SEC Increases IT Investments

The Securities and Exchange Commission (SEC) is getting a face-lift, and technology is playing a central role in its transformation. According to a recent report by Needham, Mass.-based TowerGroup, the SEC IT budget for 2005 -- $113 million -- is 2.5 times that for 2002. The budget will be spent on four key areas: upgrading technology infrastructure (telecom, hardware, storage, desktops); developing new applications; improving data management; and expanding analytical capability.

A massive overhaul was imminent, says Dushyant Shahrawat, a senior analyst at TowerGroup and author of the report. Historically, the SEC has relied on self-regulatory organizations like the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) to invest in systems, people and processes to identify potential violations in the industry and refer them to the Commission. But after a series of corporate scandals like Enron and WorldCom brought much criticism from the U.S. Congress and the public, the pressure to strengthen the SEC's effectiveness was greatly increased. "Collective pressure was building up over the last five to seven years," explains Shahrawat, "I think one of the most telling statistics is between 1996 and 2000, SEC IT spending went up 2 to 3 percent at best when the industry that it most oversees, the brokerage industry, they're IT spending was going up 16 to 17 percent every year."

In recent years, SEC Chairman William Donaldson has become more vocal about his plan to make the Commission a more proactive, efficient and effective regulatory body -- a plan that will undoubtedly affect all industry participants. Broker-dealers can expect to face more diligent investigations and swifter enforcement both directly from the SEC as well as through better collaboration with the NYSE and NASD. There also will be much closer scrutiny on the investment management business as a result of trading scandals and the rapid growth of the mutual fund industry. TowerGroup believes that for each additional budget dollar that the SEC spends on internal efforts, the industry will spend five dollars to ensure better compliance amid a stricter regulatory environment. "In 2004 going forward, there will be some visible impact on what firms will have to do with compliance spending and the amount that will be spent because there'll be a more active regulator on their back," Shahrawat says.

He is quick to add that the SEC will make life easier on the industry too. The Commission's initiative to improve the corporate filing process with standardization based on extensible business reporting language, or XBRL, will alleviate the hassle for public firms in filing financial data into EDGAR, the SEC's electronic data gathering, analysis and retrieval system. Additionally, plans to enhance both EDGAR and the SEC Web site also will help the industry gain better access to massive amounts of valuable information. "It's not all negative," Shahrawat says.