On the heels of a damning independent report that blamed the failure to catch Bernard Madoff’s fraud scheme on widespread incompetence at the Securities and Exchange Commission, a key lawmaker said Thursday he wants to change the way the agency is funded to ensure it has the resources to prevent future Wall Street abuses.
Sen. Charles E. Schumer, New York Democrat and a member of the Senate banking committee, said he will draft legislation that would allow the agency to keep all of the fees it collects so it can afford to recruit and retain better-trained personnel.
The SEC raises millions more dollars every year in registration and transaction fees than it is allocated through the appropriations process, but its budget is limited to the amount approved by Congress. The agency must turn over to the Treasury Department a large portion of the fees paid by public companies and other entities that register stock with the agency.
Federal banking regulators such as the Federal Reserve and the Federal Deposit Insurance Corp. can use what they collect in fees, deposit insurance and interest income to fund their operations.
Mr. Schumer said his proposal, to be introduced when Congress returns next week from its late-summer break, would bolster the SEC’s budget by hundreds of millions of dollars on an annual average basis, enabling the agency to attract professionals with the expertise required to uncover complex financial fraud.
“The SEC’s failure to catch Bernie Madoff shows a level of incompetence unseen since FEMA’s handling of Hurricane Katrina,” he 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.”
Mr. Schumer’s proposal comes a day after the release of a scathing report by SEC Inspector General H. David Kotz that said the agency repeatedly bungled investigations of Madoff, the disgraced former Wall Street investment manager, for 16 years.
The independent watchdog report said that the SEC, while investigating allegations of fraud in Madoff’s business practices, caught him in several lies and misrepresentations but failed to follow up on these “inconsistencies.”
The report also accused the SEC of rejecting whistleblowers’ offers to provide additional evidence.
Madoff pleaded guilty in March to operating a Ponzi scheme that has been called the largest investor fraud ever committed by a single person. Federal prosecutors estimated Madoff’s clients lost nearly $65 billion. He was sentenced to 150 years in federal prison.
Mr. Schumer, vice chairman of Congress’ Joint Economic Committee, said the SEC’s ability to retain experienced personnel is an ongoing problem since Wall Street firms are able to lure away the agency’s experts with higher salaries. He added that the SEC’s chronic underfunding must be addressed in a comprehensive way.
The SEC, along with the Commodity Futures Trading Commission, are the only two financial regulators that must go through the annual congressional appropriations process.
In 2007, though the SEC brought in $1.54 billion in fees, it secured just $881.6 million in funding, Mr. Schumer said. 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 Obama administration has proposed $1.03 billion for the agency for the fiscal year starting Oct. 1 - up from $960 million this year. The House approved a $1.04 billion budget, and a Senate panel approved $1.1 billion, although the full Senate hasn’t yet voted on it.
Mr. Schumer said that SEC Chairman Mary L. Schapiro has “signed her support” for his proposal.
SEC spokesman John Nester, in response to an inquiry about Ms. Schapiro’s position on the pending legislation, said agency officials “look forward to reviewing Senator Schumer’s legislative proposal.”
“The chairman has previously noted the benefits of self-funding,” he said. “We stand ready to work with Congress on this important issue.”
Mrs. Schapiro has suggested that hiring hundreds of new employees over the next few years for her agency’s enforcement and compliance divisions would give the SEC the resources it needs to keep up with a vast and expanding market.
Securities-trading volume has increased 261 percent between 2003 and 2008, but the SEC’s staff grew only 15 percent over that period, Mr. Schumer said.