U.S. SECURITIES AND EXCHANGE COMMISSION 

ORGANIZATIONAL STUDY AND REFORM 

March 10, 2011 

The Boston Consulting Group, Inc. · 4800 Hampden Lane · Suite 400 · Bethesda, MD 20814 · USA · Tel. +1 301 664 7400 · Fax +1 301 664 7401
© 2011 The Boston Consulting Group, Inc. 2

The information, approaches, methodologies and know how contained in all pages of 

this report represent the valuable, exclusive property of The Boston Consulting 

Group. Except as expressly agreed by The Boston Consulting Group in writing, nothing 

herein shall be construed to grant any ownership interests in or license to The Boston 

Consulting Group's trademarks, copyrights, patents, trade secrets, methodologies, know 

how, or any other intellectual property. 

The Boston Consulting Group does not provide, or purport to provide, legal 

advice. Nothing in this report should be construed as an attempt to offer or render a 

legal opinion or otherwise engage in the practice of law. 

The material contained in this document is being furnished pursuant to Contract No. 

SECHQ1-11-F-0001, and solely for the limited purposes described in that 

Contract. Third-parties may not, and it is unreasonable for any third-party to, rely on 

these materials for any purpose whatsoever. To the fullest extent permitted by law 

(and except to the extent otherwise agreed in a signed writing by BCG), BCG shall have 

no liability whatsoever to any third-party, and any third-party hereby waives any rights 

and claims it may have at any time against BCG, with regard to this document or other 

materials, including the accuracy or completeness thereof. Receipt and review of this 

document shall be deemed agreement with and consideration for the foregoing. 
© 2011 The Boston Consulting Group, Inc. 3

Table of Contents 

1 Executive summary ............................................................................ 5

2 Scope and approach ......................................................................... 11

2.1 Overview..................................................................................................................11

2.2 Selection of The Boston Consulting Group ...........................................................11

2.3 Matters for study .....................................................................................................11

2.4 Project scope............................................................................................................12

2.5 Project approach .....................................................................................................13

2.6 Methodologies and tools.........................................................................................14

3 Context............................................................................................. 19

3.1 Overview of the SEC ...............................................................................................19

3.2 Reliance on self-regulatory organizations .............................................................20

3.3 The SEC’s external environment............................................................................26

3.3.1 Regulatory landscape ........................................................................................26

3.3.2 Capital markets trends ......................................................................................28

3.4 Constraints impacting the SEC...............................................................................33

3.4.1 Congressional requirements .............................................................................33

3.4.2 Governance requirements.................................................................................37

3.4.3 Civil service laws and related factors ...............................................................38

3.4.4 Funding predictability and funding levels .......................................................39

4 Assessment...................................................................................... 42

4.1 Organization design ................................................................................................42

4.2 Personnel and resources.........................................................................................52

4.3 Technology and resources ......................................................................................58

4.4 Relationships with SROs.........................................................................................63

5 Strategic direction for the SEC .................................................... 68

5.1 Structural disconnects to address...........................................................................68

5.2 Overcoming disconnects .........................................................................................69

5.2.1 Relaxation of select constraints ........................................................................70

5.2.2 Development of forward looking capabilities..................................................70

6 Recommended initiatives............................................................. 75

6.1 “No regrets” optimization.......................................................................................77

6.1.1 Reprioritize regulatory activities ......................................................................79

6.1.2 Reshape the organization..................................................................................84

6.1.3 Invest in enabling infrastructure ....................................................................107

6.1.4 Enhance SRO engagement model ..................................................................133

6.1.5 Implementation plan.......................................................................................141

6.2 Choice 1: Relax funding constraints to better fulfill current role ......................147

6.3 Choice 2: Change current role to fit available funding.......................................150

7 Appendix ....................................................................................... 155

7.1 Organization design ..............................................................................................155

7.1.1 Approach..........................................................................................................155

7.1.2 Structure: Overview.........................................................................................156

7.1.3 Structure: Operating divisions and exam program .......................................159

7.1.4 Structure: Operations management and support offices..............................163

7.1.5 Structure: Dodd-Frank mandated offices.......................................................165

7.1.6 Balance between regional offices and headquarters ....................................169

7.1.7 Shape of the organizational pyramid .............................................................177

7.1.8 Communication and collaboration.................................................................178
© 2011 The Boston Consulting Group, Inc. 4

7.1.9 Roles and accountabilities...............................................................................181

7.1.10 Commission and staff interaction processes and delegation....................182

7.2 Personnel and resources.......................................................................................182

7.2.1 Approach..........................................................................................................182

7.2.2 Capabilities and competencies .......................................................................183

7.2.3 Workload capacity...........................................................................................188

7.2.4 People pipeline and supporting HR processes ..............................................199

7.2.5 Workforce engagement...................................................................................209

7.3 Technology and resources ....................................................................................212

7.3.1 Overview ..........................................................................................................212

7.3.2 Technology systems.........................................................................................213

7.3.3 OIT’s ability to deliver IT services ..................................................................222

7.4 Relationship with SROs ........................................................................................232

7.4.1 Approach..........................................................................................................232

7.4.2 SEC acting as a co-regulator............................................................................233

7.4.3 SEC acting as an oversight body.....................................................................236

7.5 Additional analyses requested in Statement of Work ........................................242

7.5.1 Exam program comparison.............................................................................242

7.5.2 High-frequency trading assessment................................................................257

7.6 Glossary..................................................................................................................261
© 2011 The Boston Consulting Group, Inc. 5

1 Executive summary

 Section 967 of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act (Dodd-Frank or the Act) directed the Securities and Exchange 

Commission (hereinafter referred to as the “SEC” or “the agency”)1 to engage an 

independent consultant to examine the internal operations, structure, and the 

need for reform at the SEC. The Boston Consulting Group (BCG) was selected for 

this study, which focused on four matters identified in the Statement of Work: 

organization structure, personnel and resources, technology and resources, and 

relationships with self-regulatory organizations (SROs). We have not examined 

the regulatory philosophy behind the SEC’s authorizations, whether the current 

statutory framework is optimal for regulating the US securities markets, or other 

related topics. 

 BCG conducted this study from October 2010 to March 2011. BCG 

leveraged a number of proprietary methodologies and tools, reviewed extensive 

documentation, undertook analyses, and conducted more than 425 discussions 

with the SEC, former SEC officials, regulated entities, peer regulators, SROs, and 

industry groups. 

 

 BCG recognizes that the SEC has recently undertaken several initiatives to 

increase its efficiency and effectiveness (including, for example, the 

reorganization of the Division of Enforcement (Enforcement) and the Office of 

Compliance Inspections and Examinations (OCIE), the rollout of the new Tips, 

Complaints, and Referrals program (TCR), and the hiring of a Chief Operating 

Officer (COO) and a new Chief Information Officer (CIO)). These initiatives 

were, in our opinion, necessary and are proving effective. 

 That said, our findings lead us to the following two key conclusions. One, 

the agency has significant opportunity to further optimize its available resources 

through implementing the initiatives recommended in this report. Two, Congress 

should reflect on whether or not such optimization adequately meets its 

expectations for the agency’s efficiency and effectiveness. If not, it should 

consider two further choices: 

 

 Relax funding constraints to allow the SEC to better fulfill its current role 

 Change the SEC’s role to fit available funding 

The optimization initiatives we recommend fall into four major categories: 

 

Reprioritize regulatory activities: The SEC should engage in a rigorous 

assessment of its highest-priority needs in regulatory policy and operations, and 

reallocate resources accordingly. The agency’s various divisions and offices have 

identified several high-priority regulatory activities they deem necessary to 

 

1

 Reference to the “SEC” or “the agency” is not intended to include nor should it be construed to 

include the Commission or its Commissioners. 
© 2011 The Boston Consulting Group, Inc. 6

initiate or expand. Given that at least some of these activities are of greater 

priority than current activities (as suggested by the divisions and offices, 

themselves), this will enable the agency to reallocate its resources in a more 

effective manner. 

 The SEC is already making some difficult activity trade-offs, and this will 

need to continue, given the dynamic evolution of the securities markets. The 

agency should undertake a structured agency-wide process to evaluate and 

reprioritize its mission critical activities and re-align resources accordingly. In 

order to accomplish this, each division and office should classify its respective 

mission critical activities into the following categories: 

 High-priority activities that SEC management deems critical to strengthen 

or commence 

 Activities that the SEC could, if necessary, scale back or stop entirely 

 Activities where the SEC could consider delegating responsibilities 

externally, e.g., to SROs 

 Mandated activities where SEC management could request 

implementation flexibility 

Reshape the organization: The SEC should reshape its organization structure, 

roles, and governance to maximize efficiency, effectiveness, and collaboration, as 

well as to drive continuous improvement. 

 

 Systematically redesign the organization: The SEC should undertake a 

disciplined and transparent cascading process to re-design the 

organization, roles, accountabilities and decision rights to address the 

structural design of the operating divisions and support offices, as well as 

the strategy, design, and footprint of the regional model. This redesign 

must also take into account the reprioritization of activities and 

reallocation of resources described above, as well as the opportunity to 

streamline the management structure 

 Seek flexibility from Congress on certain Dodd-Frank mandated offices: The 

SEC should seek flexibility from Congress to design its organization 

structure in a manner consistent with the activities required to be 

performed by the Dodd-Frank-mandated offices while avoiding 

unnecessary duplication 

 Review Commission- staff interaction processes and delegation of authority: 

The SEC should review the Commission-staff interaction processes to 

provide clarity on delegated authority, increase transparency for the 

Commission in areas that are delegated, and increase efficiency in 

Commission-staff interactions where authority is retained by the 

Commission 

 Implement a continuous improvement program: The SEC should undertake 

an ongoing initiative to systematically reduce costs throughout the 

organization through levers such as demand management, sourcing, and 

business process optimization 
© 2011 The Boston Consulting Group, Inc. 7

Invest in enabling infrastructure: The SEC should invest in key enabling 

infrastructure, including technology, human resources, risk management, and 

high-priority staff skills. In particular, the SEC should: 

Technology 

 Enhance or develop key systems: The SEC should enhance its existing 

technology and develop a new suite of systems to drive internal efficiency 

(e.g., by deploying workflow tools) and enable critical functionality (e.g., 

improve the availability of information by deploying a knowledge 

management system and sharing data across applications) 

 Enhance the Office of Information Technology’s (OIT) ability to deliver 

technology solutions: The SEC should undertake a multi-faceted 

transformation of OIT, which will improve the effectiveness of the 

information technology (IT) function to develop key technology 

capabilities 

 Establish a Technology Center of Excellence: The SEC should establish a 

Technology Center of Excellence to institutionalize an awareness of the 

impact of technology on the securities markets (e.g., the effect of highfrequency trading on market structure) and improve the adoption of new 

technology at the agency (e.g., market data analytics) 

Human resources 

 Execute the planned Office of Human Resource (OHR) redesign: The SEC 

should undertake a multi-faceted transformation of OHR, through the 

execution of its restructuring plans, including a build out of the new HR 

Manager role, centralization of the SEC’s training function, the 

development of a targeted recruiting process, and an enhancement of 

OHR’s capability to support more effective people management processes 

within the agency 

 Complete roll-out of the new performance management system: The SEC 

should accelerate the implementation of OHR’s new performance 

management system; in concert, the agency should develop and link 

performance to a meaningful compensation strategy 

 Create a surge capacity plan: The SEC should develop a short-term staffing 

plan that would enable the agency to navigate short-term surges in 

workload, particularly with respect to the Division of Investment 

Management and TM 

High-priority staff skills 

 Enhance risk management: The SEC should further develop and embed its 

risk management capabilities in the line organizations to better track key 

market trends and developments in a timely and actionable manner 

 Hire staff to build high-priority staff skills: The SEC should fill vacancies 

caused by attrition with employees who meet high-priority skill needs 

 
© 2011 The Boston Consulting Group, Inc. 8

Enhance SRO engagement model: The SEC should implement initiatives to 

enhance its role as both an overseer of, and co-regulator with, SROs. 

 

 Strengthen oversight of SROs: The SEC should enhance the disclosures SROs 

make about their regulatory activities, develop metrics and standards that 

SROs can be measured against, and enhance oversight of the Financial 

Industry Regulatory Authority (FINRA) 

 Centralize and coordinate approach to SRO interactions: The SEC should 

create a central, coordinating point of contact for SRO interactions and 

implement structural measures that foster dialogue with SROs on market 

trends and related issues

 Strengthen processes for SRO rule proposals: The SEC should institute clearer 

processes for SRO rule proposals and the SEC’s review thereof 

 To drive disciplined implementation of these initiatives, the SEC should 

establish a dedicated Project Management Office with robust initiative progress 

reporting, as well as strong governance and oversight to enable rapid course 

correction in the event of progress being stalled. The initiatives are described in 

detail in Chapter 6, including benefits, implementation approach, costs, and risks. 

 Successful implementation of these initiatives will help drive both 

efficiencies and enhance capabilities. These efficiencies will be meaningful. 

Indeed, two of them—the continuous improvement effort and the organizational 

redesign—could release approximately $50 million in resources on a run-rate 

basis that the agency can then re-deploy. 

 

 In addition, the initiatives will allow the SEC to strengthen five core 

capabilities, which are becoming increasingly important: 

 

 Risk IQ: Understanding, monitoring and evaluating external and 

enterprise-wide risks—“connecting the dots”— and providing actionable 

transparency to appropriate levels of the organization 

 

 Ability to adapt: Maintaining the ability to deliver on the mission 

effectively in a rapidly changing marketplace, e.g., through internal 

collaboration, faster decision-making processes, and efficient/flexible 

resource deployment 

 Leveraging communities of aligned interest: Enhancing efficiency and 

effectiveness through alignment and collaboration with external partners 

(e.g., peer regulators and government agencies, SROs, auditors, academia 

etc.) 

 Technology sophistication: Maintaining awareness of technology 

advances in the securities markets and deploying advanced technology 

capabilities that increase the SEC’s efficiency and effectiveness 
© 2011 The Boston Consulting Group, Inc. 9

 Strong credibility: Credibly demonstrating the SEC’s presence, power, 

and influence to all relevant stakeholders

 However, these recommended initiatives will only take the agency so far, 

partly due to real constraints it faces: notably, Civil service laws limit the agency’s 

ability to attract, retain and manage personnel. There are also governance 

challenges inherent in the commission structure itself, which can slow decisionmaking and limit productive interaction between Commissioners and staff. In 

addition, some Congressional requirements (e.g., new Dodd-Frank mandated 

offices) limit the agency’s flexibility. Finally, given the highly dynamic nature of 

the market the SEC regulates, its dependence on the appropriations cycle has 

meaningful impact on its planning process. 

 Perhaps the bigger issue, however, is the inherent gap in capabilities that 

must be filled, and the change management challenge this poses to the agency. It 

is also likely that, even with reprioritization of regulatory activities, the agency 

may not be able to execute upon all the activities it deems necessary. Thus, even 

after the agency has implemented the recommended optimization initiatives, 

Congress may wish to consider two further options illustrated below: 

Exhibit 1.1: Two choices for Congress to consider 

Redeploy existing resources 

efficiently

Implementation of 

recommended initiatives: 

"no regrets" optimization Choices

to consider

Do all mission critical activities 

and build out all required 

capabilities

Relax funding constraints to 

better fulfill current role 

1

Increase SRO leverage and 

enhance oversight

Change current role to fit 

available funding

2

Primary focus Source: BCG analysis

 The recommendations outlined above create real efficiency and 

effectiveness improvement for the agency. We would recommend that they be 

implemented immediately and rigorously on a “no regrets” basis, because they 

are foundational to the agency’s future and should, in any case, be the first major 

set of initiatives to be launched, whichever of the two further choices Congress 

may eventually make. This sequence is particularly important if only to reduce 

the net funding requirement were Congress to select Choice 1. A precise estimate 
© 2011 The Boston Consulting Group, Inc. 10

of the funding need can only be determined by an in-depth analysis of specific 

investment initiatives that target long-standing capability needs, future increases 

in market-driven workload, and the results of the optimization initiatives. 

Alternatively, in Choice 2, Congress could redefine the role of the SEC to better 

match its available funding. 

* * * 

 Carrying out the SEC’s mission requires both a regulatory framework with 

clear authorizations and a robust set of internal capabilities to deliver against 

these authorizations; our study addresses only the second of these factors. 

Ultimately, BCG recommendations on the latter should be considered together 

with the former for their collective impact on the agency’s mission. While we 

recognize the inherent difficulty in developing metrics to measure performance 

against mission, true accountability is hard to attribute absent a thoughtful set of 

outcome-oriented metrics. If designed well, these metrics could then be cascaded 

through the agency to establish clear alignment at the division/office, manager, 

and individual contributor levels. The SEC already utilizes a set of performance 

measures that it reports on annually in its Performance Accountability Report, 

but BCG recommends that the SEC should conduct a study on the feasibility of 

more outcome-oriented metrics. 

 In the final analysis, however, it may be that the most important measure 

of success will be how effectively the agency addresses three chronic, structural 

disconnects it has historically faced and continues to face today; namely: 

 Between stakeholder expectations and its legal authorizations, 

 Between its authorizations and available resources, and 

 Between the dynamism of the markets it oversees and the rigidities from 

its constraints and culture. 

Excellence in the five core capabilities described earlier will go a long way 

towards addressing these disconnects. 
© 2011 The Boston Consulting Group, Inc. 11

2 Scope and approach 

2.1 Overview 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (DoddFrank or the Act) was signed into law in July 2010.2

 As part of this reform, 

Congress directed the SEC to engage an “independent consultant of high caliber” 

to study the agency’s structure and operations, among other areas, and to 

propose alternatives and improvements.3 

As enumerated in the Act, Congress identified the following means to 

address that goal: 1) eliminating unnecessary/redundant units at the SEC; 2) 

improving communication among the SEC’s offices and divisions; 3) establishing 

a clear chain-of-command, especially with respect to enforcement investigations 

and compliance inspections; 4) responding to high-frequency trading and other 

technological advances in the market; 5) refining the SEC’s hiring, workplace, and 

personnel policies by streamlining the hiring process for employees with nontraditional skill sets, further reforming compensation policies, and diversifying 

employee skill sets as necessary; and 6) evaluating the SEC’s relationship with 

self-regulatory organizations (SROs) and adjusting that relationship as 

appropriate.4

2.2 Selection of The Boston Consulting Group 

The Boston Consulting Group (BCG) was selected to perform this study 

based on our knowledge and experience in securities markets, organizational 

design, people management, and technology—for both public and private sector 

clients. The former include other regulators and the latter span the range of 

registrants the SEC oversees. 

2.3 Matters for study 

The SEC specified four matters for study, consistent with Dodd-Frank:5

1) Organization structure 

2) Personnel and resources

3) Technology and resources

4) Relationships with SROs 

 

2

 United States. Cong. Senate. Dodd-Frank Wall Street Reform and Consumer Protection Act. 111st 

Cong., 2nd sess. Washington: GPO, 2010. Print. 3 Dodd-Frank Wall Street Reform and Consumer Protection Act. S 967(a)(1). 4 Dodd-Frank Wall Street Reform and Consumer Protection Act. S 967(a)(2)(A)-(G). 

5

 United States. U.S. Securities and Exchange Commission. Statement of Work Form SECHG1-11-F0001. 13 Oct. 2010. Print. 
© 2011 The Boston Consulting Group, Inc. 12

Organizational structure: BCG analyzed the SEC’s existing organizational 

structure, with an emphasis on making recommendations and providing options 

for improving efficiency.6 

 

 Personnel and resources: BCG examined the SEC’s hiring authorities, 

personnel processes and practices, and the diversity of staff expertise and skills. 

BCG also evaluated the adequacy of existing resources devoted to personnel 

compensation and training.7

 

 

Technology and resources: BCG examined the SEC’s existing information 

technology personnel, resources, systems, and skill sets and assessed whether 

these are capable of meeting current and emerging technology needs. In 

addition, BCG assessed the effect on the securities markets of high-frequency 

trading and other technological advances, and determined what capabilities the 

SEC requires to monitor the effect of such advances on the markets.8

 

 

Relationships with SROs: BCG examined the SEC’s relationship with and 

reliance on SROs and similar entities that operate under the SEC’s oversight and 

are relevant to the regulation of securities and the protection of securities 

investors.9

2.4 Project scope 

To carry out its mission, the SEC requires both a regulatory framework 

with clear authorizations, as well as a robust set of internal capabilities to fulfill 

this mandate. This study focuses on the latter.10 An analysis of the legal 

framework, regulatory philosophy, or performance of the SEC against its mission 

is beyond the scope of this study. 

 

6

 Ibid 6. 

7

 Ibid 6-7. 

8

 Ibid 8. 

9

 Ibid 9. 

10 Dodd-Frank Wall Street Reform and Consumer Protection Act. S 967(a). 
© 2011 The Boston Consulting Group, Inc. 13

2.5 Project approach 

Exhibit 2.5-1: Four modules in BCG’s approach 

 

Module 1: Assess implications of external forces

 This module studied the business and regulatory context in which the SEC 

operates. The perspectives developed during this module informed subsequent 

modules of the project. We supplemented our experience in securities markets 

and financial regulation with targeted research and analysis to identify the key 

external factors affecting the SEC—for example, the emergence of highfrequency trading, the growth in the size, complexity, and global 

interconnectedness of securities markets, the evolution of risks in recent years, as 

well as the expansion of the SEC’s mandate resulting from Dodd-Frank. An 

understanding of these external forces was critical to assessing the capabilities 

that the SEC needs. 

Module 2: Deep dive into matters for study identified by the SEC 

This module established a baseline assessment of the SEC along the four 

matters for study: organizational structure, personnel and resources, technology 

and resources, and relationships with SROs. This module also identified key gaps 

and developed recommendations for each matter for study. 

Synthesize 

and integrate 

recommendations 

Assess implications of 

external forces

3

Review and 

refine final 

report

4

Assessment Options identification and recommendation 

development Refinement

2a. Organizational Structure

2b. Personnel & Resources

2c. Technology & Resources

2d. Relationships with SROs

• New regulatory mandates 

• Capital markets dynamics

Text

Develop baseline and benchmarks Identify key gaps 

and develop recommendations

Deep dive into matters for study identified by the SEC

• Develop baseline of current SEC 

state and understanding of future 

needs

• Compare baseline against best 

practices, external benchmarks, and 

new requirements

• Identify key gaps

• Develop recommendations for each 

matter for study

1

2

Source: BCG analysis
© 2011 The Boston Consulting Group, Inc. 14

Module 3: Synthesize and integrate recommendations 

Recognizing the interconnectedness of the four matters for study, BCG 

approached them both collectively and as standalone topics. In this module, we 

synthesized the analysis and recommendations across the four matters for study. 

A draft version of the final report was completed during Module 3. 

Module 4: Review and refine final report 

 

 In this module, we refined our analysis, recommendations, and final 

report. 

2.6 Methodologies and tools 

BCG conducted this study from October 2010 to March 2011. Per standard 

practice, BCG primarily worked on-site at the SEC’s headquarters in Washington, 

DC. In addition, we engaged with the SEC’s regional offices. BCG reviewed 

extensive documentation, undertook analyses, and conducted more than 425 

discussions with the SEC, former SEC officials, regulated entities, peer regulators, 

SROs, and industry groups. 

BCG used a number of proprietary methodologies and tools throughout 

the study to develop our findings. In particular: 

Organization design: BCG undertook an assessment of the SEC’s 

organization design using an adapted version of the proprietary methodology, 

Designing for Performance (see Exhibit 2.6-1). This methodology helped us assess 

the SEC’s organizational structure as well as its collaboration mechanisms and 

accountabilities. For example, we mapped the reporting lines for each SEC 

employee in the five divisions and OCIE and assessed the shape of the 

organizational pyramid utilizing proprietary BCG methodologies. To complement 

the methodology, BCG conducted baseline interviews with the directors of each 

division and office at the SEC, including interviews with members from selected 

regional offices. These interviews were followed by multiple in-depth discussions 

with staff of key organizational units. Additionally, we leveraged various studies 

and reviewed organizational charts and key agency-wide processes, including the 

strategic planning and budget processes. 
© 2011 The Boston Consulting Group, Inc. 15

Organizational Capabilities and Job-Specific Competencies

Strategy Recruiting Training Performance 

management

Talent 

management

People Pipeline

Strategy Recruiting Training Performance 

management

Talent 

management

People Pipeline

High-performance organizations require a robust people pipeline...

...supported by a well-functioning Human Resources organization...

Workforce Capacity

...that can deliver the required skills and capacity to enable mission success...

• Clear front/middle/back office 

responsibilities

• Clear accountabilities with 

customers

• Well-staffed and deployed

• Customer service focus

HR Structure HR Processes HR People

• Streamlined processes

• Clear policies

• Performance metrics

...contributing to an engaged workforce

Source: BCG analysis and experience

Exhibit 2.6-1: Designing for performance 

Structure...

...drives focus on strategic imperatives

• Core organization units

• Appropriate support structures

• Efficient organizational pyramid with 

flat reporting hierarchy

Collaboration & accountabilities...

...make structure work

• Clear role charters with accountabilities

• Effective collaboration mechanisms

• Clear, cascaded communication

High-performance organizations align building blocks of design with strategic imperatives

Source: BCG analysis and experience

 

Personnel and resources: To assess the SEC’s personnel and resources, 

BCG used the approach described in Exhibit 2.6-2. As part of this effort, we 

conducted interviews, reviewed documentation, analyzed data, and gathered 

input from relevant stakeholders. We reviewed the SEC’s people pipeline and 

supporting human resources processes—including existing strategies, hiring 

authorities, recruiting processes, contracting processes, training resources and 

planning, performance management, and talent management. BCG also 

conducted a capability/competency assessment to collect feedback on staff skill 

sets, completed a workload modeling exercise designed to detail agency capacity, 

and employed our proprietary Engaging for Results methodology to assess 

employee engagement. 

Exhibit 2.6-2: Approach to evaluating personnel and resources 
© 2011 The Boston Consulting Group, Inc. 16

Technology and resources: BCG conducted a targeted assessment of the 

SEC’s existing technology capabilities relative to its changing technology needs 

(see Exhibit 2.6-3). We focused on three aspects of technology: 

 Technology systems, including the current capabilities and extensibility of 

the full range of technology services. The scope also included specific 

areas where technology investments are merited to reflect ongoing and 

emerging needs 

 The Office of Information Technology’s (OIT) ability to deliver 

information technology (IT) services, including its process for addressing 

the SEC’s technology priorities, and its organizational structure, 

governance, management processes, and tools to support solution delivery 

 Technology expertise, including expertise in existing and emerging 

securities markets technologies, the development and management of 

complex technology systems, and data analytics 

Our review included the capabilities of both the SEC’s central IT group—

OIT—and the “shadow” IT groups embedded in the agency’s various offices and 

divisions. During the course of this review, we conducted interviews with the OIT 

leadership team and managers, and representatives from the SEC’s divisions and 

offices, reviewed documentation for a targeted set of the SEC’s approximately 

200 existing technology solutions and applications, and analyzed internal agency 

data. 

 

Exhibit 2.6-3: Technology and resources assessment approach 

Technology

systems

Technology

expertise

OIT's ability to deliver

technology services

• Securities markets 

technology expertise

• Expertise to develop 

and manage complex 

IT systems

• Technology strategy and business alignment

• Organizational structure

• Management processes

• Governance

• Application and 

technology portfolio to 

support the business

• Technology standards

Source: BCG analysis and experience
© 2011 The Boston Consulting Group, Inc. 17

Relationships with SROs: To examine the SEC’s relationships with SROs, 

BCG conducted interviews with SROs11 and relevant peer regulators. We also 

interviewed SEC staff, primarily in the Division of Trading and Markets (TM) and 

Office of Compliance Inspections and Examinations (OCIE). BCG leveraged 

studies, articles, and memoranda drafted by the SEC, other regulatory agencies, 

and individuals and firms in the private sector. We reviewed documents and 

content available on the public websites of several broker-dealers, investment 

advisers, clearing agencies, and other regulated entities. 

BCG assessed the SEC’s role as a co-regulator and oversight body for the 

SROs by evaluating the agency’s structure, competencies, and processes as they 

relate to SROs (see Exhibit 2.6-4). 

Exhibit 2.6-4: Approach for evaluating SRO relationships

Structure

e.g., which 

Divisions 

interact with 

SROs

Competencies

e.g., does SEC 

have the right 

skills and tools

Processes

e.g., how are 

SRO rules and 

operations 

reviewed

SEC as an oversight body

to the SROs

SEC as a co-regulator 

with SROs

Inputs for 

assessment

Areas for 

recommendation

Source: BCG analysis

 

11 NYSE Euronext, NASDAQ-OMX Group, Inc., Direct Edge Holdings, LLC, BATS Global Markets, 

Inc., International Securities Exchange Holdings, Inc., CBOE Holdings, Inc., Chicago Stock 

Exchange, Inc., The Financial Industry Regulatory Authority (FINRA), the Municipal Securities 

Rulemaking Board (MSRB), the Public Company Accounting Oversight Board (PCAOB), 

Depository Trust & Clearing Corporation (DTCC), and Options Clearing Corporation.
© 2011 The Boston Consulting Group, Inc. 18

* * * 

 To recap, BCG used these tools and methodologies to assess the SEC across 

the four matters for study. We synthesized these assessments into the findings 

described in this report. Our approach considered the history of the SEC as well 

as recent improvement initiatives already undertaken by the agency. Wherever 

possible, we adopted a forward-looking perspective, evaluating the SEC in the 

context of the increasing demands and the constraints under which it operates. 

 
© 2011 The Boston Consulting Group, Inc. 19

3 Context 

3.1 Overview of the SEC 

Congress created the SEC under the Exchange Act of 1934 (the Exchange 

Act),12 which together with the Securities Act of 1933 (the Securities Act),13

established the first substantive federal securities laws in the United States. The 

SEC’s mission is threefold: protect investors, maintain fair, orderly, and efficient 

markets, and facilitate capital formation. While this mission has remained largely 

unchanged, the agency’s regulatory authorities, along with the securities markets 

it oversees, have evolved. 

 Today, the SEC oversees a large, highly complex, and rapidly changing 

market in securities with a wide range of registrants including over 5,000 brokerdealers, over 11,000 registered investment advisers, investment companies, SROs 

(including exchanges and clearing houses), ratings agencies,14 public companies, 

and accounting and auditing firms. The equity market alone has a market 

capitalization of approximately $14 trillion. Each year, the SEC adopts between 

25 and 30 rules packages, 15 brings between 575 and 675 enforcement actions,16

conducts over 1,500 exams, processes tens of thousands of requests for 

information from investors17 and over 1 million securities filings, considers over 

2,000 SRO rule filings, and conducts training sessions for approximately 2,000 

foreign financial regulators. 

 Dodd-Frank imposes significant new requirements on the agency, 

including mandatory organizational changes and the expansion of the SEC’s 

scope of responsibility. It directs the SEC to create five new offices, four of which 

are to report directly to the Chairman. It also expands the SEC’s mandate to 

include previously unregulated over-the-counter (OTC) swaps, derivatives 

markets, advisers to private funds, and municipal securities advisors. 

 

 Today, the SEC employs approximately 2,300 employees at its Metro DC 

offices, along with about 1,600 employees in 11 regional offices spread 

throughout the US. The Commission itself consists of five Presidentiallyappointed Commissioners, each of whom serves a staggered five-year term. One 

Commissioner is designated by the President as Chairman, and no more than 

three of the Commissioners may belong to the same political party. The SEC staff 

 

12 15 USC. Sec. 78a. 1934. Print. 

13 15 USC. Sec. 77a. 1933. Print. 

