When the United States grew into the world’s top economic power during the 20th century, it was the ingenuity and reliability of our financial system that funded the expansion.
Federal laws passed in the wake of the Great Depression created an effective — albeit imperfect — system that balanced both innovation and regulation with respect to lending, investing, trading and developing new products. But day by day, we are seeing breakthrough technologies render that old way of regulating markets obsolete.
{mosads}Congress now has a problem to solve: Wall Street’s primary regulators do not possess the resources and tools required to oversee an increasingly digital-first financial sector that is constantly evolving due to artificial intelligence, machine learning and high-speed computing.
Much like during the lead-up the Great Recession, when regulatory agencies lacked the manpower to identify the mortgage bubble, Wall Street’s top cops presently lack the ability to track all the challenges and opportunities presented by emerging technology. Put simply, financial institutions are speeding into the future as regulators remain delayed in the past.
JPMorgan Chase Chief Financial Officer Marianne Lake summed the shift up perfectly this spring when she said, “[T]he business case for digital everything is compelling.”
Her organization will spend $11 billion on technology in 2018, while Citigroup plans to allocate $8 billion toward innovation. Moreover, the financial sector is now spending close to $500 billion per year on information technology alone.
These numbers reveal just how quickly the financial and technology sectors are colliding.
The issue is by no means lost on our regulators in the trenches:
“The future is devouring the past […] technology is leading us into a world that is much different than the world we knew five or ten years ago,” Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo said after his agency received even less funding from Congress this year than last.
Operating on a shoestring budget is also the norm at the Securities and Exchange Commission (SEC). Chairman Jay Clayton noted recently that, “The IT budget of one of our largest banks was over five times the SEC’s total budget.”
The SEC’s 2019 budget authority has increased just 10 percent in the last five years to approximately $1.65 billion for Fiscal Year 2019.
Fortunately, there is a relatively simple way to modernize regulatory funding, which would also have the additional benefit of lowering transaction costs for anyone who buys and sells stocks via U.S. exchanges.
A little-known section of the Securities Exchange Act of 1934, Section 31, requires the SEC to collect from self-regulatory organizations (SROs), including all of the national securities exchanges, a transaction fee on securities sold on their markets.
The legislative intent of the fee is to recover the costs incurred by the government, including the SEC, for supervising and regulating the markets.
The fee established in the 1930s has not changed much. It still adjusts according to trading volume, among other factors, and pays for the entire budget of the SEC. Today, however, agency’s mandate covers many activities beyond trading, such as alternative asset management, corporate disclosures and initial coin offerings.
There is another catch that also hinders the SEC. The surplus of fees collected over the amount needed to fund the agency’s annual congressionally-authorized budget flows to the U.S. Treasury. In the most recent fiscal year, this surplus came to more than $500 million and is anticipated to rise to $700 million by 2020.
That is one hefty revenue stream fueled by individual and institutional investors, including public pension funds and endowments. The time has clearly come for Congress to pass legislation that makes better use of that money.
By revising the fee section of Depression-era legislation, we can have equitable distribution of funding and the elimination of redistribution of the budget surplus.
There is still a window for the current Congress to pass a bill that helps ensure the SEC and CFTC receive the funding they need to keep up with today’s technology-infused financial sector. Wall Street will continue to evolve – and so must our regulators.
Kirsten Wegner is CEO of the Modern Markets Initiative, an advocacy group for financial technology and trading firms.