On Capitol Hill this Wednesday, Securities and Exchange Commission (SEC) Chair Gary Gensler will appear before the House Appropriations Committee to review the SEC’s 2023 budget proposal as it looks to continue to fulfill its mission to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
In late March, the SEC submitted its budget “justification” to Congress (PDF) as a precursor to the meeting and revealed several areas in which it expects to continue to engage crypto markets in 2023.
Following up on the SEC’s recent announcement of doubling positions related to crypto enforcement this year, the 2023 budget justification outlines a request for 125 additional positions in the Department of Enforcement (ENF) to help enforce regulations across financial assets – including crypto:
“ENF requests 125 additional positions to enhance the division’s ability to timely pursue the wide variety of misconduct within the SEC’s remit. They will also strengthen ENF’s capabilities to investigate new and emerging issues, including crypto-asset markets, cyber-related risks, and the environmental, social, and governance space. Finally, it is expected that the number of litigated cases will continue to rise as ENF increasingly holds wrongdoers accountable for their misconduct with more meaningful and, in some instances, escalating sanctions. ENF requires additional resources to ensure that it has an adequate number of attorneys to staff the increasing number of litigated cases.”
The ENF only accounts for an increase of 63 full-time employees in the justification’s line item – from 1302 in 2022 to 1365 in 2023 .
Another budget area which may be discussed is from the SEC’s Division of Investment Manangement (IM) which defines itself as developing “regulatory policy for open-end management investment companies (commonly known as mutual funds), exchange-traded funds (ETF), closed-end funds, variable insurance products, other investment companies, and investment advisers.” This division of the SEC has publicly taken a backseat to the SEC’s enforcement initiatives as it relates to crypto. IM would assist in the decision-making around a Bitcoin spot market ETF that companies such as Grayscale have been advocating for in the past year or two.
13 positions are proposed in the SEC’s 2023 IM budget and the justification makes special note of crypto’s evolution as part of the request: “In particular, the focus will be on ensuring appropriate protections when reviewing new investment products such as nontransparent ETFs and funds seeking investments in a limited set of crypto-assets.”
The SEC’s Office of the General Counsel (OGC) is also a part of the budget mix for 2023 and will continue to need funding as it “anticipates continued work on legislative initiatives to reform the existing regulatory structure for the securities markets and the financial services industry.” This includes “responding to emerging crypto-asset issues, and work to protect the Commission’s identity against cyber-impersonation and other deceptive practices.” The OGC is looking to bump up 17 employees to 161 full-time employees (FTE).
Within the SEC’s Office of International Affairs (OIA), continued subsidies are requested for its ongoing work which entails cross-border communications, enforcement and coordination in financial markets. A subset of the OIA, The Regulatory Policy and Supervisory Cooperation (RP/SC) Group, will continue to support Commission efforts “on sustainable finance, asset management, outsourcing, financial technology (fintech) and crypto-assets, and data consolidation.”
The Strategic Hub for Innovation and Financial Technology (FinHub) is part of the SEC’s networking function with the financial industry and is tasked with helping connect market participants to the Commission and visa versa. In 2023, FinHub will be asking for another FTE. From the justification: “FinHub helps coordinate the agency’s oversight of, and responses to, emerging financial technologies, including in the areas of distributed ledger technology (for example, crypto-asset markets), automated investment advice, digital marketplace financing, and artificial intelligence/machine learning.”
Intersecting these budget requests, the SEC made note again of its ongoing need to collaborate across the three broad areas of its mandate:
- Protecting Main Street investors
- Staying abreast of developments in capital markets and allocating resources appropriately
- Improving analytics and recruiting to ensure success
As it relates to digital assets and collaboration, the SEC notes its brethren in commodities: “The SEC and CFTC work closely and collaboratively on a wide range of crypto-asset related issues. Both agencies have dedicated offices responsible for staying abreast of developments in the crypto-asset space, and our respective staff communicate frequently about developments in
Not to be overlooked, decentralized finance or DeFi, is a part of the forward-looking 2023 focus for the SEC. The budget justification notes: “The American public is buying, selling, and lending crypto on these so-called decentralized finance (DeFi) platforms, and they present significant challenges for investor protection and market integrity.” This will be especially relevant for discussion this month considering the recent blow-up of the TerraUSD stablecoin and its Terra LUNA governance token.
More to come on Wednesday.
The hearing with the Senate side of appropriations has yet to be scheduled.