Report slams SEC's union, oversight of Finra

Boston Consulting says tenure rules could hamstring Dodd-Frank initiatives; 'deeper and broader' monitoring of B-D regulator needed, as well

Mar 7, 2011 @ 3:16 pm

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 report also criticized the workers' union at the agency, and noted that the SEC 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 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.

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.

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.

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.

--Bloomberg News--

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