Does an Optimized SEC Require Less Funding?

Section 967 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires that the Securities and Exchange Commission hire an independent consultant to examine the Commission’s internal operations, structure, funding and the need for comprehensive reform, as well as its relationships with and reliance on self-regulatory and other organizations.  Specifically Section 967 requires that the study look at:

• the elimination of unnecessary or redundant units within the Commission;

• improving communication between Commission offices and divisions;

• the need for a clear chain-of-command structure, particularly with respect to enforcement examinations and compliance inspections;

• the effects of technological advances (such as high frequency trading) on the securities markets and what is needed to monitor these effects;

• the Commission’s hiring authority, workplace practice and personnel policies;

• whether the Commission’s reliance on self-regulatory organizations promotes efficient and effective governance for the securities markets; and

• whether the Commission’s reliance on self-regulatory organizations requires adjustment.

In October 2010 the Commission engaged The Boston Consulting Group (BCG) as its independent consultant, and yesterday BCG presented its findings to Congress in a comprehensive 263 page report, replete with the requisite consultant speak (which some would say is at least better than legalese).

In its report BCG reached two key conclusions: the Commission “has significant opportunity to further optimize its available resources through implementing the [recommended] initiatives … ” and “Congress should reflect on whether or not such optimization adequately meets its expectations for the [Commission’s] efficiency and effectiveness … [and i]f not, it should consider … ” providing the Commission with additional funding or a role that fits its available resources.

Meaning, the Commission can more efficiently use its existing resource, but those resources will only take it so far, so Congress has to consider whether the Commission can effectively carry out its mission, given its current level of funding, and, if not, should either increase the Commission’s budget or decrease its workload.  The funding issue is, of course, a reoccurring theme, as the Commission continues to suffer from budgetary constraints that have forced it to scale back or delay implementation of a number of Dodd-Frank initiatives, among other things.

With respect to the first conclusion BCG suggests that the Commission can more efficiently use its existing resources in four ways:

• Reprioritizing its regulatory activities — by focusing on the highest-priority matters, scaling-back or eliminating lesser-priority matters, delegating matters to self-regulatory agencies and requesting flexibility with respect to the implementation of certain Dodd-Frank mandated activities.

• Reshaping the organization — by redesigning the Commission’s organizational structure, improving Commission and staff interactions, clarifying the delegation of authority between the Commission and staff and implementing ongoing improvement processes.

• Investing in key infrastructure — such as technology, human resources management and employees with high-priority skills.

• Enhancing self-regulatory engagement — by strengthening its relationships with self-regulatory agencies, increasing its oversight of, and improving its interactions with, such agencies, and clarifying its rule making processes.

BCG estimates the Commission could reallocate approximately $50 million in resources by implementing its suggested initiatives.  That’s a long way off from the Commission’s $264 million requested budget increase for the 2012 fiscal year, but at least it’s a start.

Update March 18, 2011:

The Washington Post is reporting that on Tuesday Representatives Randy Neugebauer, Chairman of the Subcommittee on Oversight and Investigations, and Spencer Bachus, Chairman of the House Financial Services Committee, penned a letter to Chairman Schapiro seeking information about the “what editorial input” the Commission had over BCG’s report to Congress.  WaPo seems to suggest that the letter is calling into question the integrity of BCG’s report, but Representative Neugebauer characterizes the inquiry as part of a broad effort to examine the influence of studies on policy.

This is Representative Neugebauer and Bachus’ latest letter to the Commission. In their last letter they were seeking information about what implementation and execution of the Dodd-Frank Act would cost the Commission on an annual basis.