The SEC has in recent years suffered through its fair share of failures, blunders and gaffs. Indeed, there are times that it seems like this string will never end. At the same time it is important to view these incidents in context. The agency is responsible for regulating and policing markets which expand, innovate and change at a pace which far exceeds the ability of even the best government or private sector regulator to keep up. Nevertheless, the SEC has for most of its history been known as one of the best and most efficient regulators in government with a highly regarded enforcement program. Despite always being under funded and understaffed, the agency has effectively monitored increasingly complex markets and litigated with the best of the best that that a much better financed corporate America has to offer. Yet the gap between the resources the SEC needs and what congress is willing to fund for the tasks it demands done continues to widen.

Recently, the House appropriations committee voted to ax the SEC’s budget by $222.5 million. The proposal is to freeze the fiscal 2012. Setting aside the fact that the SEC has vastly expanded obligations under Dodd-Frank, if the goal is effective regulation and law enforcement, the wisdom of cutting an already inadequate budget is at best questionable. According to its report the Committee is concerned about recent errors as well as the SEC’s track record in dealing with Ponzi schemes. There is no doubt that the SEC failed to find Madoff. There is no doubt that the SEC failed to find Stanford and other Ponzi schemes. This however is in the past.

If bringing Ponzi scheme cases is the litmus test for more funding the Committee missed the mark – the SEC is entitled to a big budget increase. The House Committee need only briefly examined the current enforcement cases listed on the SEC’s website (or search the data base on this blog for “investment fund fraud”) to understand this point. Just last Thursday for example, the SEC filed an enforcement action against Jeffrey Lowrance and his entity, First Savings & Loan, Ltd. for operating an investment fund fraud. SEC v. Lowrance, Case No. CV 11 3451 (N.D. CA. Filed July 14, 2011).

The case is typical of the dozens and dozens the SEC has brought in recent months. Mr. Lowrance ran a fraudulent investment scheme which raised about $21 million from investors in 26 states. Like most of these schemes it promised steady returns. Some investors were told those returns were guaranteed through trading in a specialized foreign currency program. The false pitch line used by Mr. Lowrance was politics and Christian values. Defendant Lowrance assured investors he shared their Christian values. He also claimed to share views about limited government (perhaps to keep the DOJ and SEC away from his operation). Some investors were solicited through an advertisement in start-up newspaper, USA Tomorrow, distributed at a political rally in Minneapolis, Minnesota. Apparently investors were so taken with this sales pitch that even as the scheme began to unravel in 2008 – there were virtually no investments – over the next several months he was able to raise another $1 million from 36 investors. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The SEC’s case is in litigation. Mr. Lowrance is also facing criminal charges now that he has been brought back from Peru.

Lowrance is just one of well over one hundred similar cases the SEC has brought in recent months. Thus if Ponzi scheme cases are the test, the SEC should get back all the money cut from its budget and more. More importantly, it makes no economic sense to cut the SEC’s budget. This is suppose to be a time of belt tightening and promoting efficiency. Yet as James B. Stewart points out in a recent excellent article in the New York Times (here) the SEC’s budget is fully paid for by the fees it charges. Not only that, the enforcement program generates billions of dollars in disgorgement, interest and fines, much of which goes to the U.S. treasury – it makes money for the government. In contrast, cutting the SEC’s budget means reducing fees and reducing cash paid to the U.S. treasury by the enforcement program.

In the end effective law enforcement and fiscal prudence dictates that the SEC’s budget be increased, not decreased. If there is any lesson to be learned from the recent market crisis it is that lax regulation and ineffective enforcement helps give birth to market calamity and fraud. If fiscal prudence and efficiency – getting “more bang for the taxpayer’s buck” – is the watchword, then enabling an agency like the SEC which has retooled its enforcement program and makes a huge profit should be a priority. This means that whatever errors the agency has committed, it is time to get over it. The mission of the SEC is far too important. Its time to enable the Commission by giving it the resources necessary to do the job congress has directed – bring a new ethics to the market place.