June 8, 2017

SEC Budget Proposal: Dodd-Frank Reserve Fund on Chopping Block

This Reuters article says that the President’s budget proposal would eliminate the SEC’s reserve fund, which was established under Dodd-Frank to be used “as the [SEC] determines is necessary to carry out the functions of the Commission.” The Administration says that eliminating the fund would reduce the deficit by $50 million.

In recent years, the fund – which is separate from the SEC’s budget and is funded with registration fees – has been used to support the SEC’s IT modernization efforts.  According to this House Financial Services Committee memo, since FY 2012, the SEC has spent more than $205 million from the reserve fund for improvements to its website & internal IT systems.

The reserve fund has also attracted a lot of opposition from Republican lawmakers.  The version of the Financial Choice Act recently passed by the House Financial Services Committee would also eliminate the fund, while the Congressional spending proposal put forth in early May would have slashed it by $25 million.

Insider Trading: Will Reserve Fund Cut Curb New Cases?

This Proskauer blog notes that the SEC’s Enforcement Division is making increased use of advanced data analytics in insider trading investigations.  My Cleveland Browns are trying to do the same thing in football – but this excerpt suggests that the SEC has actually made progress:

Over the past few years, the SEC has taken strides to find cases on its own, not simply waiting for tips or FINRA referrals. Much of the SEC’s work on insider trading matters occurs within the Enforcement Division’s Market Abuse Unit, which proactively launches its own investigations through data mining and advanced detection. The co-chief of that unit, Joseph Sansone, has repeatedly noted that it makes sense to invest resources into investigations when analysts notice patterns in multiple trades over a period of time.

The blog points out several recent insider trading cases that the SEC developed through its own data analysis efforts.  However, it also notes that cutting the $50 million annual reserve fund “may affect the SEC’s funding to mine and analyze large data sets.”

SEC Budget Proposal:  On the Other Hand. . .

This Wolters Kluwer report notes that all things considered, the SEC could be doing worse in the budget battle.  As things stand, it would essentially be getting what it asked for in its budget request.  What about the hit to the reserve fund?  Under the President’s proposal, those reserve fund cuts won’t kick in until after 2018.

Of course, as the SEC points out in its budget request, it has one thing going for it that many other agencies don’t:

It is important to note that the SEC’s funding is deficit-neutral, which means that any amount appropriated to the agency will be offset by transaction fees and therefore will not impact the deficit or the funding available for other agencies.

John Jenkins