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SEC ‘Capacity Gap’ Risks Oversight Lapses as Targets Multiply

The U.S. Securities and Exchange Commission is about 400 employees short of what it needs to manage its current workload, according to a consultant’s four-month internal review mandated by the Dodd-Frank Act.

The preliminary findings by Boston Consulting Group Inc. reinforce arguments by SEC officials that the agency is underfunded and understaffed as it takes on oversight of derivatives, credit-rating firms and municipal bonds, according to a draft copy of the report obtained by Bloomberg News.

“Without sufficient human resources, the agency will be unable to complete the requirements of Dodd-Frank while maintaining its current activities,” the draft said.

The study said staffing levels had declined since 2005 and that SEC employees interviewed consistently complained their departments were understaffed. The “capacity gap” of 375 to 425 employees identified in the report could be partially offset by shifting managers down to front-line or support roles, it suggested. The SEC could also resort to a large influx of temporary workers, the report said.

SEC Chairman Mary Schapiro said in Feb. 17 testimony to the Senate Banking Committee that her agency has been “fully engaged” with the consultants. She said she expected its report, which is due March 14, to “identify additional efficiencies for SEC operations.” The chairman has said her agency needs a larger budget and eventually 800 more workers to implement the regulatory demands of Dodd-Frank, the law signed by President Barack Obama in July.

Republican Cuts

House Republicans have proposed cutting federal spending back to 2008 levels for the rest of the current fiscal year to help reduce the nation’s budget deficit.

A major spending increase for the SEC “would further the mindset that our nation’s problems can be solved with more spending, not more efficiency,” Representative Scott Garrett of New Jersey, chairman of the House subcommittee that oversees the SEC, said in a January statement. “Government agencies must learn to operate effectively within their budgets.”

The Boston Consulting study said every SEC division is failing to get to some “potentially high-impact activities” because of budget constraints.

Stephen Crimmins, a former SEC trial attorney who has been pushing lawmakers to increase the agency’s budget, said that the consultant’s report may help it advocate for more money from Congress.

“Things have changed so fundamentally for the SEC that they really need a radical reassessment of their needs,” said Crimmins, now a partner at the K&L Gates law firm in Washington.

Management Structure

The report noted that the regulatory overhaul dictates the management structure of the agency in some ways, such as adding new offices to supervise credit-rating firms and municipal bonds. Schapiro, it said, will have four more managers when those offices are up and running, for a total of 24 direct reports.

In comparison, Gary Gensler, head of the Commodity Futures Trading Commission, has 10 direct reports, the consultant said. “Dodd-Frank reorganizes the SEC without full consideration of managerial” and other consequences, the report found.

The report also was critical of the SEC employees’ union, saying its seniority rules could hamper how people are transferred to new roles. “In some cases, this could mean that the least experienced employees get reassigned to the most critical work, as defined by Congress, rather than assigning the ideal person for the job,” the report said.

Firing Bad Workers

In addition, the union grievance process makes it almost impossible to fire bad workers, the consultants found. The SEC’s “involuntary attrition rate” is less than 1 percent per year, while the federal rate varies from 4 percent to 8 percent, the consultants said.

“The related complexities increase risk aversion among managers to consider dismissal as a real option for poor performance,” the report said. “Frequently managers resolve this by either enduring poor performance or moving poor performers to new roles.”

The report also cites poor communication between the agency and self-regulatory organizations it oversees, including the 3,000-employee Financial Industry Regulatory Authority, which regulates brokerages. It suggests “the SEC could adopt a much deeper and broader oversight program specially dedicated for FINRA” and that it needs “multiple and deep lines of defense” against gaps in Finra regulation.

Finra Oversight

The consulting firm also took a dim view of the SEC’s need to set up the Office of Minority and Women Inclusion, a requirement under the law that seeks to increase diversity in the agency’s contracting programs and on Wall Street. The unit’s “functions are largely duplicative, and the creation of a new office requires additional resources,” the report noted.

The minority office, which the SEC has put on hold citing budget constraints, also needs to familiarize itself with federal rules to “avoid illegal diversity practices (eq. quota setting),” the consultants wrote.

After receiving the consulting firm’s final report, the SEC will have to issue a series of reports to Congress every six months documenting how it’s implementing the recommendations.

John Nester, an SEC spokesman, declined to comment on the contents of the report.

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