14 Also known as Nationally Recognized Statistical Rating Organizations (NRSROs). 

15 SEC Final Rules. U.S. Securities and Exchange Commission. Web. 1 Feb. 2011. 16 United States. U.S. Securities and Exchange Commission. In Brief FY 2005 – 2010 Congressional 

Justification. Washington: GPO, 2005 - 2010. Print; United States. U.S. Securities and Exchange 

Commission. 2010 Performance and Accountability Report. Washington: GPO, 2010. Print. 17 United States. U.S. Securities and Exchange Commission. In Brief FY 2012 Congressional 

Justification. Washington: GPO, 2011. Print. 
© 2011 The Boston Consulting Group, Inc. 20

is grouped into five divisions and eighteen offices, 20 of which report directly to 

the Chairman. Three of the five divisions are organized based upon the primary 

body of law and types of regulated entities for which they are responsible: the 

Division of Trading and Markets (TM) regulates broker-dealers, transfer agents, 

and SROs for compliance with applicable Exchange Act provisions; the Division 

of Investment Management (IM) oversees investment advisers and investment 

companies for compliance with the Investment Advisers Act of 194018 and the 

Investment Company Act of 1940;19 and the Division of Corporation Finance (CF) 

is responsible for enforcing the provisions of the Securities Act and the Exchange 

Act relating to public companies’ disclosure requirements. The remaining 

divisions are organized according to their functional expertise: the Division of 

Risk, Strategy, and Financial Innovation (RSFI) oversees risk and financial 

analysis, strategic research, and financial innovation; and the Division of 

Enforcement (Enforcement) oversees all investigation and enforcement actions. 

The 18 offices oversee various internal and external functions, which range from 

examining regulated entities and liaising with the SEC’s foreign counterparts to 

providing human resource and information technology support for the agency. 

The largest of these, the Office of Compliance Inspections and Examinations 

(OCIE), conducts examinations of various registrants and SROs. 

 The SEC is responsible for a comprehensive, end-to-end set of regulatory 

activities for the securities markets, including: 1) registering participants; 2) 

reviewing disclosures; 3) reviewing policy and rule proposals; 4) writing and 

interpreting rules; 5) assisting with monitoring the markets for systemic risk; 6) 

surveilling trading activity; 7) examining market participants; 8) overseeing 

securities clearing; and 9) enforcing the securities laws. 

 To carry out these responsibilities, the SEC deploys approximately 200 

technological solutions. Three systems are of particular note: 1) EDGAR, which is 

a filing solution that supports the receipt and review of public filings; 2) Hub, 

which is a case management system supporting the enforcement of the securities 

laws; and 3) TCR (tips, complaints, and referrals), which is a tracking system for 

managing triage of tips, complaints, and referrals. 

3.2 Reliance on self-regulatory organizations 

Overview

To oversee the securities markets, the SEC leverages its own capabilities as 

well as those of SROs. These SROs are endowed by statute with regulatory 

authority over specific segments of the market. As discussed earlier, the SEC 

conducts market-wide regulation including policymaking, coordination with peer 

regulators, and systemic risk anticipation. To supplement these efforts, SROs 

conduct activities including registration of market participants, market 

surveillance, and the creation of rules to govern their respective jurisdictions. In 

 

18 15 USC. Sec. 80b. 1940. Print. 

19 15 USC. Sec. 80a. 1940. Print. 
© 2011 The Boston Consulting Group, Inc. 21

all cases, the SEC oversees these activities closely. The result is that the SEC 

supervises the SROs in some contexts (e.g., when inspecting SROs or approving 

SRO rule proposals) and regulates alongside them in others (e.g., when pursuing 

joint enforcement actions). 

Throughout the study, we used a functional approach in determining what 

entities to classify as SROs, one that is broader than the statutory definition but 

better reflects the realities of securities regulation. We included as SROs all nongovernment entities that aid the SEC in fulfilling its mission and are subject to the 

SEC as their primary oversight body. For purposes of this report, we group the 

SROs into three broad categories: 

 Exchanges: Nine companies—NYSE Euronext; NASDAQ-OMX Group, Inc.; 

Direct Edge Holdings, LLC; BATS Global Markets, Inc; International 

Securities Exchange Holdings, Inc; CBOE Holdings, Inc; National Stock 

Exchange; Chicago Stock Exchange, Inc; and Boston Options Exchange—

have registered securities exchanges with the SEC. Many, such as 

NASDAQ-OMX, operate multiple exchanges while others, such as 

International Securities Exchange Holdings, LLC, operate only one. 

Although the holding companies themselves have no direct regulatory 

obligations to the SEC, their subsidiary exchanges do: under the Exchange 

Act, all exchanges are responsible for regulating their members for 

compliance with the securities laws and with the exchanges’ own rules 

 Oversight organizations: The Financial Industry Regulatory Authority 

(FINRA), the Municipal Securities Rulemaking Board (MSRB), the Public 

Company Accounting Oversight Board (PCAOB), and the Financial 

Accounting Standards Board (FASB) perform a range of regulatory 

activities for the organizations falling under their purview. Except with 

regard to the FASB, this range includes rulemaking, exams and 

enforcement (except with respect to the MSRB). The PCAOB and FASB are 

also standard-setting bodies 

 Clearing corporations20: The SEC has authority over nine clearing 

organizations under the Exchange Act, including the Depository Trust 

Company, the National Securities Clearing Corporation and the Options 

Clearing Corporation.21 These companies undertake significant regulatory 

duties

 

20 Clearing agencies comprise both clearing corporations and depositories, per the SEC’s 

definition; Clearing Agencies. U.S. Securities and Exchange Commission. Web. 1 Feb. 2011. 21 There are four additional entities that perform a similar function for swaps and derivatives and 

that have been exempted from registration, though they are subject to SEC oversight in different 

ways. 
© 2011 The Boston Consulting Group, Inc. 22

The SEC’s reliance on SROs over time 

While the core role of SROs has remained relatively constant, the nature 

of responsibilities granted to them has varied over the years. We measured the 

SEC’s reliance on SROs based primarily as a function of two core metrics: the 

range of regulatory activities they undertake, and the entities for which they 

oversee those activities, as shown below in Exhibit 3.2-1. 

In the years immediately following passage of the Exchange Act in 1934, 

SROs performed a more limited set of regulatory activities than today. The SEC’s 

three key activities during this period were promulgating and approving rules, 

reviewing disclosures by public companies, and prosecuting violations of the 

securities laws. The two key SROs of this era—the National Association of 

Securities Dealers (NASD) and the New York Stock Exchange (NYSE)—wrote 

rules to govern market participants and conducted enforcement but did not (and 

to this day, do not) assist with reviews of issuers’ public disclosures. Due to 

technological and legal limitations, regulators were not conducting surveillance in 

any comprehensive sense, and regular exams of market participants were not yet 

at today’s levels. 

Following a string of regulatory failures by the SROs, Congress passed the 

1975 amendments to the Exchange Act. These amendments strengthened the 

SEC’s oversight of the SROs considerably, and brought new regulated entities 

within the SEC’s jurisdiction. Any new SRO rules or changes in existing rules 

were to be filed with the SEC and, with limited exception,22 no rule could take 

effect without SEC approval. All SRO disciplinary actions were also subject to 

SEC review. The amendments also subjected municipal securities dealers to SEC 

oversight for the first time. The other fundamental change during this period was 

the founding of the Depository Trust Company (DTC) and National Securities 

Clearing Corporation (NSCC) in the mid-1970s. Together, the DTC and NSCC 

ameliorated many back office and other administrative difficulties by, among 

other services, immobilizing security certificates at a central depository and 

simplifying trade settlement.23 The two companies were also registered with the 

SEC under the Exchange Act as a new category of SRO, meaning that their rules 

and procedures became subject to SEC oversight.24 

Beginning in the early 1990s, many SROs began demutualizing into forprofit companies; by 2006, all but one of the national securities exchanges were 

demutualized.25 The exchanges restructured their regulatory functions with a goal 

of ensuring that business operations did not unduly influence disciplinary 

 

22 Under Section 19(b)(3)(A), some rules can take effect immediately upon filing. The SEC has 60 

days to abrogate the rule, if it decides to do so. 

23 For a general description of the DTCC’s history and functions, see Responding to Wall Street’s 

Paperwork Crisis. The Depository Trust & Clearing Corporation. Web. 1 Feb. 2011. 24 The Fixed Income Clearing Corporation was added in 2003 to perform a similar function for 

debt instruments. 

25 CBOE was not demutualized until 2010. 
© 2011 The Boston Consulting Group, Inc. 23

responsibilities. Following a series of enforcement actions by the SEC, the 

exchanges began to segregate regulatory functions from business functions. In 

addition to these structural adjustments, to some extent there has also been 

consolidation of regulatory activities performed by SROs: FINRA was formed in 

2007 as the successor to the NASD and in 2010, it completed a combination with 

parts of NYSE Regulation. Currently, FINRA provides regulatory services 

(including surveillance) for approximately 80 percent of the trading volume in US 

equity markets. Its other responsibilities include registering and examining all 

securities firms doing business with the public, writing and enforcing rules and 

the federal securities laws, and informing and educating the investing public. 

The SEC currently leverages SROs for a broad range of activities. With 

respect to broker-dealers, SROs register members, review regulatory reports, 

write and interpret rules, conduct examinations, investigate and enforce rule 

violations, oversee all trade clearing and settling, and surveil all trading activity. 

SROs also play a significant role in overseeing public auditors: the PCAOB 

registers, conducts examinations, reviews regulatory reports, and writes rules for 

all accounting firms that conduct audits of public companies or broker-dealers. 

Finally, issuers who choose to list on an exchange are subject to SRO oversight in 

the form of the substantive listing requirements. 

Exhibit 3.2-1: Evolution of SEC and SRO responsibilities over time 

There is an active debate both in the US and abroad over the appropriate 

role for SROs in financial regulation. In addition to questions about what the 

SROs should do, there is no universally fixed definition of “self-regulation”: 

Some form of SRO involvement

Brokerdealers

Investment 

companies / 

advisers

Public 

companies

Muni traders / 

advisors

Accounting / 

auditing firms

Scope and distribution of regulatory responsibilities in: 1940 1970s Current

Source: BCG analysis

Expansion of regulatory

responsibilities

Regulatory value chain

Regulated 

entity

Registration Regulatory 

reporting

Rule-writing / 

interpretation

Approval of 

SRO rules

Investigation 

&

enforcement

CCP clearing Exams Surveillance Sys. risk 

anticipation Registration Regulatory reporting

Rule-writing / 

interpretation

Approval of 

SRO rules

Investigation 

&

enforcement

CCP clearing Exams Surveillance Sys. risk 

anticipation
© 2011 The Boston Consulting Group, Inc. 24

governance models exist on a continuum, with purely voluntary industry 

regulation on one end and purely governmental regulation on the other.26 

The following discussion is intended primarily as an overview of the 

ongoing debate. The SEC recently released a study mandated under Dodd-Frank 

that analyzes, among other topics, whether self-regulation is appropriate with 

respect to investment advisers.27 Another Dodd-Frank study to be performed by 

the Government Accountability Office will examine the governance of national 

securities associations such as FINRA.28 These studies supplement the existing 

rich analyses of self-regulation in the securities markets. 

There are a number of commonly-cited justifications for relying on SROs, 

the most prominent of which is that self-regulators have greater technical 

expertise because of their proximity to the industry.29 According to this 

argument, complex industries such as the securities markets require regulators 

that are intimately familiar with day-to-day business issues and operations. That 

familiarity, the theory goes, grants certain informational advantages to selfregulators. First, industry participants may be better positioned to construct a 

regulatory structure that is appropriate to the industry. Second, self-regulators’ 

proximity to the industry enables them to prescribe requirements—such as 

ethical and moral standards—that government authorities might not be able to 

impose effectively. Finally, once the regulatory framework is in place, selfregulators could monitor the industry more efficiently than government 

regulators. Self-regulation is also credited by some as being more cost-effective 

than direct government oversight. The more common variation on this claim is 

that self-regulation is usually funded by the industry being regulated, meaning 

that the cost of regulation is internalized.30 While some of these costs might be 

passed through to a broader population, they are almost certainly more focused 

than the general taxation that would fund a government regulator.31 There has 

been, to date, no resolution on private versus public regulatory efficiency with 

respect to financial regulation, but the view that government regulators are 

overly bureaucratic (and therefore more expensive) nevertheless persists.32 

 

There are two incentives-based justifications for self-regulation. Under this 

line of thinking, self-regulation is appropriate where profitability is linked to the 

appearance of stability. Of course, this justification is strongest with respect to 

securities exchanges: exchanges require participation by a broad issuer/investor 

 

26 Ogus, Anthony. Rethinking Self-Regulation, 15 Oxford J. Legal Studies 97, 1995. Print. 27 United States. U.S. Securities and Exchange Commission. Study on Enhancing Investment Adviser 

Examinations, Washington: GPO, 2011. Print. 28 Dodd-Frank Wall Street Reform and Consumer Protection Act. S 964. 

29 See e.g., Dodd-Frank Wall Street Reform and Consumer Protection Act. S 964; Poser, Norman S. and 

James A. Fanto. Broker-Dealer Law and Regulation, 4th Ed. Print; Gunningham, Neil and Rees, 

Joseph. Industry Self-Regulation: An Institutional Perspective, 19 Law & Pol’y 363, 1997. Print. 30 Rethinking Self-Regulation. 31 Note, of course, that this justification fades when the government regulator is funded by 

industry fees and not by tax revenues. 

32 See e.g., Carson, John. The World Bank. Self Regulation in Securities Markets, Policy Research 

Working Paper 5542, 2011. Print. 
© 2011 The Boston Consulting Group, Inc. 25

base to be successful, and they will only do business with exchanges that are well 

regulated (or are at least seen as such, to the extent that there is a distinction). 

Government regulators, the theory goes, may therefore entrust exchanges with 

regulatory responsibilities since those exchanges are incentivized to enact 

appropriate regulation anyway. The second incentives-based justification is more 

broadly applicable and relates to industry cooperation: industry participants are 

seen as more likely to buy into regulation when it comes from within. In this 

view, voluntary self-regulation may be more amenable to market participants 

than government oversight, even when the level of “voluntariness” is only 

superficial. With respect to US securities regulation, this was at least partially the 

case: the Exchange Act provisions establishing the national securities associations 

were a means of garnering support from market participants. 

There are, however, criticisms of self-regulation. The most fundamental 

critique is that self-regulation is not real regulation at all: at best, self-regulation is 

less effective than government regulation, and at worst, is merely “an illusion” 

meant to deflect calls for government oversight.33 According to this view, industry 

participants have a conflict of interest (between commercial interests and those 

of the market) that might prevent them from imposing adequate regulatory 

strictures on themselves.34 Critics of securities SROs, for example, claim that 

exchanges fail to discipline profitable or otherwise powerful members out of fear 

that excessive regulation will push business to more lightly regulated 

competitors.35 By extension, there are concerns that powerful members may 

exert excessive influence to not only avoid regulation on themselves but also 

impose additional regulation on other, less powerful members. 36 Industry 

participants may also be unwilling—or even unable—to coordinate properly with 

government regulators, thus creating additional hurdles to market oversight. 

Some also criticize self-regulation as lacking sufficiently broad jurisdiction to 

regulate effectively. In the context of the securities markets, these critics claim 

that individual securities exchanges, for example, cannot effectively regulate 

across multiple venues. Finally, some observe that SROs govern with only limited 

democratic accountability: besides their respective boards of directors, SRO 

leadership answers only to the SEC, meaning that investors and other market 

participants have, at best, indirect democratic means for effecting regulatory 

change. 

As discussed above, the SEC has been increasing its reliance on SROs, and 

recent discussions suggest the possibility that the SEC will rely on SROs in 

additional areas.37 This is not a global trend, however; outside the US, the level of 

SRO reliance varies. The United Kingdom relied heavily on informal selfregulatory bodies to oversee its securities markets for hundreds of years. 

Following financial regulatory reform in 2000, however, the UK centralized 

 

33 Omarova. Rethinking the Future of Self-Regulation in the Financial Industry, 35 Brook. J. Int’l L. 

665, 2010. Print. 

34 Ibid. 

35 Ibid. 

36 Broker-Dealer Law and Regulation. 37 Study on Enhancing Investment Adviser Examinations. 
© 2011 The Boston Consulting Group, Inc. 26

nearly all regulatory responsibilities in a single body, the Financial Services 

Authority (FSA). This move largely dismantled the country’s SROs, representing 

a shift away from the UK’s relatively informal regulatory policies.38 Similarly, the 

Hong Kong Exchange, Hong Kong’s sole stock and futures exchange, ceded much 

of its regulatory responsibilities in 1989 to the then-nascent Securities and 

Futures Commission, which had been created in response to the 1987 market 

crash that shut down the country’s exchange for several days.39 In contrast, the 

Canadian financial regulatory framework, which is a hybrid of state- and federallevel agencies, relies on SROs for certain market oversight responsibilities in part 

to navigate the two levels of government oversight. The two most prominent 

Canadian SROs are the Investment Industry Regulatory Organization of Canada, 

which oversees all investment dealers and enforces stock exchange rules, and the 

Mutual Fund Dealers Association, which oversees all mutual fund dealers.40

Ultimately, there is no universal “right” answer; each country determines 

the appropriate mix of governmental and non-governmental oversight of its 

securities markets based on relevant characteristics, including market size, 

investor base, and product types. Congress and the SEC must therefore 

determine the optimal level of reliance on SROs and, given that level of reliance, 

how the SEC should interact with SROs. 

3.3 The SEC’s external environment 

The environment in which the SEC operates is changing rapidly, requiring 

the agency to adjust along several axes. Two prominent drivers of these 

developments are changes in the regulatory landscape and changes in the capital 

markets. In response, the SEC has had to take on new duties, develop new skills, 

and build new capabilities, all on an accelerated timeframe. 

3.3.1 Regulatory landscape 

Dodd-Frank calls for a significant restructuring of the US financial 

regulatory framework. The Act imposes new requirements on financial market 

participants and calls for enhanced coordination among regulators through 

vehicles like the Financial Stability Oversight Council and the Office of Financial 

Research. It also creates new regulators (e.g., the Consumer Financial Protection 

Bureau) and eliminates others (e.g., the Office of Thrift Supervision). 

 

38 Schooner, Heidi M. and Michael Taylor. United Kingdom and United States Responses to the 

Regulatory Challenges of Modern Financial Markets, 38 Tex. Int'l L.J. 317. 2003. Print; Alpert, Cory. 

Financial Services in the United States and United Kingdom: Comparative Approaches to Securities 

Regulation and Dispute Resolution, 5 B.Y.U. Int'l L. and Mgmt. Rev. 75. 2008. Print. 39 Jordan, Cally and Pamela Hughes. Which Way for Market Institutions: The Fundamental Question 

of Self-Regulation, 4 Berkeley Bus. L. J. 205, 211, 2007. Print. 40 Pan, Eric J. Transnational Law and Contemporary Problems, 19 Transnat'l L. & Contemp. Probs. 

796, 2011. Print. 
© 2011 The Boston Consulting Group, Inc. 27

 In addition, the Act imposes new requirements on the SEC, including 

mandatory organizational changes and new responsibilities in several key 

areas. 

Organizational changes: The Act requires five new offices within the SEC, 

four of which must report directly to the Chairman: 

 Office of Municipal Securities:41 Administers SEC rules for municipal 

securities broker-dealers, advisors, investors, and issuers and coordinates 

with the MSRB for rulemaking and enforcement actions 

 Office of Credit Rating Agencies:

42 Administers SEC rules for NRSROs and 

is required to conduct exams of each NRSRO at least annually and publish 

an annual report of exam results 

 Office of the Investor Advocate:43 Assists retail investors in their 

interactions with the SEC or SROs, identifying problems that investors 

have with financial service providers and investment products, and 

analyzing the impact of proposed SEC and SRO rules on retail investors 

 Office of Minority and Women Inclusion:44 Oversees all matters relating to 

diversity in management, employment, and business activities at the SEC, 

including contracting practices; assesses the diversity policies and practices 

of regulated entities 

 Whistleblower Office:45 Administers and enforces the Whistleblower 

incentives and protection included in Dodd-Frank; the head of this office 

will not report directly to the Chairman 

New responsibilities: Under Dodd-Frank, the SEC has an expanded scope 

in a number of areas: 

 Private funds: With certain exceptions, the Act requires managers of 

private funds to register with the SEC under the Investment Advisers Act, 

subjecting managers of those funds to enhanced SEC scrutiny and 

oversight for the first time46

 Derivatives: The Act imposes new regulation on the swaps markets, 

dividing jurisdiction between the SEC and the CFTC. The Act calls for 

mandatory clearing through regulated central clearing organizations and 

mandatory trading through regulated exchanges or swap execution 

facilities. The Act also creates new categories of regulated market 

participants, including swap dealers and major swap participants47 

 

41 Dodd-Frank Wall Street Reform and Consumer Protection Act. S 979. 42 Ibid S 932(a)(8). 

43 Ibid S 915. 

44 Ibid S 342. 

45 Ibid S 924. 

46 Dodd-Frank Wall Street Reform and Consumer Protection Act. Title IV 47 Ibid. Title VII, Subtitle A, Part II. 
© 2011 The Boston Consulting Group, Inc. 28

 Credit rating agencies: The Act subjects credit rating agencies to annual 

examinations, provides the SEC with additional enforcement tools, and 

requires additional rulemaking48

 Asset-backed securitization: The Act requires heightened reporting and 

disclosure for asset-backed securities issuances. It also requires issuers to 

retain a portion of the credit risk associated with the instruments49

 Corporate governance reform: The Act requires the SEC to draft rules 

governing executive compensation and other governance matters. These 

provisions include, among others, non-binding shareholder votes on 

executive compensation every three years, the independence of 

compensation committees, and certain prohibitions and reporting 

requirements for financial institutions regarding compensation structures50

 Given these mandates, the SEC must determine the extent to which tradeoffs will be required to implement its new responsibilities and whether the 

agency has sufficient flexibility to deploy its resources efficiently. 

3.3.2 Capital markets trends 

In addition to the changes in the regulatory landscape, capital markets 

have also evolved. Over recent years, changes in the capital markets have been 

prompted by four key drivers: 1) new types of demand; 2) technology-led 

innovations; 3) changes in market structure; and 4) the response of market 

participants to regulatory change. In aggregate, these drivers have created a 

financial marketplace that is significantly larger, faster, and more complex than 

ever before. 

New types of demand 

Notwithstanding the credit crisis and its severe impact on capital markets, 

there has been a long-term structural expansion of the role of capital markets in 

the economy. This is exemplified by the growing breadth of participants who are 

accessing the capital markets for a variety of financial needs. These participants 

include public and private sector issuers seeking to raise financing in public 

markets, various types of investors (e.g., investment managers, mutual funds, 

hedge funds, sovereign funds, insurance companies, retail participants), market 

intermediaries (e.g., broker-dealers, investment advisers), markets (e.g., 

exchanges, ECNs, and dark pools), rating agencies, clearing houses, and 

depositories. 

With a long history of innovation, capital markets have offered these 

participants an increasing number of asset classes/products (e.g., equities, fixed 

income, derivatives) and a means of accessing the markets (e.g., direct market 

access, high-frequency trading). These innovations have allowed participants to 

 

48 Ibid. Title IX, Subtitle C 

49 Ibid. Title IX, Subtitle D 

50 Ibid. Title IX, Subtitle E 
© 2011 The Boston Consulting Group, Inc. 29

better address a variety of financial needs, including capital raising, investing, risk 

management, speculation, and research. Consequently, while demand varies 

across different products and markets to reflect prevailing investment conditions, 

the aggregate size and complexity of capital markets has been growing 

consistently. 

Rise in cross-jurisdictional market activity: Cross-jurisdictional market 

activity has increased, fueled by the growth of international markets and 

technological advances that have enabled easy access and faster communication. 

As a result, capital markets are becoming increasingly global. Issuers are 

accessing capital markets worldwide to get the best financing for their needs, 

investors are accessing global capital markets to find the best investment 

opportunities, and financial institutions have become global entities operating 

within and across a variety of regulatory jurisdictions. 

The increase in cross-jurisdictional market activity has important 

implications for regulators, largely due to the complications it raises. In 

particular: 

 Frictions caused by inconsistencies in the patchwork of regulation are 

more acutely felt by market participants

 Effective investigation and enforcement activity is more likely to require 

cross-border coordination among regulators

 The task of assessing and addressing systemic risk is made more complex 

Technology-led innovations 

Transition to electronic trading: As recently as a decade ago, the majority 

of equity share volume was executed manually on exchange floors or over the 

telephone. Today, as a result of advancements in technology and regulatory 

changes, almost all equity trades are executed electronically. This trend has 

spread to other asset classes as well, such as fixed income and foreign exchange. 

 Electronic trading is increasing the prevalence of Straight Through 

Processing (STP), whereby the entire transaction process for trades is conducted 

electronically, without manual intervention. When fully implemented, STP 

provides market participants with faster trade settlements, reduced settlement 

risk, and lower operating costs. STP is a critical enabler of high-frequency trading 

and other high-volume strategies: without it, back offices would struggle to 

support the volume of trades generated. 

Emergence of high-frequency trading: High-frequency trading—a trading 

strategy that relies on the frequent turnover of many small positions based on the 

detection of minute inefficiencies or market patterns—has recently emerged as 

the largest driver of volume in the US equity markets. It is estimated that highfrequency trading currently accounts for approximately 56 percent of US equity 
© 2011 The Boston Consulting Group, Inc. 30

trade volume, up from 35 percent in 2005 (see Exhibit 3.3.2-1). High-frequency 

trading is a growing phenomenon in other markets as well. 51 

 Factors behind the development of high-frequency trading include: 1) the 

modernization of the capital markets (e.g., decimalization, competition between 

trading venues, and direct market access); 2) increased computing power; 3) the 

broad availability of low latency bandwidth; and 4) advances in the field of 

complex event processing. 

 High-frequency trading is having a significant impact on capital markets. 

By driving the increase in volume over the last decade, it has helped deepen 

markets and tighten spreads. High-frequency trading is also seen as a potential 

source of market volatility and new risks of market manipulation. Additionally, 

by virtue of some common practices such as co-location, high-frequency trading 

arguably reduces market fairness. 

 For a further discussion of high-frequency trading, see Section 7.5.2. 

Exhibit 3.3.2-1: Significant growth in high-frequency trading (HFT) 

Increase in the effective use of information: Sophisticated market 

participants are employing new tools and methodologies for collecting, 

managing, and making use of all kinds of market data. Many automated highfrequency trading strategies employ real-time news feeds—including nontraditional information feeds—to better incorporate up-to-the-minute data into 

algorithms. The result is an increase in the speed and sophistication of market 

participants and trading strategies, which requires the SEC and other regulators 

to make corresponding increases in their own speed and sophistication. 

 

51 TABB Group. 

0

20

40

60

80

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

% of total equity trading volume from HFT

Asia

Europe

US

Today, 56 percent of US equity volume 

estimated from high-frequency trading

Projected

Source: TABB Group; BCG analysis
© 2011 The Boston Consulting Group, Inc. 31

Changes in market structure 

Proliferation of new trading venues: Technological advancements, 

coupled with a series of regulations designed to foster competition and drive 

down trading commission costs (e.g., Regulation NMS), have given rise to new 

trading venues. These new venues—primarily alternative trading systems (ATSs) 

such as electronic crossing networks (ECNs) and dark pools—have captured a 

significant share of the market from traditional exchanges (see Exhibit 3.3.2-2). 

Five years ago, 70 percent of volume in NYSE-listed stocks was traded on the 

NYSE; today, NYSE Euronext handles only 36 percent52 of those trades.53 

Meanwhile, the over 80 ATSs that have emerged in recent years are expected to 

capture an estimated 38 percent of US equity volume in 2011.54 

The proliferation of venues has a number of implications for the capital 

markets. As volume shifts away from traditional exchanges, the capital markets 

become more fragmented. The result is increased complexity which leads to, 

among other consequences, opacity in price discovery, difficulties in tracking 

market manipulation, and challenges in collecting market data. 

Exhibit 3.3.2-2: New trading venues carry larger share of US equities volume 

 

Emergence of new market access solutions: Sophisticated market 

participants are employing new means of accessing markets, with the intent of 

gaining flexibility and speed, and reducing transaction costs. These new market 

 

52 This 36 percent includes Arca and Amex; NYSE alone is approximately 22%. 

53 “The New Speed of Money, Reshaping Markets.” New York Times 1 Jan. 2011. Print. 

54 Alternative Trading Systems Active Filers as of October 15, 2010. U.S. Securities and Exchange 

Commission. Web. 1 Feb. 2011; Tabb Group Equities Liquidity Matrix; BCG analysis. 

1. Exchanges include BATS, NASDAQ, NYSE, NYSE Arca, and regional exchanges

Source: Tabb Group, BCG analysis

38

35

27

23

62

65

73

77

0

20

40

60

80

% US equity market volume

2008

Exchanges1

ATSs

2009 2010 2011E
© 2011 The Boston Consulting Group, Inc. 32

access solutions—in particular, co-location, direct market access (DMA), and 

sponsored access—help to enable or enhance new trading strategies such as highfrequency trading. 

 To develop a speed advantage, high-frequency traders are physically 

locating their servers as close as possible to exchange and ATS matching 

engines—in many cases, in the same data center. This practice, called colocation, can confer an advantage of a few milliseconds, which is potentially 

enough time to view and react to price quotes before the rest of the market. 

 Market participants employing sophisticated trading strategies are 

increasingly bypassing sell-side trading operations through DMA and sponsored 

access. With DMA, a broker-dealer provides market participants with direct 

access to its order routing infrastructure, giving the participant the same level of 

market access as the broker-dealer’s own traders. With sponsored access, this 

concept is taken further: market participants are allowed to interact directly with 

the exchange or ATS, just as the broker-dealer does. By cutting out the brokerdealer entirely, the market participant gains additional speed over both 

traditional market access and DMA. 

 These new market access solutions enable faster, more complex capital 

markets. They also have the potential to increase market risk and raise questions 

regarding fairness. The SEC’s recent ban on “naked” sponsored access, which 

allowed market participants to place trades that had not undergone a brokerdealer pre-trade risk assessment,55 as well as the SEC’s concept release 

questioning the practice of co-location,56 demonstrates regulators’ awareness of 

these concerns. 

 

Market participant response to regulatory change 

 

 In the wake of the financial crisis, there has been a concerted effort among 

US and international regulators to strengthen the regulatory oversight of capital 

markets, harmonize the regulatory treatment of various risks across jurisdictions, 

and create institutions and capabilities to anticipate, mitigate, and manage future 

financial crises. This effort has already had significant implications for financial 

institutions. These institutions have placed greater emphasis on improving risk 

transparency and management, rationalized their business portfolios (e.g., exited 

proprietary trading pursuant to the Volcker Rule in Dodd-Frank), and are 

optimizing the deployment of capital (e.g., by following Basel III guidelines). In 

addition, some complex financial institutions are working with regulators to 

develop “living wills” as a potential approach to resolution in the event this were 

to become necessary. 

 

55 United States. U.S. Securities and Exchange Commission. Risk Management Controls for Brokers 

and Dealers with Market Access, Exchange Act Release No. 63241. 75 Fed. Reg. 69792. 2010. Print. 

56 United States. U.S. Securities and Exchange Commission. Concept Release on Equity Market 

Structure, Exchange Act Release No. 61358. 17 CFR 242. 2010. Print. 
© 2011 The Boston Consulting Group, Inc. 33

 

 In summary, the advent of new types of demand, technology-led 

innovations, changes in market structure, and updates to the regulatory 

framework all have material implications for the SEC. It is paramount that the 

agency determine how these trends will—and should—affect its organizational 

structure, people, technology, and interactions with SROs. 

3.4 Constraints impacting the SEC 

In addition to the changing external environment, the SEC is impacted by 

a number of real and substantial constraints. Some are unique to the SEC while 

others are shared across government agencies. These constraints fall into two 

categories: non-funding and funding. The primary non-funding constraints are 

Congressional requirements, governance requirements, and civil service laws, 

and other related factors. The funding constraints include not only the funding 

level but also funding cycle predictability. 

