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U.S. Securities and Exchange Commission

Testimony Concerning
Appropriations For Fiscal Year 2002

By: Laura S. Unger Acting Chair, U.S. Securities & Exchange Commission

Before the Subcommittee on Commerce, Justice, State,
and the Judiciary Committee on Appropriations
United States House of Representatives

May 22, 2001

Chairman Wolf, Ranking Member Serrano, and Members of the Subcommittee:

I appreciate this opportunity to testify on behalf of the Securities and Exchange Commission ("SEC" or "Commission") in support of the SEC's fiscal 2002 budget. The SEC is a civil law enforcement agency. Since its creation in 1934, the Commission's mission has been to administer and enforce the federal securities laws in order to protect investors, and to maintain fair, honest, and efficient markets. We accomplish this mission by overseeing the markets through a public-private partnership. This system of shared regulation among the SEC, state regulators, self-regulatory organizations ("SROs"), and the securities industry enables the Commission to leverage its resources and is markedly different from the approach taken by other federal regulators. Even with this system, however, the SEC must stretch to keep pace with the rapidly changing marketplace.

The Commission today faces some of the most complex and difficult issues it has ever considered. No segment of American business has been more transformed by the rapid pace of technological innovation in recent years than the securities industry. New technologies, new participants, and new financial products are reshaping our markets. Our markets also are becoming increasingly global - a trend that most expect to accelerate in the coming years. In addition, our national securities markets are taking steps to shed their long-held membership status and are moving to become publicly held entities. In short, it is now more important than ever that the SEC remain vigilant in policing and maintaining the integrity and transparency of our securities markets.

We are a nation of investors. Twenty years ago, only 5.7 percent of Americans owned mutual funds. Today, some 88 million shareholders, representing 51 percent of U.S. households, hold mutual funds. Our nation's investors have an unprecedented stake in our markets. Whether through college savings plans or retirement accounts, our collective stake in U.S. markets continues to grow, and we are increasingly dependent on the success and integrity of those markets. In addition, online trading and new technologies have empowered individual investors in ways that were previously unimaginable. It is against this backdrop that I intend to discuss the President's fiscal 2002 budget request for the SEC and the primary challenge we currently face: our inability to attract and retain staff.

The President's fiscal 2002 budget requests an appropriation of $437.9 million for the SEC, 3.6 percent more than our fiscal 2001 enacted level of $422.8 million. This $437.9 million request, while providing the resources necessary to meet the Commission's current needs, is a zero-growth budget. It only partially funds the Commission's inflationary and mandatory cost increases, does not provide any programmatic staffing increases, and actually requires the Commission to make a small reduction in its authorized staff level.

We intend to support the Administration and meet the challenges posed by this recommended budget by continuing to use our existing resources as efficiently and effectively as possible. Unfortunately, and perhaps ironically, we have the ability to operate at this funding level because of the severe staffing problems we currently face. In particular, our inability to pay staff at a level comparable with the other federal financial regulatory agencies has hampered our ability to attract and retain staff. The resulting high turnover that we have experienced has resulted in a significant efficiency loss and has left certain positions unfilled indefinitely. Because filling these positions has proven to be so difficult, we intend to fund some of our mandatory costs by making reductions in the number of vacancies that we will fill in fiscal 2002. However, constraining the SEC's growth and relying on cutting unfilled positions is not preferred and certainly is not sustainable over the long term.

The SEC will need significant additional resources in fiscal 2003 and beyond to respond to both the continuing innovations in our markets and the increasing regulatory responsibilities we face as a result of several recent legislative initiatives. In particular, we will require additional examination and oversight staff to meet our new responsibilities under the recently enacted Commodities Futures Modernization Act of 2000 ("CFMA"), which provides for joint oversight with the Commodities Futures Trading Commission of new security futures products, and the landmark Gramm-Leach-Bliley Act of 1999 ("GLBA").

In addition, the SEC critically needs to stay abreast of the rapid evolution of our securities markets. New markets and new trading models are constantly emerging. Electronic trading platforms - some of which didn't exist just a few years ago - are now anonymously matching buyers and sellers of hundreds of millions of shares every day. In February of last year, the Commission approved the International Securities Exchange's application to become the first new national securities exchange in twenty-seven years. Now, four entities have applied for registration as an exchange. At the same time, the traditional exchange and over-the-counter markets continue to innovate. Both the New York Stock Exchange and Nasdaq are in the process of incorporating greater automation into their markets, launching complex and important initiatives such as NYSE Direct and the SuperMontage.

