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FOR IMMEDIATE RELEASE: September 3, 2009


Yesterday's Inspector General Report Faulted SEC
Staff's Lack of Expertise and Experience For Failure To Discover Madoff Ponzi Scheme

Schumer's Proposal Would Give SEC Access To Millions In Badly-Needed Funds To Recruit And Retain Higher-Caliber Examiners

Schumer Bill Would Treat Investor Protection Agency Like Fed and FDIC, Which are Already Allowed To Keep Fees They Collect

On the heels of an explosive independent report that blamed the failure to catch Bernie Madoff’s fraud scheme on widespread incompetence at the Securities and Exchange Commission, U.S. Senator Charles E. Schumer (D-NY) announced Thursday that he is drafting legislation to allow the agency to keep all of the fees it collects so it can afford to recruit and retain better-trained personnel. 


Schumer’s proposal, to be introduced when Congress returns to session next week, would, on average, bolster the SEC’s budget by hundreds of millions on an annual basis, enabling the agency to attract professionals with the expertise required to uncover complex financial fraud. In recent years, the size of the financial markets has grown rapidly while the SEC’s budget has remained essentially flat. The new funding scheme Schumer is proposing would treat the SEC in the same way as Federal Reserve and the Federal Deposit Insurance Corporation, both of which are funded through fees it collects from institutions it oversees.


SEC Chairman Mary Schapiro has already signaled her support for Schumer’s proposal.


“The SEC’s failure to catch Bernie Madoff shows a level of incompetence unseen since FEMA’s handling of Hurricane Katrina. It is clear the SEC needs a bigger, more reliable funding stream so it can retain and recruit the top talent that has fled the agency of late,” Schumer said. “Under the current system, the agency’s rank-and-file personnel are struggling to keep up with the more sophisticated actors in the market. We cannot keep starving the SEC’s budget or the agency will remain a shadow of its former self.”


Schumer’s proposal comes after the SEC released a damning report by the Inspector General yesterday. According to a summary of the report, the SEC had enough evidence against Madoff to merit an investigation into the dealings of his investment firm, but the agency simply didn’t see what was happening right in front of them. The report repeatedly cites the lack of experience and expertise of the SEC personnel assigned to investigate Madoff, finding that they “failed to appreciate the significance of the analysis” in the complaints about Madoff and “failed to follow up on inconsistencies.”


Schumer said the agency’s ability to retain experienced personnel is an ongoing problem since Wall Street firms are increasingly able to lure the agency’s experts with higher salaries. Schumer said the SEC’s chronic under-funding must be addressed in a comprehensive way. Currently, the SEC raises millions more dollars every year in registration and transaction fees (not including enforcement penalties or settlements) than it is allocated through the appropriations process, but its budget is limited to the amount approved by Congress.  In 2007, though the SEC brought in $1.54 billion in fees, it secured just $881.6 million in funding. Had the agency simply been able to hold onto all the fees it collected, it would have represented a 75 percent increase over the budget it was allotted through the appropriations process.


The SEC is one of only two financial regulators in the U.S. that must go through the annual Congressional appropriations process.  U.S. banking regulators such as the Federal Reserve and the FDIC, on the other hand, can use what they collect in fees, deposit insurance and interest income to fund their operations


Under Schumer’s proposal, the SEC will fund its own operations by using the transaction and registration fees it collects in place of a Congressionally-mandated budget.  Self-funding will give the SEC access to millions more than is allocated through the Congressional appropriations process. Shapiro has suggested that hiring hundreds of new employees over the next few years for the Division of Enforcement and the Office of Compliance, Inspection, and Examination will give the SEC the human and technological resources it needs to keep up with a vast and expanding market. 


The SEC’s staff of approximately 3,650 oversees 35,000 entities.  Securities trading volume has increased 261% between 2003 and 2008, but the SEC staff grew only 15% over that period of time.  The number of registered investment advisors has grown by 47%, and the assets they manage have increased by 105%.  Meanwhile, the SEC examination staff charged with overseeing this portion of the financial system has grown by only 13% in that same time.  The number of tips and complaints received by the SEC has increased by 146%, but the enforcement staff has expanded by only 23%.  The SEC does not have the technology to track such a large market with so many players, and currently the SEC has limited capabilities to analyze data and identify market and trading risk. 




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