3.4.1 Congressional requirements 

Legal jurisdictions allowing only for partial regulation or enforcement action 

 The legal jurisdiction of the SEC is still defined primarily by the Securities 

Act, the Exchange Act, the Investment Company Act, and the Investment 

Advisers Act. These acts gave the SEC jurisdiction over most aspects of the 

market—as it existed almost 80 years ago. Since then, much has changed and the 

recent financial crisis highlighted gaps in regulatory oversight. Efforts have been 

made to close some of these gaps (e.g., derivatives on securities), but from the 

agency’s perspective, coverage remains incomplete. For example, the SEC may 

regulate broker-dealers, but not their holding companies. In addition, it shares 

legal jurisdiction with the CFTC in that the SEC may regulate securities, but not 

all futures products derived from those securities. As a result, overlapping 

regulatory authority may lead to inconsistent rulemaking. Finally, the SEC has 

the authority to bring civil, but not criminal charges. In these ways, the SEC’s 

regulatory purview is constrained. 

Organizational structure partly mandated by Congress 

 Dodd-Frank mandates four new offices that must report directly to the 

Chairman; however, the Chairman already has 20 direct reports. Moreover, 

many of the functions performed by these new offices already exist at the SEC. 

To comply with Dodd-Frank, the agency is required to reorganize its 

organizational structure, reallocate support resources to these small new offices, 

and reprioritize its focus on this work. As a result, these new offices create 

management complexity, duplication, and a need for new support capacity. 
© 2011 The Boston Consulting Group, Inc. 34

Congressional 

requirements

Legal jurisdictions allowing only for partial regulation or enforcement action

• E.g., SEC authority to regulate broker-dealers but not holding companies, 

securities but not futures

• E.g., Enforcement authority to bring civil but not criminal charges

Organizational structure partly mandated by Congress

• E.g., four new offices mandated by Congress that report directly to the 

Chairman

Rulemaking agenda and priorities influenced by Congress

• E.g., conduct annual exams of all NRSROs as mandated by Dodd-Frank 

irrespective of risk profile 

• E.g., review annual reports of all public companies, including investment 

companies, at least every three years irrespective of risk profile 

Administrative processes dictated by guidelines

• E.g., Paperwork Reduction Act, Administrative Procedure Act, Privacy Act, 

FOIA

Congressional 

requirements

Legal jurisdictions allowing only for partial regulation or enforcement action

• E.g., SEC authority to regulate broker-dealers but not holding companies, 

securities but not futures

• E.g., Enforcement authority to bring civil but not criminal charges

Organizational structure partly mandated by Congress

• E.g., four new offices mandated by Congress that report directly to the 

Chairman

Rulemaking agenda and priorities influenced by Congress

• E.g., conduct annual exams of all NRSROs as mandated by Dodd-Frank 

irrespective of risk profile 

• E.g., review annual reports of all public companies, including investment 

companies, at least every three years irrespective of risk profile 

Administrative processes dictated by guidelines

• E.g., Paperwork Reduction Act, Administrative Procedure Act, Privacy Act, 

FOIA

Governance 

requirements Commission Structure and Government in Sunshine Act

Civil service 

laws and

related factors

Complex hiring authorities

• E.g., Competitive Service hiring process

Limited compensation authority for specialized hiring

Civil service 

laws and

related factors

Complex hiring authorities

• E.g., Competitive Service hiring process

Limited compensation authority for specialized hiring

Funding

Unpredictability of appropriations process

Funding level 

Source: BCG analysis

Exhibit 3.4-1: Constraints 

Rulemaking agenda and priorities influenced by Congress 

 Congressional mandates also influence the daily operations of the SEC. 

Dodd-Frank requires the agency to write over 100 new rules. In 2010, the SEC 

proposed 34 rule packages—two-thirds of which were Dodd-Frank related. In 

contrast, the SEC has historically proposed an average of 20 rule packages per 

year. The Act also requires that the SEC conduct annual exams of all NRSROs 

rather than permitting the agency to define a risk-based approach or the 

appropriate cadence. To fulfill the requirements of Dodd-Frank, the agency will 

need to significantly reallocate resources. 

In addition to these new requirements, the SEC still has significant duties 

stemming from other regulations. For example, the Sarbanes-Oxley Act of 2002 

(Sarbanes-Oxley) requires the agency to review the financial statements of all 

publicly-held companies, including investment companies, at least once every 

three years. Given its resource constraints, the SEC has only a limited ability to 

spend more time on companies that pose the largest risk for the securities 
© 2011 The Boston Consulting Group, Inc. 35

markets. In some instances, these requirements force prioritization of the agenda 

according to mechanical prescriptions. 

 

Administrative processes dictated by guidelines 

 The SEC’s daily administrative processes are also dictated, to a great 

extent, by requirements that are not specific to the agency. 

 The Paperwork Reduction Act of 1980 (PRA) mandates that the Office of 

Management and Budget (OMB) review and approve all information collection 

vehicles distributed by the federal government. The PRA has multiple objectives, 

which include reducing the paperwork burden for both the federal government 

and the general public, and maximizing the public benefit from collected 

information.57 The information collection vehicles require submission to and 

approval from OMB. This submission must include the anticipated burden that 

the proposed rule would impose on a member of the public, as well as an 

estimate of the total burden the proposed rule would impose on a national 

basis.58 The procedure that accompanies the rule proposal could be a driver of 

additional workload. In general, any proposed rule must solicit public comment 

on the paperwork collection; be revised to respond to public comments received; 

and then after adoption, OMB generally has another 60 days to approve the 

collection. As the PRA applies to many of the rules created, the cost to the SEC is 

twofold: the delay in the effective date of a new rule, as well as the added 

workload of the burden analysis and response to public comments. Additionally, 

the PRA restricts the number of respondents from whom the SEC can perform 

certain standardized data collections to nine, without receiving prior approval 

from OMB.

 The Administrative Procedure Act of 1946 (APA) is another piece of 

legislation governing how the agency may propose and establish new regulations. 

The APA requires the agency to provide public notice and seek comments prior 

to the enactment of new rules. Additionally, it defines the process for judicial 

review of most rules in federal court. As a result, the SEC must make most rule 

filings available to the public prior to implementation—to ensure that the general 

public has an opportunity to voice complaints and objections—and it must 

respond to comments when adopting the final rule.59 Finally, when involved in 

formal adjudications, the SEC must conduct public, formal hearings subject to 

judicial review. Should any party feel aggrieved by the ruling, they can request 

judicial oversight.60 These review requirements add to the response time and 

workload of the agency and reduce its ability to adapt quickly in a changing 

environment. However, benefits of the APA include increased transparency of 

government agencies, the promotion of public participation in the rulemaking 

 

57 44 USC. Sec. 3501. 1980. Print. 

58 Ibid. 

59 5 USC. Sec. 500. 1946. Print. 

60 Ibid. 
© 2011 The Boston Consulting Group, Inc. 36

process, and the establishment of uniform standards for the conduct of formal 

rulemaking.61 

The 1975 and 1996 amendments to the securities laws require an analysis 

of impact on efficiency, competition, and capital formation when adopting new 

rules. These responsibilities have been interpreted such that the agency produces 

cost-benefit and burden analyses to accompany most of its rules. As such, 

rulemaking teams must include not only policy experts but also data analysts and 

economists able to estimate the impact of any regulation, and produce a report 

suitable for public consumption justifying the consequences of new regulation. 

This activity engages nearly 50 percent of the analytic capacity within RSFI, thus 

reducing its ability to focus on other risk management activities. 

 The Privacy Act of 1974 governs the collection and use of personally 

identifiable information by federal agencies. Under the Privacy Act, individuals 

are protected from the disclosure of information without written consent, and are 

able to seek access to and request amendment of their records.62 For the SEC, 

employees are required to 1) preface any testimony taken or information 

requested with a standard disclosure identifying themselves as an agent of the 

SEC; and 2) reveal the purpose for which they are conducting an investigation. 

These disclosure requirements limit the agency’s ability to conduct discreet 

investigations and, thus, pursue potentially fraudulent practices. 

 The Freedom of Information Act (FOIA) requires the SEC to respond to 

information requests regarding its regulated entities. While there is great value 

in transparency, over 70 percent of FOIA requests to the SEC are made by 

commercial organizations that use the data as part of their business operations. 

Another 20 percent of the requests are made by media organizations. Less than 1 

percent of requests are from other government agencies or for educational 

purposes. In 2010, the SEC spent almost $6.5 million responding to FOIA 

requests.63 These funds are diverted from other critical activities and cannot 

always be recovered by the agency. 

 In summary, acts of Congress affect the structure, priorities, and processes 

at the SEC. These acts bring significant benefits to the general public, including 

an increased regulatory focus on key topics, enhanced agency transparency, and 

strengthened protection of individuals’ privacy. However, these acts also impact 

the SEC’s discretion to prioritize those activities that management believes are 

most critical. 

 

61 United States. Department of Justice. Attorney General’s Manual on the Administrative Procedure 

Act. Tom C. Clark. Attorney General, Washington: GPO, 1947. Print. 62 5 USC Sec. 552. 1974. Print. 

63 United States. U.S. Securities and Exchange Commission. Freedom of Information Act (FOIA) 

Annual Report for Fiscal Year 2010. Washington: GPO, 2010. Print. 
© 2011 The Boston Consulting Group, Inc. 37

3.4.2 Governance requirements 

In addition to providing the SEC with its mandate and overseeing its 

execution of that mandate, Congress has input into and oversight of the internal 

governance of the agency. This oversight comes in different forms, such as the 

Commission structure, the Government in the Sunshine Act of 1975 (the Sunshine 

Act), and the Government Accountability Office (GAO) and Inspector General 

(IG). 

Commission structure and Government in Sunshine Act 

 The Commission structure—not unusual for regulatory agencies64—is 

composed of five Presidentially-appointed Commissioners with staggered fiveyear terms. Of these appointees, one is designated by the President as Chairman 

of the Commission and serves as the agency’s chief executive. By law, no more 

than three of the Commissioners may belong to the same political party, ensuring 

the agency’s non-partisanship as well as a rich dialogue of key issues.65

 When interacting with the Commission, the SEC is subject to the 

Government in Sunshine Act of 1975. This act was created to provide greater 

transparency into governmental decisions. Affected agencies are required by law 

to conduct certain deliberations involving a quorum of members and regarding 

official agency business in an audience open to the public. 66 Although this 

requirement may seem somewhat trivial at first glance, it imposes a substantial 

burden on the agency. It prohibits, absent exceptions, more than two 

Commissioners from meeting at the same time with the staff to discuss official 

agency business. Other than a limited set of enforcement and confidential 

matters, any dialogue between multiple Commissioners and a staff member must 

occur in a public setting, limiting information exchange to formally scheduled 

sessions. As such, this is one driver contributing to a slower decision-making 

process. 

 Additionally, these restrictions imposed on sharing working results with 

the Commissioners could result in significant rework for SEC staff or an 

inefficient prioritization of rulemaking projects. Although the agency has 

developed several methods of communicating with the Commissioners less 

formally—staff members can meet with each Commissioner separately to get 

their input on rulemaking projects and can hold non-public briefings with the 

Commissioners, as long as the Commissioners refrain from engaging in 

substantive discussion on the presentation—these workarounds are insufficient, 

place a meaningful burden on the SEC’s resources, and further inhibit the 

agency’s speed of decision-making. 

 

64 The CFTC, for example, uses the commission structure, as do various other agencies, including 

the Equal Employment Opportunity Commission and the Federal Trade Commission, among 

others. 

65 The Investor’s Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates 

Capital Formation. U.S. Securities and Exchange Commission. Web. 1 Feb. 2011. 66 Members defined as members of the collegial body governing the agency. 
© 2011 The Boston Consulting Group, Inc. 38

Potential risk aversion 

In recent years, there has been an increase in audit activity by the GAO 

and IG. These audits and investigations are unequivocally important in ensuring 

the proper and efficient functioning of the agency. At the same time, these place 

demands on the SEC staff’s time and attention, and can cause potential risk 

aversion. 

3.4.3 Civil service laws and related factors 

Certain aspects of civil service laws act as a material constraint on the 

SEC’s degrees of freedom with regard to personnel management. These, 

together with related factors such as consultation and negotiation with the union, 

will need to be taken into consideration when implementing certain 

recommended initiatives.

Complex hiring authorities 

 As a federal agency, the SEC’s hiring processes are governed by the civil 

service laws. The hiring authorities provided to the SEC vary depending on the 

position. The Competitive Service hiring process is the most constraining. This 

process applies to administrative and support positions such as human resources, 

business operations, financial management, acquisitions and administrative 

support. In this process the SEC is required to provide public notice and post the 

job on a national website for those searching for government employment. In 

addition, the agency applies the OPM minimum qualifications to each job 

posting; minimum qualifications are used to filter applications for qualified 

applicants. An assessment tool is created to score the qualified applications. 

OHR and the hiring manager define “categories”, or ranges of scores, to group 

applications. Under the Competitive Service process, veterans’ preference 

applies and veteran applications rise to the top category. For postings that attract 

significant interest, the Competitive Service process can become quite lengthy 

and cumbersome, sometimes making it difficult to find the right talent. 

 Recognizing these constraints, Congress provided additional authorities 

(e.g., Excepted Service Hiring Authority) that impose fewer requirements. 

However, in practice, these are strictly interpreted and not fully utilized for 

reasons further discussed in Section 7.2.4.2. Consequently, hiring authorities 

remain a material constraint. 

Limited compensation authority for specialized hiring 

 The compensation system at the SEC is also governed by civil service laws. 

While the Pay Parity Act (see Section 7.2.4.2) gave the SEC more authority to 

differentiate its pay scale, the agency may need to revisit pay authorities to 

ensure its ability to attract and retain industry expertise. 
© 2011 The Boston Consulting Group, Inc. 39

 

*** 

 As a related factor, similar to other federal agencies, the SEC operates in 

cooperation with a union,67 whose collective bargaining agreement governs in 

part how the agency uses its resources and implements decisions. The union has 

the right to negotiate on the impact and implementation of management 

decisions as they relate to personnel. Timely and effective consultation and 

negotiation will be a prerequisite of successful implementation of personnelrelated initiatives. 

3.4.4 Funding predictability and funding levels 

The SEC oversees a large, complex, and rapidly changing securities market. 

With its workforce of 3,900 employees, the agency regulates over 37,000 

registered entities,68 and the complexity of its role has increased as a result of 

both expanded legislated responsibilities under Dodd-Frank and the evolution of 

securities markets. The SEC has assumed these new responsibilities with its 

available resources: writing new rules, overseeing new financial products, and 

developing new offices, all while managing its previous workload and 

responsibilities. 

 Historically, given regulation of this significance, the SEC’s funding has 

grown to meet the new demands. For example, from 2002 to 2003 the SEC’s 

budget climbed 39 percent, from $515 million to $716 million to meet the 

demands of Sarbanes-Oxley. The budget continued to grow as the agency 

managed the aftermath of the new regulation, increasing another 25 percent 

from 2003 to 2005. In 2006 and 2007, the funding allocated to the SEC shrunk 

slightly and despite gains in 2008 and 2009, has not kept up with inflation since 

2005.69 Despite the material increases in responsibility driven by Dodd-Frank and 

the concomitant increase in workload, the SEC’s resources have not grown in 

proportion.

 

67 National Treasury Employee’s Union, Chapter 293. 

68 In Brief FY 2010 Congressional Justification. 69 About the SEC. U.S. Securities and Exchange Commission. Web. 1 Feb. 2011.
© 2011 The Boston Consulting Group, Inc. 40

Exhibit 3.4-2: SEC funding 

 

In contrast, other regulators have increased resourcing to respond to the 

crisis or to changing regulatory environments. For example, the MSRB raised its 

annual fee for municipal securities dealers in October 2009 due to rising costs of 

regulation primarily associated with the implementation of its new Electronic 

Municipal Market Access system.70 To effectively respond to the crisis and 

regulatory reform, the FDIC doubled its funding to $2.3 billion in 2009. Finally, 

in addition to the FDIC, other federal regulators are self-funded and have more 

funding flexibility. For example, the OCC does not receive appropriations from 

Congress. Its funding level of $791 million is derived primarily from assessments 

collected from the roughly 1,500 national banks that it regulates.71 The Federal 

Reserve funds its operations through fees levied on the banks it oversees. 

 In addition to the challenges associated with its level of funding, the SEC—

like other government agencies—operates under an unpredictable budget cycle. 

The fiscal year begins in October but as of this report, the budget for 2011 has yet 

to be approved. Instead, the SEC is operating under last year’s budget, via a 

continuing resolution, until Congress completes the appropriations process. This 

circumstance is not unique to 2011. Over the last 11 years, the SEC has waited an 

average of three months beyond the start of its fiscal year to receive its budget 

allocation. In 2009, the continuing resolution extended 157 days into March.72 

 

70 United States. Municipal Securities Rulemaking Board. “MSRB Increases Annual Fee for 

Dealers.” 13 Aug. 2009. Web. 1 Feb. 2011. 

71 United States. U.S. Department of the Treasury. Office of the Comptroller of the Currency. 

Annual Report Fiscal Year 2010. Washington: GPO, 2010. Print. 72 United States. U.S. Government and Accountability Office. Continuing Resolutions: Uncertainty 

Limited Management Options and Increased Workload in Selected Agencies. Washington: GPO, 2009. 

Print. 

Response to 

Sarbanes-Oxley

$ in millions

500

1,500

1,000

0

+39%

2010

1,119

2009

960

2008

905

2007

875

2006

877

2005

887

2004

811

2003

716

2002

515

+17%

Source: 2002 – 2004 figures from SEC Performance and Accountability Reports; 2005 – 2010 figures from SEC Congressional Justifications

Response to 

financial crisis
© 2011 The Boston Consulting Group, Inc. 41

While under continuing resolution, the SEC is constrained from making key longterm investments (e.g., recruiting, technology). In addition, the SEC—like other 

government agencies—must seek permission from Congress to shift funding 

within its budget through a reprogramming request. 
© 2011 The Boston Consulting Group, Inc. 42

4 Assessment 

BCG conducted a broad assessment of the SEC across the four matters for 

study—organizational structure, personnel and resources, technology and 

resources, and relationships with SROs. While we note that the SEC has 

strengths and has successfully implemented key initiatives in each of these areas, 

there are also areas for development where further improvement is required. 

The following section includes an assessment along each of the four matters for 

study outlined in the Statement of Work. 

4.1 Organization design 

When creating the SEC in 1934, Congress vested it with the authority to 

regulate the securities markets under the Securities Act of 1933, the Securities 

and Exchange Act of 1934, and later the Investment Adviser and Investment 

Company Acts of 1940. The SEC has traditionally organized its divisional 

structure to align with this regulatory framework. This structure enabled the 

agency to develop proficiency in the applicable bodies of law, in turn creating 

industry expertise in several areas (e.g., broker-dealers and investment advisers). 

In 1971 and 1995, respectively, the SEC enhanced its functional capabilities by 

creating the Division of Enforcement (Enforcement) and the Office of 

Compliance Inspections and Examinations (OCIE). These changes to the 

organizational structure added substantial functional capabilities by building 

enforcement and exam programs that ranged across the whole spectrum of 

applicable laws and registrants. These units were intended to streamline and 

strengthen the agency’s programs, improve resource allocation, and reduce 

duplication. Today, the majority of the SEC’s enforcement and exam staff are 

located in the eleven regional offices. The SEC’s regional model has historically 

sought closeness to the markets and entities regulated, and facilitated alignment 

with local co-regulators. 

 Over the past two years, the SEC has initiated a series of changes to its 

organization, including, but not limited to: 

 Restructuring the Division of Enforcement: In 2009-2010, Enforcement 

implemented a broad restructuring of its operations. The overarching goal of the 

effort was to increase the efficiency and expertise with which the Division 

investigates and brings its cases, so that time and resources can be devoted to 

matters with high urgency and impact. As part of the restructuring, Enforcement 

created a Managing Executive position for the Division (similar to a Chief 

Operating Officer) charged with responsibility for project management and 

workflow for various infrastructure and operational aspects of the Division.73 Key 

initiatives of the restructuring included the creation of five national units 

 

73 United States. U.S. Securities and Exchange Commission. “Adam Storch Named Managing 

Executive of SEC’s Enforcement Division.” 16 Oct. 2009. Web. 1 Feb 2011. 
© 2011 The Boston Consulting Group, Inc. 43

dedicated to highly-specialized and complex areas of the securities industry, the 

streamlining of management and internal processes, the establishment of an 

Office of Market Intelligence responsible for collecting, risk-weighting, triaging, 

and referring TCRs, improvements to the Division’s metrics, the devolvement of 

certain decision-making from Division senior leadership to senior officers, and the 

delegation of authority of certain matters from the Commission to the Division 

Director.74 One result of these efforts was the establishment of a nationwide 

network of experts that connects regions and allows for a more flexible staffing 

model. 

 Reorganizing OCIE and establishing a National Exam Program: Over the 

past year, OCIE’s new leadership team has undertaken a comprehensive selfassessment of its strategy, structure, people, processes, and technology to 

strengthen the exam program.75 As part of its strategy going forward, OCIE is 

establishing an integrated National Exam Program to increase consistency, 

effectiveness, and efficiency across the regions. In addition, OCIE is working to 

implement an enhanced risk-focused exam strategy to better allocate available 

resources. Finally, OCIE is strengthening expertise through focused recruiting, 

specialty units, and enhanced training. Key initiatives to support these strategies 

include the creation of a national governance model to enhance oversight and 

communication between the regional and home offices, the implementation of a 

new Risk Analysis and Surveillance Unit to inform risk-based decision-making, 

the introduction of a Managing Executive position to improve the effectiveness 

and efficiency of operations, the recruitment of senior specialized examiners, and 

the development of standardized policies, procedures, and tools. In addition, the 

program increases flexibility by introducing a common staffing pool of examiners 

with different backgrounds and areas of expertise, and by breaking down the 

silos between investment adviser and broker-dealer exams. Based on a 

comparison of exam programs across peer regulators, we note several potential 

opportunities for improvement of the SEC’s exam program in Section 7.5.1. 

 Creating the Division of Risk, Strategy and Financial Innovation (RSFI): 

RSFI, which was created in 2009 and is still in the process of being fully 

established, is charged with sophisticated analysis that integrates economic, 

financial, and legal disciplines—such as identifying new developments and trends 

in financial markets and systemic risks, making recommendations as to how 

these new developments and trends affect the agency’s regulatory activities, and 

conducting research and analysis in furtherance and support of the functions of 

the agency.76 The objective is for RSFI to look across all programs of the SEC to 

better understand systemic risks and to “connect the dots” across divisional silos. 

 

74 Khuzami, Robert. “My First 100 Days as Director of Enforcement.” New York City Bar. New York, 

NY. 5 Aug. 2009. Speech. 

75 di Florio, Carlo. “Remarks at the CCOutreach National Seminar.” SEC Headquarters. Washington, 

DC. 8 Feb. 2011. Speech. 76 United States. U.S. Securities and Exchange Commission. “SEC Announces New Division of 

Risk, Strategy, and Financial Innovation.” 16 Sept. 2009. Web. 1 Feb 2011. 
© 2011 The Boston Consulting Group, Inc. 44

 Promoting a culture of collaboration: The agency has recognized the need 

for heightened collaboration, and senior management has stressed the 

importance of sharing information and ideas. One notable success of this 

approach is the cross-divisional tips, complaints, and referral (TCR) project. The 

objective of the project was to revamp the SEC’s technology and cross-divisional 

processes for handling the approximately 300,000 tips and complaints it receives 

each year. As with TCR, the agency has also established cross-divisional task 

forces in other key areas of focus, such as the Consolidated Audit Trail and Life 

Settlements. In addition, a series of newly established meetings should help 

facilitate collaboration. Examples include: 1) the monthly “Trends Meeting”, 

which is tasked with promoting open dialogue about market trends, systemic 

issues, and key emerging/potential risks affecting the markets that the agency 

regulates; 2) the regular meetings of all rulemaking functions instituted by the 

General Counsel to align and ensure consistency of the rulemaking efforts 

resulting from Dodd-Frank provisions; 3) the regular meetings of the agency-wide 

“Task Force on International Implementation” established by the Office of 

International Affairs to discuss international issues arising from Dodd-Frank 

rulemaking and facilitate awareness and consistency, where appropriate, across 

the rulemaking process; 4) regular coordination meetings between OCIE and 

Enforcement to discuss the status of examinations and enforcement referrals; 

and 5) OCIE and policy divisions have implemented several new coordination 

mechanisms (e.g., “One SEC” supervision strategies for large firms).

 While these and other recent changes are steps in the right direction, 

there are further opportunities to shape a more efficient and flexible 

organization. Specifically, we examined the following seven organizational 

aspects and discuss each in detail below: 

 Operating division structure 

 Operations management and support office structure 

 Dodd-Frank mandated offices 

 Regional model 

 Organizational pyramid (in terms of layers and spans of control) 

 Collaboration mechanisms

 Commission/staff interaction processes and delegation of authority 

Operating division structure 

 As it relates to the SEC’s operating divisions (including OCIE), we 

identified the following key challenges: 

 Structural separation of broker-dealer and investment adviser regulation:

The structural separation of regulatory responsibilities for investment 

advisers and broker-dealers into the Division of Investment Management 

(IM) and the Division of Trading and Markets (TM) aligns with statutory 

legislation even though, from a business standpoint, distinctions between 
© 2011 The Boston Consulting Group, Inc. 45

the two have become blurred.77 As it stands, the agency’s structure is not 

fully aligned with the business realities of the industry it regulates. Absent 

structural changes, were the SEC to harmonize broker-dealer and 

investment adviser regulation as its staff report recently suggested,78 it 

would have to bridge across the existing divisional boundaries—through 

enhanced collaboration mechanisms—between IM and TM. While the 

rulemaking functions for broker-dealers and investment advisers are 

clearly separated as discussed above, OCIE has taken steps to enhance the 

coordination between the exam functions across broker-dealer and 

investment adviser exams 

 Structural distance between exam and rulemaking functions: The 

rationale for centralizing examiners in OCIE in 1995 included the need to 

streamline the exam process, reduce duplication of work, increase the 

quality of training, improve resource allocation, increase objectivity, and 

enhance coordination with regional exam staff, Enforcement, and other 

regulatory agencies.79 Today, OCIE is also the key driver in implementing 

the National Exam Program, as discussed above. By centralizing exam 

functions in OCIE, however, the SEC makes an implicit trade-off. It gains 

some consistency and coordination as well as enhanced independence of 

the exam function but—by segregating the exam function from the 

policymaking functions of TM and IM—it distances rulemaking from 

exams, which can weaken the critically important information and 

knowledge flow between the two. In addition, it weakens a historical 

career path for examiners who could over time advance into rulemaking 

roles within the same division. 

 Impact of Dodd-Frank mandates on the exam program: Section 965 of 

Dodd-Frank requires IM and TM to each establish a staff of examiners.80

The distribution of exam resources between OCIE and the two divisions is 

not yet fully specified.81 However, as a result, exam staff at the agency 

could end up spread across the OCIE home office, regional offices, and 

operating divisions and would reside in all of the following units: 

 Division of Investment Management (as per Dodd-Frank Section 

965) 

 

77 Investor and Industry Perspectives on Investment Advisers and Broker-Dealers. RAND Corporation, 

2008. Print. 

78 United States. U.S. Securities and Exchange Commission Staff. Study on Investment Advisers and 

Broker-Dealers. Washington: GPO, 2011. Print. 79 United States. U.S. Securities and Exchange Commission. 1995 Annual Report. Washington: GPO, 

1995. Print. 80 Dodd-Frank Section 965 states that IM and TM must have a staff of examiners that “perform 

compliance inspections and examinations of entities under the jurisdiction of that Division and 

report to the Director of that Division.” 

81 SEC management believes that the most effective and efficient means of implementing Section 

965 would be to have a coordinating committee between OCIE, TM, and IM and have a limited 

number of examiners in TM and IM whose function would include liaising with OCIE and 

supporting the coordinating mechanisms noted above. 
© 2011 The Boston Consulting Group, Inc. 46

 Division of Trading and Markets (as per Dodd-Frank Section 965) 

 Office of Credit Rating Agencies (as per Dodd-Frank Section 932) 

 Office of Compliance Inspections and Examinations 

 Eleven regional offices 

Coordination between the exam staff in the home office and regional 

offices currently occurs through OCIE’s newly implemented committee 

structure, which connects regional and home office staff. As examiners 

spread across the agency, however, OCIE and the divisions will need to 

continue working together to jointly identify the roles, responsibilities, 

coordination requirements, and collaboration mechanisms needed for the 

various exam teams

Operations management and support office structure 

Historically, the agency’s operational responsibilities were split between 

the Office of the Executive Director (ED) and the division directors. In fact, the 

Code of Federal Regulations gives significant operational responsibility to the 

ED.82 Given the necessary focus on the annual congressional appropriation cycle, 

internal budgeting process, and administrative duties, however, the ED has 

traditionally been left with limited time for the operational management of 

support offices. As a consequence, the support capabilities and offices (e.g., HR 

and IT) did not receive requisite attention and investment. In addition, the 

typical division director’s focus on policy and rulemaking tended to result in dayto-day operations within divisions moving further down the agenda. 

 The SEC’s senior management has recognized the importance of making 

the agency more efficient and effective. One critical step towards achieving this 

goal was the recent creation of a Chief Operating Officer (COO) position for the 

agency, with the explicit objective of enhancing the agency’s effort to refocus its 

resources and make the agency more efficient and effective.83 Operational 

efficiency has also moved to the top of the agenda for most of the division 

directors, who created (or are in the process of creating) COO-like positions called 

“managing executives” within the major operating units (e.g., Enforcement and 

OCIE). 

 

 However, with the creation of a COO, responsibility for “maximizing the 

use of SEC resources by overseeing the strategic planning, information 

technology program, financial management, records management, human 

resources and administrative functions of the agency”84 is currently split between 

the Office of the Executive Director (ED) and the Office of the COO. The ED 

manages the Offices of Human Resources and Administrative Services while the 

 

82 United States. U.S. Securities and Exchange Commission. Organization; Conduct and Ethics; and 

Information and Requests. 17 CFR 200.13. 1995. Print. 83 United States. U.S. Securities and Exchange Commission. “Jeff Heslop named SEC Chief 

Operating Officer.” 27 May 2010. Web. 1 Feb 2011. 84 2010 Performance and Accountability Report.
© 2011 The Boston Consulting Group, Inc. 47

COO oversees the Offices of Information Technology and FOIA & Records 

Management Services. Together, the COO and ED oversee the Office of Financial 

Management (OFM). The current separation of responsibilities between the two 

has, at times, led to a lack of clarity in roles for the COO and ED. This situation 

weakens the authority of both roles and limits them from adopting a broader 

approach to improving efficiency across the agency’s support functions and 

providing relevant guidance to the operating divisions. In addition, there is no 

explicit link between the COO organization and the managing executives in 

operating divisions.

 In addition to the administrative offices mentioned above, the SEC has 

three offices that, in one form or another, perform external relations functions: 

the Office of Investor Education and Advocacy (OIEA), Office of Public Affairs 

(OPA), and Office of Legislative and Intergovernmental Affairs (OLIA). OIEA 

interacts with the public through its role as an investor advocate and educator. 

Meanwhile, OPA coordinates the agency’s relations with the media and the 

general public, in the United States and around the world. Finally, OLIA acts as a 

liaison with House and Senate members and staff. In addition, the Office of the 

Secretary (OS) is responsible for the SEC’s official website beyond its main 

responsibility for the procedural administration of Commission meetings, 

rulemaking, practice, and procedure. Elsewhere, various divisions and offices 

formally and informally communicate externally with different stakeholders as 

needed. Given the fragmentation of communication responsibilities across a 

number of offices, ensuring the consistency of messages and communication 

priorities can be difficult. 

Dodd-Frank mandated offices 

 Under Dodd-Frank, the SEC is required to create five new offices, four of 

which report directly to the Chairman: 1) Office of Municipal Securities; 2) Office 

of Credit Rating Agencies; 3) Office of the Investor Advocate; and 4) Office of 

Minority and Women Inclusion. Creating these offices would increase visibility 

and focus on the activities and responsibilities of each respective office. 

However, many of the functions to be performed by these new offices are already 

performed within the SEC today. The congressionally mandated reporting of 

these offices to the Chairman would further drive organizational complexity by 

increasing the Chairman’s number of direct reports from the current 20 to 24. In 

addition, separating the new offices from the existing support infrastructure 

would lead to increased resource duplication and fragmentation. 

