Fund the SEC! From Alex Berenson, via Andrew Tobias
Andrew Tobias - Money and Other Subjects
In
1939, when a total of 260 million shares traded – all year – the S.E.C.
had 1,700 employees. In 2001, when 2
billion shares traded a day, the S.E.C. had the equivalent of 2,936
full-time employees.
The
number of brokers and mutual funds and annual reports and proxy statements had exploded
– not to mention hedge funds and all the rest – yet the agency itself was
little bigger than it had been in 1939.
What’s
more, the loss of experienced personnel had become chronic. Why?
First-year associates at major law firms earned more than senior S.E.C.
attorneys.
On
July 30, in the wake of Enron, the collapse of Arthur Anderson, and so
much else that was shaking confidence in the trustworthiness of the U.S.
securities markets – a national asset of incalculable importance – the
President signed the Sarbanes-Oxley bill authorizing an increase in the S.E.C.
budget from $438 million to $776 million.
“Then, astonishingly,” writes Berenson, “Bush proposed that the S.E.C.
not be given all the money that it had been authorized in July.”
The
Bush budget would be for $568 million, enough to improve the pay of existing
employees, but not nearly enough to grow the commission to the size it
needs to be.
The
particular irony is that the S.E.C. is a net money-maker for Uncle
Sam. In the fiscal year ended September
30, 2001, it collected a total of about $2 billion – $987 million in
registration fees and $1.04 billion in transaction fees – or about five
times its budget.
Even
this year, with registrations way down, and the fees themselves mandated to be
a much smaller sliver, more than $1.3 billion in receipts is expected.
Why
not spend that on an S.E.C. that is equal to its task? Or at least more nearly equal? Today, the S.E.C. sees lots of likely
frauds it simply lacks the resources to pursue. If you are a shareholder who’s been taken to the cleaners in one
of these, doesn’t that gall you?
Instead
of giving the S.E.C. the resources it needs, the emphasis seems to be on
cutting the revenue it collects. Registration
fees, which nicked companies $250 for every $1 million raised in 2001 will
be cut to $80.90 per million for 2003.
So instead of having to tip the croupier $25,000 for each $100 million a
company raises, it’s going to be $8,090.
I’m all for saving the shareholders $17,000 for each $100 million
raised, but let’s at least spend what’s left to fund the S.E.C. Transaction fees of $33 per $1
million of stock traded were collected from the stock exchanges in 2001 and are
slated to fall to $25.20 for 2003.
These fees are often passed through to us and reflected on our brokerage
confirmation slips (but as there are two parties to each trade, you only get
nicked half the time, when you sell).
The practical effect is that if you buy $10,000 of some stock and then
later sell it for $10,000, you get dinged for 25 cents.
I’m
a guy who – without meaning to brag – sometimes trades in amounts even greater
than $10,000, so in the course of the year my share of the S.E.C. fees might
total ten bucks or even twenty. But
it’s a small price to pay to have cops on the beat – both to discourage deceptive
practices in the first place and to pursue those that take place anyway.
As
usual, it comes down to priorities. The
Treasury is going to collect more than $1 billion from S.E.C. fees this year. So if Sarbanes-Oxley authorizes $776
million, why not accept that authorization and appropriate it? And plan to spend even more in future years,
once the S.E.C. has time to ramp up and use the additional resources
appropriately? How come the
Bush/Cheney administration and many Republicans in Congress (and some
Democrats) generally want to underfund the agency? It’s the sort of budget appropriation only an insider trader
or a market manipulator would applaud.
(As has been much noted, both Bush and Cheney have some firsthand experience with
these murky waters. The less S.E.C.
scrutiny of outfits like Harken and Halliburton, they may instinctively feel,
the better.)
On the other hand, look at the productivity coming out of them. That's gotta count for something!
Posted by: Paved on December 18, 2002 11:48 AMOr is it that the Bush economic team thinks that cleaning up the financial sector would further depress the stock market. From a short-term perspective, they may not be wrong actually. The stock market did go down as talks of tougher regulation wete raging and went back up when it started to look like the media had shifted their attention. From a longer-term perspective, it's clear to me, however, that the stock market will be doing all the better, the more trust investors have in financial statements... But who cares, by then, America's attention will be most likely focused on Irak.
