Posts this month
A blog on financial markets and their regulation
As required by Section 967 of the Dodd-Frank Act, the SEC engaged an independent consultant (Boston Consulting Group) to examine the internal operations, structure, and the need for reform at the SEC. The BCG report released last week covers four matters: organization structure, personnel and resources, technology and resources, and relationships with self-regulatory organizations.
The strength of the report is that it focuses on SEC as an organization rather than on regulatory philosophy or politics. We have known from several sources that there are serious organizational problems at the SEC. For example, Selling America Short by former SEC official, Richard Sauer, provides an insider’s perspective of the bureaucratic hurdles facing a committed SEC official. Markopolos of Madoff fame provides an even more riveting outsider’s perspective (see my blog post of two years ago).
I therefore looked forward to the BCG report which is based on nearly six months of work and more than 425 discussions with various people inside and outside the SEC. My main complaint against the report is that BCG appears to have accepted the views of the SEC senior management uncritically. This is quite normal in consulting assignments – a consultancy firm that does not align itself with the perspective of the client is unlikely to have many clients. In this case, however, it is not clear that the SEC is the client; arguably, the client is the US Congress if not the people of the US.
Consider for example, the excellent work that BCG has done in putting together Exhibit 4.1.1 on page 49. Essentially, BCG says that the SEC has too many layers and that many experienced and highly qualified professionals sit in the lower layers (layers six through eight of the organization. Equally disturbing is the finding (page 210-11) on the level of engagement of the workforce (the degree to which employees feel a bond to the organization and are motivated to give their best). Using data from a survey conducted by the US Government as well as their own data, BCG finds that SEC’s level of engagement is low compared to other private and public sector organizations.
If one combines this analysis with the insights from Markopolos and Sauer, the natural remedy is clearly a brutal delayering of the SEC that prunes out a lot of the dead wood at the upper managerial layers of the SEC and empowers the professionals who actually do the work. Unfortunately, a management consultant’s loyalties are to the senior managers and not to the professionals in layer eight.
The key conclusion of the BCG report is that the SEC needs a bigger budget and less interference from the Congress and the Government. The SEC Chairman of course welcomed the report enthusiastically.