Regional model 

 The majority of the SEC’s exam and enforcement staff is located in one of 

its eleven regional offices. The agency has recently taken steps to streamline and 

strengthen both programs by establishing consistent and interconnected 

nationwide programs, increasing specialized expertise, and enhancing staffing 

flexibility. We considered three components of the regional model: 1) the 
© 2011 The Boston Consulting Group, Inc. 48

location strategy; 2) the roles of regional versus home office staff; and 3) the 

regional structure and reporting relationships. 

 Location strategy: The SEC does not currently have a clearly articulated 

agency-wide strategy for its regional office presence. This is partly driven 

by the fact that the regional offices are historically grown, with the 

majority dating back to the inception of the agency in 1934. However, 

changes in the SEC’s external environment, the likely continued funding 

constraints, as well as the agency’s focus on national programs, 

specialization, and flexibility require the SEC to assess whether the current 

approach best supports its national programs and the efficiency of the 

current regional model given the offices’ different sizes and territories 

assigned. On a more practical level, the lack of a long-term plan makes it 

difficult for regional directors and offices to plan and adequately support 

regional staff 

 Role clarity: While both OCIE and Enforcement have taken steps to clarify 

the specific roles assigned to their respective regional and home office 

staff, specific areas of tension remain. In Enforcement, for example, the 

assignment of cases between regional and home office staff has historically 

been a topic of ambiguity and contention. This is largely driven by two 

factors: 1) the agency’s Washington, DC home office is the largest office, 

but it has no predetermined geographic jurisdiction; and 2) the home 

office is geographically close to several other offices. Since cases are 

usually assigned based on the geographic nexus of the activity underlying 

the case, home office staff—by default—work on cases that are technically 

in the jurisdiction of regional offices. In the past, this has led to concerns 

by regional staff that the home office acts as a separate, “duplicative” 

enforcement program that is able to target cases selectively, although 

whether this is more perception than reality is an open question. As a 

result of these and other considerations, Enforcement has undertaken an 

initiative to revise and make transparent the criteria by which cases based 

on tips, complaints, and referrals are assigned throughout the division. 

This and other initiatives reflect that both Enforcement and OCIE have 

started to clarify the respective roles of regional and home office staff, 

although more needs to be done. This includes areas where regional 

responsibilities overlap between Enforcement and OCIE, such as support 

needs that serve both programs or discretionary budget allocated to the 

region for both programs 

 Regional structure and reporting lines: Currently, each regional office is 

headed by a regional director, who reports both to the Director of the 

Division of Enforcement and to the Director of OCIE. The regional director 

is responsible for regional operations and support functions. Associate 

directors in the regions oversee the local enforcement and exam programs 

in their respective regions and report directly to the regional director. Until 

recently, the link between OCIE and the regional exam program has been 
© 2011 The Boston Consulting Group, Inc. 49

weaker compared to that of Enforcement. This is due to the historic 

context under which the regional offices and Enforcement evolved and to 

the fact that regional directors traditionally have more of an enforcement 

background. This makes it more difficult for OCIE to ensure sufficient 

knowledge and expertise flow between the home and regional offices85

Organizational pyramid

 Looking at the SEC’s organizational structure in aggregate across operating 

divisions and OCIE, the shape of its pyramid in terms of spans of control (SoC) 

and reporting layers,86 we make four observations that are labeled below on 

Exhibit 4.1-1 and described in the following text: 

Exhibit 4.1-1: Layer-level analysis for divisions and OCIE 

8 2 166 18 5 0 191 191

1

0

1

N/A

EX 3

1

4

2

2

3

AD 0

4

149

147

2

5

SK 1-12

41

77

23

3

145

144

1

5

SK 13

46

63

13

5

730

726

4

6

SK 14

125

303

128

6

2

ICs 250 10 163 20

Managers 6 27 16 144 1 111

1219

226

504

223

57

18

0

0

ICs

315

45

46

113

74

30

6

1

Managers

Total 6 32 18 154 164 131

549 5 1 4 Median 

SOC

Level SO 3 SO 2 SO 1 SK 17 SK 16 SK 15 4 1534

7 1 14 44 4 271

6 25 52 30 5 550

5 2 69 51 50 5 336

4 12 7 58 34 6 4 131

3 18 11 1 11 1 4 48

2 6 9 6

1 N/A 1

Layer

Total

Median 

SoC

Headcount by layer and level – Divisions incl. OCIE

(ex. regional staff & office automation)

8 2 166 18 5 0 191 191

1

0

1

N/A

EX 3

1

4

2

2

3

AD 0

4

149

147

2

5

SK 1-12

41

77

23

3

145

144

1

5

SK 13

46

63

13

5

730

726

4

6

SK 14

125

303

128

6

2

ICs 250 10 163 20

Managers 6 27 16 144 1 111

1219

226

504

223

57

18

0

0

ICs

315

45

46

113

74

30

6

1

Managers

Total 6 32 18 154 164 131

549 5 1 4 Median 

SOC

Level SO 3 SO 2 SO 1 SK 17 SK 16 SK 15 4 1534

7 1 14 44 4 271

6 25 52 30 5 550

5 2 69 51 50 5 336

4 12 7 58 34 6 4 131

3 18 11 1 11 1 4 48

2 6 9 6

1 N/A 1

Layer

Total

Median 

SoC

Headcount by layer and level – Divisions incl. OCIE

(ex. regional staff & office automation)

Overall median span of control: 4

Source: HR database as of Oct 2010; BCG analysis

1

2

3

4

SoC: Span of control

Manager: has one direct report

IC: Individual contributor

1) The agency has eight layers, which creates significant separation 

between senior leadership and relatively senior staff operating deep 

down in the structure. An overly deep organization typically faces 

challenges in communication and engagement, as it is more difficult 

for information to travel up and down the organization 

2) While they vary by division and office, spans of control (SoC) are 

relatively low within the agency, which contributes to the high number 

of layers described above. Many organizations face this issue as 

structures change over time, new responsibilities are absorbed, and 

 

85 The new national governance model that OCIE implemented this past year has begun to 

improve oversight, coordination, and accountability (including the participation of regional exam 

staff on national governance committees). These efforts should be continued and monitored. 86 Layer/level analysis was completed for headquarters staff only given data availability. 
© 2011 The Boston Consulting Group, Inc. 50

high performers are promoted. The agency’s median SoC is four across 

most layers. Although a narrow SoC may appear to lessen the burden 

on supervisors, it also introduces the potential for unnecessarily high 

levels of oversight. Especially with relatively small team sizes, 

managers continue to maintain a high degree of involvement with the 

content, potentially at the expense of developing people management, 

leadership, and operations skills 

3) More than 80 percent of often long-tenured SK-14 lawyers, 

accountants, and economists sit in the lower layers (layers six through 

eight) of the organization. With significant portions of senior staff 

quite deep in the organization, the agency could potentially be underleveraging this experienced talent, which is compensated at a relatively 

high pay-grade 

4) Over 40 percent of employees in layers three and four are nonmanagerial staff (i.e. individual contributors (ICs)). Having these ICs 

high in the organization contributes to lower SoC throughout the top 

and middle of the organization. Low spans of control perpetuate gaps 

in management capabilities and empowerment, incenting managers to 

engage in detailed content instead of providing direction and 

developing employees 

Collaboration mechanisms

 Collaboration is critical at the SEC and enables the agency to connect the 

dots across its divisions and offices. Collaboration is also needed to ensure 

consistency in the regulation of similar entities, enable communication between 

home and regional offices, increase the effectiveness of special projects, and 

enhance alignment between the business divisions and support offices. The 

SEC’s senior management has recognized the need for heightened collaboration, 

as evidenced by the new TCR system, the monthly “Trends Meeting”, rulemaking 

function meetings, and agency-wide task forces. However, despite these 

advances, structural, cultural, technological, and process driven aspects continue 

to impact communication and collaboration. 

 The SEC’s segmentation into units is partially aligned with the relevant 

legislation, and each division’s internal structure is tailored to division-specific 

needs with historically limited emphasis on formalized cross-divisional 

collaboration mechanisms. As a result, communication tends to be ad hoc and 

based on personal relationships. In conjunction, the SEC’s traditionally siloed 

nature is driven by several cultural factors, including the agency’s informal 

incentive structure and its hierarchical culture. Enforcement success, for 

example, was informally measured by statistics (i.e. number of cases) and the 

relative profile of cases, resulting in internal competition for “hot” cases, an 

aversion to take on resource and time intensive cases, and limited information 

sharing across teams. Enforcement has since taken steps to address this issue by 

including collaboration across regions and units in its processes and measuring 
© 2011 The Boston Consulting Group, Inc. 51

qualitative factors. Meanwhile, the agency has a hierarchical culture—more 

prevalent in some divisions than others—which too impairs collaboration. While 

good communication and collaboration exists at the most senior level, 

information does not always cascade through the chain-of-command as efficiently 

as it should. 

Effective communication and cross-divisional collaboration is further 

affected by the SEC’s lack of supporting technological infrastructure, which does 

not readily enable information sharing across the agency. In many cases, each 

division maintains its own independent database, and the agency still depends 

largely on written memos to track and communicate staff actions or key 

decisions. Some unpredictability in its workload and resourcing has also 

prevented the agency from fully utilizing mechanisms that usually foster 

collaboration across divisions, such as the strategic planning process. The SEC’s 

latest strategic plan was developed collaboratively with an Executive Steering 

Committee and cross-divisional working groups; however, due to uncertainty 

around Dodd-Frank and funding, it was not fully communicated to staff and as a 

result, is not used to guide divisional strategies, goals, or metrics. 

Commission/staff interaction processes and delegation of authority 

 The role of the Commission has changed over time. Historically, 

Commissioners were closely involved in day-to-day decision-making. However, 

as part of the Reorganization Plan 10 of 1950, all executive functions were 

consolidated under the Chairman. In addition, a 1962 amendment to the 

Exchange Act allowed the Commission to delegate responsibilities other than 

rulemaking to SEC staff. The Commission has since delegated many decisions to 

the staff, such as the authority to approve certain types of exemptive orders, issue 

no-action letters, and approve SRO rule filings. In addition to rulemaking and 

novel exemptive relief, the Commission retains authority over decisions on 

enforcement actions. While the Commission has delegated to Enforcement the 

authority to 1) submit witness immunity orders to the Department of Justice, and 

2) issue formal order of investigation, including the accompanying subpoena 

power, it approves every enforcement action, from settlement to litigation. This 

may be one area for potential further selective delegation. 

 

 As in every situation with delegated authority, the SEC faces two sets of 

challenges. Delegated authority helps increase the agency’s efficiency of 

operations and speed of decision-making by empowering staff. However, where 

authority is delegated to staff, Commissioners may have limited visibility into 

decision-making without formal mechanisms to inform the Commission of 

ongoing issues. Conversely, where authority is retained by the Commission, it 

has substantial control over decision-making. However, the process of gaining 

input and approval can be cumbersome and time-consuming. This is largely 

driven by the constraints of the Sunshine Act, but it requires additional staff 

resources and could require additional time, reflecting the Commission’s own 

capacity.

 
© 2011 The Boston Consulting Group, Inc. 52

Summary 

 While the SEC has done much to improve organizational efficiencies and 

communication, going forward it will have to make fundamental decisions 

regarding the agency’s operating model. Key areas of focus will include 

redesigning the structure of the operating divisions, increasing the focus on 

operational management and efficiency, formulating a clear strategy and design 

for the regional model, and reviewing the interaction between the Commission 

and SEC staff. These topics will be described in greater detail in Chapter 6 of this 

document. 

4.2 Personnel and resources 

Having the right people with appropriate skill sets and experience levels is 

crucial for the SEC. Nearly 70 percent of its $1.1 billion budget is allocated to 

personnel, demonstrating the importance of talent to the agency. 

 Currently, the agency has a highly skilled workforce. For example, fully 84 

percent of employees hold a bachelors degree or higher. Over 1,600 employees, 

or 41 percent of the agency workforce, have a professional degree; another 500 

have Masters Degrees and over 50 hold PhDs.87 In addition, the agency has a 

very experienced workforce. Over half of employees had experience in securities 

markets before joining the SEC.88 Employees, on average, have 10 years of SEC 

experience, and 40 percent of the workforce has been with the SEC for greater 

than 10 years.89 The tendency to remain at the SEC is also evident in its attrition 

levels—voluntary attrition at the SEC averaged 3.6 percent from 2005 to 2009,90

relative to 7.1 percent for the federal government over the same timeframe.91 

This relatively low attrition enables the agency to build a significant experience 

base with institutional memory. Furthermore, the SEC is an attractive place to 

work. Compensation levels for most current roles are in parity with or above 

other FIRREA agencies. The flexible work arrangements (e.g., alternative work 

schedules, telework) attract a variety of diverse talent; currently, over 40 percent 

take advantage of the telework options.92

 The agency has built upon these strengths, undertaking several initiatives 

to further improve its personnel and resources. While this progress is significant, 

more can be done to improve resourcing, particularly with respect to: 

 Organizational capabilities 

 Job-specific competencies 

 

87 SEC HR database 27 Oct. 2010. 

88 BCG Capability and Competency Survey 2011. 

89 SEC HR database. 

90 SEC vacancy database 2010; SEC FY2009 Turnover; SEC Official Turnover 2005-2008. 91 BLS JOLTS Quits data 2000-2010. 

92 United States. U.S. Office of Personnel Management. Status of Telework in the Federal 

Government. Washington: GPO, 2009. Print. 
© 2011 The Boston Consulting Group, Inc. 53

 Workload capacity 

 People pipeline and supporting HR processes 

 Workforce engagement 

Organizational capabilities 

 As described more fully in Section 7.2.2, BCG conducted an assessment of 

the agency’s organizational capabilities and individual competencies, drawing on 

perspectives from the SEC’s senior management. There are several areas where 

more expertise is desired: risk management, technology sophistication, data 

analytics, and industry expertise. For example, over half of existing risk 

management capabilities across the agency were rated as average or below by 

senior management. In RSFI, just four employees out of 59 have prior 

experience in risk management. Effective risk management capabilities across 

multiple divisions could enable the agency to better manage several types of risk, 

including systemic, mission-related, and operational risk. 

 In addition, the agency’s understanding of new technologies has not kept 

pace with the expertise of market participants. For example, high-frequency 

traders employ sophisticated and highly-technical trading algorithms; today, the 

agency does not have sufficient in-house expertise to thoroughly investigate the 

inner-workings of such algorithms, should the need arise. While this example 

highlights a specific skill gap, it is indicative of a broader area for development. 

According to senior management, the agency’s employees have only a “basic” 

skill level with regard to technology. As a result, the SEC is not fully equipped to 

regulate and proactively act on technology-driven market activity. 

 SEC senior management also believed that staff supports decisions with 

analytics where possible, but that staff is short specific expertise, training, 

resources, and tools to provide top-quality analytics. In addition, managers 

viewed existing analytic capabilities as average or below. This together suggests 

that existing employees have tried to bridge the gap on their own, but are likely 

responding to a need outside their existing skill sets. Further development of 

analytic capabilities is necessary to perform simulations and analytics that help 

the agency spot market manipulation, fraud, and other trends. 

 Specialized industry expertise is also required to deliver upon the 

expanded scope mandated under Dodd-Frank. In particular, OTC derivatives, 

asset-backed securities and corporate governance were all identified by SEC 

leadership as high-priority areas of expertise with the largest need. 

 

 Although capability needs still persist, the SEC has taken proactive steps to 

address them. For example, the creation of RSFI is a first step towards building 

analytic and risk management capabilities at the agency. In addition, 

Enforcement has developed specialized units with industry expertise to focus on 

structured products and municipal securities. Similarly, OCIE has created 

specialized working groups and recruited senior specialized examiners to cover 
© 2011 The Boston Consulting Group, Inc. 54

specific topic areas (e.g., structured products, trading practices, valuation). The 

agency has also begun hiring additional expertise in hedge funds and Value at 

Risk modeling. However, making further progress remains difficult. As 

described above, the agency has relatively low attrition levels and a relatively flat 

budget in recent years. This allowed limited opportunities to hire new talent and 

build new capabilities. 

Job-specific competencies 

As noted above and described in detail in Section 7.2.2, BCG also assessed 

job-specific competencies aligned with various roles at the SEC. The agency’s 

senior managers clearly identified a need to build the functional skill sets of 

managers and administrative support staff in particular. Managers, for example, 

have a very challenging role. As an agency of professionals, employees are 

naturally experts in their content areas. However, people management is often a 

new skill set for those promoted into management roles. Especially with 

relatively small team sizes, managers continue to maintain a high degree of 

involvement with content, at the expense of people management, leadership, and 

operations skills. The SEC’s senior management noted a significant need for 

improvement in people development, situation management, strategic planning 

and technology management skill sets. Improvements in people management 

skills could also contribute to streamlined people pipeline processes as managers 

play stronger roles in recruiting, developing, and actively managing their talent. 

In addition, there is little monetary or other incentive to become a 

manager. The difference in pay for managers, despite the role’s new and 

challenging responsibilities, is minimal. There are cases where an SK-14 nonmanagement professional earns more than an SK-15 manager, and of the nearly 

300 SK-15s at the agency, 18 percent earn below the SK-14 average salary.93 By 

maintaining a clear compensation differential between managers and senior line 

staff, the SEC can motivate high performers to take on managerial duties, create 

more desirable career paths within the agency, and develop a pipeline of top 

talent prepared to succeed in leadership roles. 

BCG’s assessment also revealed a need for improved administrative 

support skill sets (e.g., document management and control). Filling this gap is 

often challenging because managers are less willing to use their allocated human 

resource slots for administrative staff, especially given concerns about whether 

new staff will have sufficient skill sets. This behavior is reinforced by the 

Competitive Service hiring process (described further in Section 3.4.3), which 

increases the complexity associated with locating and hiring talented 

administrative staff. Where skill gaps exist that have not been addressed, 

professional staff has often taken on these duties, reducing their capacity and 

efficiency. 

 

93 SEC HR database. 
© 2011 The Boston Consulting Group, Inc. 55

Workload capacity 

 The question of adequate capacity is increasingly relevant given the 

expanded mandate conferred on the SEC by Dodd-Frank. It is not surprising, 

then, that the need for additional human resources was a consistent theme 

throughout BCG’s interviews at the SEC. To test this, BCG used a workload 

modeling approach to estimate capacity needs by organizational unit. To 

construct its capacity model, BCG examined workload drivers by organizational 

unit, focusing on the SEC’s largest programmatic areas: Enforcement, OCIE, CF, 

IM, TM, and RSFI. These six areas comprise approximately 75 percent of the 

SEC’s personnel and the bulk of its mission-related operations. BCG conducted 

over 60 interviews with SEC managers to understand current activities in these 

units, key workload drivers, and the impact of Dodd-Frank. In addition, BCG 

built a separate capacity model for OIT, which is discussed further in Section 4.3. 

 The workload modeling results indicate that workload in the SEC’s 

operating divisions and OCIE has increased such that they currently face a net 

capacity gap of 375 to 425 FTEs for the five divisions and OCIE. In addition, 

BCG’s capacity model for OIT indicates a further gap of approximately 60 FTEs. 

This is a net capacity gap, reflecting the balance of surplus in management and 

gaps in professional and support staff. This estimate (see Section 7.2.3 for further 

detail) assumes that the SEC performs its current activities and those mandated 

by Dodd-Frank without making meaningful business process enhancements. 

With the optimization recommendations outlined in Chapter 6, there is an 

opportunity to address part of this resource need through efficiencies. 

 There are several drivers of this capacity gap. Initially, the gap can be 

traced primarily to an increase in rulemaking requirements resulting from DoddFrank. TM faces an extra burden as it becomes responsible for processing 

additional SRO rule filings and monitoring new clearing and execution facilities 

related to security-based swaps. These new entities, along with NRSROs, private 

fund advisers and municipal securities advisors, also become candidates for 

examination and enforcement. The addition of new registrants is not a 

temporary issue. Once registered, the firms become subject to SEC oversight, 

including examinations, going forward. Though part of this capacity gap is 

temporary due to the new rule-writing, based on the ongoing need to administer 

new regulations and examine new registered entities, the agency’s capacity 

shortage will continue to grow through 2013. 

 The significance of Dodd-Frank, combined with its immediacy, required 

the agency to ramp up new activities very quickly (e.g., writing new rules, 

registering new entities, supporting FSOC projects). The SEC’s management had 

to make difficult decisions about its priorities without the benefit of a plan or 

resources in place to quickly increase capacity to correspond with workload. The 

lack of surge capacity to manage this spike in workload has forced the agency to 

stretch and reallocate its resources to respond to the new legislation. 
© 2011 The Boston Consulting Group, Inc. 56

People pipeline and supporting HR processes 

 As described more fully in Section 7.2.4, a robust end-to-end people 

management process supports effective compensation and recruiting strategies, 

training, performance management and talent management in order to better 

manage existing and new talent. To be as successful as possible, these processes 

must be supported by a well-functioning HR team. The SEC has taken a number 

of important steps to improve OHR and its recruiting, training, and performance 

management functions. While these steps lay the foundation for a robust people 

pipeline, there are areas where the agency could improve implementation. Each 

step of the people pipeline and the supporting HR organization are examined 

further below. 

Compensation: As noted above, managerial compensation is not 

significantly differentiated from many non-managerial positions. In addition, 

because the percentage of compensation allocated to the merit pay pool is just 

1.5 percent and is not yet linked to the performance management system, the 

SEC struggles to differentiate high performers through merit compensation. The 

SEC can also reward performance through one-time monetary awards, but this 

award budget is minimal, at ~0.5 percent of the overall compensation budget for 

the agency. The median government award budget is just over six percent and 

goes as high as 12 percent. 

Recruiting: Recruiting strategies and processes provide the inputs to the 

people pipeline by sourcing diverse, high-quality talent aligned with an 

organization’s long-term capability needs. It has been difficult to fill the SEC’s 

capability gaps using current recruiting processes given the constraints described 

in Section 3.4.3. For example, the recruiting process at the SEC is largely driven 

by the hiring authorities provided by Congress (see Section 7.2.4 for further 

detail). While Congress afforded the SEC significant flexibility in the Excepted 

Service (ES) and Excepted Service Hiring Authority (ESHA), strict interpretations 

inhibit the SEC from taking full advantage of the flexibilities allowed and 

recruiting talent in a more targeted way. Instead, much of the recruiting 

processes default to the legacy government posting process. It is also difficult, 

given the variable budget cycle year-to-year, for the agency to develop and 

implement recruitment and diversity strategies and maintain dialogue with top 

talent. This has been particularly difficult when the agency must respond quickly 

to increases in workload that require significant recruiting efforts. 

 

Training: The HR function has made considerable progress in improving 

its training function. For example, it recently hired a new Chief Learning Officer 

as well as a new Dean for the College of Leadership Development, both with 

deep FIRREA agency training experience. The training team has begun the 

process of centralizing training programs across the agency into curricula (e.g., 

centralizing the Certified Examiner Training program for OCIE). In addition, it 

created a new leadership training program that helps develop a stronger, more 

active cadre of leaders at the agency by developing personal strengths and 

leadership styles, effective human capital management, coaching tools, and 
© 2011 The Boston Consulting Group, Inc. 57

strategic leadership. However, the training team is operating at about half its 

optimal size. To support SEC staff at a benchmark ratio of 180 to 240 learning 

staff members per FTE, the SEC would require an additional 6 to 12 training 

staff.94 Based on BCG experience, support levels provided by training at other 

regulators can be even higher. Section 7.2.4 discusses these benchmarks further. 

 Another critical training capability is a knowledge management system 

that enables employees to codify and share learning. Currently, knowledge 

sharing systems and processes are limited, and the agency lacks an overarching 

framework for capturing and building agency knowledge. Though the steps 

already taken improve the SEC’s training organization, more remains to be done 

to fully support the agency’s training needs. 

Performance management: Significant progress has also been made with 

the launch of the new Evidence-Based Performance Management (EBPM) system 

in 2008; it addresses both work outcomes as well as behaviors, aligns individual 

objectives with strategic goals, implements a consistent set of objectives by metric 

and grade, and deploys actionable metrics with a thorough Key Performance 

Indicators vetting process. However, successful implementation of EBPM is 

critical to realizing the system’s full potential, as is a strong link between 

performance and compensation. Managers and employees are still hesitant to 

use EBPM and will require further training to illustrate the system’s benefits and 

to convey how it can be used as a management and staff development tool. In 

addition, a robust change management strategy and visible leadership support 

for the new system will be essential, particularly as the SEC moves back toward 

performance-based compensation. These implementation efforts will be critical 

to talent management and employee engagement efforts going forward. 

Talent management: Another new HR initiative is the creation of an HR 

Manager role to liaise with various divisions and offices. This role is intended to 

provide strategic thought partnership to divisions and offices, and to help develop 

talent management plans, including recruiting, career pathing, and high-potential 

and succession planning. Further development or staffing of these roles is on 

hold pending the 2011 budget release. However, these roles on their own are not 

sufficient; they require alignment with other front, middle and back office 

functions, clear delineation of responsibilities, and service standards with 

“customers.” 

Engagement 

 By continuing to improve the people management capabilities and people 

pipeline processes, the agency will also improve overall employee engagement 

levels. Engagement describes the degree to which employees feel a strong bond 

 

94 United States. American Society for Training & Development. 2010 State of the Industry Report: 

Definitive Review of Workplace Learning and Development Trends. Alexandria: ASTD Press, 2010. 

Print. 
© 2011 The Boston Consulting Group, Inc. 58

with their organization and are motivated to give their best.95 According to BCG 

analysis of prior Federal Employee Viewpoint Surveys using our proprietary 

Engaging for Results methodology, engagement levels at the SEC have been 

declining since 2004 and are largely in the fourth quartile when compared to 

public sector benchmarks.96 While the senior management at the SEC is highly 

engaged (better than public sector peers), engagement levels are low in the 

middle levels of the organization. The SEC has a clear opportunity to improve 

staff morale and engagement, which can have exponential benefits for the 

agency’s overall performance. Engaged employees are typically more productive 

and willing to apply discretionary effort for the benefit of their overall 

organization. This kind of commitment will significantly bolster the agency’s 

ability to succeed in a rapidly changing and resource-constrained environment. 

In addition, engagement can improve retention of high-performing employees, 

which will be paramount both as the economy begins to recover and as the SEC 

tries to attract talent with specialized expertise. 

Summary 

 In summary, while significant progress has been made to improve 

personnel and resourcing at the SEC, there is recognition that more can be done 

to improve its people processes and capabilities. For example, the agency 

requires a targeted recruiting process, enhanced training capabilities, a 

knowledge management system, and a fully implemented and embraced 

performance management system. These must be supported by a wellfunctioning, service-oriented, and appropriately staffed HR team. Continuing to 

build the necessary processes and a robust HR function that support the SEC’s 

capacity and capability needs will be essential to ensuring that the agency has the 

talent it needs to continue executing on its complex and growing mission. 

4.3 Technology and resources 

Technology is a critical enabler for the SEC. As a result of the expansion 

in the agency’s mandate and the growing complexity in the securities markets, 

the role of technology in supporting the agency’s mission has been significantly 

enhanced. Today, the agency’s technology needs are greater and more urgent 

than ever before. 

 The SEC’s recent momentum with regard to technology is promising. The 

SEC’s senior management recognizes the critical role of technology at the agency 

and has spoken at length in public and private forums about the need for 

technology sophistication to be a key organizational strength. With this objective 

in mind, the agency recently made two key leadership hires, a COO and a new 

Chief Information Officer (CIO), both with professional experience in managing 

 

95 Konrad, Alison M. “Engaging Employees through High-Involvement Work Practices.” Ivey 

Business Journal. 2006. Print. 96 2010 Human Capital survey response rate of 54 percent suggests results might be lower than 

actual for the entire agency, as respondents often tend to be most unengaged. 
© 2011 The Boston Consulting Group, Inc. 59

sophisticated IT organizations in the private sector. The agency also prioritized 

the development and implementation of key systems, in particular a solution for 

managing tips, complaints, and referrals (TCR) and an improved case 

management system (Hub). These systems support critical elements of the SEC’s 

workflow and begin to lay a foundation for fostering the sharing of information 

across systems, divisions, and offices. 

 The new IT leadership team is working to improve the effectiveness of the 

Office of Information Technology (OIT) in delivering the IT services the SEC 

requires. For example, the leadership is exploring new models for engaging with 

the SEC’s divisions and offices, with the intent of improving coordination and 

OIT’s understanding of their needs. It is also conducting a thorough review of its 

capital investment process aimed at improving initiative prioritization and 

management, and is putting in place the mechanisms necessary to better 

leverage metrics and key project management tools to drive accountability. 

 While these successes are notable and highly visible, technology at the SEC 

has been hindered by a history of neglect and constrained funding, and much 

remains to be done for the SEC to fully realize the benefits that technology can 

provide. Specifically, the SEC needs: 

 An institutionalized technology awareness and expertise 

 The technology systems capable of delivering necessary capabilities 

 A technology delivery capability for implementing and supporting the necessary 

applications and systems 

Technology awareness and expertise 

The SEC’s mission requires a deep expertise in technology. This need 

extends well beyond the scope of the traditional IT function; it must be an 

institutionalized understanding and awareness of technology that is pervasive in 

the day-to-day functioning of the organization. 

 In our assessment, we found that the agency needs to take further steps to 

develop its technology awareness and expertise, specifically in the following 

areas: 

 Understanding of current and emerging market technologies: Given the 

increasing role of technology in shaping market behaviors and structures, 

there is a strong need for the SEC’s staff to have a solid understanding of 

the technologies currently utilized by market participants and trading 

venues. Such an understanding—when coupled with insight into the 

impact of these technologies on the securities markets—can enable 

investigation and enforcement activities, proactive risk management, and 

more informed policy-making. This is an area where the SEC needs 

significantly enhanced capabilities. As noted in the assessment outlined in 

Section 4.2, senior SEC managers described the staff’s understanding of 
© 2011 The Boston Consulting Group, Inc. 60

market technologies as “basic” and expressed a clear interest to invest in 

additional resources that possess a high level of technology awareness

 Expertise to develop and manage complex IT systems: The SEC requires 

the internal IT expertise necessary to develop complex applications and 

systems. In particular, significant skill is required in business systems 

analysis, technical architecture, project management, and software 

development/integration. To meet its current level of demand, OIT faces 

a shortfall of approximately 125 FTEs in these roles. This gap is both the 

result of sub-optimal resource deployment (e.g., an over-commitment of 

resources to infrastructure support) and the resource constraints faced by 

OIT. 

OIT has historically relied on outsourcing to fill a significant portion of its 

resourcing needs. Currently, 80 percent of its FTE resources are from 

external contractors. This excessive reliance on external staffing has the 

effect of reducing OIT’s understanding of division and office needs and its 

institutional knowledge. Additionally, some contracts for the outsourcing 

of complete functions could have been better managed, which has 

impacted OIT’s performance. 

OIT is aware of its resource challenges and has recently taken initial steps 

to address them. For example, stronger performance-based metrics are 

being put in place for new contracts such as the new infrastructure support 

services (ISS) arrangement 

Technology systems 

 The effective leveraging of technology requires that the agency have in 

place a robust set of systems that are capable of supporting the organization’s key 

functions—today and in the future. 

 The SEC currently has 196 technology solutions in place. Of these, three 

business applications—EDGAR (public filing store), Hub (case management), and 

TCR (tips, complaints, and referrals)—are of particular note given their broad 

scope, wide deployment, and relative import to the core activities of the SEC. 

 The SEC’s existing suite of business applications meets a significant 

portion of the agency’s current needs in terms of functionality. However, as a 

result of their historical architecture, many of these systems drive operational 

inefficiencies, limit end-user productivity, and hamper the sharing of information 

across systems, divisions, and offices. For example, EDGAR—a flagship 

application for storing and disseminating filings—is overly complex. It is in need 

of modernization, particularly given that its previously scheduled upgrade was 

delayed indefinitely due to a lack of resource availability. EDGAR currently has 

duplicative components, lacks standardization in data formats and business logic, 

and provides a sub-optimal end-user experience due to a proliferation of filing 

forms and inconsistent processes. As another example, many of the SEC’s 196 
© 2011 The Boston Consulting Group, Inc. 61

systems are single-purpose: they typically address a single need from a single 

division or office. Due to dissimilarities in the architecture of these systems, data 

cannot be easily shared between systems, and maintenance and development is 

made less efficient. 

