SEC Responds To Boston Consulting Group Recommendations

When you’re an agency that has shot itself in the foot as many times as the SEC has in the recent past, Congress will not hesitate to step up its oversight authority over you.Its members can’t really afford to. Heads must roll, etc. So Congress tends to do things like order consultants to come in and review all of your operations, as the Boston Consulting Group recently did, issuing a report recommending the SEC’s re-organization last March. As required by the Dodd-Frank Act, the Commission responded to a number of BCG’s recommendations on September 9th.It speaks in terms of “workstreams” and “optimiz[ing] mission and structure,” which I suppose documents like these do. But several parts are interesting. 

See, for example, Workstream 3E – Accelerate Rollout of the SEC’s Evidence-Based Performance Management System. It essentially means moving to a merit-based pay system. Now it may be that any such system can be effective only on the margins, for, say, two to five percent of a person’s yearly salary. But as a recent member of the Commission’s staff, I can tell you that a compensation system truly based on merit would have been a welcome addition to the dynamic there. Yes, it would be difficult to implement. It can be hard to quantify someone’s effect on the organization over a fixed period of time. Do you pay the person who has spent the entire year doing excellent work on a single, large-scale investigation, discovering gems of incriminating text from thousands of documents and carefully teasing out admissions in sworn testimony? Or the person who has filed three smaller cases that will ultimately have less monetary effect than the big one just described? What if one of the three has a low-dollar penalty figure but applies the law in a new way that will serve as a significant deterrent for other potential bad actors? It’s tough. But I’m skeptical about whether the SEC will ever get there. There hasn’t been anything approaching a merit-based pay system in a number of years, partly because the National Treasury Employees Union’s SEC chapter adamantly opposes the idea. The union calls those systems “unfair, arbitrary, and even illegal.” If such a system is ever implemented – to the delight of the Commission’s high-performing staff and to the dismay of the duds – know that there will be much wailing and gnashing of teeth by union officials . . . and then plotting its demise.

Workstream 2B – Conduct a Regional Organizational Assessment, is also intriguing. The last two years at the Commission have seen a lot of discussion about what role its regional offices should play in the Enforcement Division and the Office of Compliance, Inspections, and Examinations (“OCIE”). OCIE, which conducts routine exams of broker-dealers and investment advisers, has largely pushed its staff out to the field, where the regional offices have geographic jurisdiction over their respective registered entities. The home office staff is left to deal with national exchange issues, oversight of self-regulatory organizations, and the like. The Enforcement Division’s relationship to its regional offices is more interesting to me. Since Rob Khuzami’s installation as Director, the regional offices have enjoyed something of an ascendance at the SEC. Khuzami has hired strong regional directors, and perhaps to encourage more strong lawyers to take those jobs, has let the regional offices handle a number of prominent cases. ’Twas ever thus, of course. But it can no longer be assumed that the SEC’s home office will be the default setting for high-profile investigations. 

This can be a problem for two reasons. First, an Enforcement Director is called to account for a million different things, and one of those things is the status and progress of investigations that affect big players in the financial system. We all have email and phones, and videoconferencing does wonders these days. But there’s nothing quite like hauling lower-level staff members to your office to explain what is going on. Second, the Enforcement Division’s home office has no geographic jurisdiction. The biggest securities fraud in the history of the world could be happening in the food court at Union Station, and technically the Philadelphia Regional Office would have jurisdiction over the investigation. And they might say as much. The result can be that the home office staff are left with not much to investigate. With over 300 lawyers housed there, that would be a serious morale problem and a misallocation of substantial resources.