Congress created SEC in 1934 to administer and enforce the federal securities laws to protect investors and maintain the integrity of the securities markets. SEC’s mission is to (1) promote full and fair disclosure; (2) prevent and suppress fraud; (3) supervise and regulate the securities markets; and (4) regulate and oversee investment companies, investment advisers, and public utility holding companies. SEC works to fulfill this mission through various divisions and offices, among them the Office of the Executive Director, which formulates SEC’s budget and authorization strategies. As a federal agency, SEC is subject to congressional oversight. Congress oversees federal agencies primarily through two distinct but complementary processes—authorizations and appropriations, which are implemented through authorizing and appropriating committees in the U.S. Senate and House of Representatives. The authorizing committees are responsible for creating a program, mandating the terms and conditions under which it operates, and establishing the basis for congressional oversight and control. SEC’s authorizing committees are the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services. The appropriations committees and subcommittees are charged with assessing the need for, amount of, and period of availability of appropriations for agencies and programs under their jurisdiction. SEC’s annual appropriations are under the jurisdiction of the Subcommittee on Commerce, Justice, State, and the Judiciary, U.S. Senate Committee on Appropriations; and the Subcommittee on Commerce, Justice, State, the Judiciary, and Related Agencies, House Committee on Appropriations. To fund its operations, the federal securities laws direct SEC to collect fees. SEC generally collects three types of fees: Securities registration fees, which are required to be collected under Section 6(b) of the Securities Act of 1933 (the Securities Act), are paid when companies register with SEC new stocks and bonds for sale to investors. In 2001, SEC collected $987 million in Section 6(b) fees; Securities transaction fees, which are required to be collected under Section 31 of the Securities Exchange Act of 1934 (the Exchange Act) are paid by national securities exchanges and national securities associations when registered securities and security futures are sold on or off exchanges through any member of such an association. In 2001, SEC collected $1.04 billion in Section 31 fees; and Fees on proxy solicitations for mergers, consolidations, acquisitions, or sales of a company’s assets, which are required to be collected under Section 14(g) of the Exchange Act, are paid by the person filing proxy solicitation materials for such transactions. Fees on the purchase of securities by an issuer of its issued securities are paid by the issuer under Section 13(e) of the Exchange Act. In 2001, SEC collected $33 million in filing fees. SEC fees are deposited in a special SEC appropriations account to be used as offsetting collections. Although the fees were enacted to fund SEC operations, figure 1 illustrates how the amount of fees collected in recent years has far exceeded SEC’s appropriated budget. For example, in 2000, SEC collected $2.27 billion in fees, while the agency’s 2000 budget was $368 million. Similarly, in 2001, SEC collected about $2.1 billion, while its 2001 budget was $423 million. Projected fee collections in excess of SEC’s appropriations are available to SEC’s appropriators to fund other priorities within the CJS appropriations bill. Congress first addressed the issue of excess SEC fees in 1996 through the National Securities Markets Improvement Act of 1996, which reduced registration and transaction fees. However, SEC’s fee collection grew even higher because of subsequent increases in stock prices and stock trading volume. Viewing these excess fees as an unwarranted tax on investment and capital formation, Congress enacted the Investor and Capital Markets Fee Relief Act on January 16, 2002. The Act substantially reduces the fees collected by SEC and designates all such fees as offsetting collections available to fund the operations of the agency, to the extent provided by Congress. Prior to the enactment of this Act, most of the fees collected were deposited in the U.S. Treasury general fund as revenue. The Act also reduces the basic rates for transaction fees, registration fees, stock repurchase fees, and merger and acquisition fees, and it eliminates certain other filing fees. The Act includes “target offsetting collection amounts” for both transaction and registration fees for fiscal years 2002 through 2011. SEC would be required to adjust the basic rates for those fees to make it “reasonably likely” that collections would equal the target amounts. The Act also grants SEC the authority to pay its employees’ salaries and benefits at levels commensurate with those paid by the federal banking regulators (pay parity). For 2003, SEC currently estimates the additional cost of implementing pay parity to be $76 million. SEC anticipates that the funding to accommodate this increase will be provided exclusively out of the amount of fees SEC is scheduled to collect annually under the Act and appropriated by Congress. Although SEC fee