 While much remains to be done to address this shortcoming, the SEC has 

recently made strides towards standardizing its systems on a common 

architecture. For example, two of the SEC’s newest core systems—TCR and 

Hub—share a common architecture and platform and are able to efficiently 

share information between systems. 

 In addition to the challenges with core business applications, the SEC’s 

underlying off-the-shelf system software is not current, creating operational risk. 

For example, critical SEC system components including middleware programs, 

application servers, and web servers are considerably dated, to the point that 

some are no longer supported by their vendors. 

 Looking forward, the SEC’s existing systems do not meet the full range of 

data management, analytics, knowledge management, and workflow capabilities 

that the agency requires—particularly given the increasing scale and complexity 

of the securities markets and trends such as high-frequency trading. For example, 

the SEC’s analytics toolset was ill-equipped to handle the large volume of data 

necessary for the agency’s assessment of the market events of May 6, 2010. 

Similarly, the SEC lacks the technical capacity to handle more than minimal 

amounts of trading data. To conduct its assessment of the market events of May 

6, 2010, the SEC had to acquire and consolidate trading data from a large number 

of trading venues in an ad hoc, time-consuming process that delayed its effort. Of 

note, there is awareness of the insufficiency of its current access to trading data. 

To address this, the agency has proposed the creation of a Consolidated Audit 

Trail (CAT), which would serve as a comprehensive repository of trading data 

from all trading venues.97

Technology delivery capability 

 The implementation and management of the SEC’s applications and 

systems requires a strong IT delivery capability. At the SEC, this function is 

primarily carried out by OIT. As previously noted, the SEC has taken some initial 

steps toward improving OIT’s ability to deliver IT services. However, significant 

capability gaps remain along the following six dimensions: 

 Lack of a well-defined technology vision and strategy: Today, OIT does not 

have the well-articulated and clearly communicated vision and strategy 

that it requires. Rather, OIT operates in a reactive posture, responding ad 

hoc to the SEC’s technology needs as they arise and are deemed critical. 

 

97 United States. U.S. Securities and Exchange Commission. Consolidated Audit Trail, Exchange Act 

Release No. 62174. 75 Fed. Reg. 3255. 2010. Print. 
© 2011 The Boston Consulting Group, Inc. 62

Planning is typically short-term and lacks the broad organizational support 

necessary to be made effective.

Under new leadership, OIT has begun to take steps towards correcting this 

deficiency, in part through the creation of strategy workshops and 

implementation of industry-standard performance metrics

 Insufficient understanding of business needs: Currently, OIT and its 

internal clients are not tightly aligned. Communication between these 

groups is typically informal and ad hoc. For example, there is no formal 

process or checkpoint for divisions and offices to determine and prioritize 

their IT needs and formally communicate them to OIT. During project 

execution, divisions and offices typically do not engage in formal sign-offs 

with OIT at project development milestones, limiting visibility into their 

investments.

OIT’s leadership has recently begun efforts to improve its alignment with 

internal clients, such as designating formal liaisons for each division and 

office and instituting project status dashboards to improve communication 

and transparency

 Limited investment governance: The SEC has a governance structure for 

planning, funding, and monitoring the delivery of IT investments. 

However, this structure suffers from significant gaps in process and 

execution. For example, there is little up-front planning before project 

proposals are submitted. As a result, governance bodies often must 

evaluate a proposed project without a well-developed business case or 

clear business requirements. Further, projects are typically evaluated 

individually, without considering the full breadth of IT demand and the 

necessary resourcing trade-offs. These gaps limit the SEC’s ability to 

ensure that it is investing in the most critical IT initiatives.

Of note, OIT has recently launched a thorough review of its capital 

investment process with the aim of improving the prioritization and 

management of its IT investments

 Limited and inconsistent use of tools and methodologies: The tools and 

methodologies that OIT employs to develop applications and define 

development practices are inconsistently adhered to and limited in scope. 

For example, OIT lacks a comprehensive tool to manage project 

requirements. Similarly, although OIT uses an industry-leading project 

management system, it only utilizes a handful of its capabilities. 

Adherence to development methodologies is also sub-optimal—less than 

50 percent of projects follow the software development lifecycle (SDLC) as 

prescribed. This lack of adherence is driven both by a lack of 

communication and insufficient historical management vigilance
© 2011 The Boston Consulting Group, Inc. 63

 Sub-optimal organization design: OIT’s current organizational structure 

does not align OIT with the divisions and offices that it supports. In 

addition, the current structure lacks key roles such as strategy 

development. It also separates the development efforts for EDGAR from 

other projects, reducing the opportunity to benefit from synergies within 

functions. Lastly, OIT’s structure provides only limited alignment with 

“shadow” IT staff deployed in offices and divisions, leading to a 

duplication of activities and poor standardization of support and 

development efforts.

OIT’s leadership is aware of these alignment challenges and is currently 

exploring alternative organizational structures aimed at addressing them 

Summary 

 There is recognition of the increasingly critical role of technology in the 

pursuit of the agency’s mission. Indeed, the agency has undertaken efforts in 

recent years aimed at enhancing its technology-enabled capabilities: valuable 

new systems with common, adaptable architectures have been built; plans for 

deploying resources more efficiently have been developed; and new roles aimed 

at improving engagement with internal clients are being formalized. However, 

despite these efforts, significant areas for development remain. As a result, the 

SEC today under-leverages technology in the conduct of its business. Given the 

SEC’s expanding mandate and the increasing complexity of the securities markets 

that it oversees, it is imperative that the agency address these gaps and make 

technology a strategic enabler. 

4.4 Relationships with SROs 

The SEC functions as both an overseer and a co-regulator in its 

relationship with SROs. It has a long history of overseeing and interacting with 

SROs to regulate the markets and market participants. Today, that relationship 

extends across multiple divisions, offices, and regions within the agency: 

 TM works with SROs to write and interpret SEC and SRO rules, as well as 

to review SRO rule proposals governing markets and market participants 

 Enforcement sends and receives referrals to/from the SROs, and leverages 

SRO capabilities, data, and resources to support investigations 

 OCIE regularly inspects the regulatory operations at SROs and provides 

recommendations for improvement. OCIE also leverages data provided by 

FINRA to administer some broker-dealer examinations 

 The Office of Chief Accountant (OCA) oversees and partners with the 

PCAOB to write rules governing audit/accounting firms and evaluate 

trends and risks in the audit space, both in general and for specific firms 

 Several strengths underpin the SEC’s ability to carry out these interactions. 

By regularly inspecting the SROs’ operations and reviewing their rules, the SEC 
© 2011 The Boston Consulting Group, Inc. 64

has developed an understanding of the culture and capabilities at each SRO. For 

example, the Office of SRO Inspections in OCIE has close to 50 FTEs dedicated to 

inspecting twelve SROs.98 TM has over 100 staff attorneys reviewing SRO rule 

filings covering a wide range of topics, such as market structure and brokerdealer operations. The agency also has staff members who regularly team with 

SROs to achieve specific objectives. For example, enforcement professionals 

throughout all the regions regularly receive tips and referrals from the SROs 

regarding potential cases of insider trading and market manipulation. 

Subsequent investigations often leverage data and information provided by 

FINRA and the exchanges. Additionally, OCA regularly partners with the PCAOB 

to review audit firm practices, and, if they find unusual audit results, passes along 

the information to CF and Enforcement for further review or investigation, as 

appropriate. Furthermore, many staff members at the agency have worked with 

the same regulatory personnel at the SROs for years, and over time these 

professional relationships have led to better communication. Such relationships 

have formed at senior levels throughout the agency, both at headquarters and in 

the regions. Collectively, these strengths have enabled the SEC to function in its 

dual role as an oversight body and a co-regulator with SROs. 

 Nonetheless, we believe there are features of the SEC’s relationship with 

SROs which can be improved. In particular, there are opportunities for 

improvement in three areas of the agency’s SRO-related operations, which are 

discussed in detail below: 

 Structure 

 Competencies 

 Processes 

Structure 

 The SEC interacts with SROs across multiple divisions/offices and 

activities. As more divisions and offices have cultivated relationships with SROs, 

a structure has been created where SROs face multiple points of contact within 

the agency. Moreover, as most divisions and offices function independently, it 

can be difficult to coordinate their interactions with SROs. For example, if an 

SRO provides data to OCIE during an inspection that would be valuable for staff 

in TM and RSFI, there is no consistent, structured way to share that data. Today, 

that opportunity would be lost unless someone in OCIE or at the SRO took the 

initiative to contact the right people in the other divisions. While cross-functional 

collaboration is growing, there can also be more structural mechanisms to 

facilitate formal coordination between divisions/offices and centralize how SROs 

communicate and share information with the agency. Some progress has been 

made; leaders in some divisions and offices have sought to clarify, through 

informal mechanisms, the roles and responsibilities of staff members who 

interact with SROs. 

 

98 OCIE is currently responsible for inspecting all the national security exchanges, FINRA, the 

MSRB, and the PCAOB in conjunction with OCA. 
© 2011 The Boston Consulting Group, Inc. 65

 Although the level of interaction with SROs has been fairly steady over 

time, the interactions themselves have become increasingly focused on specific 

issues at hand. For example, OCIE may inspect a specific aspect of an SRO’s 

operations, or TM may review a specific rule filing submitted by an SRO. While 

engaging SROs to resolve near-term issues is important, there is also the need to 

have a more structured engagement with SROs, leveraging their regulatory 

expertise and perspective to understand and respond to broader trends and risks 

in the market. For example, the agency does not have a structure like an internal 

“College of Regulators” to engage and manage SROs in a consistent and 

coordinated manner. 

 There are also legal and legislative barriers that prevent the SEC from fully 

leveraging and overseeing the SROs. For instance, the state actor doctrine has 

become a somewhat controversial issue with respect to SRO information-sharing 

with the SEC. Additionally, under the current securities laws, the agency’s review 

of SRO rules is limited to assessing the proposed rule’s consistency with the 

Exchange Act. As such, two SRO rules may conflict, but can still be consistent 

with the Exchange Act. 

Competencies 

 One of the agency’s principal responsibilities with regard to SROs is its 

duty to review all SRO rule filings. Currently, this responsibility is predominantly 

handled by TM, where 50 percent of staff members are lawyers. While some of 

these staff attorneys have industry experience and expertise, others could benefit 

from a deeper understanding of how the markets and market participants 

operate. As the volume and complexity of SRO rule filings have increased, a 

shortage of staff and lack of skill diversity in TM has resulted in longer lead times 

for reviews to be completed and more reviews needing to be escalated to senior 

managers. While TM has begun hiring professionals with a background in 

securities markets to expand the division’s competencies, the skill level of existing 

staff needs to be improved. In the near term, such capability upgrades become 

even more critical in light of the agency’s expanded rulemaking responsibilities 

required by Dodd-Frank. 

 In recent years, the number of SROs has increased and the national 

securities exchanges have demutualized, creating potential conflicts of interest 

between each exchange’s regulatory operations and its business operations. 

Many exchanges have also begun outsourcing their regulatory responsibilities to 

FINRA. Given these developments, it has become increasingly important that the 

SEC be able to measure the effectiveness of SRO regulatory operations, over time 

and relative to each other. The SEC currently does not employ a consistent set of 

metrics or standards by which to assess the regulatory efficacy of each SRO, 

however, OCIE is in the process of establishing a baseline assessment for each 

SRO with a goal moving forward to conduct strategic evaluations of SROs relative 

to that baseline. To that end, OCIE has begun requesting information from the 

SROs regarding their regulatory operations, but more can be done to make such 
© 2011 The Boston Consulting Group, Inc. 66

SRO disclosures more frequent and standardized. Given that OCIE’s use of a riskbased inspection approach is a relatively recent development, it will be important 

for OCIE to periodically review its methodologies to ensure they are identifying 

the right risks in a timely manner. 

While the SEC’s oversight of all SROs needs strengthening, FINRA merits 

particular attention given its size and scope of regulatory authority. In particular, 

FINRA provides market surveillance of approximately 80 percent of all US equity 

trading. Currently, the SEC does not have any automated market surveillance 

systems in-house and only selectively audits the surveillance systems and outputs 

at FINRA and the exchange SROs. As market trends such as high-frequency 

trading become more prevalent, it is increasingly important for the SEC to 

maintain robust oversight of the surveillance capabilities deployed in the market. 

Processes 

 The SEC and SROs are responsible for writing rules to govern market 

structure and market participants. SRO rules are often developed in partnership 

with TM and always require a review by TM staff. Historically, this rule review 

process has functioned relatively well to handle a steady flow of filings submitted 

by SROs. However, due to limited staff bandwidth, higher volumes of rule filings, 

and statutory requirements, this process has become strained. Indeed, the 

number of proposed SRO rule changes reviewed by TM has increased from 956 

filings in 2005 to over 1,340 in 2010, a 40 percent increase in volume.99 For each 

filing, TM needs to ensure the proposed rule is thoroughly described and 

analyzed in order to enable meaningful public comment. TM’s approach to rule 

reviews is naturally risk-averse to ensure that every proposed rule is written in a 

manner that conforms to Federal Register and other technical requirements, and 

that no potentially negative market implications are overlooked. In addition, for 

proposed rule changes subject to SEC approval (approximately 25 percent of total 

filings), Dodd-Frank mandates a 45-day deadline for such rules to be approved or 

disapproved by the SEC, or for the SEC to institute proceedings to determine 

whether to disapprove the proposal, which further strains the agency’s 

processes.100 Given these factors, there is an opportunity for the agency to 

redesign the process end-to-end so as to more efficiently meet the requirements 

specified under Dodd-Frank and the operational needs of the agency and SROs. 

 Indeed, TM has already considered different ways to streamline the SRO 

rule review process and reduce the number of re-filings. For example, 

supervisors in TM informally segment rules depending on their complexity, 

assigning the most difficult filings to senior staff members. This type of 

segmentation could be explicitly designed into the rule review process. TM has 

also revised the rule review process flow to adhere to the Dodd-Frank statutory 

deadline for SEC action. The SEC could also seek legislative changes to modify 

the rule review process in ways that go beyond the current statutory framework. 

 

99 In Brief FY 2005 – 2010 Congressional Justification. 100 Dodd-Frank Wall Street Reform and Consumer Protection Act. S 916. 
© 2011 The Boston Consulting Group, Inc. 67

For example, Congress could amend the Exchange Act to give the SEC the 

authority to allow SROs to self-certify certain types of rules that they write. The 

Exchange Act could also be revised so that TM is only required to review SRO 

rule filings of a high-risk type or significance. Such changes would reduce the 

volume of filings submitted and allow staff to focus on the most complex and 

consequential rules. 

 Aside from optimizing the SRO rule review process, the SEC could also 

benefit from new processes regarding how SROs should interact with and 

transmit information to the agency. For example, although OCIE meets regularly 

with SROs, they are not currently required to regularly disclose information to 

the SEC regarding their regulatory operations. As OCIE moves to more of a riskbased inspection approach, it will need to regularly access information about the 

SROs to inform its risk assessments. As such, there is a need to formalize the 

processes by which SROs submit data to the agency, as well as how that 

information is then cataloged and distributed to various divisions and offices. 

 Finally, the SEC would benefit from increased coordination with SROs on 

risk assessment processes and data. For example, as the front line regulator for 

broker-dealers, FINRA conducts extensive risk assessment activities in support of 

its examinations. The SEC could use this analysis, which is not currently shared 

with the agency, to improve its own examination targeting efforts and support its 

oversight of broker-dealers. As such, increased coordination represents an 

opportunity to drive increased efficiency and reduced duplication of effort. 

Summary 

 The SEC is actively connected to all SROs, acting as both an oversight body 

and a co-regulator. Nonetheless, against the backdrop of constraints, an 

increasingly complex and fragmented market environment, and an expanded 

mandate under recent legislation, the SEC/SRO relationship has become strained 

in terms of structure, competencies, and processes. While there is 

acknowledgement of deficiencies in the relationship and the agency has begun 

working to remedy them, more can be done within the current context to build 

the agency’s ability to more effectively oversee and partner with the SRO 

community. 

*** 

 Further detail on each assessment is located in Chapter 7. 
© 2011 The Boston Consulting Group, Inc. 68

5 Strategic direction for the SEC 

5.1 Structural disconnects to address 

As described in Chapter 4, the SEC has begun addressing many of the areas 

of concern affecting the agency. These initiatives were indeed necessary and 

undoubtedly a critical first step. However, more needs to be done. In BCG’s 

strong view, any initiative that the agency undertakes must go beyond its tactical 

objectives and align with the need to address fundamental and long-persisting 

challenges that have prevented the agency from building required capabilities to 

the extent desired. These challenges manifest themselves in three major 

disconnects, outlined in Exhibit 5.1-1 below: 

Exhibit 5.1-1: Fundamental disconnects 

 

Disconnect 1: There is an “expectation disconnect” between what the 

agency’s stakeholders expect from the SEC and what the agency is actually 

authorized by Congress to do. As just one example, there appear to be 

expectations that the Division of Corporation Finance (CF) make judgments on 

the merits of corporate filings, opine on whether a security is a good investment, 

and evaluate if a firm “should” become a public entity. In fact, the division’s 

activities are limited to reviewing registrant disclosure in order to assess 

compliance with applicable securities laws. While the agency or its stakeholders 

could be tempted to resolve this disconnect by expanding the scope of the SEC’s 

activities, the SEC is already stretched in its current role and resources. Rather, 

addressing this disconnect requires the SEC to clarify public expectations through 

stronger communications, and that key stakeholders proactively understand the 

SEC’s role and the constraints faced by the agency. Addressing the fragmentation 

What the SEC is 

authorized by Congress to do

What stakeholders 

expect the SEC to do

What the SEC is 

authorized by Congress to do

What available resources the SEC 

has to fulfill those authorizations

The dynamism of the market 

the SEC oversees

The rigidities imposed by the 

SEC's constraints and culture

Source: BCG analysis
© 2011 The Boston Consulting Group, Inc. 69

of the agency’s external communication approach as discussed in Section 4.1 will 

help ameliorate this problem. 

Disconnect 2: The second is a “resource disconnect”—that is, a disconnect 

between what Congress has authorized the SEC to do and the resources available 

to the agency. Congress has authorized the SEC to conduct a broad scope of 

activities including registration responsibilities for broker-dealers, investment 

advisers, public companies, and four new classes of swap entities under DoddFrank; broad rulemaking authority; exam authority over broker-dealers, 

investment advisers, investment companies, exchanges, clearing agencies, 

transfer agents, municipal advisors, security-based swap entities, and NRSROs; 

broad oversight responsibilities for SROs; and investigative and enforcement 

authority for all federal securities law violations. Indeed, the SEC regulates a 

large market—it receives more than 3,000 securities filings per day, and has 

oversight responsibilities of more than 5,000 broker-dealer firms and more than 

11,000 investment advisers. 

 As discussed in Section 3.4.4, while the SEC’s funding has grown over the 

decade, in recent years the growth has not kept pace with the SEC’s expanded 

role. Consequently, while the agency can certainly use its resources more 

efficiently (as discussed further in Chapter 4), it still faces a “resource 

disconnect”. 

 Disconnect 3: The third is a “responsiveness disconnect”—that is, a 

disconnect between the responsiveness that is required of the SEC given the 

dynamic nature of the markets it is charged with regulating and the rigid nature 

of the SEC that results from its constraints. 

 The SEC regulates highly dynamic markets and needs to respond to 

changes in it. However, at the same time the SEC faces a number of constraints, 

including Congressional mandates (e.g., the Paperwork Reduction Act), 

governance requirements (e.g., the Commission structure), and complex hiring 

authorities, as well as capability gaps (e.g., risk management capabilities, 

technology sophistication) that collectively translate into the SEC being relatively 

rigid. Finally, the agency has a risk-averse culture which slows decision-making. 

5.2 Overcoming disconnects 

Overcoming these disconnects will require the SEC to increase its 

efficiency, build a set of forward-looking capabilities, address chronic gaps, and 

seek selective relaxation of constraints that the agency faces. In this chapter, we 

describe the constraints which may need to be relaxed, as well as the forwardlooking capabilities that will be required. Chapter 6 outlines specific 

recommendations for initiatives that the SEC should undertake in this context. 
© 2011 The Boston Consulting Group, Inc. 70

5.2.1 Relaxation of select constraints 

One lever that would help the SEC to begin addressing the structural 

disconnects is achieving greater flexibility in select constraints. A useful way to 

look at the SEC’s constraints is to cluster them by their relative flexibility and 

impact, illustrated in Exhibit 5.2.1-1. 

Exhibit 5.2.1-1: Relative impact and flexibility of constraints 

 Focus should be placed first and foremost on the relaxation of constraints 

with both greater flexibility and impact (Group I). Group I constraints are those 

which specifically affect the SEC and would not require a government-wide 

change, but where relaxation would still have a material impact. Given their 

impact on the agency, funding constraints constitute the next key area of focus 

(Group II), although these apply across the government. Constraints with less 

flexibility and lower impact should be prioritized third (Group III). Relaxation of 

some of these constraints will go a long way towards successfully implementing 

the recommendations described in Chapter 6. 

5.2.2 Development of forward looking capabilities 

 BCG strongly recommends that the SEC develop a set of required 

capabilities as another lever to address the structural disconnects. Each of these 

capabilities builds upon elements of organization, people, technology, and 

relationships with SROs, which we believe are all interconnected. The SEC needs 

to build its capabilities in five areas: 

Source: BCG analysis

Impact of the constraint

Flexibility of 

the 

constraint

Low Medium High

Less

More • Commission structure / 

delegation of authority

• Admin processes (e.g., 

APA, PRA)

• Gov't in Sunshine Act

• Compensation authority 

for specialized hiring

• Legal jurisdictions

• Rulemaking agenda 

and priorities 

influenced by 

Congress

• Org structure partly 

mandated by Congress

• Complex hiring 

authorities / civil 

service laws

• Appropriations process

• Funding level

II

I

III
© 2011 The Boston Consulting Group, Inc. 71

Risk IQ: Understanding, monitoring, and evaluating external and 

enterprise-wide risks—“connecting the dots”—and providing 

actionable transparency to appropriate levels of the organization 

Ability to adapt: Maintaining the ability to deliver on the mission 

effectively in a rapidly changing and dynamic marketplace, e.g., 

through internal collaboration and fast decision-making processes 

Leveraging communities of aligned interest: Promoting effective 

regulation through alignment and collaboration with external 

partners 

 

Technology sophistication: Maintaining awareness of technology 

advances in the securities markets and deploying advanced 

technology capabilities that increase the SEC’s efficiency and 

effectiveness 

Strong credibility: Credibly demonstrating the SEC’s presence, 

power, and influence to all relevant stakeholders 

While the SEC has a good foundation and momentum to draw upon as it 

seeks excellence in these areas, there is certainly more to do. The following table 

(see Exhibit 5.3-1) outlines specific elements of each of these capabilities, along 

the lines of the four matters of study, which are required to be addressed. 
© 2011 The Boston Consulting Group, Inc. 72

Exhibit 5.3-1: Future vision of SEC capabilities 

 

 

 Risk IQ: Excellence in this capability requires the SEC to be able to gather 

information across the SEC, SROs, and broader communities of aligned interest, 

prioritize this information, connect the dots, develop actionable insights, and 

then communicate these insights back as appropriate to the relevant entities to 

act upon them. Such a capability will strengthen SEC oversight, for example with 

respect to complex financial institutions. These institutions conduct many 

activities—including acting as a broker-dealer, providing investment 

management services, acting as a participant in various markets, managing dark 

pools, and advising public companies—and the SEC needs to be able to see 

across different business lines, not just today but with a view towards where the 

institution is going, and effectively “connect the dots.” 

Developing a strong risk IQ capability will enable the SEC to have actionable 

information in order to be responsive as market needs necessitate. This in turn 

partially addresses the “responsiveness disconnect” discussed earlier. 

 Indeed, as discussed in Chapter 4, the SEC has already begun to take a 

number of steps to enhance its risk IQ capabilities. These include the creation of 

the Division of Risk, Strategy and Financial Innovation (RSFI), the establishment 

of cross-division “trends” meetings, and the upgrade of the tips, complaints and 

referrals (TCR) system. 

 To achieve excellence in this area, the SEC needs to further build on its 

risk management function to exemplify best practices, define clear role charters 

for RSFI, and embed risk capabilities in the operating divisions. The SEC needs 

Organization Design People Technology SRO

• Comprehensive and welldefined internal/ external 

communication strategy

• Effective leverage of 

SROs to enhance 

market intelligence

• Portfolio approach to 

regulation 

• Streamlined and 

effective SRO rule 

review processes

• Effective use of 

contractors and 

vendors 

• Strong, coordinated 

SEC/ SRO 

interaction model

• Superior alignment 

of IT and divisions

• Balanced approach 

to IT resourcing

• Ability of people 

pipeline to recruit, 

train, manage talent

• Adequate capacity

• Flexibility to 

reallocate resources

• Invigorated employee 

engagement

• Mission-aligned values

• Perceived as strong 

overseer of SROs

• Coordinated, consistent 

and defined interaction 

with stakeholders having 

aligned or adjacent 

interests

• Efficient structure, 

collaboration and clear 

accountabilities for IT

• Clear roles and fast 

decision-making 

• Efficient organizational 

pyramid

• Efficient business 

processes

• Networked organization

• Effective risk 

management functions, 

informing policy 

decisions

• Actionable transparency

• Advanced systems

Strong 

credibility

Technology 

sophistication

Ability to 

adapt

Risk IQ 

capabilities

• Risk management, 

functional, industry 

and analytical 

expertise

• Sophisticated 

technology skill sets

• Strong data analytics 

systems and tools

• Knowledge 

management tools 

Leveraging 

Communities 

of aligned 

Interest

• Seamless leverage 

of technology and 

data between SROs 

/ SEC

• Strong technology 

innovation 

• Use of IT to drive 

efficiency & 

effectiveness

• Understanding of 

critical technology 

deployment at SROs

Source: BCG analysis
© 2011 The Boston Consulting Group, Inc. 73

talent that understands risk management, securities markets, technology, and 

that has strong data and analytics abilities. The SEC also needs to be equipped 

with the tools and systems to analyze and act upon data and information and 

finally, to have in place mechanisms with SROs and other regulators to gather 

data and enhance its market intelligence. As the SEC develops this capability 

further, it should also look at enterprise-wide risks, including operational and 

reputational risks to the agency. 

 

 Ability to adapt: Excellence here requires that the SEC be able to actively 

align its resources against mission critical activities, flexibly deploy them as 

market conditions change, and efficiently execute key activities and processes. 

 

 To achieve excellence in this area, the SEC needs a flat hierarchy and a 

strongly connected network of experts across divisions, offices, and regions. In 

addition, the SEC needs the right number of people coupled with the flexibility to 

reallocate and/or scale resources when needed, a cultural mind-set that enables 

the organization to proactively anticipate emerging trends, and technology that 

provides decision-makers with the information needed in order to take action. 

 The ability to adapt will enable the SEC to effectively act on the information 

gathered through its risk IQ capability. In combination, these capabilities substantially 

address the “responsiveness disconnect” described earlier. 

 As discussed in Chapter 4, the SEC has recognized this need and made 

progress against this capability through recent initiatives. However, as noted 

there, significantly more needs to be done to make the organization adaptable. 

Leveraging communities of aligned interest: Excellence here requires that 

the SEC identify key stakeholders with aligned interests, proactively engage them 

in meaningful dialogue, utilize that dialogue to foster information and data 

sharing, and ultimately leverage the respective strengths of the SEC and these 

stakeholders for mission critical activities. As an example, the SEC should 

explore additional collaboration opportunities with SROs and gain seamless 

access to SRO data. Finally, the SEC should enhance collaboration with other 

regulators through platforms such as the Financial Stability Oversight Council 

(FSOC), as well as maintain frequent informal engagement. 

There is recognition of the need to effectively leverage communities of 

aligned interest and the agency has made progress in building this capability. For 

example, the SEC is working closely with the MSRB to adopt rules governing 

municipal advisors, coordinating with FINRA and the Federal Reserve to find 

ways to improve the broker-dealer exam program, and has recently proposed 

creating a Consolidated Audit Trail. In addition, the new whistleblower program 

required by Dodd-Frank will leverage tips and complaints from industry actors to 

inform the SEC’s enforcement efforts. 

This capability will enable the SEC to stretch its resources further and focus on 

the most critical activities. This will help the agency address the “resource disconnect”. 
© 2011 The Boston Consulting Group, Inc. 74

 Technology sophistication: Excellence here requires that the SEC embed in 

its processes an understanding of technology’s role in today’s markets and also 

ensure that its own technological capabilities are sophisticated enough to keep 

pace with the entities it regulates. 

 To develop excellence in this area, the SEC needs to create a sustained, 

multi-year technology vision and strategy to invest in systems and tools. That 

strategy should also develop a workforce with a deep understanding of the 

technology used by market participants and SROs, an evolving awareness of 

trends and emerging technologies, and the ability to develop and manage 

complex technology services. 

This capability will enhance the SEC’s efficiency and apply new technology to 

track, understand, and proactively respond to market advances. This will help the 

agency address the “resource disconnect” and “responsiveness disconnect”. 

 Indeed, there is recognition of the importance of technology in fulfilling 

the agency’s mission and, as discussed in Chapter 4, it has recently taken a 

number of steps to increase the SEC’s technology sophistication. 

Strong credibility: Excellence in this area requires that the SEC be seen as 

a strong performer, which implies that it has in place effective programs, people, 

technology, and relationships with SROs. Developing this capability also requires 

effective communication to internal and external stakeholders, and the fostering 

of credible deterrence. 

This capability enables the SEC to better align key stakeholders’ expectations 

with a more realistic view of the agency and its responsibilities. This will help the 

agency address the “expectation disconnect”. 

*** 

Collectively, the five capabilities above portray a vision for building the 

future SEC, one with an increased ability to address the structural disconnects 

that the agency faces today. The initiatives launched in the last couple of years 

are a good start toward building these. However, much remains to be done. The 

next section of the report describes how the SEC can best build upon the 

foundation already created. 
© 2011 The Boston Consulting Group, Inc. 75

6 Recommended initiatives 

As described in Chapter 3, the SEC oversees a large, complex, and rapidly 

changing securities market. In addition to its continuing responsibilities under 

pre-existing legal authorizations, the agency is taking steps to adapt to the 

renewed regulatory focus on systemic risk as well as the expanded authorizations 

and responsibilities under Dodd-Frank. 

 The agency has been shouldering these expanded responsibilities in the 

face of real constraints, as described in Chapter 3. It has done so by stretching its 

organization, people, and legacy technology. Given the crucial role of the SEC at 

this time of transformational change in the securities markets, it is vital that the 

agency align its available resources against the highest priority mission-related 

activities, and invest in the necessary capabilities for its future. 

 As is clear from the wide range of initiatives the agency has already 

undertaken, the SEC is on the path to using its resources better and investing in 

key capabilities. Some of these initiatives have been completed (e.g., the 

reorganization of Enforcement) and are already delivering good results, while 

some continue to be implemented (e.g., the reorganization of OCIE, the build out 

of RSFI, and the implementation of the new performance management system). 

Furthermore, concrete steps have been taken in other areas (e.g., hiring of a COO 

and a new CIO, and the Tips, Complaints, and Referrals (TCR) first phase 

rollout). The SEC’s senior management has taken steps to create greater 

collaboration and communication within their respective areas as well as across 

the agency. The agency has also been driving efforts to create a Consolidated 

Audit Trail (CAT) and working with SROs to ensure a comprehensive view of 

market data. 

 Having said this, there is more to do. There are mission critical activities 

that the SEC is not performing that force it to make intelligent but hard tradeoffs. There is enabling infrastructure that the SEC requires to support its 

operating divisions and regulatory activities but is able to only partially invest in. 

