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SEC Releases Strategic Five-Year Plan

Strategic five-year plans are a fact of life to corporate executives. But for the Securities and Exchange Commission, the nation's top securities regulator, this year's newly released five-year plan spanning 2004 through 2009 took a lot of blood, sweat and tears and includes several lofty goals. These include stepping up examinations of investment companies deemed most at risk for problems, modernizing information technology systems, more aggressive hiring of both accountants and investment company examiners, and redesigning its pay, benefit and training programs for employees.

Such five-year plans have been required since Congress' passage of the Government Performance and Results Act of 1993, which, since September of 1997, has required most government agencies to prepare a five-year plan that must be updated every three years, as well as prepare an annual performance report.

In the past, the SEC has taken a more cursory "check the box" approach to these legislatively mandated reports, said an SEC spokesman. Now, for the first time, the Commission's mission and vision are aligned in one cohesive, well thought out plan, he added.

This five-year plan comes less than one year after New York Attorney General Eliot Spitzer's allegations against both hedge funds and several mutual fund sponsors that rocked the fund industry. That scandal led to numerous charges being filed by state and Federal regulators, a siege of investor lawsuits, and dozens of fund executives that were caught red-handed being fired or even sent to jail.

The SEC was caught up in the firestorm, with critics wondering how such widespread, recurring and blatant abuses escaped detection by Federal regulators.

For fiscal year 2005, President Bush, on behalf of the SEC, has asked Congress to appropriate $913 million to the Commission. If approved, that budget will be allocated among various initiatives including the expected hiring of 106 new staff members to examine mutual funds and possibly hedge funds, noted the plan report.

Last month, in a split decision among the SEC's five commissioners, the regulator floated for public comment a formal proposal to require most hedge funds to register with the agency, bringing them into the SEC's regulatory span of control.

Dollars and Cents

If approved, the SEC's 2005 fiscal year budget will increase 12.5% from the $811.5 million appropriated to the agency in 2004, and 27.5% higher than the $716 million the Commission received for fiscal year 2003.

Sarbanes-Oxley significantly increased the SEC's budget, but directed the regulator to allocate resources toward staffing and enhancing technology. The law required the SEC to add 200 additional professional staff members, to begin initiating "pay parity" among employees and bring staff members' compensation up to the levels of other Federal financial regulators, and to develop IT security enhancements in light of the 9/11 terrorist attacks.

IT enhancement is an area that hasn't been a major focus of the SEC.

According to a July 2004 report from the Government Accountability Office, the audit and investigative arm of Congress, the SEC expects to expand its IT budget to $120.5 million in 2004, a 20% increase from the $100.9 million it spent in 2003. In 2002, the agency budgeted $46.6 million for IT expenditures. But most of the SEC's IT budget has paid for maintenance, hardware and software and not new technology development, noted the report.

Going forward, the SEC expects to undertake six new IT projects over the next few years including modernizing its database of mutual fund information, expanding the Electronic Data Gathering Analysis and Retrieval (EDGAR) system, and revamping its Web site to allow for more interaction with investors.

Risk-Based Approach

To Head Off Abuses

The SEC is also working to get two new departments up and running, including the new Office of Risk Assessment. That department is charged with early detection of "new or resurgent forms of fraudulent, illegal or questionable behaviors or products," said the plan report. "For too long, the Commission has found itself in a position of reacting to market problems rather than anticipating them," admitted the SEC in the report.

Under this initiative, the agency will revise its review and examination cycle, scrapping a one-size-fits-all approach and utilizing a new risk-based approach aimed at better detecting "emergent risks and market trends." That will allow the regulator to direct resources to those firms or industries seen as being in need of closer scrutiny.

Human Capital

Another of the SEC's greatest challenges has been attracting and retaining staff, especially accountants, due to fierce private sector competition. According to the GAO report, about 1,000 employees, or one-third of SEC's staff, left the agency between 1998 and 2000. That includes Barry Barbash, the former Director of the division of investment management who left in October 1998. Paul Roye replaced him one month later.

In 2003, the SEC hired 842 new employees, although only 15 of them were assigned to the division governing mutual funds and variable insurance products. But the SEC has vowed to continue its aggressive hiring tactics, and recently retained two executive recruitment firms for the first time ever.

The regulator has also enhanced health and other benefit programs and has instituted a pay-for-performance program that awards merit raises for achieving goals.

Growing Budget, Shrinking Fee Revenue

But while the agency's budget is set to grow, its internally generated revenue will take a dive, according to the plan. Newly enacted Federal laws will reduce the revenue that the SEC now receives through fees charged to securities industry firms by a whopping $1 billion, from $2.1 billion to $1.1 billion. The SEC uses that fee revenue to offset its operational costs. That has led the agency to wonder aloud if alternative funding methods should be considered, noted the report.