Talk Back

by Jessica Holzer

Dow Jones Newswires

WASHINGTON (Dow Jones)–Securities and Exchange Commission Chairman Mary Schapiro said Friday budget constraints were hampering the regulator’s ability to enforce U.S. securities laws, in her bluntest remarks yet on the resource strain facing the agency.

Schapiro, speaking at a legal seminar in Washington, D.C., said the budget strain was forcing market analysts to use decades-old technology to “monitor trading that occurs at the speed of light.”

She also suggested that data-management systems and a digital forensics lab were on the chopping block unless Congress acted to increase the regulator’s budget.

Also, she indicated the agency didn’t have the funds to hire the market experts it needs to keep ahead of fraudsters and manipulators.

The SEC was tasked with wider responsibilities by the Dodd-Frank financial law, but Congress hasn’t increased the agency’s budget.

With Republicans back in control of the House of Representatives, the prospects for a boost in the agency’s funding have dimmed significantly.

House Republicans on Friday unveiled a plan that would slash nondefense, discretionary spending for the rest of the year by 9%, a cut of $43 billion compared with 2010 levels. The plan didn’t contain details about cuts at specific federal agencies.

Key House Republicans have voiced skepticism the SEC requires any funding increase.

On Friday, Schapiro painted a bleak picture of a resource-strapped agency trying to keep pace with securities markets that were growing larger and more complex.

She said during the last decade, trading volume has doubled and the number of investment advisers has jumped by 50%. Meanwhile, she said the SEC’s work force has only just been returning to levels seen before the financial crisis after being cut in the preceding years. Schapiro has said the agency needs 800 new staff to beef up enforcement and carry out new duties from the Dodd-Frank law.

The budget strain “is already having an impact on our core mission” apart from all the new duties to police large hedge funds, derivatives dealers and credit agencies the regulator gained from the Dodd-Frank law, Schapiro said.

“It is a strain that will intensify the longer the budget remains at existing levels,” she said.

Commissioner Luis Aguilar, speaking later on Friday, said the agency has had to impose “draconian cutbacks” in its examination and enforcement units. He said the agency has had to limit the use of expert witnesses at trials and take fewer depositions.

He also echoed Schapiro’s concerns the agency was being forced to shelve plans to upgrade its technology and hold off hiring market experts just as its responsibilities have been extended to new, complex areas.

“At a time when the SEC should be expanding its expertise to appropriately oversee the markets, it is operating with a serious handicap,” he said.

Separately, Schapiro on Friday said the SEC may issue proposals during the spring to revamp equity market rules, including new limits on high-speed traders that buy and sell stocks at lightning speed.

“Through the spring, I would expect us to formulate some proposals that we’d be able to put out for comment,” Schapiro told reporters on the sidelines of the conference after she was asked about the timing of draft rules to rein in high-speed traders.

The regulator signaled it would undertake a broad revamp of market rules last year when it posed a series of questions about the current structure of the U.S. equity markets. The effort has gained urgency since the May 6 market crash briefly erased hundreds of billions of dollars of equity-market value.

Schapiro has suggested on numerous occasions that she favors imposing new limits and obligations on high-speed traders–an idea that has drawn fire from some key Republican lawmakers.

Schapiro, in her speech Friday, said the regulator was mulling new rules and obligations for such traders.

“We are asking if these firms should be subject to an appropriate regulatory structure, including with respect to their quoting and trading activities,” she said.

Schapiro also told reporters the regulator is examining its existing rules governing the securities offering process. The SEC is probing the trading of shares of privately held companies, including Facebook, The Wall Street Journal has reported.

-By Jessica Holzer, Dow Jones Newswires; 202-862-9228; jessica.holzer@dowjones.com