As investors and advisors continue to sort through the implications of the myriad measures contained in the One Big, Beautiful Bill Act Congress passed this month, the Securities and Exchange Commission is dealing with a different facet as it deals with cancelled funding that had been dedicated to “long-term” IT projects, including cybersecurity.
The SEC Reserve Fund was initially established in the 2010 Dodd-Frank Act, but was discontinued in a little-noticed section of the reconciliation legislation.
According to Corey Frayer, the director of investor protection with the Consumer Federation of America and a former policy advisor for prior SEC Chair Gary Gensler, the funding essentially acted as a “savings account” for the commission to commit to long-term projects despite the hills and valleys of annual congressional appropriations.
“If you’re a person who is genuinely concerned about the government keeping up with technological advances and using technology to be at its most efficient with taxpayer money, eliminating technology planning is the opposite of good governance,” Frayer said.
With the enactment of Dodd-Frank, Congress allowed the SEC to set up the fund to deposit up to $50 million annually from fees collected from registrants, with a balance limit of $100 million, separated from the agency’s annual appropriation (the commission is technically deficit-neutral, which means its annual appropriations should be offset by transaction fees).
Congress didn’t restrict the specific use of the funding, and according to a 2015 report from the Office of the Inspector General, SEC officials decided to use the fund for “large-scale, enterprise-wide, multi-year, mission-critical IT modernization efforts.”
The focus on tech efforts continued in the following decade. In recent years, the Reserve Fund money was used for projects “that enhance the agency’s security posture, expand the use of risk and data analytics, and migrate legacy applications to modern enterprise solutions,” according to the agency’s Congressional Budget Justification for FY 2025.
According to Carlo di Florio, the president of compliance consulting firm ACA Group, the need for these improvements was a lesson learned after the 2008 crash.
In January 2010, di Florio was recruited into the SEC to lead the agency’s exam division amid fierce criticism and calls to abolish the commission altogether after it failed to prevent the financial crisis (and missed Bernie Madoff’s titanic fraud scheme). Di Florio and others believed the commission became “resource-constrained” in the previous decade and failed to keep pace with technological evolution in the markets.
“If you don’t invest in technology, it becomes obsolete pretty quickly. And that was a little bit of the problem leading into the financial crisis and Madoff, was that they stopped investing in technology,” he said. “A decade went by, and the world had changed dramatically.”
According to Frayer, while the SEC is ostensibly deficit-neutral, it still undergoes a congressional appropriations process that could leave long-term projects vulnerable to ideological shifts of power in Washington, with the Reserve Fund acting as a “middle ground.”
“This was a sort of stop gap so they could at least make some of those long-term planning decisions and invest in a project that might take three years and that would be incredibly costly to start and then end after one year because the next year’s appropriations didn’t cover the ability to do that,” he said.
However, the fund has been a longtime irritant for GOP legislators, who argued that ending it would increase the agency’s accountability. According to Reuters, the first Trump administration attempted to halt the funding in 2020, which would have required the SEC to request additional money from Congress.
“While the fund is outside of the congressional appropriations process, it has come to represent an extension of the SEC’s regular appropriation rather than the emergency reserve it was intended to be,” a 2020 White House Office of Management and Budget report read.
Though the first Trump administration was unsuccessful, the president got his wish this year in the One Big, Beautiful Bill Act passed earlier this month.
According to the legislation, the SEC can continue to spend funds obligated before the bill’s passage through Oct. 1; at that point, the “obligated and unobligated balances of the amounts in the (fund) shall be transferred to the general fund of the Treasury,” and the fund will be closed.
The SEC did not respond to a request for comment on the fund’s loss and what it could mean for any ongoing projects inside the agency, but di Florio felt the explosion of artificial intelligence-related tools (and their use in potential fraud schemes) made it all the more critical for the commission to keep pace.
“If they don’t have the resources to do that, and the rest of the industry does, we’re going to be right back to the old cat and mouse game where the industry has all the modern tools and the regulators are playing with yesterday’s tools,” he said.
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