When Congress passed the Dodd–Frank Act last July, lawmakers widely proclaimed it the most sweeping reform of financial regulation in the United States since the Great Depression. 

Not so fast. Just six months later, it is becoming increasingly clear that, in fact, the passage of Dodd-Frank has settled very little.

That's because Congress has now failed to provide the Securities and Exchange Commission and the Commodity Futures Trading Commission—the agencies that must write the new rules and reports that the law requires—with the necessary funds to carry out their mandates. Denying these funds is a not-so-stealthy attack on the financial reforms called for by Dodd-Frank, and shows that (as one commentator put it) the law was really “more a promise to write a bill than a bill itself.”

Indeed, the Dodd-Frank Act requires the SEC to create five new offices within its existing structure, conduct and publish 67 one-time reports or studies, conduct and publish another 22 reports on a periodic basis, and promulgate more than 240 new rules. Once these rules are written, of course, they must be implemented and enforced by the staff of the SEC and the CFTC.

The substantial new burdens imposed upon the SEC did not fall upon an agency with excess capacity or budget. To the contrary, the chairman and commissioners of the SEC have stated for several years that their budget is inadequate. In Congressional testimony in 2009, Chairman Mary Schapiro pleaded for a meaningful increase in the SEC's funding in its 2011 budget. She noted that since 2005 the agency had endured three consecutive years of flat or declining budgets, “the end result being a 10 percent reduction in its workforce and a cut of more than 50 percent in its new technology investments. This occurred at the same time that the securities markets we regulate were growing significantly in size and complexity.”

Schapiro asked for an increase of $182 million for fiscal 2011 (which began on Oct. 1, 2010), to bring the agency's total budget to $1.3 billion. That extra funding would add more than 375 new full-time positions and pay for $30 million in new technology investments—mainly in the enforcement, examination, risk-assessment, and market oversight functions. And all that was before Dodd-Frank heaped so many additional responsibilities onto the SEC's plate. Last September, after the law was passed, Schapiro told Congress that the SEC would need to hire another 800 people to address all the additional work.

Schapiro was not exaggerating in her 2009 testimony about the SEC's pressing need for additional funds. A 2009 report issued by the Government Accountability Office confirmed that a lack of funds was hindering the work of the Enforcement Division, forcing it to forego some worthwhile cases and close others prematurely due to insufficient resources. The report listed a number of problems caused by the budget squeeze, including inadequate support staff, outdated document management systems, inability to share information between divisions, poor access to specialized services such as forensic accounting, and so on.

All that meant that more money for the SEC would be critical to its success in implementing Dodd-Frank and executing all of its other regular duties. Dodd-Frank accounted for that. Under the legislation, the SEC's budget was set to double in five years from its 2010 level of $1.118 billion, as follows:

·       Fiscal year 2011: $1.3 billion;

·       Fiscal year 2012: $1.5 billion;

·       Fiscal year 2013: $1.75 billion;

·       Fiscal year 2014: $2 billion;

·       Fiscal year 2015: $2.25 billion.

Frozen Forward

Well, that was then. Suffice to say that whatever enthusiasm Congress once had for regulatory reform has now much diminished.

The first indication of a change in sentiment came in late September, when Congress passed a temporary spending bill that did not include any additional funds for the SEC. Instead, the SEC's budget was frozen at 2010 levels along with the rest of the federal government due to the ongoing budget impasse in Congress.

In December the SEC announced that it would not be able to go forward with plans to open those five new offices required under Dodd-Frank due to “budget uncertainty.” One of the offices placed on hold was the high-profile Whistleblower Office, which was scheduled to handle the expected crush of new tips that will be generated by Dodd-Frank's new whistleblower bounties. For now, the SEC said, the functions of the Whistleblower Office will be “temporarily assigned to existing staff within the Division of Enforcement.”

On December 21, in one of its last acts before leaving town, the 111th Congress approved another temporary funding bill that will maintain government operations through March 4. Once again, however, Congress did not give the SEC any more money than its 2010 budget levels. Prior to passage of that bill, Senate Republicans blocked two other bills in December that would have raised the SEC's 2011 budget anywhere from $1.25 billion to $1.3 billion.

Numerous people say the lack of such critical funding for the regulators in charge of implementing Dodd-Frank is no oversight. Republicans, who largely opposed Dodd-Frank, now control the House of Representatives, and many have already called for its repeal. If repeal isn't possible—and since Democrats still control the Senate and the White House, it isn't—then starving the SEC of money to enforce the law is a logical Plan B. Indeed, incoming House Majority Leader Eric Cantor recently said that denying funds to the SEC and other agencies is “what the American people are expecting.” He stated: “We certainly have the power to go about denying [President Obama's] agencies the funding they need.”

Denying these funds is a not-so-stealthy attack on the financial reforms called for by Dodd-Frank, and shows that (as one commentator put it) the law was really “more a promise to write a bill than a bill itself.”

Christopher Dodd, the former chairman of the Senate Banking Committee who just retired in December, believes that depriving the SEC of funds to derail the legislation that bears his name is precisely what Republicans want to do. “It's harder to accuse someone of wanting to deregulate when they just starve the budget of an agency … [rather than] actually try to get rid of it,” Dodd recently said.

The budget freeze is already affecting other areas at the SEC beyond the Dodd-Frank Act. Following the infamous “Flash Crash” of May 6 (which the agency attributed to algorithm-based trading), the SEC reviewed more than 1,000 job applications in a search to bring on its own algorithm experts. The SEC identified five such experts—but doesn't have the money to hire them. The agency also recently had to back out of a lease for 900,000 square feet of office space in Washington, D.C.; delay plans for a new primary data center; and curtail travel by its investigators and inspectors.

All of this recent budget wrangling shows, once again, how important self-funding could have been to the SEC. Schapiro and her fellow commissioners pushed hard last year for lawmakers to let the agency fund itself based on the fees it collects, freeing it from the whims of appropriators in Congress. House and Senate lawmakers reportedly even reached an agreement to that effect in mid-June 2010. About a week later, however, a last-minute compromise between Senate and House negotiators wrapping up the Dodd-Frank Act rejected self-funding. As part of the compromise, the SEC was promised a larger, rapidly escalating budget and the ability to tap into a new $100 million reserve fund. Those promises now appear quite illusory.

As the 112th Congress convenes in Washington, epic battles over the federal budget will be a recurring theme. Will the SEC ultimately get the funding it needs to implement Dodd-Frank? It's too soon to tell. But the answer will be a good indication of how this Congress views financial regulation overall.