Give the SEC Its Due: More Money. Joseph A. Grundfest.  November 2002.

It’s budget season and every agency has a story. The FBI, the CIA, and the military all need more resources to respond to mushrooming security concerns. So it’s easy to understand how a knife-wielding budgetmeister might decide to carve back the $776 million Securities and Exchange Commission authorization contained in the Sarbanes-Oxley Act of 2002. That’s what happened recently, when the administration proposed a budget of $568 million, freeing up $208 million to be spent elsewhere.

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The administration might respond to critics by pointing out that its proposal is $130 million more than the SEC’s current budget. Few agencies are getting 30% budget increases these days. But the administration will likely discover that if it prevails, it will have saved itself a very expensive $208 million.

The $776 million budget figure wasn’t pulled out of thin air. The number was an essential part of the legislative bargain. The additional funding was intended to help prevent and punish fraudulent behavior through monitoring and oversight. Punishment requires more litigators with the wherewithal to go to the mat against some of the biggest, smartest law firms representing defendants in SEC proceedings. The funding was also intended to provide investors with timely access to public filings, reduce compliance costs for public companies, and help start up a new accounting oversight board. It’s clear that $568 million will prove insufficient.

The proposal also creates credibility problems for the administration. What happens when Congress next considers a bill containing similar budgetary commitments? The White House signed off on Sarbanes-Oxley on July 30. Now, only 80 days later, it’s backing away dramatically from its budgetary commitment. Who’s to say similar episodes won’t recur? You can already hear the choruses of “Remember Sarbanes-Oxley” on the floor of Congress.

On a practical level, the cut will also exacerbate an enforcement vacuum in our nation’s capital markets at the worst time. The SEC lacks the resources it needs to prosecute all instances of major fraud. Nature may abhor a vacuum, but state attorneys general and trial lawyers love one. The decision to starve the SEC only empowers this brigade of alternative enforcers. Do we really think they’d do as effective a job as a well-funded SEC?

Not by a long shot. Also, if this budgetary backtracking is driven by fear that a bulked-up SEC will impose substantial compliance costs on the private sector, the administration should recognize that history teaches the opposite is true. It’s when the agency is politically weak and its resources stretched thin that it strives to compensate by imposing inefficient compliance and litigation burdens on corporations and investors. In contrast, a well-funded agency doesn’t have to prove its mettle by pursuing questionable lawsuits or adopting overbearing regulations. Today’s weak SEC is a prescription for disaster for Wall Street and Main Street alike.

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Yes, it’s hard to put a price on the value of trust, and the recent decline in market valuation can’t be entirely attributed to Enron and the like. Many causes conspired to drive prices to their peak. Many caused them to fall. But the market’s ability to recover will depend on the SEC’s ability to restore confidence in the integrity of our financial reporting system.

At the end of the day, we’re known by the tough decisions we make. There’s still time for the administration to reverse course and support legislation it has already signed. It shouldn’t be that hard to honor a commitment already made in a market that’s looking for signs of trust and confidence.

Mr. Grundfest, a professor at Stanford Law School, was SEC commissioner from 1985-90.

This article originally appeared in the Wall Street Journal on October 29, 2002.