The Securities and Exchange Commission’s (SEC) ability to closely regulate the securities and financial markets has become “increasingly strained” due to its restricted funding, limited staff and high turnover of senior staff, according to a report released by General Accounting Office (GAO) last week.

These constraints have “forced [the] SEC to be selective in its enforcement activities and have lengthened the time required to complete certain enforcement investigations,” and have led to “less frequent and less complete reviews” of corporate filings, the GAO concluded.

In the past decade, SEC staff charged with regulatory oversight responsibilities grew between 9-166%, while its workload expanded by 60-264%, according to the 37-page report, “SEC Operations: Increased Workload Creates Challenges.” The level of corporate filings rose 60%, but the SEC staff charged with reviewing those filings increased only 29%, it said. Similarly, the number of complaints and inquiries received at the agency jumped by 100%, but the staff dedicated to investigating the complaints rose only 16%.

The SEC staff last September totaled 3,285, 39% of whom were attorneys, 18% were accountants or financial analysts, 6% were investigators or examiners, and 37% were technical and support staff.

The GAO initiated the review at the urging of Senate Banking Committee Chairman Paul S. Sarbanes (D-MD) and Sen. Christopher J. Dodd (D-CT), chairman of the committee’s securities and investment subcommittee.

An understaffed SEC has failed to keep up with the expansion in the securities markets, which the GAO said “have experienced unprecedented growth and change.” At the same time, “technology has fundamentally changed the way markets operate and how investors access markets. These changes have made the markets more complex. In addition to these market-driven changes, the markets have become more international, and legislative changes have resulted in a regulatory framework that requires increased coordination among financial regulators and requires that [the] SEC regulate a greater range of products.”

As a possible short-term solution to its problems, the GAO urged the SEC to consider tapping into its “no-year fund” to recruit new staff members and retain senior-level staff. The SEC has about $25 million in this account, which is comprised mostly of fees collected by and funds appropriated to the agency over the years, but which have not been touched.

In addition, “we recommend that [the] SEC explore innovative ways to attract senior level staff and bring in additional information technology expertise to better position itself to oversee evolving securities markets,” the GAO report suggested.

In the longer term, the report recommended that the SEC carry out a strategic planning effort to “systematically determine [the SEC’s] regulatory priorities and resource levels needed to fulfill its mission,” and expand its recruiting efforts accordingly.

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