaction fees paid by the brokerages and stock exchanges it oversees.
Still, the agency has lost employees in recent years. At the House subcommittee hearing on March 29, several lawmakers asked Gensler if the attrition was related to the poor morale noted in several recent Government Accountability Office reports.
Rules and more rules
Some of the SEC's recent rule proposals would result in changes that investors advocates have long wanted.
Other proposals come in response to relatively recent developments like the burgeoning popularity of cryptocurrencies and the advent of commission-free stock transactions through Robinhood Financial's trading app and similar services. In February,
Some industry groups argue that the SEC is not only trying to do too much too fast; it's not paying enough attention to how its proposed rules will work with all the other regulations that are either proposed or are already on the books.
The proposed 30-day deadline for reporting breaches, for instance, comes in tandem with a separate proposal that would require broker-dealers and others in the securities trading industry to adopt written policies designed to prevent hacks, and to review those policies once every year. Meanwhile, the SEC has given the public
Gail Bernstein, the general counsel of the Investment Adviser Association, said the slew of new rules will fall most heavily on small firms. Unlike their big rivals, these companies rarely have compliance personnel dedicated to ensuring they state on the right side of the law.
Bernstein said too many of the new rules are prescriptive in nature, requiring firms to do a lot of "box checking" to stay in compliance. That requirement, she predicted, "will make enforcement actions more common for inadvertent or technical violations where there's no misconduct or harm to clients."
Steve Hall, the legal director and securities specialist of the Washington, D.,C.-based market reform nonprofit Better Markets, said he thought Gensler's ambitious agenda in some ways needs to take care of business left unfinished in previous administrations.
"This is not rulemaking for the sake of rulemaking," Hall said. "There are problems out there that need to be addressed. And, to his credit, Chair Gensler is tackling them."
Enforcing rules is just one part of the SEC's many-pronged mission to ensure orderly markets, protect investors and facilitate capital formation. The federal agency also has jurisdiction over stock exchanges, asset managers, mutual funds and other market participants. It regulates broker-dealers both on its own and through its oversight of the Financial Industry Regulatory Authority, the brokerage industry's self-regulator.
Beyond enforcement, the part of the SEC's work that's most likely to touch on advisors and brokers is its annual compliance exams, when regulators look for systems and policies meant to prevent investors abuses, cybersecurity breaches and other violations. The SEC conducted more than 3,000 of them in its 2022 fiscal year. The 2024 budget proposal would give the SEC 1,144 examination officers, an increase of 8% from the current 1,061.
"Exams will help you identify potential enforcement priorities early on," Canning said. "And that will help you differentiate those problematic industry participants who can be approparity remediated through the examination process and corrective action from those who need true enforcement attention."
