Schumer plan to let SEC keep fines, fees sparks controversy

Sen. Charles Schumer’s plan to allow the Securities and Exchange Commission to keep the fines it levies is drawing fire for creating a possible conflict of interest for the agency.

“It’s probably bad policy,” said William T. Baldwin, chairman of the National Association of Personal Financial Advisors. “It would motivate the SEC to collect more and larger fines.”

Even so, he supports the part of Mr. Schumer’s proposal that would allow the SEC to keep the more than $1 billion it collects annually in transaction and other fees from the financial services industry. That would place the SEC on the same self-funded basis as the Federal Deposit Insurance Corp. and the Federal Reserve.

Mr. Baldwin is wary of allowing the SEC to keep the approximately $1 billion a year that it collects in disgorgement of ill-gotten gains and penalties that it levies against wrongdoers.

“It could end up with an SEC with way too much money, or just a huge bureaucracy,” said Mr. Baldwin, who is also president of Pillar Financial Advisors Inc., which manages about $500 million.

“The objective shouldn’t be for them to collect more fines,” he said. “It should be for investment advisers to be more compliant.”

SEC member Luis Aguilar, who supports the idea of letting the commission use fees to fund its operations, balks at keeping fines.

“I would not want any penalties to be part of the self-funding,” he said. “There’s too great a conflict.”

Keeping the fines may not be constitutionally permissible, said Frank Razzano, a partner with law firm Pepper Hamilton LLP. He said the Supreme Court has already set a precedent against allowing government agencies to be funded with fines, because such a system would create a conflict of interest

“The more [fines that are] collected, the more they’d have to pay [in] salaries and bonuses,” said Mr. Razzano, who was assistant chief trial attorney in the SEC’s division of enforcement from 1978 to 1982.

Groups that represent financial advisers and brokerage firms also support Mr. Schumer’s plan to allow the SEC to keep fees it receives from security transactions, registrations and mergers.

The plan, which he hopes to include in financial regulatory reform legislation, would give the SEC more autonomy and re-sources, and would help the agency improve its enforcement efforts, the groups say.

“The SEC needs a bigger, more reliable funding stream so it can retain and recruit the top talent that has fled the agency,” Mr. Schumer said in a release.

Mr. Schumer is expected to introduce the legislation soon, Brian Fallon, the senator’s press secretary, wrote in an e-mail.

The SEC’s budget is proposed by the administration and approved by Congress each year. The administration has proposed a budget for the agency of about $1 billion for the fiscal year beginning Oct. 1. The agency is expected to take in more than $1.5 billion in fiscal 2010 in transaction and other fees.

More than $1 billion was collected in fines for disgorging ill-gotten gains in the year that ended in September 2008.

The proposal “deserves consideration,” said David Bellaire, general counsel and director of government affairs for the Financial Services Institute Inc., which represents independent broker-dealers and financial advisers.

Broker-dealers are inspected more frequently than investment advisers, but closing the “regulatory gap requires some creative thinking about how to fund that effort,” and Mr. Schumer’s funding plan may be a way to resolve the issue, he said.

The Schumer plan would give the SEC more power because it would not have to depend on administration and congressional appropriators, said Richard Salmen, president of the Financial Planning Association.

“Anything that helps the lack of resources they’ve been suffering through will help,” said Mr. Salmen, who is also senior vice president of GTrust Financial Partners Inc., which manages $400 million.

SEC Chairman Mary Schapiro favors a self-funding plan because it would provide “stable and sufficient resources to carry out the agency’s mission and [enable] better long-term planning in critical areas such as technology and staffing,” SEC spokesman John Nester wrote in an e-mail.

But others are leery of allowing the SEC to bypass the appropriations process. “Going to Congress for [funds] is a mechanism for checking in periodically and making sure we’re doing what we’re supposed to do, and making sure our budgets adhere to some reason,” said one SEC official, who declined to speak for attribution.

PLAN COULD BACKFIRE

The proposal also could create financial difficulties for the SEC during an economic downturn, Mr. Razzano said. If fee collections went down, the agency could face a lengthy wait for Congress to increase funding. “What are you going to do when you have a Madoff scandal in a down economy, and they don’t have sufficient funding to go out and investigate?” he said.

Regardless of whether the SEC becomes a self-funded agency, advisory trade groups support an idea advanced by Mr. Aguilar to levy fees on the roughly 11,000 advisory firms it oversees so they can be inspected on a more regular basis.

“Many [advisory firms] haven’t been inspected in a long time,” he said. The SEC needs “a mechanism to decide what assessments may be appropriate with respect to investment advisers.”

“We would prefer that to [a self-regulatory organization],” said David Tittsworth, executive director of the Investment Adviser Association.

The IAA and other advisory trade groups fear that advisers could otherwise be put under the supervision of the Financial Industry Regulatory Authority Inc., which has asked for the responsibility.

E-mail Sara Hansard at [email protected].