Doubling the SEC and CFTC budgets

According to a blog post yesterday by Jeff Zients, assistant to the President for economic policy and director of the National Economic Council, President Obama’s fiscal year 2017 budget proposal includes funding of $1.8 billion for the Securities and Exchange Commission and $330 million for the Commodity Futures Trading Commission, up 11% and 32% respectively. More significantly, Zients’ post says that the President is calling for doubling the budgets of the SEC and the CFTC (albeit only from their substantially lower fiscal year 2015 levels) by fiscal year 2021. This has prompted the usual sputtering about excessive regulation and its dolorous effects on economic growth and the price of financial services. Raising barriers to entry in the financial sector. Stifling innovation.

Yadda yadda yadda. As if no serious person would deny the empirical truth of these statements. Far be it from me. But I have some questions:

How much of the 5-year increase in SEC and CFTC rulemaking, examination and enforcement activity will be directed at issuers and end-users (not otherwise engaged in financial activities) and how much will be directed at financial intermediaries (banks, broker-dealers, swap dealers, investment advisers, commodity trading advisers, etc.)?

The growth of the financial sector—particularly in the asset management and household credit sub-sectors—has consistently outpaced GDP growth over the last 35 years, during intervals of both comparatively strict and comparatively permissive financial regulation. To the extent the increased regulatory burdens in the next five years fall on financial intermediaries, what is the evidence that the resulting impediments (if any) to financial sector growth would adversely affect the real economy? That a smaller financial sector might in fact benefit the real economy by releasing some of the human capital and other scarce resources now devoted to extracting rents from the intermediation of financial assets?

The efficiency of the financial sector—as measured by the unit cost of financial intermediation—is today about what it was in 1900. This despite the reduced transaction and other marginal costs resulting from advances in information technology, the use of derivatives to manage risk and the move to an “originate-to-distribute” banking model. Is there any evidence that a 5-year increase in SEC and CFTC rulemaking, examination and enforcement activity would make the financial sector even less efficient and financial intermediation even more expensive, given the insensitivity of unit cost to changes in marginal costs over the very long term?

And if the financial sector’s persistent inefficiency results from the same oligopolistic and other anticompetitive behaviors that seek complex and arbitrary regulation as a means to bar entry and stifle innovation, then wouldn’t it be better to reduce the financial sector’s size and influence (e.g., through antitrust enforcement and campaign finance reform) than to “starve” our only means of goading it into more responsible behavior?

Gone Gallagher

Speaking of the overall dickishness at the SEC, you should Google “Gallagher Grundfest Harvard” and read about how Dan Gallagher (that flaming asshole) abused his office by accusing the Harvard Shareholder Rights Project of securities fraud – not as part of an SEC proceeding, but in an academic paper he co-authored with Prof. Grundfest – securities fraud supposedly perpetrated when the Harvard SRP made filings in support of Rule 14a-8 shareholder proposals to de-stagger boards of directors at a number of publicly traded corporations and, Gallagher alleges, mischaracterized the academic literature as overwhelmingly in support of de-staggering, when in fact there is a “substantial” body of research that favors leaving staggered boards as they are.

Leaving aside the merits of Gallagher’s views and his unctuously pro-management, anti-activist tone (at least we now know what he’s planning to do when he leaves the SEC), how can it possibly be appropriate for an SEC Commissioner to accuse private individuals or organizations of Rule 14a-9 violations or other securities fraud in the absence of any SEC proceeding or investigation?  Even where (maybe especially where) current SEC Staff policy makes it very unlikely that the underlying conduct would ever be the subject of an enforcement action?  Since when is an SEC Commissioner permitted to pronounce violations of the Federal securities laws, using his own preferred interpretation, on a freelance basis?

Over the line!  Gallagher must go!  I’m sure there’s a lobbying job for him at Americans For Entrenched Management or The Impunity Society or someplace like that.

Unscrupulous tipsters and touts

From the legislative history of the U.S. Investment Advisers Act of 1940:

Not only must the public be protected from the frauds and misrepresentations of unscrupulous tipsters and touts, but the bona fide investment counsel must be safeguarded against the stigma of the activities of these individuals. Virtually no limitations or restrictions exist with respect to the honesty and integrity of individuals who may solicit funds to be controlled, managed, and supervised. Persons who may have been convicted or enjoined by courts because of perpetration of securities fraud are able to assume the role of investment advisers. Individuals assuming to act as investment advisers at present can enter profit-sharing contracts which are nothing more than “heads I win, tails you lose” arrangements. Contracts with investment advisers which are of a personal nature may be assigned and the control of funds of investors may be transferred to others without the knowledge or consent of the client.

S. Rep. No. 1775, Investment Company Act of 1940 and Investment Advisers Act of 1940, 76th Cong., 3d Sess., 21-22 (1940).

“UnSCRUpulous TIPsters and TOUTS.”  An alliterative, rhythmic and evocative phrase.


On November 19, 2010, the Securities and Exchange Commission (SEC) issued proposed rules relating to provisions of the Dodd-Frank Act that expand the SEC’s regulatory authority over investment advisers to include many more investment advisers to private equity and hedge funds, subject to certain exemptions.

Later, a non-U.S. investment adviser went to the SEC’s Division of Investment Management to get a Foreign Private Adviser Exemption, as described in the Dodd-Frank Act.

This is the story of that investment adviser.