The strategic challenge for the agency is to implement these changes while 

continuing to deliver on its expanded mandate given the foregoing. This chapter 

proposes a strategy to address this challenge in a way that optimizes its resources 

and strengthens the agency within its current context and outlines a roadmap for 

a future in which some of its constraints are relaxed. We have structured this 

discussion as outlined in Exhibit 6.1-1. 
© 2011 The Boston Consulting Group, Inc. 76

Exhibit 6.1-1: Focus on “no regrets” optimization 

Redeploy existing resources 

efficiently

Implementation of 

recommended initiatives: 

"no regrets" optimization Choices

to consider

Do all mission critical activities 

and build out all required 

capabilities

Relax funding constraints to 

better fulfill current role 

1

Increase SRO leverage and 

enhance oversight

Change current role to fit 

available funding

2

Primary focus Source: BCG analysis

 The SEC’s primary focus in the near term should be optimization. Absent 

significant change in the agency’s role and/or relaxation of funding constraints, it 

has to find ways to do more with existing resources. This will require a 

reprioritization of regulatory activities and the redeployment of available 

resources in a more efficient way. In turn, these actions will free up some 

resources for investment in the agency’s required capabilities. Doing so will 

enhance the SEC’s focus on the most critical regulatory activities, partially create 

the capabilities required of the agency moving forward, and create a foundation 

to build upon for the future as the SEC’s role evolves and/or more resources 

become available. It is crucial to note that while this strategy will strengthen the 

SEC, it will still leave the agency short of what it deems necessary in terms of 

activities and capabilities. 

 Choice 1 illustrates what the SEC could do more fully if its constraints 

were relaxed. The agency would no longer have to make as many hard trade-offs 

among regulatory activities and would be able to fully build out the capabilities 

that enhance its effectiveness. The agency could also expand crucial programs 

(e.g., investor adviser exams) consistent with mission needs. 

 While it is possible to extend Choice 1 to consider a materially larger SEC 

that even takes on some responsibilities currently performed by SROs, we believe 

that such consideration requires a real debate about the role of the agency. 

There are clear advantages to the consolidation of greater regulatory 

responsibilities into the SEC (e.g., increased visibility, control, and the elimination 

of perceived conflicts of interest); however, these should be balanced against the 

material expansion in budget implied as well as consequent management 

complexity. 
© 2011 The Boston Consulting Group, Inc. 77

 Choice 2 illustrates a radical redesign of the SEC’s role to fit its available 

funding. In the event that available resources are insufficient to invest in all the 

capabilities required by the SEC to perform its regulatory activities, it will be 

useful to consider a role redefinition for the agency. The SEC could consider 

materially expanding the role of existing SROs and support the creation of new 

SROs (as appropriate) to handle selected regulatory activities that the agency 

currently handles. This will selectively shift the funding burden from the SEC 

(and Congress) to the SROs (and the industry). The agency would redeploy its 

available resources to substantially strengthen its rulemaking, exam, and 

enforcement functions and redesign its organizational capabilities to be 

consistent with a radically redesigned role. 

While the bulk of our recommendations focus on optimizing the agency, the 

debate on the appropriate role of SROs is implicit in Choices 1 and 2. This is a 

very important debate, not just from an investment, capability, and resource 

standpoint but also from the perspective of regulatory philosophy. There are 

strong arguments on either side of the debate as described in Chapter 3. 

Regardless of how this debate is eventually resolved, we believe that the SEC has 

the opportunity to take specific actions today to optimize its available resources, 

which will enable a greater focus on the highest-priority regulatory activities with 

materially enhanced efficiency. If planned and executed well, these actions will 

also create foundational capabilities that are relevant in both Choices 1 and 2. 

Thus, while the debate on the role of SROs continues, the SEC can make concrete 

progress today that is not in conflict with the resolution of this debate. 

6.1 “No regrets” optimization 

The SEC can take specific steps to redeploy available resources in a way 

that will enhance its effectiveness and efficiency. BCG recommends that the 

agency: 

 

 Reprioritize regulatory activities: The SEC should engage in a rigorous 

assessment of its highest-priority needs in regulatory policy and operations, 

and reallocate resources accordingly 

 Reshape the organization: The SEC should reshape its organizational 

structure, roles, and governance to maximize efficiency, effectiveness, and 

collaboration, as well as to drive continuous improvement 

 Invest in enabling infrastructure: The SEC should invest in key enabling 

infrastructure, including technology, human resources, risk management, 

and high-priority staff skills 

 Enhance SRO engagement model: The SEC should implement initiatives to 

enhance its role as both an overseer of, and co-regulator with, SROs 
© 2011 The Boston Consulting Group, Inc. 78

 Given its resource constraints, the SEC should reprioritize its regulatory 

activities. The SEC’s various divisions and offices have identified several highpriority activities they deem critical to initiate or expand upon but are currently 

unable to undertake. Given that at least some of these activities are of greater 

priority than current activities (as suggested by the divisions and offices 

themselves), the SEC should consider scaling back or stopping some vital but 

lesser priority activities to free up resources. The agency should also consider 

identifying selected activities that outside institutions with aligned interests (e.g., 

SROs) may be able to perform. The agency is best placed to identify where, if 

any, such flexibilities exist and to make the inevitably hard trade-offs, keeping in 

mind the risks such a reprioritization implies. If the SEC does not receive greater 

resources in the near-term, it will not be able to defer this reprioritization in the 

hopes of using more resources to effect solutions. 

 While the foregoing reprioritization will allow the SEC to redirect its 

mission-focused resources to higher-priority activities, it by itself will neither 

make the agency’s organization more efficient nor release significant resources 

for investment in new capabilities (e.g., technology). By selectively reshaping its 

structure, the SEC has the opportunity to become an agile and efficient 

organization with clear roles, accountabilities, and reporting lines which will 

improve decision-making, collaboration, people management, and staff 

engagement. This reshaping, along with the reprioritization of regulatory 

activities, will likely change the roles required going forward. The SEC should 

also undertake a comprehensive review of all its costs and processes to identify 

potential areas of savings which will help to drive continuous improvement. This 

could lead to some resource release, which could then be reinvested in 

technology, people, and crucial capabilities. 

 The SEC should also seek to invest, to the extent possible, in further 

enhancing selected enabling infrastructure: technology, human resources, risk 

management, and high-priority staff skills. While the full build out of these 

capabilities to the degree desired will require additional resources, some 

investment is necessary even now as a means to execute the agency’s mission 

more efficiently. For example, increased investment in workflow technology can 

help free up FTEs that can be used in better ways. Similarly investment in human 

resource management capabilities can help with the implementation of some 

organizational reshaping initiatives crucial for efficiency. Finally, investment in 

risk management can extend the concept of RSFI in a way that will allow the 

agency to quickly aggregate, analyze, and take action on information from across 

the agency, co-regulators, and related SROs. 

 Finally, with its reprioritized regulatory activities, an agile and efficient 

organization, and stronger enabling infrastructure, the SEC should enhance its 

engagement model with SROs. It should take steps to further strengthen its 

oversight of SROs, for example by establishing rigorous SRO disclosure 

requirements. The SEC should also improve its ability to partner with and 
© 2011 The Boston Consulting Group, Inc. 79

leverage SROs by developing a more coordinated approach to SRO interactions 

and studying options to optimize the SRO rule review and approval processes. 

To drive disciplined implementation of these initiatives, the SEC should 

establish a dedicated Project Management Office (PMO) with robust initiative 

progress reporting, as well as strong governance and oversight to enable rapid 

course correction in the event of progress being stalled. 

 Collectively, these sets of initiatives will help the SEC address some of the 

chronic gaps it faces, build many required forward-looking capabilities, and use 

its available resources better. However, it is important to note that the benefits 

possible under current constraints are limited, considering the amount of 

investment required to build the forward-looking capabilities alluded to in 

Chapter 5. Thus, the agency will still not be performing several regulatory 

activities that it deems necessary for its mission, nor will it have the ability to 

build out all the capabilities it needs to oversee the fast-changing markets (e.g., all 

of the technology skills and systems required to keep pace with increases in highfrequency trading). This results in clear risks that Congress should be aware of as 

it contemplates the ongoing role of, and the right resource allocation for, the 

agency. 

6.1.1 Reprioritize regulatory activities 

6.1.1.1 Initiative 1: Reprioritize regulatory activities 

 Given resource constraints that prevent the SEC from executing all mission 

critical activities that its senior managers deem necessary and consistent with its 

statutory mission, it is imperative that the agency align its resources against the 

highest-priority activities. In this section, BCG recommends an initiative to help 

the SEC undertake a rigorous reprioritization of its ongoing work, as well as 

activities that it deems critical to strengthen or commence. We first discuss the 

initiative and four categories of actions that the SEC should consider, as well as 

selected examples for each category derived from interviews with SEC senior 

management. 

Description and benefits 

 The SEC is already making some difficult trade-offs between valuable 

activities, and this will need to continue given the impact of Dodd-Frank and the 

evolving securities markets on the agency’s priorities. Assuming that funding 

constraints are likely to persist, BCG recommends that the SEC undertake a 

robust agency-wide process to evaluate and reprioritize its mission critical 

activities and re-align resources accordingly. In doing so, each division and office 

should classify its respective mission critical activities into four categories: 
© 2011 The Boston Consulting Group, Inc. 80

1. High-priority activities that SEC management deems critical to strengthen or 

commence 

2. Activities that the SEC could, if necessary, scale back or stop entirely 

3. Activities where the SEC could consider delegating responsibilities externally, 

e.g., to SROs 

4. Mandated activities where SEC management would request implementation 

flexibility 

 Below, we present examples of activities gleaned from a series of 

interviews with senior leadership from the SEC’s operating divisions.101 We 

discuss one selected example for each category in more depth, detailing the 

activity as well as potential benefits and risks that could arise from 

reprioritization. Note that these examples are not intended to be comprehensive 

and are presented for illustrative purposes only. Furthermore, this is an exercise 

that only the SEC can undertake; BCG takes no view on which regulatory activities 

should be prioritized or in what way. 

 If the agency reprioritizes its mission critical activities, it will create some 

flexibility in the deployment of available resources. This exercise will also 

promote alignment among the SEC’s senior management with regard to agencywide priorities. Finally, the SEC will also benefit by transparently stating the risks 

inherent in scaling back, delegating, or not commencing some activities. Making 

these risks explicit will illustrate the difficult but necessary trade-offs that exist 

given the SEC’s current context and will particularly address the “expectations” 

disconnect described earlier. 

1. Activities SEC management deems critical to strengthen or commence 

 As noted above, there are a number of high-priority mission critical 

activities (identified by the operating divisions) that the agency is currently not 

performing to the extent senior management seeks to. Illustrative examples are 

listed below: 

 

 Strengthen the triage of Suspicious Activity Reports 

 Increase strategic partnership with other regulators 

 Deepen monitoring of the markets, clearing agencies, and securities firms 

 Enhance market analysis capabilities, for example the use of data to 

understand money market fund exposure to non-US issuer risk 

 Strengthen selected ongoing disclosure review, such as public company 

transactions, proxy statements, and complex financial institutions 

 Conduct effective oversight of new registrants, such as those newly under 

the SEC’s purview as a result of Dodd-Frank (e.g., swap registrants and 

private fund advisers) 

 

101 We use the term “operating divisions” as including the five Divisions and OCIE. 
© 2011 The Boston Consulting Group, Inc. 81

 Strengthen the examination program, both in terms of frequency (e.g., 

investment adviser examinations) and depth (e.g., using more dedicated 

teams, such as large firm monitors) 

 The examples above illustrate a subset of activities that the operating 

divisions indicated are a high priority for expansion. However, given the agency’s 

constraints, it is unlikely that the SEC will have sufficient resources to perform all 

of these activities, even if it reprioritizes its current work. It is important to 

explicitly state which activities the SEC will not be able to commence, as well as 

the associated risks. For example, OCIE deems it necessary to expand its 

examination of investment advisers while maintaining a risk-based approach. 

Historically, OCIE reviews 9 to 18 percent of investment advisers annually. 102 In 

comparison, 45 to 55 percent of broker-dealers are examined by the SEC or 

FINRA each year. Even if OCIE prioritized strengthening the investment adviser 

exam program, the resources required would be prohibitive in the current 

context. For example, doubling the percentage of investment advisers examined 

annually would require an additional 350 to 400 FTEs. While reprioritizing will 

ensure that the SEC dedicates resources to its highest agency-wide priorities, it 

will still not provide sufficient resource flexibility for the SEC to take on every 

mission critical activity. 

2. Activities the SEC could scale back or stop if necessary 

 Beyond those activities that the SEC could delegate to SROs or other 

entities, there is a set of activities that the agency could further scale back or stop 

entirely, if absolutely necessary. The SEC is already making trade-offs by scaling 

back existing activities to meet the requirements and deadlines included in DoddFrank. This clearly poses risks, which should be transparently acknowledged by 

all stakeholders. Illustrative examples are listed below, with one example 

discussed in greater detail: 

 Discretionary rulemaking projects 

 SRO rule review by leveraging self-certification 

 Intensity of Sarbanes-Oxley-mandated disclosure review for small 

companies 

 Broker-dealer examinations by further leveraging FINRA 

As an example, the Division of Trading and Markets (TM) could potentially 

reduce resources dedicated to SRO rule review by leveraging a self-certification 

process. Currently, certain rule changes proposed by an SRO must be filed with 

and reviewed by SEC staff in TM, although some rules take effect upon filing and 

others will be deemed approved automatically if deadlines pass without action by 

the SEC. If Congress amended the Exchange Act, TM could use an alternate 

model for certain SROs or filing types wherein SROs self-certify proposed rule 

changes using a pre-determined set of guidelines. Self-certified changes would 

then be reviewed by the regulator. The Commission has proposed rules that 

 

102 In Brief FY 2006 – 2011 Congressional Justification. section 914
© 2011 The Boston Consulting Group, Inc. 82

would use this model for swap-execution facilities; this model will also be 

employed by the CFTC. This would still require resources for rule review, but 

self-certification would streamline the review process and reduce the effort 

required. One risk is that TM may not review all of the self-certified filings 

thoroughly or quickly enough to prevent harmful rules from taking effect (e.g., 

excessive fees for market participants). In addition, filings that raise significant 

policy issues would still require adequate time for the Commission to make its 

judgment based on the best interests of the public. Market participants harmed 

by an SRO rule would likely bring it to the SEC’s attention, but by that point 

damage would have already occurred. In addition, reducing TM’s involvement 

with the SRO rulemaking process could make it more difficult to maintain an 

overarching view of changes occurring in the market. 

3. Activities the SEC could consider delegating responsibilities externally 

 In selected cases, the SEC could also reduce its resource needs by 

delegating activities to an SRO or other entity with aligned interests. The 

examples discussed here address potential areas of delegation in the current 

context, where the SEC’s role does not fundamentally change. In Choice 2, the 

SEC would radically reconsider its role and explore increasing third party 

leverage. In this case, delegation would require that Congress authorize 

additional non-conflicted SROs. Two illustrative examples for the current context 

are listed below, with one example discussed in greater detail: 

 Collection and distribution of funds disgorged through legal proceedings 

 Section 31 examinations of fee payments by SROs 

As an example, consider the annual Section 31 examinations conducted 

by OCIE. Under Section 31 of the Exchange Act, SROs are required to pay fees to 

the Commission based on the sales of certain securities. OCIE examines the 

SROs to ensure that the SEC receives the correct payments. Instead, the SEC 

could require SROs to obtain a third-party audit demonstrating payment of the 

correct amounts. This would both reduce the SEC’s workload and increase the 

quality of the examination, as OCIE’s staff does not include auditors, nor does it 

have sufficient resources to conduct a full audit of each SRO. The SEC would 

appear to face minimal risks in delegating this activity. 

 Again, this is a partial but representative list of activities that the SEC 

could consider delegating to other organizations. Doing so would provide the 

SEC with the flexibility to shift resources otherwise used to perform these tasks to 

support higher-priority activities as discussed above. 

4. Mandated activities where SEC senior management would request implementation 

flexibility 

 Operating division management identified an illustrative set of example 

activities where the SEC would request implementation flexibility from Congress, 

including: 
© 2011 The Boston Consulting Group, Inc. 83

 Mandatory examinations of all NRSROs annually and a public report on 

examination results (OCIE would prefer the discretion to use a risk-based 

approach) 

 Mandatory disclosure review required by Sarbanes-Oxley for small public 

issuers and investment companies 

 Certain mandatory rulemaking projects 

As an example, the SEC would seek flexibility on Sarbanes-Oxley’s 

requirement to conduct disclosure review for small public issuers and 

investment companies. Sarbanes-Oxley requires the SEC to review financial 

statement disclosures for all public companies, including investment companies, 

at least once every three years. The smallest public companies constitute 

approximately 60 percent of issuers but less than one percent of total market 

capitalization. While the Division of Corporation Finance (CF) would still 

conduct some disclosure review of small issuers, it would use a risk-based 

approach to target companies with a high risk profile or for which a specific tip or 

complaint was received. Similarly, the Division of Investment Management (IM) 

would seek flexibility with respect to mandated reviews of investment company 

financial statements given the already high degree of SEC scrutiny on investment 

fund prospectuses. 

Implementation approach 

To fully consider the categories of activities described above, the SEC 

should implement this reprioritization initiative in two steps. First, each division 

and office should conduct an internal prioritization exercise to understand which 

activities it considers critical to strengthen or add and which it could scale back, 

stop, or delegate. These activities should be ranked in order of priority (i.e. 

activities the division would choose to strengthen first, activities it would choose 

to scale back first), based on a clear and consistent set of criteria (e.g., alignment 

with agency mission, risks to investors). Managers should also estimate the 

resources associated with each activity. BCG takes no view on which activities 

should be prioritized; this is an exercise that should be completed by the SEC.

 Next, the Chairman’s office should establish a cross-divisional working 

group that integrates each division’s and office’s assessment into a broad 

portfolio of priorities. This working group should develop agency-wide priorities 

with regard to where the agency should take advantage of flexibility. These 

broad priorities should determine the reallocation of resources freed up through 

scaling back, stopping, or delegating activities. This process should take no more 

than six months. The SEC should also reprise the process on an annual basis. 

Costs 

 

 This initiative should not result in any additional costs for the SEC. While 

it will require a commitment of management time initially and on an ongoing 
© 2011 The Boston Consulting Group, Inc. 84

basis (to a lesser degree), once completed it will free up resources to be 

redeployed to other priorities. 

Risks 

 

 The primary risk to implementation for this initiative is that the SEC may 

not be able to implement its reprioritization due to organizational rigidities. It is 

also possible that Congress will not grant the SEC the implementation flexibility 

required to reprioritize certain activities. In addition, even if the SEC reprioritizes 

successfully, there will still be several high-priority, mission critical activities that 

the agency does not have the resources to commence. It is crucial that the SEC 

transparently communicate these risks to the appropriate stakeholders so that 

they can be mitigated to the fullest extent possible. 

6.1.2 Reshape the organization 

In this section, BCG recommends that the SEC make fundamental 

decisions about its organization design, specifically with regard to its divisional 

structure, operations management, and regional model. We also propose that the 

SEC seek flexibility from Congress on Dodd-Frank mandated offices, review the 

interaction between the Commission and agency staff (e.g., delegation of 

authority), and initiate a continuous improvement program to drive efficiency. 

 These initiatives are a vital lever for the SEC to ensure that the agency 

allocates its available resources in the most efficient and effective way possible. 

The SEC’s senior management should also recognize that this is a “leadership 

moment” for the agency, and that they have an opportunity to make tough 

decisions about organizational priorities as collaboratively as possible—through a 

disciplined, transparent, and equitable process. 

 In particular, BCG recommends that the SEC implement four specific 

initiatives to reshape the organization: 

Systematically redesign the organization: As the SEC redesigns its 

organization, it should address three key design areas of focus: 

1. Structural design of operating divisions (including OCIE)

2. Operations management and support office structure

3. Strategy and design of the regional model

 In addition, the redesign should examine how the various organizational 

units collaborate with each other. Finally, it should ensure that the organization 

design is consistent with the reprioritized activities and that the agency’s 

resources are deployed most efficiently. 

 While we have described concrete options and the respective benefits and 

risks for each of the areas outlined above, the selected option must be consistent 
© 2011 The Boston Consulting Group, Inc. 85

with the systematic reprioritization of the agency’s core activities described 

previously. The agency needs to complete the design and embrace the change to 

ensure ownership, accountability, and implementation support for the redesign 

going forward. All the options described in this context are feasible; however, 

choosing one a priori creates the risk of having to redesign once again, following 

activity reprioritization. 

 Per BCG experience, such organizational reshaping is best done through a 

cascading process that redesigns the organization, strengthens accountability and 

collaboration through the clear definition of role charters, and removes excess 

management layers to improve efficiency and effectiveness. A systematic 

reshaping and flattening of the organizational pyramid will empower employees 

and speed decision-making. The impact of the reshaping could vary across the 

agency driven by organizational context and already completed reshaping 

initiatives. 

 Seek flexibility from Congress on Dodd-Frank mandated offices: DoddFrank requires the SEC to create four new offices with direct reporting 

relationships to the Chairman. Given that some of these functions already exist 

within the SEC, BCG recommends that Congress authorize flexibility for the 

agency to organize these new offices in a way to reduce duplication with existing 

divisions and offices. 

 

 Review Commission/staff interaction processes and delegation of 

authority: BCG recommends that the SEC review the Commission/staff 

interaction processes to: 1) provide clarity on delegated authority; 2) increase 

transparency for the Commission in areas where authority is delegated; and 3) 

increase efficiency in Commission/staff interactions in areas where authority is 

retained by the Commission. 

 Implement a continuous improvement program: BCG recommends that 

the agency undertake an initiative to systematically reduce costs throughout the 

organization. This could include levers such as demand management, sourcing, 

business process optimization, factor cost optimization, and contractor-toemployee conversion.

6.1.2.1 Initiative 2a: Systematically redesign the organization 

Description and benefits 

BCG recommends the SEC follow a disciplined and transparent cascading 

process to redesign the organization, adjust management and team role charters, 

and remove excess management layers to improve organization effectiveness and 

reduce management costs (i.e. delayering). This cascading approach implies a 

layer-by-layer process that starts at the top and flows through the organization, 

repeating the steps of redesigning and role chartering for every layer of the 

organization. 
© 2011 The Boston Consulting Group, Inc. 86

 In the first phase of this initiative, the SEC needs to address fundamental 

questions about its operating model, specifically in the areas described below. 

These areas of focus should be addressed in the context of the reprioritization as 

discussed in Section 6.1. 

1. Structural design of operating divisions: The SEC needs to address issues 

concerning the separation of broker-dealer and investment adviser 

regulation and the distance between exam and rulemaking functions 

2. Operations management and support office structure: The SEC needs to 

ensure operational effectiveness and efficiency agency-wide as well as in 

the divisions and regional offices. In addition, the SEC should simplify its 

support office structure and empower the role of the COO 

3. Strategy and design of the regional model: The SEC should assess whether 

today’s regional structure can effectively support the national programs it 

has created. In developing a regional strategy, the agency should focus on: 

1) location approach; 2) the balance between, and roles of, regional versus 

home office staff; and 3) the regional reporting structure 

 In the second phase of this initiative, after the agency has reached a 

decision on the operating model and key questions outlined above, the SEC 

should conduct a layer-by-layer role chartering, which will allow the agency to 

fundamentally rethink every role at the SEC in light of the reprioritization of 

mission critical activities. This will allow the agency to reinforce clarity of 

accountability, resolve decision right tensions, and identify and agree on critical 

interdependencies. This effort will also facilitate a critical assessment of longstanding processes and how to make them more efficient, thereby building on 

efforts already under way (e.g., in CF and OCIE). 

 In parallel, the SEC should systematically delayer selected organizational 

units. This would include increasing spans of control, eliminating redundant 

reporting layers and positions and—where applicable—redefining the 

management role to emphasize talent management skills. This will afford the 

agency with greater flexibility in redeploying available resources and FTEs 

against the reprioritized set of mission critical activities and other capabilitybuilding initiatives. A flatter organization typically enables faster information 

sharing and the delegation of decisions to the right level of expertise. Finally, 

delayering would increase the empowerment of employees in lower 

organizational layers, thus yielding a more engaged workforce. 

Implementation approach 

 The proposed layer-by-layer redesign and role chartering exercise involves 

each manager defining the supporting organization and roles needed in order to 

perform assigned responsibilities, and then staffing those roles accordingly. The 

process is then repeated at the next layer down, cascading through the 
© 2011 The Boston Consulting Group, Inc. 87

organization until it reaches the bottom. The role chartering process works by 

bringing together management teams and enabling them to coalesce around how 

they can individually and collectively “get the job done”—that is, deliver on the 

agency’s mission. 

 

 A successful role chartering process depends on management commitment 

to, and ownership of, four key outcomes: 

 Clear individual accountabilities for mission critical objectives assigned 

solely to the responsible management team member. The accumulation of 

these accountabilities defines the expected achievements for the entire 

organizational unit 

 Clear shared accountabilities, where individual management team 

members jointly agree on which mission critical interdependencies are 

shared, and with whom—resulting in joint commitments to successful 

outcomes 

 The key metrics that indicate the success of these individual and shared 

accountabilities 

 The high-priority decision rights that need to be assigned to empower each 

individual in the management team to meet their accountabilities 

 Throughout this process, managers will design their organization within a 

set of pre-defined design principles that include targets for the spans of control 

and layers consistent with the context of each organizational unit. If a manager 

determines that a particular role is no longer necessary as a result of activity 

reprioritization, the agency may choose to include the role as part of a reductionin-force (RIF). A PMO usually plays a strong role in coordinating this effort across 

different organizational units. 

 Each relevant division or office should own this process, starting with the 

most senior managers and cascading through the organization. A PMO should 

also provide guidance and support. In conjunction, the SEC should work in 

partnership with, and engage, the union throughout the organization redesign 

process. The entire redesign should take no longer than six to nine months, with 

each relevant division and office proceeding in parallel. It will, however, take 

longer to resolve final RIF decisions and to fulfill appropriate legal and 

contractual requirements. 

Costs 

 The primary cost associated with role chartering is a significant upfront 

investment of managerial staff time. Generally, the process takes four to six 

weeks for each management layer, with a weekly time commitment of 

approximately 20 percent by each manager. With regard to the delayering aspect 

of this effort, the costs will be twofold. First, any RIF will incur various costs—for 

example, potential severance costs of up to $25,000 per employee, depending on 

tenure, or costs related to accrued leave. Second, management time will be 
© 2011 The Boston Consulting Group, Inc. 88

expended, primarily at the leadership and middle management levels. Any RIF 

will also require additional time from human resources personnel. However, if 

this initiative is approached in a targeted way and cascaded through the 

organization, the incremental time demand should not be so great as to require 

new capacity. 

Risks 

 Any organizational reshaping exercise comes with the attendant 

possibilities of losing some focus on day-to-day priorities, creating confusion 

around accountabilities and decision rights, misaligning roles and personnel from 

a capability perspective, and disengaging employees. The recommended process 

outlined above, in conjunction with a strong PMO, should significantly mitigate 

these risks excluding that of personnel mismatch. The risk of a personnel 

mismatch is a real concern given the constraints of civil service laws which grant 

“bump and retreat” rights according to tenure. In the case of a RIF, “bump and 

retreat” rights give the senior employees who have risen through the ranks the 

right to reclaim former positions. The benefit of such rights is that it provides a 

way to keep experienced personnel, even if their current role is eliminated. 

However, the risk can be that this approach limits flexibility in filling positions. 

6.1.2.1.1 Additional details on three areas of focus 

As discussed earlier, during the redesign of its organization, the SEC needs 

to consider three specific aspects of its operating model: the structual design of its 

operating divisions, its operational management approach, and its location 

strategy and regional model. We discuss each area of focus in turn to provide 

additional color on this initiative. 

1. Area of focus: Structural design of operating divisions 

 The SEC’s five operating divisions, together with OCIE, carry out the 

majority of the agency’s mission-related programs. The current divisional 

structure follows a rigid regulatory framework and, aside from the creation of 

RSFI, has not fundamentally changed in the past fifteen years. Looking ahead, 

the SEC should shape an organization that keeps pace with the fluid and everchanging markets that it regulates. Specifically, the SEC needs to address the 

structural separation of broker-dealer and investment adviser regulation and the 

structural distance between exam and rulemaking functions. We have laid out 

four options for the SEC to consider. The decision on these will be made by the 

SEC through the redesign process described earlier. 
© 2011 The Boston Consulting Group, Inc. 89

Exhibit 6.1.2.1-1: Options for structural design of the SEC’s operating divisions 

Option 1a: Maintain current structure and elevate OCIE to division status 

 Under this option, the SEC would retain its current divisional structure. 

Where divisional boundaries create challenges, either because the SEC’s structure 

does not reflect changes in the securities markets or because there are structural 

distances between thematically linked units,103 the SEC would strive to overcome 

these challenges by implementing strong collaboration mechanisms. These could 

take the form of a designated function (e.g., exam liaison offices), defined 

working teams (such as the cross-divisional team working on the Section 913 

Study) or clearly defined processes (e.g., for joint rulemaking projects). To 

strengthen OCIE’s coordinating role for the exam program, the SEC should 

consider elevating OCIE to division status in this option. 

This option has several benefits: 

 Minimizing change in TM and IM’s current structure would prevent major 

burden on both divisions, at a time when they are significantly stretched 

by the implementation requirements resulting from Dodd-Frank 

 Elevating OCIE to division status would further strengthen OCIE and 

support its efforts to establish a streamlined and consistent National Exam 

Program. As the second largest operating unit in the SEC, OCIE accounts 

for approximately 25 percent of SEC staff and budget. Maintaining OCIE 

as a separate division would equip it with greater independence, standing 

and authority, and would also provide for greater consistency throughout 

the examination program. 

 The downsides of keeping the current structure and bridging structural 

distances via collaboration are: 

 The SEC’s structure would still not be fully aligned with the business 

realities of the investment adviser and broker-dealer industries that it 

regulates 

 The agency would not achieve the in-depth knowledge flow between exam 

and rulemaking functions that could result from structural integration. It 

would also limit a potential career path for examiners to move into 

rulemaking functions within the same division 

 

103 For an overview of structural challenges, refer to Chapter 4. 

TM

OCIE

Enforcement

RSFI

TM IM CF

OCIE

Enforcement

RSFI

TM IM CF

OCIE

Enforcement

RSFI

IM CF Intermediary

OCIE

Enforcement

RSFI

Market 

Ops CF Intermediary

OCIE

Enforcement

RSFI

Market 

Ops CF TM

policy & 

exams 

Enforcement

RSFI

IM

policy & 

exams

CF

TM

policy & 

exams 

Enforcement

RSFI

IM

policy & 

exams

CF

TM

policy & 

exams 

Enforcement

RSFI

IM

policy & 

exams

CF

Intermediary

policy & 

exams 

Enforcement

RSFI

Market 

Ops

policy & 

exams

CF

Intermediary

policy & 

exams 

Enforcement

RSFI

Market 

Ops

policy & 

exams

CF

Intermediary

policy & 

exams 

Enforcement

RSFI

Market 

Ops

policy & 

exams

CF

Source: BCG analysis

Option 1a: Maintain current 

structure; elevate OCIE 

Option 1b: Combine IA/BD 

regulation

Option 1c: Integrate exams 

into rulemaking functions

Option 1d: Combine 

Options 1b and 1c
© 2011 The Boston Consulting Group, Inc. 90

 Given the Dodd-Frank provision in Section 965, the SEC would risk 

duplicating exam functions in OCIE (home office and regional offices) and 

the rulemaking divisions and an increasingly fragmented exam program 

Option 1b: Redesign TM and IM to combine investment adviser and broker-dealer 

regulation 

Under this option, while recognizing the decision with respect to 

harmonizing investment adviser and broker-dealer regulation has yet to be made, 

the SEC would redraw the boundaries between IM and TM to combine 

investment adviser and broker-dealer regulation in one division. The SEC would 

essentially restructure TM and IM to create two new divisions. TM’s existing 

market oversight and operations functions would be spun off into a new division, 

tasked with responsibility for regulating the securities markets. The remaining 

broker-dealer regulatory functions would then be combined with the functions 

currently in IM. This second new division would be responsible for regulating 

intermediaries’ practices. 

