The Securities and Exchange Commission is about 400 employees short of what it needs to manage its workload, according to a consulting firm's four-month internal review, mandated by the Dodd-Frank Act.
The report also criticized the workers' union at the SEC and noted that the commission could do a much better job of overseeing the Financial Industry Regulatory Authority Inc.
The preliminary findings by Boston Consulting Group Inc. reinforce arguments by SEC officials that the commission 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.
According to the study, staffing levels have declined since 2005, and the SEC employees interviewed consistently complained that their departments are 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 using temporary workers, the report said.
The report also was critical of the SEC employees' union, saying that 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.
In addition, the union grievance process makes it almost impossible to fire bad workers, according to the report. The SEC's “involuntary-attrition rate” is less than 1% per year, while the federal rate varies from 4% to 8%, 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 SEC and the self-regulatory organizations it oversees, including the 3,000-employee Finra, which regulates brokerage firms. According to the report, “the SEC could adopt a much deeper and broader oversight program specially dedicated for Finra,” and it needs “multiple and deep lines of defense” against gaps in Finra regulation.
The consulting firm also took a dim view of Dodd-Frank's requirement that the SEC set up an office to encourage and monitor minorities' and women's access to the commission's contracting programs and Wall Street.
The unit's “functions are largely duplicative, and the creation of a new office requires additional resources,” the report said.
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 [such as quota setting],” according to the report.
After receiving the consulting firm's final report, the SEC will have to issue reports to Congress every six months documenting how it is implementing the recommendations.
John Nester, an SEC spokesman, declined to comment about the report.
