Who Pays the SEC's Bill on Crypto?
(Hint: Not Crypto)
by Jim Toes
On Wednesday, Chairman Gary Gensler presented the SEC’s 2023 budget request before the House Appropriations Subcommittee on Financial Services and General Government. The SEC’s proposed budget, which was made public in late March, includes nearly doubling its Crypto Assets and Cyber team, a unit of its Enforcement division. I think all would agree that growth in the crypto markets necessitates more regulation. However, few of us would think it wise or fair, that the money to pay for this increase should come entirely from another asset class. Unfortunately, it does; our equity markets.
Fees designed to recover the costs incurred by the government, including the SEC, for supervising and regulating the securities markets and securities professionals are covered under Section 31 of the Securities Act of 1934. Section 31a fees are charged on equity transactions and are paid by the entity or individual who initiates the trade. So, if a broker-dealer acts in an agency capacity, the fee can be passed to the investor. On principal transactions, it is the broker-dealer who pays.
The history of Section 31a fees dates back to the early 2000’s when the Commission’s annual budget was in the $450 million range and its primary, if not only, responsibility was oversight of the equity and options markets. Since then, the Commission’s regulatory responsibilities have broadened into other areas such as credit rating agencies, fixed income and now, crypto. These new responsibilities contribute to consistent year-over-year budget increases, while all the time the funding model remains the same.
In his testimony, Chairman Gensler made a strong case to justify the SEC’s 2023 budget request of $2.149 billion. Increased headcount for the Chair's ambitious regulatory agenda and crypto were two strong points made to justify the request. Another, was that since Section 31 stipulates that 31a fees are the funding mechanism for the Commission’s budget, the “SEC’s funding is deficit-neutral, with any amount appropriated to the agency offset by transaction fees” - something all SEC Chairs have been able to say since Christopher Cox.
To be clear, STA has no opinion on whether Chair Gensler’s $2.149 billion request is too much, or too little. We simply ask: why should the equities market bear the entire burden of funding a regulator charged with overseeing multiple asset classes? It’s a question we asked in 2014, and we have yet to see a logical answer.
The rise of digital assets compounds this problem. With the level of intricacy and innovation that exists in the crypto space, regulating it will be a mammoth task, forcing the equities market to foot a much larger bill while being subject to the same level of oversight. Having equities underwrite crypto regulation isn’t just unfair, it could easily result in a large mismatch between the resources available and the resources needed.
Instead of waiting for the problem we all know is coming down the line
— the SEC having an insufficient budget to properly fulfill its increased regulatory burden — let’s tackle the problem now. As regulators and lawmakers try to decide on crypto oversight, their conversations should include a funding model that places the cost of regulation on the asset being regulated.
