BRAIN DRAIN BATTERS SEC: RUMOR HAS IT EVEN BARBASH MAY JOIN DEFECTORS AS AGENCY FIGHTS EXODUS TO PRIVATE SECTOR

Now the top cop’s office is getting raided.

As the bull market rages on, fattening the profits of investment houses, the Securities and Exchange Commission is struggling to cope with an exodus of many of its most valuable employees to higher-paying jobs in the private sector.

The all-important enforcement unit has been especially hard hit. The latest to defect is William R. McLucas, the unit’s director for eight years.

The commission also lost two of its four deputy directors in the past year, and a third is on her way out. There’s even widespread talk that Barry Barbash, director of the Division of Investment Management, is close to announcing his own exit. Mr. Barbash did not return calls seeking comment.

SEC Chairman Arthur Levitt Jr. went before Congress last month to request $7 million to give several hundred employees a 10% to 20% boost in salary, to be paid out over the year — but it may not stop the bleeding.

“It’s extremely frustrating,” says Mr. McLucas, who maintains that his leaving at the same time as the others is coincidental. “I can literally sit in my office and hear my staff talking to headhunters all day long.”

Some think the commission is the victim of its own success. Its visibility and stature have grown under Mr. Levitt, boosting demand for mid- to high-ranking SEC officials. Many are being seduced by mutual fund companies, law and accounting firms, where they can earn two to three times as much as Uncle Sam pays.

“I feel a lot like Jerry Jones must feel running the Dallas Cowboys. . . You get to really good form and are playing well. Then everybody else goes after your free agents,” said Mr. Barbash at an industry conference, acknowledging the drain has created a work backlog.

The cherry-pickers include the Vanguard Group, Merrill Lynch & Co. and Smith Barney Holdings Inc. as well as dozens of influential law firms like Shearman & Sterling of New York and Morgan Lewis & Bockius of Philadelphia.

The turnover rate at the SEC, which employs close to 3,000, was 11.9% in fiscal 1997, compared to 9.5% the previous fiscal year. The rate for lawyers was 16%, vs. 11.3% in 1996. For accountants, turnover reached 12.1%, vs. 9%, and for examiners it was 10.8%, up from 10.3%.

a long list

By comparison, government-wide white collar turnover has ranged from 7% to 8% for the last two fiscal years, the SEC says.

The defection-caused backlog means it is taking noticeably longer to get responses to routine filings, industry officials say. What’s more, enforcement actions and decisions on regulatory matters are stalled.

That’s no surprise considering the long list of resignations: Mr. McLucas plans to leave the commission later this month to work for the Washington law firm of Wilmer Cutler & Pickering. He is being replaced by Richard Walker, the SEC’s general counsel.

His departure follows those of two deputy directors: Heidi Stam and Meredith Cross. A third deputy director, Colleen Mahoney, is slated to leave in a month but won’t say where she’s going.

“The backlog is worse than it’s ever been,” says Pam Wilson, a lawyer in the mutual-fund practice of Hale & Dorr, a Boston law firm.”I just had an application for exemption that took months to get the SEC to comment on. And that’s not consistent with their practice.”

The SEC is hoping to boost salaries in order to retain talent. With junior employees making $40,000 to $50,000 a year, a $10,000 raise isn’t chump change. But whether it will be sufficient is doubtful.

“I don’t think it’s going to help much,” says Tony Evangelista, a partner at Coopers & Lybrand. “These people will always be able to make a lot more money on the outside.” He ought to know. He used to be an accountant in the commission’s investment management division.

The gap in earnings between SEC employees and their private sector counterparts is significant. A lawyer starting at the SEC can expect to earn $47,000 a year. The same lawyer at a New York City firm can easily pull in $80,000 to $90,000.

Even Mr. Levitt’s annual salary of $125,000 pales in comparison to the $1.6 million the average top executive at the nation’s biggest companies took home last year, according to New York compensation consultant William M. Mercer Inc.

“There’s no way we can compete with salaries being paid in the private sector,” concedes Duncan King, a spokesman for the SEC. “We’re just trying to slow down the turnover.”

ready to make his move

One defection that would surely hurt is that of Mr. Barbash, the high-profile architect of the SEC’s regulatory policies for the mutual fund industry. Sources close to him say he wanted to leave last year, but agreed to stay until the end of June at Mr. Levitt’s urging. According to one account, Mr. Levitt recently asked Mr. Barbash, who joined the commission from New York law firm Wilkie Farr & Gallagher in 1993, to stay on even longer. This time, apparently, Mr. Levitt was rebuffed.

“Barry essentially said ‘thanks but no thanks,’ ” says an individual close to him. “I would be very surprised if Barry doesn’t make a move by the third or fourth quarter of 1998.”