No less pressing is our need to keep up with the challenges presented by today's increasingly global marketplace. Companies throughout the world are now seeking capital on a cross-border basis. In addition, U.S. investors today can view real-time quotes from foreign markets, and electronic linkages reduce the costs to U.S. investors of trading directly in foreign markets. These developments make it increasingly important for the SEC to promote high quality disclosure and transparency standards, including high quality internationally acceptable accounting standards.

Despite these long-term needs, our fiscal 2002 request will allow the Commission to continue such important initiatives as:

  • combating the rise in Internet and financial reporting fraud;

  • overseeing the securities industry's automation changes in connection with the transition to a T+1 settlement system;

  • maintaining our formal inspection cycle program for the increasing number of alternative trading systems;

  • updating and improving prospectus requirements for variable insurance products;

  • developing a tailored disclosure document for unit investment trusts; and

  • addressing developments in domestic and international accounting and auditing matters.

Having outlined our ongoing priorities and how we intend to manage the funding level approved in the President's budget, I would now like to discuss the Commission's severe difficulties in attracting and retaining qualified staff.

Staffing Crisis

At present, the Commission is unable to pay our staff what our counterparts at the federal banking agencies pay their staff. Without the ability to pay more, the Commission's effectiveness is jeopardized by its inability to attract and retain dedicated professionals. None of the federal banking regulators is subject to the government-wide pay schedule. As a result, they are able to provide their staffs with appreciably more in compensation and benefits than we can. This disparity is a significant drain on morale. It is difficult to explain to SEC staff why they should not be paid at comparable levels, especially when they are conducting similar oversight, regulatory, and examination activities. It is one thing for staff to make salary comparisons with the private sector, but quite another for them to see their government counterparts making substantially more than they are.

This is particularly true in the wake of the landmark GLBA mentioned above. As this Subcommittee is well aware, the GLBA demands that the Commission undertake additional examinations and inspections of highly complex financial services firms both to fulfill our own oversight responsibilities and to provide the Federal Reserve and other banking agencies with the information and analyses needed to fulfill their missions. Moreover, by allowing securities firms, banks, and insurance companies to affiliate with one another, the GLBA requires increased coordination of activities among all the financial regulators. Even more so than in the past, Commission staff are working side-by-side with their counterparts from the banking regulatory agencies, including the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation. However, we cannot match the salaries that our sister regulators pay.

The Commission has already seen several staff leave to take positions with these agencies, primarily because of pay. Unless we are put on equal footing, this trend will continue and most likely intensify. Given the complexities of our markets and the new business affiliations we are likely to see, the SEC believes we should be working together from the same starting point.

Pay parity is good public policy. With approximately 3,000 staff, the SEC is small by federal agency standards. This staff is charged with overseeing an industry that includes about 700,000 registered representatives of approximately 8,000 broker-dealers, some 15,000 companies that file reports with us, about 30,000 investment company portfolios, and about 8,000 registered investment advisers. Over $41 trillion in stocks are expected to trade hands this year on the New York Stock Exchange and Nasdaq, including transactions on numerous new electronic communication networks. Mutual funds now hold over $7.4 trillion in assets. This exceeds by about $4 trillion the amount on deposit at commercial banks and surpasses by $2 trillion the total financial assets of commercial banks. Unlike bank deposits, however, mutual fund assets are uninsured and no SROs help us regulate this sector.

With such important responsibilities and at such a critical time in our markets' development, along with the possible advent of social security reform that may involve many more individuals in our markets, the Commission simply cannot afford to suffer a serious staffing crisis. Since 1996, our attrition rate has been increasing, particularly among our more senior professionals. Over the last two fiscal years, the Commission has lost 30% of its attorneys, accountants, and examiners.1 If this trend continues, the Commission's mission of protecting investors will be seriously threatened. 2

In a world where first-year associates are making six-figure salaries in Washington, D.C. law firms, the salaries the SEC can provide are simply not competitive to recruit and retain a sufficient number of talented professionals to reduce high turnover and fill open positions. We recognize that the SEC cannot completely match the higher salaries offered in the private sector by brokerages, law firms, SROs, and other securities-related businesses. Something needs to be done, however, to close the pay gap and reduce the turnover problems we face. The most vital resource we have, ultimately, is our highly professional and well-regarded staff. This is the one area we can least afford to jeopardize.3 With the full Senate passing S.143, the Competitive Market Supervision Act of 2001, and the House Financial Services Committee having voted to approve companion legislation in H.R. 1088, the Investor and Capital Markets Relief Act, I hope you can support us in providing the salary relief and resources the SEC truly needs.