This option has the following principal benefit: 

 It would create an organization that reflects the highly integrated nature 

of the financial services industry and allow for harmonized investment 

adviser and broker-dealer regulation as was recently recommended by 

SEC staff104 

However, the downsides of this option are: 

 

 The ultimate degree of harmonization will depend on Congressional 

actions regarding the laws and regulatory frameworks that apply to 

investment adviser and broker-dealer regulation. However, the debate 

over the extent of harmonization is still ongoing, with the study under 

Section 913 of Dodd-Frank having been delivered by SEC staff in January 

2011 

 IM and TM are currently focused on rule-writing requirements resulting 

from Dodd-Frank, and a major reorganization might stretch management 

capacity, thus impacting the timetable for Dodd-Frank implementation 

 This option would still not address the structural distance between exam 

and rulemaking functions 

 

Option 1c: Integrate the exam function into the rulemaking divisions of IM and TM 

Under this option, the SEC would re-integrate the exam functions back 

into IM and TM, replacing OCIE as a standalone office. This would mirror the 

structure prior to the creation of OCIE in 1995 and would potentially support the 

 

104 Study on Investment Advisers and Broker-Dealers. It is important to note that, while SEC staff has 

issued a recommendation, the Commission has not yet proposed new rulemaking on harmonizing 

broker-dealer and investment adviser regulation. 
© 2011 The Boston Consulting Group, Inc. 91

intent behind Section 965 of Dodd-Frank, which requires IM and TM to establish 

a staff of examiners.105 

Structurally combining the two functions has two main benefits: 

 It would result in proximity and all of the associated benefits between 

rulemaking and exam functions 

 It would provide a richer career path, as employees can start in the 

division as an examiner and then choose to move into a more policyfocused role, bringing with them the breadth of knowledge stemming from 

on-the-ground examinations 

On the other hand, the downsides and risks are: 

 It would constrain OCIE’s previous efforts to establish a streamlined, 

consistent, and connected National Exam Program, and would result in 

increased fragmentation of exam resources across divisions 

 It could lead to specialized exam groups for broker-dealers and investment 

advisers, limiting the exam program’s flexibility to draw on both sets of 

expertise 

 It could limit the SEC’s ability to reduce duplication in the exam program, 

realize synergies, and streamline communication between the exam staff 

and other divisions (e.g., Enforcement) 

 While it creates a career path from exam into operating divisional policy 

and rulemaking, it would take away the management career path within 

OCIE as a functional organization 

Option 1d: Combine options 1b and 1c 

This option combines the two proposals described above, with the 

respective benefits and risks outlined earlier

2. Area of focus: Operations management and support office structure 

 As the SEC redesigns its organization, it needs to continue its efforts on 

operational effectiveness and efficiency. It should look to simplify its support 

office structure, and also clarify and empower the role of the COO. 

 Simplifying the support office structure has two components (as depicted 

in Exhibit 6.1.2.1-2 below): 1) consolidating the COO and ED offices into one; and 

2) consolidating the external facing functions of the Office of Public Affairs 

(OPA), the Office of Investor Education and Advocacy (OIEA), and the Office of 

Legislative and Intergovernmental Affairs (OLIA) under a new Office of External 

Relations. The first of these would enable the SEC to adopt an agency-wide 

approach to improving efficiency under a single point of accountability and 

 

105 Section 961 of Dodd-Frank references OCIE, however, suggesting uncertainty with respect to 

Congress’s intent regarding OCIE. 
© 2011 The Boston Consulting Group, Inc. 92

focused leadership. The second would enable a more efficient means of ensuring 

consistent and aligned external facing communications and stakeholder 

management. 

 Consequently, the SEC has three distinct options in addition to the current 

structure, as depicted in Exhibit 6.1.2.1-2: 

Exhibit 6.1.2.1-2: Options for consolidating administrative support offices 

Source: BCG analysis

Option 2a: Consolidate the ED and COO into one office 

 In its combined form, the responsibility of the COO would be to maximize 

the use of the SEC’s administrative resources by overseeing the strategic 

planning, information technology program, financial management, records 

management, human resources and administrative functions of the agency. With 

regard to the role of the COO, the SEC would seek to empower it: in addition to 

directly overseeing the administrative support offices, the COO would serve as a 

“Center of Excellence” for efficient business processes by coordinating closely 

with the managing executives (who carry out COO-like functions) in the divisions 

and offices to provide guidance and facilitate best practice sharing. The 

interaction between the COO and the divisional managing executives could take 

a number of forms: 1) informal coordination; 2) dotted-line reporting of the 

managing executives; or 3) a dual reporting relationship to both the COO and the 

division director. To avoid the complexities of dual relationships and to ensure 

closeness to the division’s operations, BCG recommends a coordination model, 

whereby the managing executives report to the division director and are less 

formally connected to the COO (e.g., through a committee structure). In 

addition, the role chartering process should be used to clarify accountabilities and 

decision rights for the COO and managing executives. We propose that each 

division introduce a managing executive role to serve as the division’s COO, with 

responsibility over all operational aspects. This will allow division directors to 

focus on the policy agenda. Finally, the agency COO would also be in charge of 

the strategic planning and budget processes, which represent important tools for 

cross-divisional collaboration and should be used to communicate and embed the 

agency’s overall vision within every division and office. 

OPA

Chairman

OIEA OLIA

Ext.

relations

OIT OHR FOIA/

RMS OFM OAS

COO OED

OEEO OS OIG

OPA

Chairman

OIEA OLIA

Ext.

relations

OIT OHR FOIA/

RMS OFM OAS

COO OED

OEEO OS OIG

COO/

OED

OAS OIT OHR

OEEO OIG

OPA

Chairman

OIEA OLIA

Ext.

relations

OFM FOIA/

RMS

OS

OEEO

Chairman

OPA OIEA OLIA OS

COO/

OED OIG

OIT OHR FOIA/

RMS OFM OAS

OEEO OIG

Chairman

OPA OIEA OLIA OS

COO OED

OIT OHR FOIA/

RMS OFM OAS

Illustrative

Today

Option 1: ED/COO 

consolidation

Combine options 1 & 2

(Full consolidation)

+ Extent of consolidation -

Option 2: External facing 

offices consolidation
© 2011 The Boston Consulting Group, Inc. 93

 One could imagine the role of the COO as a broader one, with a focus that 

extends beyond administrative functions. We do not recommend such a role for 

the SEC; it is preferable, in our view, to retain key operational decision-making 

under the purview of division directors and their managing executives in order to 

maintain proximity to the specific processes and procedures, and otherwise align 

with divisional strategic priorities. However, the risk to keeping the authority for 

division operations separate is that the agency COO would then require the close 

cooperation and dedication of divisional directors and other managers. If 

divisional cooperation were not fully available given other priorities, this would 

limit the potential of the COO role. 

 

Option 2b: Consolidate external facing offices under one new Office of External 

Relations 

Under this option, OPA, OLIA, and OIEA would be consolidated under a 

new Office of External Relations to ensure maximum consistency in the SEC’s 

communication with external audiences. This new overarching office would also 

contain any other external relations functions, such as responsibility for the 

agency’s website, which is currently under the purview of the Office of the 

Secretary (OS). As part of its primary accountabilities, this office would institute 

agency-wide procedures to ensure that all external communication (e.g., 

speeches, press statements) are pre-approved. It could also use its infrastructure 

to support internal SEC communications, where appropriate. The consolidation 

of these offices would reduce organizational complexity while at the same time 

allowing for increased efficiency and alignment of the SEC’s external facing 

communications and enhanced stakeholder management. 

 However, by creating another layer between the Chairman and externalfacing offices (e.g., OLIA, which prepares the Chairman for Congressional 

testimony), minor inefficiencies and communication challenges could result. If 

this option is not executed well, there is the possibility that the specialized skill 

could get diluted. Similarly, combining OIEA, OPA and OLIA would eliminate 

the firewall between different types of agency communications. 

Option 2c: Consolidate ED and COO and consolidate external facing offices 

 This option combines the two consolidation proposals described above, 

with the respective benefits and risks outlined earlier. 

3. Area of focus: Strategy and design of the regional model 

 Over the past two years, the SEC has expended significant effort to 

streamline and strengthen its enforcement and exam programs. In both cases, the 

agency has worked to establish consistent and interconnected nationwide 

programs that extend across all regional offices. Throughout this process, the 

agency has balanced strengthening the regions (through measures such as 

delegated authority in Enforcement) with greater home office oversight (through 

regular reporting processes). As the SEC completes this journey, it needs to 
© 2011 The Boston Consulting Group, Inc. 94

critically assess whether today’s regional structure optimally supports the 

national programs it has created. In developing an effective regional strategy, the 

agency should: 

3(a): Define a clear location approach for the SEC 

3(b): Clarify the balance and roles between regional and home office staff 

3(c): Consider options for regional reporting relationships 

3(a): Define a clear location approach for the SEC: The SEC should develop a 

location approach, taking into account the costs and benefits of each regional 

office and the regional structure as a whole. This location approach should 

determine whether it is appropriate to retain the current regional office structure, 

selectively consolidate certain offices, or restructure its regional approach 

altogether (perhaps through establishing fewer but larger regional hubs). The 

new location approach should support the agency’s emphasis on specialization, 

staffing flexibility, and consistent nationwide programs. Given the SEC’s current 

and likely future funding constraints, consolidating regional offices might free up 

resources that the agency could re-invest in further building other critical 

capabilities. The benefits of potential consolidation should be weighed carefully 

against the benefits of a broader regional model, such as closer involvement with 

local regulatory communities and markets.

Were the SEC to opt to consolidate regional offices, it would likely have to 

address concerns across a variety of stakeholders, including local jurisdictions, the 

union, Congress, and the SEC’s regional staff. The agency would also risk losing 

some of its high-performing staff in the regions as well as the relationships and 

local knowledge established in the respective regional offices. Depending on the 

scale of restructuring, a consolidation of regional offices would likely impose 

implementation risks such as disruptions or slow downs in the affected exam and 

enforcement programs. These risks should be mitigated through detailed upfront 

planning. 

3(b): Optimize the balance and roles between regional and home office staff: In 

conjunction with developing a location approach, the SEC should clarify the role 

and optimal deployment of its investigators and examiners between the home 

office and regional offices. This initiative primarily applies to Enforcement, 

where regional and home office responsibilities have historically been an area of 

ambiguity and contention, and are currently in the process of being clarified.

Establishing clearly delineated roles for regional and home office 

personnel will enable the agency to utilize its limited resources efficiently. Role 

clarity would help prevent duplicative efforts and reduce existing tensions 

between regions and the home office. This should be closely linked to the 

development of the location approach described above. OCIE, as part of its 

redesign, has already begun to clarify the roles of home and regional office staff: 

home office staff will focus primarily on establishing SEC-wide policies, 

coordinating with policy divisions, providing oversight and guidance to regional 
© 2011 The Boston Consulting Group, Inc. 95

offices, and conducting clearly defined types of exams (e.g., FINRA oversight 

exams and international exams). 

Enforcement should take action to resolve the role ambiguities mentioned 

above. In doing so, the Division should build on existing efforts, such as the steps 

it has taken towards: 1) increasing the transparency of the case assignment 

process to regional offices (e.g., through the new TCR process); and 2) reviewing 

the case assignment rationale. In conjunction with the working group on the 

location approach, Enforcement would assess the costs, risks, benefits, and 

implementation approach for each option. 

Ambiguity regarding the role and responsibilities of regional and home 

office staff creates the risk of inhibiting collaboration and open communication 

between different team/offices, could lead to duplication, and makes it harder to 

ensure that activities are carried out by staff who not only have the most relevant 

expertise but also do so in the most efficient manner. 

3(c): Regional reporting relationships: Finally, the SEC should assess its 

current regional reporting structure. Today’s dual reporting structure between 

the exam and enforcement programs implies an indirect link between home 

office and regional program staff. This makes it difficult to ensure nationwide 

consistency, alignment, and knowledge sharing. This risk is more pronounced in 

OCIE, partly because of the historically stronger link between the regional offices 

and Enforcement. The SEC should rethink parts of this model and consider the 

two alternative options as described in Exhibit 6.1.2.1-3: 

Exhibit 6.1.2.1-3: Options for regional reporting relationships 

Option 3(c)(i): 

Hybrid reporting

Option 3(c)(ii): 

Divisional reporting

Dual reporting

(today)

Division of 

Enforcement 

Regional Director (RD)

OCIE 

Regional 

Exams

Regional 

Enforcement

Regional Support

Regional 

Enforcement

Division of 

Enforcement 

Regional Director (RD)

OCIE 

Regional 

Exams

Regional 

Enforcement

Regional Support

Regional 

Enforcement

Division of 

Enforcement 

Regional Director (RD)

OCIE 

Regional 

Exams

Regional 

Enforcement

Regional Support

Regional 

Enforcement

Division 

of 

Enforce

ment 

Regional

Director

(RD)

Regional 

Exams

Regional 

Enforce

ment

OCIE 

Reporting directly to division 

COO

Regional Support

Division 

of 

Enforce

ment 

Regional

Director

(RD)

Regional 

Exams

Regional 

Enforce

ment

OCIE 

Reporting directly to division 

COO

Regional Support

Source: BCG analysis
© 2011 The Boston Consulting Group, Inc. 96

Option 3(c)(i): Hybrid reporting with direct link between OCIE and the local 

exam program 

Under this approach, the SEC would establish a direct reporting line 

between the associate director for the respective regional exam programs and the 

OCIE home office, while retaining the reporting line to the regional director. In 

addition, the dual reporting structure to Enforcement and OCIE for the regional 

director would remain as is. There are two primary benefits to this approach. 

First, the reporting relationship between the regional associate director and OCIE 

would provide OCIE leadership with more direct oversight into regional office 

exam programs, thereby enabling the home office to ensure consistency and 

program-wide prioritization. Second, the regional director—who is ultimately 

responsible for overseeing the regional exam program in his/her office—would 

be more directly supported by OCIE leadership.

 Under this approach, OCIE would change the existing associate director 

role in the home office to be responsible for liaising with the exam associate 

directors in the regions. The associate directors in the home office and the 

regions would coordinate in the development of exam plans, which the Director 

of OCIE and the regional director would jointly review as they set the goals, 

objectives, and priorities for the local exam program. The regional director’s 

responsibilities over regional enforcement functions would remain unchanged. 

This option may increase complexity in the regional reporting structure. 

Regional exam associate directors would have two reporting relationships, which 

has the potential of diffusing role clarity. This can be mitigated by using the role 

chartering process, as previously described, to define specific individual and 

shared accountabilities. 

 

Option 3(c)(ii): Divisional reporting 

As an alternative, more radical approach, the SEC could elevate the role of 

associate regional directors in Enforcement and OCIE and establish a direct 

reporting line from the regional programs to the respective departments at 

headquarters. In doing so, the roles of the associate regional director, regional 

director, and the agency COO would change: 

 The associate regional directors would provide senior leadership to their 

respective programs (examination and enforcement) at the regional office 

level. They would work with headquarters to establish programmatic and 

operational priorities, and assume responsibility for day-to-day 

management and administration duties. Each would report to his or her 

respective associate director at headquarters 

 The regional director, who would report to the COO, would be primarily 

responsible for overseeing all regional support functions, coordinating 

cross-divisional affairs for the office, and liaising with co-regulators in the 

regions (such as SROs and peer regulators) 
© 2011 The Boston Consulting Group, Inc. 97

 The COO would take on an expanded role by assuming responsibility for 

ensuring adequate administrative support for the regional offices 

 Under this option, the regional reporting lines would reflect the SEC’s 

overall organization structure along offices and divisions, thus allowing clearer 

accountabilities for programs and initiatives. In addition, it would further 

streamline the direct flow of information between headquarters and the regions. 

Finally, providing the COO with a direct reporting line from the regional offices’ 

administrative support functions would enable the SEC to increase its focus on 

ensuring operational efficiency in the regions. 

Given that this approach requires material changes, there are a number of 

risks. Under the existing structure, regional directors can ensure alignment 

between the enforcement and exam programs, and adjust resources and focus as 

necessary. This option could hamper the regional offices’ ability to make those 

adjustments, given that authority would lie with the two associate directors who 

may at times have competing priorities. In addition, this option would distance 

the existing regional directors from programs in the respective offices, which may 

create attrition issues. Finally, during the transition phase, there is a risk that 

existing management at the associate director level would need to adapt quickly 

to the expanded role while continuing pre-existing responsibilities. 

4. Area of focus: Increasing collaboration mechanisms 

 Role chartering, as described earlier, represents one mechanism through 

which the SEC can improve collaboration. In addition, further opportunities 

include structural, cultural, technological and process solutions: 

 Structural solutions: Throughout the redesign process, the agency should 

strive to create an organizational structure—both across and within 

divisions and offices—that facilitates critical coordination and 

collaboration. This could include creating specific functions tasked with 

coordination (like the Enforcement liaison offices of IM, TM, and CF), 

launching rotational programs across the divisions and offices, or 

establishing internal divisional structures that align with other divisions 

(such as Enforcement’s Asset Management Unit and IM). A strong internal 

communications function would also increase transparency on agencywide topics. In addition, the agency should review its governance and 

committee structure, formalize some of the agency’s recently established 

Dodd-Frank related meetings (e.g., the General Counsel’s regular meetings 

with the rulemaking functions), more effectively utilize existing meetings 

(e.g., ITCPC, IOC) and introduce selected new committees or meetings 

(e.g., on risk topics) 

 Cultural solutions: It is crucial that the SEC’s senior management 

continues its emphasis on the importance of collaboration and 

communication to foster an open culture. To this end, the SEC should 
© 2011 The Boston Consulting Group, Inc. 98

clearly outline expectations for collaboration for all staff during the role 

chartering process, contemplate adding collaboration as a component of 

performance reviews, and adjust incentives to encourage cross-divisional 

collaboration

 Technological solutions: To facilitate information sharing across divisions, 

the SEC should develop enabling technology solutions (e.g., a knowledge 

management system), increase the connectivity of its existing systems, and 

leverage its solutions enterprise-wide (e.g., the new TCR system) 

 Process solutions: As part of the lean process redesign described later in 

this section, the SEC should seek to embed collaboration objectives in its 

key processes. For example, the new TCR process is highly collaborative, 

much like the working group that helped establish it. In addition, the 

agency should fully utilize agency-wide processes, such as the strategic 

planning process, to communicate agency-wide goals and align those with 

division specific objectives 

6.1.2.2 Initiative 2b: Seek flexibility from Congress on Dodd-Frank mandated 

offices

Description and benefits 

 Dodd-Frank requires that the SEC create four new offices that will report 

directly to the Chairman: 1) Office of Municipal Securities (OMS); 2) Office of 

Credit Rating Agencies (OCRA); 3) Office of the Investor Advocate (OIAD); and 4) 

Office of Minority and Women Inclusion (OMWI). These offices are primarily 

intended to increase visibility for the functions they contain, enhancing the 

degree of focus and resources accorded to them. However, many functions to be 

performed by these new offices are already performed by existing units within 

the SEC today. Placing those activities in new offices will create organizational 

complexity and resource fragmentation. While the objectives of Dodd-Frank are 

understandable, they could be achieved in a different way that addresses these 

concerns.

 BCG recommends that Congress grant the SEC flexibility to design its 

organizational structure efficiently, consistent with the activities required by 

Dodd-Frank. We propose a structure for each office below that would streamline 

organizational complexity, eliminate duplication of functions, and leverage 

existing knowledge/infrastructure. 

Implementation approach 

The reorganization would be owned by the relevant divisions and offices, 

in consultation with the Chairman’s office. The timeline depends on 

Congressional action but, once flexibility is granted, the process should take no 

more than six months. 
© 2011 The Boston Consulting Group, Inc. 99

 Office of Municipal Securities: Currently, OMS is housed in TM as part of 

the Office of Market Supervision. Dodd-Frank requires that OMS move out of TM 

and become an independent office reporting directly to the Chairman. By 

elevating OMS, Dodd-Frank increases the focus on municipal securities, which 

became a priority after the liquidity crisis in the auction-rate securities market.106 

Its increased stature should strengthen the office’s relationship with the 

Municipal Securities Rulemaking Board and enhance OMS’s ability to advocate 

for its own budget, thus increasing the agency resources devoted to municipal 

securities. However, this will add to the Chairman’s already large number of 

direct reports and require investment in infrastructure and support for a 

relatively small office. 

 A more efficient option that may allow the SEC to achieve the goals of 

Dodd-Frank is that municipal securities oversight could remain in TM, but with a 

direct reporting line to the Division Director (see Exhibit 6.1.2.2-1). This would 

address the objective of increasing senior leadership visibility into municipal 

securities issues while avoiding the complexity noted above. Needless to say, 

however, this office needs to be staffed adequately to address the oversight needs 

related to the municipal securities market. 

Exhibit 6.1.2.2-1: Current and potential organizational structures for OMS 

Chairman

Trading &

Markets

Market 

Supervision

Municipal 

Securities

Chairman

Trading &

Markets

Market 

Supervision

Municipal 

Securities

Chairman

Trading &

Markets

Municipal 

Securities

Market 

Supervision

Chairman

Trading &

Markets

Municipal 

Securities

Market 

Supervision

Chairman

Trading &

Markets

Market 

Supervision

Municipal 

Securities

Chairman

Trading &

Markets

Market 

Supervision

Municipal 

Securities

Source: BCG analysis

Office of Credit Rating Agencies: Dodd-Frank seeks to enhance the focus 

on Nationally Recognized Statistical Rating Organizations (NRSROs) by 

combining the rulemaking and examination functions into one office. Currently, 

these functions are contained in TM and OCIE, respectively. The creation of this 

office is partly the result of the controversy surrounding the rating agencies’ 

 

106 Anderson, Jenny and Vikas Bajaj. “New Trouble in Auction-Rate Securities.” New York Times

15 Feb. 2008. Print. 

Current structure Dodd-Frank mandate BCG proposal
© 2011 The Boston Consulting Group, Inc. 100

assessment of mortgage-backed securities and other complex financial 

instruments leading up to the 2008 financial crisis.107 Creating an independent 

office directly reporting to the Chairman could increase oversight of NRSROs. In 

addition, synergies may result from housing both rulemaking and examinations 

in one office, as staff develops a specialized expertise in NRSROs across 

rulemaking and examination processes. However, this will add to the Chairman’s 

already large number of direct reports, require investment in infrastructure and 

support for a relatively small office, and increase fragmentation of the SEC’s 

already stretched exam program. 

 A more efficient option would be for the SEC to maintain its current 

structure while still meeting the objectives of Dodd-Frank (see Exhibit 6.1.2.2-2). 

OCIE’s NRSRO exam program is relatively new. In fact, it was instituted in 2009 

in direct response to many of the same concerns that prompted the Dodd-Frank 

provision. In addition to streamlining organizational complexity, the current 

structure helps maintain consistency in the SEC’s exam program and in the 

drafting and interpretation of relevant rules. It also provides a richer potential 

career path for staff assigned to NRSROs. However, were Congress to grant the 

needed flexibility, the SEC should consider formalizing collaboration mechanisms 

between TM and OCIE to mitigate the risk of silos developing in the future.

Exhibit 6.1.2.2-2: Current and potential organizational structures for OCRA 

Chairman

Trading &

Markets OCIE Credit RatingAgencies

BrokerDealer

Finances

Examination Rulemaking

Chairman

Trading &

Markets OCIE

BrokerDealer

Finances

NRSRO

rulemaking

NRSRO

Exams

Market 

Oversight

Chairman

Trading &

Markets OCIE

BrokerDealer

Finances

NRSRO

rulemaking

NRSRO

Exams

Market 

Oversight

Chairman

Trading &

Markets OCIE

BrokerDealer

Finances

NRSRO

rulemaking

NRSRO

Exams

Market 

Oversight

Chairman

Trading &

Markets OCIE

BrokerDealer

Finances

NRSRO

rulemaking

NRSRO

Exams

Market 

Oversight

Source: BCG analysis Strengthen collaboration

Office of the Investor Advocate: OIAD is intended to combine several 

functions to create a central point of contact and independent advocate for 

investors. As noted in Section 7.1.5.2, these functions are currently assigned 

primarily to the Office of the Inspector General (OIG) and OIEA. OIAD also 

houses a new external Ombudsman who will liaise with the public. In creating 

OIAD, investors will have a clear point of contact with the SEC who can advocate 

with the rest of the agency. 

 

107 Gillen, David. “In Ratings Agencies, Investors Still Trust.” New York Times 4 June 2009. Print. 

Current structure Dodd-Frank mandate BCG proposal
© 2011 The Boston Consulting Group, Inc. 101

 As with the other Dodd-Frank mandated offices described above, a more 

efficient option would be to leverage the SEC’s existing organization structure 

while integrating the Ombudsman position into OIEA (see Exhibit 6.1.2.2-3). This 

reduces duplication of effort and provides a consolidated point of contact for 

investors. Meanwhile, OIEA can capitalize on its growing relationship with the 

Office of Sales Practices to advocate for investors in the policy-making process 

while continuing to serve in its traditional investor education and outreach role. 

Finally, this option minimizes organizational complexity by reducing the number 

of direct reports to the Chairman and the number of units required to collaborate 

on investor advocacy. 

Exhibit 6.1.2.2-3: Current and potential organizational structures for OIAD 

Current structure Dodd-Frank mandate BCG proposal

Chairman

Investor

Education &

Advocacy

Trading &

Markets

Sales 

Practices

Inspector

General

Chairman

Investor

Education &

Advocacy

Trading &

Markets

Sales 

Practices

Inspector

General

Chairman

Investor

Education &

Advocacy

Sales

Practices

Trading &

Markets

Inspector

General

Investor

Advocate

Ombudsman Policy

Advocate

Chairman

Investor

Education &

Advocacy

Sales

Practices

Trading &

Markets

Inspector

General

Investor

Advocate

Ombudsman Policy

Advocate

Chairman

Investor

Education &

Advocacy

Sales

Practices

Trading &

Markets

Inspector

General

Ombudsman Policy

Advocate

Chairman

Investor

Education &

Advocacy

Sales

Practices

Trading &

Markets

Inspector

General

Ombudsman Policy

Advocate

Source: BCG analysis

 Office of Minority and Women Inclusion: The Dodd-Frank provision to 

create OMWI was primarily motivated by a desire to increase diversity in the 

federal contracting process and on Wall Street.108 It also adds another 

management voice advocating for diversity and may increase the focus on 

diversity issues. Additionally, OMWI performs an assessment of diversity efforts 

by registrants—a new activity for the agency. However, many of the functions 

intended for OMWI are already performed by the Office of Equal Employment 

Opportunity (OEEO), which also reports directly to the Chairman. 

 Rather than create a separate office, the SEC could consolidate OEEO into 

OMWI (see Exhibit 6.1.2.2-4). OMWI would perform all of the activities currently 

tasked to OEEO as well as assess the diversity policies of regulated entities (the 

only mandated activity currently not performed by the SEC). This alternative 

structure is motivated, first and foremost, by the goal of creating a single, strong 

voice that can advocate for a consistent diversity strategy throughout the SEC. In 

addition, this option improves efficiency by reducing duplicative functions and 

organizational complexity. It also leverages OEEO’s knowledge of equal 

employment law and historic complaint data to inform diversity efforts. 

 

108 Roose. 
© 2011 The Boston Consulting Group, Inc. 102

Exhibit 6.1.2.2-4: Current and potential organizational structures for OMWI 

Chairman

Equal

Employment

Opportunity

Executive

Director

Human

Resources

Minority &

Women

Inclusion

Chairman

Equal

Employment

Opportunity

Executive

Director

Human

Resources

Minority &

Women

Inclusion

Chairman

Equal

Employment

Opportunity

Executive

Director

Human

Resources

Recruiting

Chairman

Equal

Employment

Opportunity

Executive

Director

Human

Resources

Recruiting

Chairman

Executive

Director

Human

Resources

Min./Wom.

Inclusion

Equal Emp.

Opportunity

Chairman

Executive

Director

Human

Resources

Min./Wom.

Inclusion

Equal Emp.

Opportunity

Source: BCG analysis

Compared to the structure mandated by Dodd-Frank, this initiative would 

reduce costs. Instead of investing in four new independent offices, integrating 

these functions into the SEC’s current organization leverages existing 

infrastructure (e.g., budget and strategic planning, support staff) and reduces the 

time required of the Chairman to oversee four additional direct reports.

There are clear implications for these proposals—for example, reduced 

independence and budget authorities for specific offices—however, hard tradeoffs might be necessary. The primary risk is that after implementation, these 

topics may still not receive adequate attention from the SEC’s senior 

management. If nothing changes, it is possible that the circumstances which 

prompted the creation of these offices could recur. In most cases, however, this 

risk is mitigated by retaining the function of each office even as the structure is 

consolidated (e.g., the Ombudsman role mandated within OIAD would still exist). 

6.1.2.3 Initiative 2c: Review Commission-staff interaction processes and 

delegation of authority

Description and benefits 

As described in Section 4.1, much of the SEC’s daily operations and 

decisions outside of rulemaking have over time been delegated to the operating 

divisions. In areas where the Commission has delegated authority, it may lack 

desired visibility into staff decision-making. Conversely, in areas without 

delegated authority, governance requirements placed on the SEC slow the 

interaction process between the Commission and agency staff, impacting the 

SEC’s efficiency and speed of decision-making. Given these challenges, the 

Commission should establish a process to regularly review its current delegation 

of authority and clarify which decision rights will belong to SEC staff and which it 

will retain. This review should include areas where the Commission may 

Current structure Dodd-Frank mandate BCG proposal
© 2011 The Boston Consulting Group, Inc. 103

delegate further and those where it may reclaim its authority, based on a clear 

and consistent set of criteria. 

 In some cases, it may benefit the SEC to further expand delegated 

authority (e.g., routine enforcement actions), but these delegations should be 

accompanied by robust accountabilities and oversight. To provide transparency 

into the portfolio of delegated authorities, SEC staff should—through a clear 

dashboard—regularly report to the Commissioners on relevant ongoing activities, 

major upcoming decisions, and potential issues the Commission can expect. It is 

also important that the SEC refine this dashboard over time with Commission 

input to ensure that it is providing appropriate visibility and oversight. In 

addition, the SEC should establish a process to identify the most important 

decisions within areas of delegated authority where the staff should specifically 

engage the Commission. 

 In areas where the Commission retains authority, the SEC should optimize 

the way in which staff interacts with the Commission to minimize the resources 

required, prioritize critical issues, and avoid delays in decision-making. As part of 

the lean process redesign described in Section 6.1.2, the SEC should review the 

procedures employed when SEC staff interacts with the Commission, with an 

emphasis on transparency and efficiency. This interaction is constrained by the 

Sunshine Act and will also require a review of the agency’s statutory ability to 

streamline these processes. 

 The primary benefits of this initiative will be clarity with respect to 

delegated authority, increased transparency for the Commission in areas where 

authority is delegated, and increased efficiency in Commission-staff interactions 

where authority is retained by the Commission. 

Implementation approach 

 Given the agency-wide scope of this initiative, it will require significant 

engagement from the Commission, the Chairman’s office, and the SEC’s 

operating divisions. This initiative will involve gathering input from stakeholders, 

coordinating dashboard development, and proposing changes to simplify 

Commission-related procedures. The Office of the General Counsel (OGC) should 

provide input on the SEC’s statutory authority to streamline Commission 

practices and procedures. This initiative should take no more than three to six 

months. 

Costs 

 This initiative would initially require a commitment of management and 

staff time. It would also require staff time to assemble the Commission 

dashboard on an ongoing basis. 
© 2011 The Boston Consulting Group, Inc. 104

Risks 

 If not designed appropriately, a dashboard could unnecessarily increase 

the reporting burden on SEC staff without a commensurate increase in actionable 

transparency for the Commission in delegated authorities. In addition, actions to 

streamline the process for engaging the Commission on areas where it retains 

authority may not be very effective absent relaxation of Sunshine Act constraints. 