collections as estimated for 2003 in the Act total $1.33 billion, the President’s 2003 Budget request included a budget estimate of $466.9 million for SEC. This amount represents a $29 million, or 6.6 percent, increase over SEC’s 2002 budget of $437.9 million but does not include any funding for a pay parity program in 2003. To date, Congress has not enacted SEC’s 2003 appropriation. As reported in our SEC operations report, SEC is operating in an increasingly dynamic regulatory environment. Over the past decade, the securities markets have undergone tremendous growth and innovation as technological advances have increased the complexity of the markets and the range of products afforded to the public. Larger, more active, and more complex markets have produced more market participants, registrants, filings, examinations and inspections, legal interpretations, complaints, and opportunities for fraudulent activities. In our SEC operations report, SEC and industry officials agreed that SEC’s ability to fulfill its mission in such a dynamic environment has become increasingly strained as SEC’s growing workload has substantially outpaced increases in its staffing levels. Specifically, over the past decade, we found that staffing within SEC’s various oversight areas has grown between 9 and 166 percent, while workload measures in those areas have grown from 60 to 264 percent. Moreover, following the sudden and highly publicized collapse of Enron Corporation and other corporate failures, SEC has been under increasing pressure to ensure that it is equipped to adequately oversee the securities markets and to ensure that investors receive accurate and meaningful financial disclosure, an important part of SEC’s mission to protect investors. In addition, legislative changes such as the Gramm-Leach-Bliley Act of 1999, the Commodity Futures Modernization Act of 2000, and the USA Patriot Act of 2001 placed added demands on SEC’s limited resources. All of these changes have significant repercussions and pose challenges for SEC’s oversight role. In light of these challenges and prompted by concerns about SEC’s ability to carry out its mission, legislators introduced H.R. 3764 and S. 2673, both of which would authorize appropriations for SEC of $776 million, and H.R. 3818, which would authorize appropriations for SEC of $876 million. Both House bills would designate more than half of these amounts for the Division of Corporate Finance and the Division of Enforcement to increase enforcement in financial reporting cases and other oversight initiatives. The Senate bill designated specific amounts for pay parity, information technology, and additional staff for oversight of audit services. Federal financial regulators are largely self-supporting through fee collections, assessments, or other funding sources, but not all of these self- funding options meet the Act’s definition of self-funding. The variation among federal agencies is attributable to how and when Congress makes the funds available to the agency and how much flexibility Congress gives the agency in using the fees or other funding sources it collects. At some agencies, Congress limits the amount of assessments collected or available for agency use. Such limitations are generally established by provisions in annual appropriations acts. For example, funding for SEC in 2002 was appropriated from fees collected in 2002 and prior years. In SEC’s case, although all the offsetting collections by definition are dedicated to SEC, Congress limits how much fee revenue is available. For example, in 2001, SEC collected about $2.1 billion in fees; however, Congress appropriated about $423 million for SEC’s operations. Therefore, almost $1.7 billion was available to the CJS subcommittees to offset spending for other agencies and programs under CJS jurisdiction. There are other regulatory agencies, such as FCA and OFHEO, which also operate at this more congressionally controlled end of the self-funding range (see fig. 2 for a description of these two agencies’ missions as well as the missions of other financial services regulators). Although FCA and OFHEO fund their operations solely by assessments from their regulated entities, these agencies remain subject to the appropriations process. That is, Congress establishes annual limits through the appropriations process by approving the amount of assessments these agencies can collect. For example, in 2001, Congress appropriated $40 million to FCA, which authorized FCA to collect assessments up to this amount as offsetting collections for 2001. Moreover, Congress limits the amount of assessments that FCA can obligate for administrative expenses. For example, in 2001, FCA’s obligation for administrative expenses was limited to about $38 million. Congress also establishes OFHEO’s budget in a similar manner. On the other hand, Congress has granted more self-controlled funding structures to other agencies. Some of these agencies have permanent indefinite appropriations, which means that these agencies can use whatever amount of funds are collected without any further legislative action. Agencies at this less congressionally controlled end of the range include the federal banking agencies (that is, FRS, OCC, OTS, FDIC, and NCUA).