Posted by: Jean-Philippe Stijns on December 18, 2002 11:50 AMIt does seem a bit unenlightening to compare the SEC only to itself.
How many employees did, say General Motors,
have in 1939 versus 2000; and how many cars were produced? How many civil servants worked in, I dunno, the Government Printing Office, and how many pages of (useful and valuable?) documents did they generate? Or, perhaps most comparably,
how many stock trades/price changes did Dow Jones track daily in 1939 with how many employees -- and how do they do the same job now?
Not criticizing Brad, here. He merely quotes Tobias. But since since surprising levels of productivity increase are a recurring theme of this blog it seems to me worth considering how
the SEC fits in with other organizations.
I got an idea. Let's research a few more numbers:
Number of SEC employees 1939, (and budget)
Number of U.S. citizens holding stocks in 1939,
Number of U.S.D.A. employees 1939, (and budget)
farm-workers in 1939,
SEC Employees 2000 (and budget)
USDA Employees 2000 (and budget)
Citizens holding stock 2000
and farmworkers, 2000.
I'll have to find a good almanac and get back to you. But I'm fairly certain that the ratio of
civil servants to taxpayers has risen dramatically in the USDA/agriculture industry. Does that represent a failure of the SEC to keep pace, or instead, hold the SEC up as an example to other, less well-run and productive, agencies of the government?
Unclear to me why you would expect productivity gains among lawyers (the bulk of SEC employees) approaching those at, e.g., General Motors, given the nature of their work.
The failure to clean things up properly, and the underfunding of the SEC is a long term drag on the market and will remain so. Investor trust has been badly damaged and Bush and co. have done nothing to restore it. Money is sloshing around between different markets, but money is not (overall) going into the financial markets. This is a problem.
Posted by: Ian Welsh on December 18, 2002 07:07 PM>>But since since surprising levels of productivity increase are a recurring theme of this blog it seems to me worth considering how
the SEC fits in with other organizations.<<
How about considering how the SEC fits in the world where the Big 6 turned into the Big 5s, and now the Fat 4s. Accounting is a bizzare, understudied, sector. While the number of firms keeps shrinking, thus encouraging strategic alliences with clients, clients keep strenghening their bargaining power. (Of course, concentration is in part a -perverse- response to the latter.)
This really puzzles me. My point is that you have see the need for bigger, competitively paid, staff at the SEC in the light of growing efforts to fool accountants.
The other night I was holding the hand of a CPA, senior audit manager at one of the Fat 4s, a pretty sharp lady, who had just been to a Turkey Night. What was she demoralized about?
Her host had spent a good part of the dinner joking around about how, today, he fools all these honest auditors around. (I believe staffs in accounting firms to be amazingly clean, my faith is not as strong when it comes to partners.) She was just bordeline crying because she really believed her job to be an effective service to society (however boring and stressful.)
What shocked her was that this CFO's tactics sounded so vicious, she knew they ought to be effective given how short a time auditors have to give a report (to their client.) And this guy also succeeded in convincing her these tactics are actually widespread...
"Where are we headed?" is my question, I guess.
Posted by: Jean-Philippe Stijns on December 18, 2002 09:51 PMRPM, Esq.
~>Unclear to me why you would expect productivity
gains among lawyers (the bulk of SEC employees)
approaching those at, e.g., General Motors, given
the nature of their work.<~
Hmm. We do have a disconnect, don't we? I expect that, for instance, having instant access to on-line, searchable, reference materials would afford lawyers massive productivity gains in research and citation efforts. I expect the concentration of corporations into one venue -- Delaware, I think -- would simplify/amplify "network effects" the way centralizing neo/cyber industries into "Silcon Valley" has boosted those industries. I expect that, were detailed facts available, we would see the ratio of lawyers to file clerks among employees of the SEC has dramatically increased since 1939 -- a distinction that merely comparing headcounts would not reflect.
But, of course, that's merely my uninformed and no doubt biased pre-judgement. I, as always, will defer to facts.
Got any?
Posted by: melcher on December 19, 2002 07:25 AM