S.E.C. Boosts Tech Spending to Apprehend the Next Madoff
March 8, 2010
The Securities and Exchange Commission's long-standing failure to detect Bernard Madoff's massive Ponzi scheme ushered in one of the most difficult periods in its history. Critics lambasted the investor-protection agency for being asleep at the switch and too cozy with Wall Street, among other things.
Among the complaints: the SEC's technology was outdated and no match for the sophistication of Wall Street's state-of-the-art information technology. Or, not so state-of-the-art, even. Madoff took trades out of thin air and put them in customer accounts, using a relatively ancient IBM AS/400 ("How Bernie Made Basket Cases of His Customers' Accounts,'' page 16, Nov. 2, 2009).
A key part of the agency's response is embodied in its budget for fiscal year 2011, which begins this fall.
SEC spending will increase 11 percent to $1.23 billion, and includes a $12 million boost for technology.
While that may not seem like much, the SEC says the increase will be strategically employed on a handful of key technology projects aimed at pro-actively reshaping areas where the investor watchdog proved especially vulnerable.
A significant technology initiative also is underway in the enforcement division, where a new market abuse unit is building a sophisticated database to go on the offense to catch insider trading.
"If the $12 million [budget increase] was just focused on the complaint database, it would be enough," says Jeff Plotkin, partner in the New York office of Day Pitney and former assistant regional manager of the New York regional office of the SEC.
The SEC's [technology] budget is aligned with the meltdown. "The SEC didn't understand or chose to ignore the level of risk [derivatives] products posed to the broker- dealer,'' Plotkin says.
The SEC has designated $160 million or 13 percent of its budget for "direction and administrative support.'' This includes spending for the Office of Information Technology (OIT), which does not have its numbers broken out separately.
But the overall budget request notes that $12 million is being designated to "enhance the data management, integration, document management, disclosure, and infrastructure support functions" of the SEC, and to strengthen the agency's controls over financial reporting.
There is also a significant amount being spent on technology under the SEC's $430 million enforcement budget, which represents 34 percent of the total (see pie chart).
FOCUS ON TIPS AND COMPLAINTS
Charles Boucher, who became the SEC's Chief Information Officer in December 2008, says that the Office of Information Technology's most important initiative following the financial crisis and Madoff scandal concerns how it handles complaints coming into the agency.
"We get thousands of tips and complaints," he told Securities Industry News. "In the past, sharing [of these at the SEC] was not as organized as it could have been."
Late last year, the SEC configured a system into which records of all phone calls and email messages coming in from individual investors are placed. "We have a transitional repository to extract that information from across the agency," he says. "This is our number one technology priority. We have a senior-level focus on this."
In a February 5 speech at an "SEC Speaks" conference, SEC Chairman Mary Schapiro said that the SEC is "revamping" its technology for handling the "massive number of tips and complaints we receive."
