Sorry, Senator Schumer, but Wall Street should not directly fund the SEC

If Senator Charles Schumer (D-NY) has his way, the Securities and Exchange Commission (SEC) will get its funding from Wall Street. It's not really that big of a switch from the current source of the SEC's budget -- fees paid to the Treasury Department by companies that issue stock. The Treasury then figures out how much of that money should go to the SEC. But I think that Schumer's idea is absolutely terrible.

Before getting into why I disagree with his idea, it's worth noting that the SEC does a really bad job of protecting investors. Its 3,650 person staff gets about $1 billion a year to oversee the public securities markets along with 35,000 registered public companies and investment funds. But as the recent report on how it missed the Bernie Madoff scandal reveals, the SEC is utterly unable to do its job in the face of sophisticated scammers.

And Madoff is not even the most prominent representative of the Wall Street that wiped out $30 trillion of shareholder value in 2008 and required $23.7 trillion in taxpayer money to keep it from collapsing. There are far more sophisticated financial scammers out there who the SEC completely failed to stop.

Among them are the ratings agencies which competed with each other to be the one to wrap toxic waste in the golden foil of their AAA ratings -- the whole sordid process paid for by the investment banks that issued that toxic waste.

And it is unclear how independent the SEC can be if, as Schumer wants, it gets paid by the very banks it is supposed to regulate. He may be thinking that this will make it easier for the SEC to get the funds it needs since it will no longer have to fight for more money from the Treasury Department.

But his approach will make the SEC financially dependent on the very industry from whose occasional malfeasance the SEC is supposed to be protecting the public. But the SEC has an even bigger problem -- its underpaid staff go to the SEC with the hope of using it as a stepping stone to a much more lucrative job inside Wall Street.

With the current structure for regulating Wall Street, the only way the SEC could keep up would be to pay more than Wall Street for the best people. That way, the SEC would actually have insight into what Wall Street is doing and be in a position to protect investors from its efforts to scam the public. But I firmly believe that such a pay hike will never happen.

So I think the U.S. should impose two fundamental changes that I believe would reduce the SEC's case load dramatically. First, as I've said before, the U.S. should create an independent government agency to create financial reports so we can stop letting companies and investment managers write their own report cards. Second, the U.S. should put Wall Street pay in escrow so that dealmakers' fees are at risk along with investors' returns.

By changing the way Wall Street gets paid and reports on its performance, the opportunities for financial scam would probably decline significantly.

Absent that, I suggest a tweak to the current funding approach. The SEC should be funded by fees on Wall Street's corporate clients -- the entities that issue stocks and bonds -- and that money should go directly to the SEC rather than be funneled through the Treasury. I think it's a dangerous idea for the SEC to be funded by the very industry that it's supposed to be regulating.

Peter Cohan is a management consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter.

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