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Overworked and Understaffed: SEC IG Report Reveals How Gensler's Agenda Is Taxing Agency
Also, more former regulators sign-on to brief backing Grayscale, SEC set to approve rule on recouping CEO pay after restatements
Gary Gensler’s enormous rulemaking effort is causing consternation among SEC managers, according to a new report by the agency’s internal watchdog that cites a litany of complaints about the chair’s “aggressive” agenda. They include: staff worries of having enough resources to do the job properly and about needing to shirk their regular duties to hammer out the dozens of new regulations on Gensler’s to-do list. In addition, some workers said they are fearful that tight deadlines are causing the commission to miss out on feedback critical to crafting sound policies – and boosting the chances of lawsuits.
The review, from Acting Inspector General Nicholas Padilla Jr., comes in what has often been a dry, bureaucratic annual assessment of the agency’s “management and performance challenges.” This year’s report, which was recently posted without fanfare on the IG’s web page, is surprisingly candid. It also highlights the significant amount of staff departures over the last fiscal year, noting the agency’s attrition rate is the highest it has been in a decade. “Most concerning,” the inspector wrote, is an estimated increased attrition of 20.8 percent for senior officer jobs and 8.4 percent for attorneys.
The IG report has quickly gone viral on Wall Street and in the business community because it says out loud what many in the industry have speculated over the past year or so: that the SEC staff is having trouble keeping up with Gensler’s full-speed-ahead approach – and may not even agree with the mission. And of course, the report is now likely to be Exhibit A in the lawsuits expected to challenge numerous final regulations.
One (of many) interested readers we heard from was Doug Cifu, the CEO of Virtu Financial and a leading opponent of Gensler’s planned market structure overhaul. He tells us: “We share the IG's concern that rushed politically motivated proposals are not the answer.”
Cifu’s firm is what’s known as a market maker, and one of its services is executing retail traders’ stock orders for brokers. He’s long argued that Gensler’s proposal, which is still being drafted at the staff level, has the potential to greatly increase costs for small investors and Virtu’s clients. “Our equity markets are the envy of the world and the SEC has a duty to 330 million Americans to not risk harming them with hasty reforms,” Cifu says. “Any reforms need to pass a very high burden of being based in fact and supported by unequivocal data that demonstrates how they will definitively make our markets better.”
An SEC spokesman declined to comment. But Gensler seems to be nonplussed about the report, seeing it in some ways as making the same arguments he often has: that the SEC is under-resourced and is in need of more people. So it is not surprising that some employees are saying they are stretched too thin. As he noted in testimony earlier this year to a House Appropriations subcommittee, the agency headcount has fallen from 2016 to 2021. Enforcement, for example, shrunk by 5 percent; corporation finance by 19 percent; and economic and risk analysis by 7 percent.
And paradoxically, the SEC chief’s supporters note, it is Gensler’s aggressive rulemaking and enforcement agendas that have created what is a very hot market for attorneys with securities law experience. It shouldn’t be surprising, they say, that there have been an unusually high number of senior people leaving – they are the ones being offered several million dollars a year to join a private firm.
The full IG report can be read here. And, some details we pulled out follow:
Summing up the issues: The inspector’s office talked with managers in the SEC divisions most impacted by the rule-writing push – trading and markets, investment management, corporation finance, and economic and risk analysis. Here’s the broad take:
“[S]ome reported an overall increase in attrition…and difficulties hiring individuals with rulemaking experience. In the interim, managers reported relying on detailees, in some cases with little or no experience in rulemaking. Others told us that they may have not received as much feedback during the rulemaking process, either as a result of shortened timelines during the drafting process or because of shortened public comment periods. Although no one we met with identified errors that had been made, some believed that the more aggressive agenda – particularly as it relates to high-profile rules that significantly impact external stakeholders – potentially (1) limits the time available for staff research and analysis, and (2) increases litigation risk. Finally, some managers noted that fewer resources have been available to complete other mission-related work, as rulemaking teams have borrowed staff from other organizational areas to assist with rulemaking activities.”
Employee departures: “The SEC seems to be facing challenges to its retention efforts…[and] has seen a significant increase in attrition over the last few years, from 3.8 percent in FY 2020 to an estimated 6.4 percent in FY 2022 (as of September 20, 2022) – the highest attrition rate in ten years.”
Still, it’s a government-wide problem: “The SEC is not alone in facing a crisis to retain mission-critical talent during what has been dubbed ‘The Great Resignation.’ Critical elements of the federal workforce are in a state of stress. For example, according to the Partnership for Public Service, FY 2021 government-wide attrition rates averaged 6.1 percent, with certain groups experiencing even higher rates, such as women (6.4 percent) and executives (9.2 percent).”
Hiring needs: The SEC 2023 budget calls for adding 454 new employees to bring the agency staff total to 5,261. “With FY 2022 attrition rates estimated to be at 6.4 percent – or about 289 positions – efforts to recruit and hire an additional 454 new positions in FY 2023 could present challenges.”
Few in the office: “On August 9, 2021, the agency began to allow vaccinated employees to voluntarily return to the workplace. In calendar year 2022, peak occupancy across all SEC building locations has averaged around 7 percent.”
Union troubles: “[T]he SEC is also negotiating a new collective bargaining agreement with the National Treasury Employees Union, which will include updated provisions related to telework and remote work. The parties are also engaged in bargaining related to the mandatory return-to-office plan…At this point, further negotiations require assistance from the Federal Mediation and Conciliation Service as the parties endeavor to avoid invoking the Federal Services Impasse Panel for a final decision on the terms of the new collective bargaining agreement and return-to-office plan. The uncertainty surrounding the plans for return-to-office and the potential for expanded telework and/or workplace flexibilities makes it more difficult to plan for future human capital management solutions.”
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Grayscale Amicus: Just a quick follow-up to our story from yesterday on the support the asset manager is getting for its legal challenge of the SEC’s refusal to allow its Bitcoin fund to become an ETF. Yes, ex-SEC Chair Harvey Pitt did sign on to a friend of the court brief backing Grayscale that was filed by academics and former regulators (he hadn’t yet by our deadline.) Two other former regulators also agreed to join the filing that we didn’t mention: former Acting OCC chief Brian Brooks and Brian Quintenz, who was a commissioner at the CFTC. Both have close ties to the crypto world. Brooks is now the CEO of Bitfury, and Quintenz advises Andreesen Horowitz’s digital assets team.
SEC Open Meeting: The regulator announced it would hold a public meeting Oct. 26 to vote on a final rule for clawing back top executives’ pay after a restatement, and another that would update requirements for mutual fund shareholder reports. The agency also will issue a proposal on setting oversight standards for investment advisers that outsource some services to third parties.
Acting FDIC Chairman Martin Gruenberg is scheduled to appear at a Brookings Institution event entitled, “Regulating Digital Assets: The Prudential Perspective.”