House Financial Services Committee Chairman Spencer Bachus, R-Ala., is planning a fall hearing on already contentious legislation -- still in draft -- called the SEC Modernization Act, which would undo some of the organizational changes mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
"The SEC is structurally flawed and suffers from operational inefficiencies and organizational incoherence," Bachus said in announcing his plan Aug. 2. "This legislation will be a comprehensive restructuring of the SEC. It will make the SEC more efficient, consolidate duplicative offices, enable the agency to use better technology and strengthen ethical safeguards to avoid conflicts of interest."
Bachus said the bill is not intended as criticism of Chairwoman Mary Schapiro or any past SEC leaders. "It is the structure of the agency itself that is the main problem, and over the years Congress has only increased its dysfunctional structure through fragmentary and piecemeal amendments rather than the comprehensive reform that is needed," he said. He presents his bill as a way to implement reforms long recommended by the SEC inspector general, the Government Accountability Office and a consultant's report mandated by the Dodd-Frank Act.
Last March, the Bethesda, Md.-based Boston Consulting Group delivered a report, welcomed by SEC, that recommended that Congress either give SEC more funding or that the agency alter its practices to reflect existing funding. The private sector report, which the Financial Services Committee says cost $4.85 million to produce, organized its recommendations under themes of reprioritizing regulatory activities, reshaping the organization and investing in enabling infrastructure.
Bachus's draft plan would reshuffle the organizational chart to consolidate numerous offices he considers duplicative, and, among other changes, enhance the stature of the newly created SEC ombudsman, who would report businesses' complaints directly to the chairwoman rather than to the commission's investor advocate.
SEC spokesman John Nester said: "We are actively reviewing a number of similar recommendations from the BCG study to evaluate improvements in the structure, operations and processes of the agency. By continuing to undertake reforms internally rather than legislatively, we can more readily adapt our structure to market dynamics as they evolve. Of course, in the past two years, the agency has undergone significant reform, including restructuring entire divisions, creating specialized units, eliminating a layer of management and putting qualified attorneys back on the enforcement front lines, and ensuring greater intra-agency collaboration."
Rep. Barney Frank, D-Mass., ranking member of the Financial Services Committee, told The Washington Post the bill is the work of anti-regulation ideologues who seek "an excuse for underfunding the agency."
Former SEC Chairman Arthur Levitt Jr. in an Aug. 8 op-ed in The New York Times, called the reorganization proposal "an almost comical intrusion into the inner workings of the commission."
The idea that Congress is interfering was echoed by Jeff Mahoney, general counsel of the Council on Institutional Investors. "Even though the SEC has made some mistakes, it is not helpful to have Congress micromanage an independent agency, particularly the main one that focuses on investors," he told Government Executive. The bill is driven in part, he said, by people who don't like Dodd-Frank and are not willing to give SEC more funding at a time when the commission's responsibilities have widened. "They know it's politically impossible to amend Dodd-Frank, so they want to starve the agency and its ability to do enforcement," Mahoney said. "Nothing leaps out when you" look at the proposed reorganization, he added. "What evidence is there this structure is superior?"
Equally skeptical was Amit Narang, regulatory policy advocate at Public Citizen who called the Bachus bill a "back-end way to block Dodd-Frank implementation of regulations and thus prevent the SEC from doing the job it should be doing, which is preventing another financial crisis." Restructuring in the midst of the additional workload of writing Dodd-Frank regulations "won't make the process more efficient," he added.
An argument favoring a reorganization was offered by an anonymous source familiar with the matter. He said the debate over Congress' role in improving SEC was "a red herring," noting that a recommendation for a major reorganization was high up the Boston Consulting Group report. Specifically, he said, SEC should "streamline management and seek flexibility from Congress in creating some of the offices mandated in" the financial reform law.
The big question, this source continued, is whether House Financial Services and the Senate Banking Housing and Urban Affairs Committee have the best angle on how to reorganize. "The agency knows itself but has internal constraints on how bold it can be, unlike some private sector corporation where the CEO can come in and move things," he said. Because staff are "the SEC's strongest asset, and you don't want people to be unhappy," he said, "Congress is a somewhat better tool," especially since the members and staff of the two committees have more expertise and interest in the issue than the hundreds of other members of Congress. The fact that SEC is an independent agency is not an obstacle for Congress, the source said, adding "independent agencies are creatures of statute."
Another issue to be discussed at the fall hearing is whether SEC performs sufficient cost-benefit analysis before issuing regulations. Financial Services Committee member Rep. Scott Garrett, R-N.J., in June introduced H.R. 2308, SEC Regulatory Accountability Act, which would require the commission to perform such analysis of any new rule-making, including comparing the cost or benefit of not issuing a regulation. Such a requirement is opposed by former chairman Levitt, who believes such analysis is too subjective and dependent ultimately on sufficient resources to produce reliable data. Cost-benefit analysis is already required under existing law, said Narang, noting any new requirement "would be dangerous in that it could delay or kill a beneficial rule."
The source familiar with the matter, however, pointed out that SEC has lost a series of high-profile court cases challenging its rules because of "deficient" cost-benefit analysis.