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22 Feb. 2011 | Comments (0)

While it may not be on the level of the historic protests in the Middle East or the budget battle playing out in Wisconsin, the funding “war” being waged against the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) in the Republican-controlled House of Representatives is worth noting if you are involved in the corporate governance function of your company. If anything, the future of the more than $1 billion in federal funds is vulnerable as the new House has vowed to cut billions in government spending, including money that would be used to implement major parts of the Dodd-Frank Act. A bigger question for public companies is what the possible de-funding of some of the SEC programs, such as the whistleblower office and bounty, could mean to corporate governance regulation in the near term. Granted, the SEC and CFTC, which oversees the derivatives industry, aren’t the only federal agencies facing the budget ax. But for the first time in recent memory, such regulators are getting support from non-political groups: institutional investors. In the past couple of weeks, both sides have made their pitches. It’s a battle pitting the Republican-led House and business organizations such as the Business Roundtable and U.S. Chamber of Commerce against the Democratic President and the Council of Institutional Investors (CII) and ShareOwners.org. Just to keep you up to speed with what’s going on so far, the House has backed a continuing resolution that cuts spending by $61 billion from March to September. At the same time, the Obama Administration has introduced a fiscal 2012 budget that would fund the SEC with $1.427 billion, a 28 percent increase over the current year. [Read Compliance Week’s Bruce Carton’s blog post, SEC Defends $1.4B Budget Proposed by Obama.”] Carton’s post goes on to spell out the 612 positions the SEC plans to add to oversee such areas as derivatives, hedge funds, whistleblower program, and credit rating agencies. In what is known as the FY2010 Congressional Justification, the SEC backs up its request for the additional funds by pointing out that it has experienced three years of flat or reduced budgets from 2005-2007 and saw its investments in IT systems decline by about 50 percent from 2005-2009. Investor groups like CII and the ShareOwners.org in the past week have ratcheted up efforts to fight the proposed cuts to the SEC and CFTC. While the CII sent letters to members of Congress asking that they restore funds to the regulators, ShareOwners.org is reaching out to individual investors to reach to Congress with the same message. Although in the case of Tracy Stewart, the executive director of the organization, was more urgent:
“The House-proposed budget cuts for 2011 and what is under discussion for 2012 are an invitation to disaster in terms of financial market integrity and efforts to restore investor confidence. “Given the need for the SEC and CFTC to oversee the most sweeping financial reforms since the Great Depression, it is absolutely essential to all Americans that the Senate and the Administration insist that the agencies that protect our financial well-being and the health of the economy be adequately funded to perform their crucial work. We urge all concerned investors to speak out and let Congress know that these cuts will cost Americans much more than they appear to save. They must not gut these agencies in the midst of critical reforms.”
The CII appeals to the common sense-side of the argument.
“The proposed $56 million cut to the CFTC’s $168.8 million budget is particularly disturbing,” according to a statement signed by the CII and 24 other organizations, including unions. “It is shocking that Congress would even consider a proposal that would have the effect of eviscerating the agency with central responsibility for assuring transparency and stability in the derivatives market, on which the health of the overall economy depends. It is difficult not to see these cuts as a back door effort to block new requirements for transparency and accountability, and not budget measures at all. “While less draconian, the proposed $25 million cut to the SEC’s budget is equally irresponsible. Over the last several decades, millions of middle-income Americans have come to rely on our nation’s securities markets for their retirement security. The SEC has primary responsibility for overseeing the brokers and investment advisers they rely on for advice, the mutual funds they invest in to fund their retirement, and the disclosures that help them determine the best place to put their money. By inhibiting its ability to perform these and other essential functions, under-funding the SEC puts the financial security of these working Americans at risk.”
In a statement earlier in the month, the Business Roundtable focused on an executive order from President Obama that asked all regulators to review their operations from a cost-benefit perspective. It has not addressed the proposed House budget cuts specifically.
“Today [Feb. 11], Business Roundtable sent a letter to President Obama,” wrote Business Roundtable President John Engler. “We thanked the President for issuing a government-wide regulatory review with an emphasis on cost-benefit analysis and restoring balance. We also a sent a letter to Congress thanking them for their focus on the role of regulatory burdens and costs as a barrier to job creation. “We applauded the executive leadership in the White House for beginning the process to streamline the regulatory structure, review existing federal regulations and avoid new regulations that impede American innovation and progress. We urged swift action by policymakers to relieve American companies of onerous rules and regulations that burden them with unnecessary costs. These unnecessary costs divert assets that otherwise would be invested into the economy. “Successfully streamlining the regulatory system is a massive undertaking. It will require vigilance, leadership, active engagement with the business community and hard work. We are more than ready to do our part to contribute to this important effort and work with the President and Congress to achieve reform.”
Certainly sounds like both camps are steadfast in their beliefs without much room for compromise. While the battle might be worth watching for the rhetoric and politics, as a corporate governance participant you may want to keep an eye on this battle for any collateral damage. Two areas to start with might be the aftermath of the mandatory Say on Pay votes and the whistleblower bounty program.
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin

     

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