In addition, S. 143 and H.R. 1088 include provisions to improve and address the long-term stability of the SEC's fee collection mechanism. Both bills significantly reduce fees for investors, market participants, and companies making filings with the Commission, while preserving the amount of offsetting collections available to this Committee to fund the agency in coming years4. These bills spread the cost of regulation more evenly among those who benefit from the activities of the Commission. The Commission supports both of them in their current forms and looks forward to having the agency's funding structure dealt with in a comprehensive and balanced manner.


Finally, despite the lack of additional resources for telecommuting in our fiscal 2002 budget, I also would like to note the SEC's commitment to your telecommuting initiative. I believe the SEC is well situated to take advantage of the benefits and increased flexibility made available by telecommuting. With a large number of staff regularly conducting off-site inspections and examinations of investment advisers, SROs, and broker-dealers, telecommuting is the next logical step. Towards this end, the SEC is currently undertaking several information technology initiatives and pilots that are consistent with your efforts. My staff and I will provide additional background regarding our efforts in this area as we move closer toward full implementation.


Our nation's markets and the SEC are at a crossroads. New technologies and activities continue to pose new challenges and threats to the integrity of our markets, as does increased globalization. I appreciate the support that this Committee has provided the SEC in the past and look forward to having a fruitful dialogue regarding the resource needs and policy issues that currently face the Commission. I also appreciate the willingness this Committee has already shown in recognizing the need to resolve the SEC's intractable staffing problems. I hope we can work together and take the final step by enacting pay parity legislation for the Commission this session. The Commission looks forward to continuing to work with you.


1 Over the past several years the Commission has explored virtually every available approach to keeping staff longer. In 1992, we petitioned and received from the Office of Personnel Management ("OPM") the authority to pay the majority of our attorneys and accountants approximately 10 percent above their base pay. While special pay was a step in the right direction, its value erodes over time and it proved to be a short-term solution. This is because staff that receive special pay do not receive the government-wide locality increase each year, which means that their special pay becomes less valuable over time and hence becomes less effective as a retention tool. Our appropriation last year included funds to reinstate special pay rates for certain employees and OPM recently approved our proposed special pay rates for certain attorneys, accountants and examiners. While this should help, we know based on our experience this is at most a temporary and partial remedy to the SEC's staffing crisis. In addition, even with special pay, the salaries of the federal banking regulators are still substantially more than we can pay our staff.
2 Resolving the Commission's staffing crisis requires statutory changes to allow the agency to pay its employees outside of the government-wide pay scale, and it also requires Commission authorization and appropriation at a level that allows the agency to implement pay parity. Without the authorization to be appropriated additional funds for pay parity, having the authority alone will do little to address our staffing crisis. By our estimates, implementing pay parity with the banking regulators would require a net funding increase of approximately $70 million in fiscal 2002, with yearly adjustments for inflation thereafter. (This assumes full-funding of special pay and no new staff in fiscal 2002.)
3 A broad cross-section of the securities industry have expressed support for pay parity, including the Securities Industry Association, the Investment Company Institute, the Investment Counsel Association of America, the California Public Employees' Retirement System, the National Association of Securities Dealers, the New York Stock Exchange, Fidelity Investments, and the Business Roundtable.
4 The Congressional Budget Office estimates that fees required to be collected by the SEC from all sources will total over $2.47 billion in fiscal 2001. This amount represents more than five times the SEC's enacted fiscal 2001 appropriation of $422.8 million. As stated, both S. 143 and H.R. 1088 are designed to reduce fees while maintaining the amount of offsetting collections that are available to the SEC's appropriators. In fiscal 2002, this amount is estimated at $1.15 billion.


Modified: 07/03/2001