6.1.2.4 Initiative 2d: Implement a continuous improvement program

Description and benefits 

The SEC needs to be constantly prepared for changing priorities driven by 

changes to the securities markets and regulations. This requires that the SEC 

possess the ability to use its available resources as efficiently as possible. Doing 

so will allow the agency maximum flexibility to dedicate resources to its highestpriority mission critical activities. To enhance the efficient use of resources, BCG 

recommends that the agency undertake an initiative to systematically reduce 

unnecessary costs throughout the organization. 

 This can be a very effective lever to release valuable resources and fund 

new initiatives required to meet emerging demands. Such a capability should not 

be limited to any one division or office, but instead needs to be institutionalized 

across the entire agency. A few examples of sub-initiatives that the SEC should 

investigate further include: 

 Demand management: Demand management is a discipline where all 

demand for services is evaluated and prioritized on the basis of impact and 

cost required to meet the demand. To implement this discipline, the SEC 

will need to measure costs on a holistic basis, using a business case 

methodology that includes elements such as “total cost of ownership” in IT 

projects, qualitative and quantitative benefits, opportunity costs, 

investments, and risks. There are several places where such demand 

management could be employed. Examples include OIT projects and 

requests made to other shared services such as the Office of Human 

Resources (OHR) and the Office of Financial Management (OFM). Some 

strategies to implement demand management include charging for 

services rendered, altering service levels, and allocating a fixed amount of 

resources (including funding) to an activity 

 Sourcing: It is sometimes advantageous to leverage external providers for 

certain services or commodities. Done well, external sourcing can lower 

costs, upgrade capabilities, and most importantly provide flexibility by way 

of varying the cost structure. However, when executed less effectively, 

external sourcing can add to the cost structure but not materially provide 

the expected benefit. The SEC has begun to employ sourcing techniques 

most recently and should continue to do so in the future. Examples of 
© 2011 The Boston Consulting Group, Inc. 105

recently initiated action include the outsourcing of financial reporting to a 

shared services organization across other agencies, and the restructuring of 

the IT infrastructure outsourcing contract from a fixed-price to a cost-plus 

contract with incentives for achieving specific performance metrics 

 Business process optimization: Business processes can be optimized in a 

variety of ways to reduce costs, improve service quality, or reduce cycle 

time (the amount of time it takes to produce the desired output). Leading 

institutions employ a variety of techniques to achieve optimization. 

Examples include the use of automation and workflow technologies to 

improve productivity, elimination of waste using lean methodologies, 

bifurcation of simple and complex workloads, and standardization of the 

underlying activities. Although application of these techniques will 

require upfront investment, they will also generate substantial and 

sustainable benefits. Optimization of business processes should not be 

considered a one-time effort. Instead, processes should be examined 

periodically to look for incremental improvement opportunities 

 Factor cost optimization: Optimization of factor costs involves looking for 

opportunities to reduce occupancy and salary costs. This could be 

achieved by relocating some of the SEC’s resources in lower cost US cities 

(including, potentially, in selected low cost regional offices) rather than the 

big metropolitan centers where the bulk of the SEC’s resources are located 

today. Activities that do not require an immediate turnaround or do not 

require face-to-face interaction could be good candidates for remote 

delivery 

 Contractor-to-employee conversion: Due to restrictions on headcount, 

institutions often resort to employing contract resources for even some 

core activities. While the use of contractors can yield some benefits in the 

short-term, continued use of contractors for certain activities can result in 

additional costs. Typically, contractors cost more, often to factor the 

overhead costs of the contracting organization, and consume mostly 

similar resources (e.g., space, computing infrastructure, etc.) as employees. 

As a result, the total cost of a contracted resource can be significantly 

higher than an employee. Furthermore, in many situations, a contractor 

resource may not provide a special capability and may just be a more 

expensive substitute for an employee. Additionally, the excessive use of 

contractors could prevent the organization from retaining institutional 

knowledge that may be helpful beyond the scope of a particular project or 

assignment. The SEC should evaluate all its contractor resources and 

target converting tenured contractor positions into permanent employees 

 Such continuous improvement levers have been successfully implemented 

in many organizations. Collectively, these levers have the potential to initially 

yield savings, including some cost avoidance. On an ongoing basis, expected 

savings from new continuous improvement ideas may be somewhat smaller since 
© 2011 The Boston Consulting Group, Inc. 106

many of the obvious efficiency levers would have already been pulled. 

Nevertheless, some amount of savings will always be there. The savings realized 

by the SEC could be redirected towards priority initiatives, thereby reducing the 

incremental funding requirements. A continuous improvement capability within 

the SEC could be an important and sustaining source of funding for new 

initiatives. Such a capability could also have the additional benefit of improving 

the engagement levels of staff across the organization. 

Implementation approach 

 This initiative should be led by the COO, although a continuous 

improvement capability should be embedded across the SEC in order to best 

identify opportunities for cost reduction. In order to jump-start this capability, 

the SEC should consider establishing a small multi-functional task force to drive 

the identification and implementation of continuous improvement ideas. 

 The task force should begin by identifying a list of possible cost reduction 

projects and conducting a rough sizing to determine where the biggest 

opportunities lie. Cost reduction opportunities should then be prioritized based 

on feasibility, potential savings, and associated risk. Beginning with the highest 

priority initiatives, the task force should then develop and execute a detailed 

project plan. Initially developing and costing the list of projects should take no 

longer than three months. The timeline for developing and executing each 

project plan will vary depending on the scope of the opportunity. 

Costs 

 Initially, the COO will need to invest staff time in developing, costing, and 

prioritizing a set of cost reduction options. On an ongoing basis, identification 

and implementation of continuous improvement ideas should become embedded 

as part of the line organizations, thereby eliminating additional costs. In 

addition, many of the initiatives discussed above will require some upfront 

investment, particularly in the near-term. Examples of these investments could 

be for project resources to identify and implement improvement initiatives and 

for automation initiatives. However, given the potential cost savings noted 

above, this initiative should ultimately result in a net cost reduction for the SEC.

Risks 

 If the SEC’s resources are not trained in continuous improvement 

techniques, there is a potential to compromise certain controls or value added 

activities in pursuit of achieving perceived efficiencies. There is also the risk of 

SEC staff getting frustrated with their inability to find “big” continuous 

improvement ideas that yield significant cost savings, leading to unproductive 

disengagement over time. 
© 2011 The Boston Consulting Group, Inc. 107

6.1.3 Invest in enabling infrastructure 

As discussed in the introduction to this chapter, there is a set of key 

capabilities in which the SEC should invest. These include technology, the 

human resources function, and risk management. The SEC should also utilize 

resource flexibility to fill the skill and capacity gaps noted in Section 4.2, where 

possible. Below, we recommend a set of initiatives in each of these areas, 

describe the associated benefits, and discuss the costs and risks of 

implementation. 

Strengthen technology and IT 

 Technology is a critical enabler for the SEC. The expansion in the agency’s 

mandate and growing complexity in the securities markets have heightened the 

need for technology to play an expanded role. Today, the agency’s technology 

needs are greater and more urgent than ever before. 

 The SEC’s senior management recognizes this, and has spoken at length in 

public and private forums about the need for technology sophistication to be a 

key organizational capability. With this objective in mind, the SEC recently hired 

a COO and a new CIO and invested in several significant IT initiatives, such as 

TCR and an improved case management system. However, there is an 

awareness of additional technology needs. 

 The agency can continue to take action to further strengthen its 

technology capabilities and progress towards the vision articulated for the SEC in 

Chapter 5. In particular, the SEC should pursue three key initiatives: 

 

Enhance and develop key systems: To drive internal efficiency and enable 

critical functionality, the SEC should enhance its existing systems and develop a 

suite of new systems. 

Enhance OIT’s ability to deliver technology solutions: To develop the 

technology capabilities it requires, the SEC should improve the effectiveness of its 

information technology function by undertaking a multi-faceted transformation 

of OIT.

Establish a Technology Center of Excellence: With the aim of developing a 

technology expertise and institutionalizing an awareness of the impact of 

technology on the securities markets, the SEC should establish a Technology 

Center of Excellence. This Center will also serve as a technology-related 

innovation function for the SEC.

 In aggregate, implementing these initiatives will provide the SEC with: 1) 

the technology capabilities that are most critical for improving its productivity 

and meeting some of its emerging needs, 2) an IT function better equipped to 

deliver these capabilities, and 3) the foundation for an increased awareness of 

technology being utilized in the markets it regulates. 
© 2011 The Boston Consulting Group, Inc. 108

 This set of initiatives is designed to provide the greatest possible 

improvement within available resources and lays the foundation for further 

technology enhancements. However, these initiatives will not deliver the full set 

of technology capabilities that the SEC requires long-term. In particular, staffing 

gaps in OIT will be narrowed but not fully closed and the agency will realize only 

some of the data analytics and knowledge management capabilities it requires. 

6.1.3.1 Initiative 3a: Enhance and develop key systems

Description and benefits

 

 To maximize the productivity and efficacy of its workforce, the SEC should 

develop new systems and enhance its existing systems. In terms of new systems, 

the SEC should implement technology solutions capable of 1) meeting its growing 

need for the ability to store and analyze large quantities of market data, and 2) 

making available internally its full range of information and knowledge 

resources. More specifically, the SEC should develop: 

 A foundational data management and analytics capability: This capability 

includes access to sufficient data inputs for both external and internal 

data, a consolidated data warehouse that stores and transforms large 

quantities of data, and an analytic toolkit that can perform analyses on 

large sets of market data. Conducting these analyses requires systems 

capable of performing both rules-based analyses (e.g., using defined 

algorithms to identify and take action on targeted data) and ad-hoc 

analyses (e.g., analyses without defined algorithms). Such analyses will 

also require access to a sufficient body of structured data (e.g., trade, 

order, and quote data) and unstructured data (e.g., information taken 

from business documents such as internal emails)

The data management and analytics sub-initiative described above does 

not purport to replace the Consolidated Audit Trail (CAT). Rather, the 

sub-initiative would look to incorporate CAT as a primary data source for 

market participant data. In this regard, this initiative complements the 

existing CAT proposal 

 A basic knowledge management capability: This capability includes 

technology systems that enable the SEC to collect and consolidate 

information across offices and divisions and foster internal collaboration. 

By bringing together all source information—information formally and 

informally collected in the course of operations combined with the 

institutional knowledge and expertise of the SEC staff—the organization 

would make better use of its resources. In particular, knowledge 

management would support knowledge capture and dissemination, 

emerging topics education, and internal collaboration
© 2011 The Boston Consulting Group, Inc. 109

 In addition to developing new systems, the SEC should drive internal 

efficiency by enhancing its existing systems. Such enhancements will: 1) improve 

the leveraging of data across systems, 2) increase the automation of the agency’s 

business processes, and 3) reduce the burden of systems maintenance and 

support. More specifically, the SEC should seek to: 

 Consolidate systems: The SEC should consolidate its large number of 

single-purpose solutions and leverage a common core architecture where 

possible. For example, the filing systems at the SEC are primarily small, 

custom solutions designed separately for each filing or groups of filings. 

By consolidating these systems, the SEC can reduce the system 

maintenance and development workload for OIT, increase the sharing 

and accessibility of data, and improve end-user efficiency 

 Improve the connectivity of systems: The SEC should improve the 

connectivity of its systems to better leverage its data resources, increase 

collaboration, and improve its workflow. For example, by more closely 

linking its case management, document management, and TCR systems, 

the SEC can provide analysts with a more comprehensive view of the 

information available that may be relevant to an investigation or topic 

area 

 Modernize systems: The SEC should modernize its key systems to reduce 

its long-term IT development, maintenance, and support costs and 

improve end-user productivity. For example, OIT estimates that a 

thorough modernization of EDGAR will result in significant long-term IT 

cost reductions and SEC-wide efficiency gains 

 Identify opportunities for workflow enhancements: The SEC should 

further leverage technology to automate its business processes and 

improve the overall productivity of its professionals. There are several 

mature technologies available (such as case and workflow management 

and business process management) that can be deployed at the SEC for 

this purpose. The SEC has many of these technologies implemented 

within some of its business applications, but there is potential to 

significantly increase their use 

 The new systems described above will deliver efficiency improvements 

and necessary capabilities. They are, however, foundational. They are intended 

to address the SEC’s most critical system needs and not the full breadth and 

depth of functionality that may be desired. 

Implementation approach

 This initiative should be implemented by OIT in close collaboration with 

internal SEC stakeholders for whom these systems will provide critical 

functionality. Implementation should follow a four-step process: 
© 2011 The Boston Consulting Group, Inc. 110

 

 Establish working groups to better understand the most critical business 

needs for new systems (e.g., data analytics and knowledge management) 

and opportunities for enhancing existing systems (e.g., TCR, Hub, and 

EDGAR). These working groups should include representatives of key 

stakeholders. The objective of the groups need not entail gathering of 

detailed business requirements but rather development of a high level 

vision for stakeholder needs that will be addressed in the technical 

solution 

In the interest of efficiency and expediency, the SEC should work with its 

peer regulators to identify any existing technology solutions that might be 

appropriate for the SEC to leverage. The SEC should also seek to identify 

opportunities to collaborate with peer regulators and SROs in the 

development of new systems, where appropriate, as it has suggested might 

be possible with the proposed Consolidated Audit Trail 

 Perform upfront planning via established OIT processes before developing 

or enhancing the technology solution. This step includes translating the 

initiative into a series of OIT projects with well defined scopes and 

following the recommended upfront planning processes for those projects 

 Perform the development work, consistent with the appropriate 

development methodologies (e.g., using an established SDLC) and ongoing 

engagement and sign-offs from the respective internal client stakeholders 

 Train users across the agency to maximize value from technology usage 

Costs 

 The total one-time costs of this initiative are expected to be approximately 

$21 to $28 million. The ongoing costs are expected to be approximately $5 to 

$7 million. More specifically: 

 Developing a foundational data management system: The initial 

implementation is expected to require approximately $6 to $10 million in 

FTE costs and more than $10 million in hardware, software, and 

supporting infrastructure costs. Total ongoing costs in subsequent years 

would be $3 to $5 million. Implementation is likely to require two years 

from planning to deployment 

 Developing a basic knowledge management system: The initial 

implementation will require approximately $2 to $3 million in FTE costs 

and $1 to $2 million for supporting hardware, software, and infrastructure. 

Total ongoing costs will be approximately $1 million. Implementation will 

require one year from planning to deployment 
© 2011 The Boston Consulting Group, Inc. 111

 Enhancing existing systems: The initial upgrade and re-architecting costs will 

be $1 to $2 million in FTE costs and another approximately $1 million in 

system costs. Ongoing maintenance and support will cost approximately 

$1 million annually. These upgrades can be carried out over a couple of 

years 

 In total, implementation is expected to require two years and will require 

a significant level of OIT management and key stakeholder engagement. 

 

Risks

 The success of this initiative is highly dependent on the engagement of key 

stakeholders throughout the SEC. Without the necessary level of engagement, it 

is unlikely that OIT will be able to deliver a suite of integrated systems capable of 

meeting the wide range of user needs. 

 The lengthy and complex nature of the system development efforts 

described in this initiative suggests the potential for overruns of costs and 

established implementation timelines. To mitigate these risks, OIT and key 

stakeholders should be vigilant about adhering to best-in-class development 

processes and methodologies. For example, OIT and internal stakeholders should 

conduct rigorous up-front project planning (e.g., development of a thorough 

business case, detailed business and technical requirements, and a well-defined 

project scope) ahead of any development work. 

 

 Modifying applications that are currently in use carries the risk of 

hindering functionality and driving system instability during the period of 

transition. OIT can mitigate this risk by developing incremental changes where 

possible and rolling out larger changes in close coordination with stakeholders 

and users. Additionally, OIT should closely adhere to sound development 

practices (e.g., following the SDLC as described in Chapter 7) and align with its 

internal clients to ensure the system meets the needs of the full range of end 

users. Although there is a risk of introducing additional levels of complexity with 

a standardized workflow, OIT can mitigate this risk by employing modular design 

techniques to effectively connect these systems. 

6.1.3.2 Initiative 3b: Enhance OIT’s ability to deliver technology solutions

Description and benefits 

 For the SEC to effectively leverage technology, it requires a well-developed 

information technology function capable of delivering complex IT services. To 

enhance OIT’s ability to deliver IT solutions, the SEC should: 

 Define a technology vision and long-term strategy: In close coordination 

with SEC stakeholders, OIT should outline the SEC’s technology needs and 

establish a clear set of priorities for delivering against them. It should 
© 2011 The Boston Consulting Group, Inc. 112

align the organization behind an enterprise architecture and provide a 

framework for assessing new and existing solutions in the context of this 

architecture. To support this work, OIT should establish a small functional 

office (approximately 2 to 3 FTEs) dedicated to defining and regularly 

revising a technology strategy

 Undertake efforts to address its most critical resourcing gaps: OIT should 

seek to narrow its current resourcing gap and optimize its resourcing mix. 

For its current level of demand, OIT faces a resourcing shortfall of 

approximately 125 FTEs in application development—particularly in 

business analysis, architecture, and project management. Meanwhile, 

OIT’s infrastructure and support team is over-staffed by approximately 65 

external contractor FTEs, a fact already recognized by OIT’s leadership. 

Once pending efforts aimed at driving infrastructure and support 

efficiencies are implemented in mid-2011, these resources can be used to 

narrow the staffing gap in key application development roles. By doing so, 

OIT’s application development staffing shortfall can be reduced to 

approximately 60 FTEs

OIT should also seek to reduce its reliance on external resources. By 

bringing key functions such as up-front project planning in-house, the 

allocation of resources staffed externally would be reduced from 

approximately 80 percent of OIT personnel to 70 percent. Doing so would 

strengthen OIT’s alignment with its internal clients, reinforce its base of 

institutional knowledge, and save approximately $1 million, which can be 

used to support the hiring of an additional approximately 5 FTEs in critical 

application development roles. Doing so will narrow OIT’s application 

development staffing gap to approximately 55 FTEs 

 Strengthen and enforce its investment governance processes: To ensure 

that its development resources are efficiently deployed against its highest 

priorities, OIT should improve and enforce its investment governance 

processes. To do so, OIT should require that project proposals undergo a 

rigorous up-front planning process that includes a detailed business case, 

finalized business requirements, and a comprehensive view into the 

commitments required. Once this planning has been completed, the 

governance structure should evaluate project proposals in the context of 

the full breadth of demand for IT projects. It should clearly prioritize this 

demand in an annual or semi-annual review process. Further, when 

considering projects for approval and prioritization, the governance 

structure should evaluate the technical merit of the project and the 

availability of the resources required to complete it. To ensure compliance 

with these measures, OIT should define and enforce clear process gates at 

each major step of the investment governance process 

 Leverage standardized tools and methodologies: To drive efficiency and 

enable more rigorous monitoring and accountability, OIT should deploy 
© 2011 The Boston Consulting Group, Inc. 113

and utilize standardized application development and project 

management tools and methodologies. It should require that Clarity, its 

project management application, be fully utilized throughout the 

development lifecycle. It should also update its SDLC to meet its current 

needs, and require that development projects uniformly adhere to it

 Optimize its organization design: OIT should adopt an organization design 

that emphasizes: 1) increased alignment with internal clients, specifically 

by establishing dedicated liaisons to all of the SEC’s divisions and offices; 

2) improved coordination with “shadow” IT groups; and 3) increased 

efficiencies and synergies by centralizing activities such as application 

development and project management. It should also clearly define 

functional roles for strategic planning. This optimization should take place 

as part of the SEC-wide layer-by-layer role chartering and pyramid 

reshaping effort described in Section 6.1.2.1 

 This initiative will enhance OIT’s capabilities, position the organization to 

better deliver on the SEC’s information technology needs, and provide a 

foundation on which to build. For example, it improves OIT’s resource 

deployment and better aligns it with management priorities. It will not, however, 

address all of OIT’s staffing needs. For example, to fully meet its current 

demand, OIT will still require an additional approximately 55 application 

development FTEs. 

Implementation approach 

 While some of these sub-initiatives are independent, in aggregate they 

represent a thorough overhaul of OIT that supports a transformation from a 

reactive organization to an energized partner of its internal clients. 

 To support this effort, OIT, in coordination with the Project Management 

Office (PMO) outlined in Section 6.1.4.4, should develop a detailed 

implementation plan that includes details on each of the five OIT sub-initiatives 

outlined above. 

 OIT should begin its transformation by defining a technology vision. To 

do so, it should establish a senior-level working group that draws from OIT and 

its key internal stakeholders. Once the vision is established, OIT’s leadership 

should outline a long-term strategy capable of executing the vision articulated by 

the working group. 

With an organizational design in place, the OIT and the PMO should 

implement the proposed changes to resourcing—i.e. reducing OIT’s reliance on 

external contractors and shifting infrastructure and support FTEs to application 

development. It should then begin strengthening and enforcing its investment 

governance process and leveraging standardized tools and methodologies. 
© 2011 The Boston Consulting Group, Inc. 114

Costs 

 Enhancing OIT’s ability to deliver complex IT services will require a 

significant organizational commitment. The burden on OIT’s management, in 

particular, will be significant. 

 Fully implementing these measures is expected to require two years. 

However, this timeline is primarily driven by the complexity involved in the 

required resource shift. The other elements of the initiative—defining a 

technology vision and strategy, optimizing its organization design, strengthening 

and enforcing its investment governance process, and leveraging standardized 

tools and methodologies—can be accomplished in the first year. 

 The costs for this initiative are all FTE costs associated with the need to 

staff a small strategy function (2 to 3 FTEs) in OIT. The annual ongoing cost is 

expected to be less than $1 million. These costs factor in expected gains in 

efficiency and opportunities to off-set costs with associated savings. 

Risks

 Like all transformations, there is a risk that this initiative will negatively 

impact OIT’s performance while it is being undertaken. The potential impact of 

this risk is heightened by the fact that the initiative requires a multi-year effort, 

creating the possibility of an extended period of OIT performance gaps. 

6.1.3.3 Initiative 3c: Establish a Technology Center of Excellence

Description and benefits 

 The significant role of technology in shaping market behaviors and 

structures argues that the SEC should develop a far greater technology awareness 

across the three facets described below: 

 

 An understanding of the technologies currently employed by market 

participants and venues, with the aim of enabling regulatory activities 

 An awareness of emerging technologies relevant to the securities markets, 

with the aim of enabling a forward-looking regulatory posture 

 An awareness of those technology innovations that would make strong 

candidates for internal adoption by the SEC, with the aim of improving the 

SEC’s capabilities 

 To build, disseminate, and institutionalize the technology awareness it 

requires, the SEC should establish a Technology Center of Excellence (COE). This 

COE would catalog existing and emerging technologies and conduct assessments 

into the impact of these technologies on market behaviors and structures, with a 

strong emphasis on identifying any regulatory implications. In the long-run, it 

should seek to identify and qualify new technologies for potential internal 
© 2011 The Boston Consulting Group, Inc. 115

adoption by the SEC. The COE would be responsible for broadly disseminating 

this information to relevant parties at the SEC, with the aim of materially 

contributing to the agency’s internal capabilities and understanding of how 

technology is shaping the continued evolution of securities markets. 

In terms of specific activities, the proposed Technology COE would: 

 Catalog technologies relevant to the SEC and the securities markets by 

interacting with market participants, trading venues and SROs, engaging 

external constituents such as technology providers and academic 

institutions, performing independent research, and learning from 

enforcement and examination activities 

 Assess the implications of these technologies on the securities markets and 

existing regulatory structures. For example, the Technology COE could 

seek to understand how emerging technologies relevant to high-frequency 

trading are likely to affect the securities markets, and anticipate any 

potential regulatory implications 

 Assess the potential of relevant technologies for internal adoption by the 

SEC: For example, the Technology COE could assess the value of cloud 

computing solutions for potential adoption in specific applications at the 

SEC. The Technology COE could also explore more radical ideas, such as 

the potential for the agency to leverage “virtual collaboration” by making 

more data available to the public to “crowd-source” intelligence gathering 

(while of course leveraging robust internal screening to vet what data goes 

out to the public as well as the tips that come back in) 

 Support core SEC activities by providing divisions and offices with 

technology expertise. For example, the Technology COE could support the 

investigation of a high-frequency trader by performing an analysis of the 

trader’s trading system and algorithm. Similarly, it could support the work 

with TM’s Automation Review Program (ARP) by developing a detailed 

understanding of the emerging technologies currently being considered for 

adoption by exchanges and ATSs 

 Embed its knowledge in the broader SEC via the direct support of 

examinations, investigations, enforcement, and rulemaking activities, the 

establishment of key topic working groups, and involvement in training 

events 

Implementation approach 

 The proposed Technology COE would be a small office (less than five 

FTEs), structured as a joint partnership between TM, RSFI, and OIT. This 

structure would ensure the COE maintains a cross-functional focus and 

encourage a broad organizational reach for its outputs. 
© 2011 The Boston Consulting Group, Inc. 116

 The Technology COE, while modest in scope at the outset, will lay the 

foundation for building and developing technology awareness within the SEC. 

Where appropriate, it should leverage resources from OIT (e.g., the new strategy 

function described in the previous initiative) and the expertise from external 

stakeholders such as SROs to maximize its impact. The SEC should evaluate the 

Technology COE’s performance over time to determine whether additional scope 

and resources are required (e.g., to test new technologies for potential SEC 

adoption). 

 The ideal staff will have a background in technology and experience in 

those areas of the securities markets where technology has had the greatest 

impact. Technologists with direct exposure to high frequency trading or 

alternative trading systems would be model candidates. Additionally, the COE’s 

unique role necessitates that it be capable of broadly infusing its expertise into 

the other divisions and offices of the SEC. This requires that the COE develop a 

culture of collaboration, supported by strong communication processes and 

forums. 

 The Technology COE can be established immediately, pending the 

identification of the required funding and a suitable leader and staff. Once the 

decision is made to establish the COE, a charter should be created. This charter 

should define the group’s objectives and provide a high-level model for its 

interaction with its constituent offices and divisions. The SEC’s core divisions and 

offices should contribute significantly to defining the group’s charter. 

Costs

 

 The proposed Technology COE is a relatively low-cost means of addressing 

the current technology expertise gap at the SEC. Its implementation and ongoing 

cost is limited to that of the necessary staff and a modest travel budget. In total, 

at a staff of less than five FTEs, the annual initial and ongoing costs of the COE 

are both expected to be approximately $1 million. 

Risks

 

 The Technology COE has no authority to conduct regulatory activity or 

implement technology solutions, and therefore, its work must be leveraged by 

other divisions and offices if it is to have relevancy or impact. There is a risk that 

the COE will not succeed in partnering effectively with its constituents and will 

not, as a result, materially contribute to the broader SEC’s awareness of 

technology. The success of the Technology COE will be highly dependent on its 

staff’s ability to effectively collaborate with other offices and divisions. Due to 

the COE’s lack of interdependencies with other proposed initiatives, a failure to 

implement the COE will not affect the implementation or performance of other 

initiatives. 
© 2011 The Boston Consulting Group, Inc. 117

Summary 

 With the increasing complexity of the securities market and the expansion 

in the SEC’s mandate, the agency’s technology needs are at its greatest today. To 

develop and expand upon technology as an enabler for the SEC and its activities, 

the agency should pursue three initiatives: 

 Enhance and develop systems 

 Enhance OIT’s ability to deliver IT solutions 

 Establish a Technology Center of Excellence 

 In total, implementing these initiatives will require additional one-time 

investment of $22 to $29 million, and ongoing investment of $7 to $9 million per 

year. The first initiative strengthens the SEC’s technology systems and thus 

improves the agency’s technology capabilities while reducing operational risk. 

The second initiative enhances the SEC’s ability to develop these technology 

systems, while the last initiative focuses on developing a more proactive and 

forward-looking technology awareness for the agency. To fund these initiatives, 

the SEC can utilize savings from other initiatives as well as the reserve fund 

provided for in Dodd-Frank. 

Support the human resources function 

An effective human resources (HR) function is an especially critical 

capability for an organization that relies as heavily on human resources as the 

SEC does, given that nearly seventy percent of the agency’s budget is devoted to 

personnel. Supporting HR processes and planned initiatives will improve the 

agency’s ability to source diverse, high-quality talent, enabling the build-out of 

critical capabilities, such as risk management and technology sophistication. 

 BCG recommends that the Office of Human Resources (OHR) undertake 

three initiatives: 

Execute the planned OHR redesign: Executing on OHR’s restructuring 

plans, building out the new HR Manager role, centralizing the SEC’s training 

function, and developing a targeted recruiting process will improve OHR’s ability 

to strategically support the rest of the SEC. 

Complete roll-out of the new performance management system: Executing 

an effective change management program will help OHR successfully implement 

its new performance management system and connect it to compensation. 

Create a surge capacity plan: Developing a short-term staffing plan will 

allow the SEC to mitigate problems caused by future short-term surges in 

workload. 
© 2011 The Boston Consulting Group, Inc. 118

6.1.3.4 Initiative 3d: Execute the planned OHR redesign

Description and benefits 

 

 A robust HR function supports the entirety of the SEC’s people pipeline 

and the agency’s ability to attract, train, and retain talent. OHR is in the midst of 

a redesign which it should continue and build upon to increase the level of HR 

support to the building of significantly improved people management practices 

within the agency. This should include five components: 

 Implement the new “HR manager” role to interface with divisions/offices 

 Clearly define front, middle, and back offices inside OHR 

 Expand and centralize the SEC’s training function 

 Create a more streamlined and targeted recruiting process 

 Upgrade talent within the HR function 

 The new HR manager role is envisioned to report to OHR but will be 

dedicated to, and sit with, the SEC’s operating divisions. Smaller offices may 

have a shared HR manager. These managers will focus on division and office 

support and serve as OHR’s external face to the rest of the SEC. The HR 

managers will also take on talent management and recruiting responsibilities not 

filled by existing OHR staff. In addition, BCG supports OHR’s plan to organize 

distinct middle and back offices, as illustrated in Exhibit 6.1.3.4-1. This will 

enable the office to better define core HR responsibilities, increase consistency of 

policies and procedures across the agency, and align OHR staff competencies 

with appropriate accountabilities. 

Exhibit 6.1.3.4-1: A human resources function illustrative office structure 

1 Back-office

HR administration

Security

Payroll and 

benefits 

administration

Labor relations

HR information systems

HR center of expertise HR client relation

2 Middle-office 3 Front-office

HR policies/ 

directions

HR tools

HR strategy

Compensation

Training

High potential 

planning & career 

pathing

Recruiting

Performance 

management

HR reporting

Illustrative

Source: BCG analysis and experience

 
© 2011 The Boston Consulting Group, Inc. 119

 The SEC should also continue to develop and centralize its training 

function. The agency recently hired a new Chief Learning Officer (CLO) with 

FIRREA training experience. Plans are in place to centralize the SEC’s training 

function, develop a full curriculum, and establish several specialized “learning 

colleges.” In fact, the SEC recently hired a new “Dean” for the College of 

Leadership Development, also with prior FIRREA agency experience. In 

addition, the CLO intends to build out a robust knowledge management system, 

develop online internal communities of practice, and leverage technology to link 

training with performance management. BCG’s recommendation aligns with the 

CLO’s vision and OHR should continue to execute on these plans. In particular, 

the training team should continue to build out its leadership training program, 

which is just now completing a pilot, develop programs to support critical 

capability gaps and ensure appropriate onboarding training at all levels. 

 A robust and centralized training program can lead to improved 

performance across the SEC as employees develop a more diversified set of 

competencies in a consistent manner. In particular, broad leadership training 

and an increased emphasis on people management capabilities will ultimately 

improve employee engagement and productivity. Centralizing the training 

function will also allow OHR to track development needs across the agency and 

align training programs with organizational priorities. 

 Recruiting is a key component of workforce planning and the SEC’s ability 

to source the right talent. The SEC should adopt a targeted recruiting strategy

that directs hiring managers to appropriate and diverse sources of talent. OHR 

should also streamline its recruiting processes to effectively utilize the hiring 

authorities accorded to it. Lastly, OHR should be able to provide hiring managers 

with consistent guidance on how to navigate these processes. Redesigning the 

recruiting process will result in timelier hiring that better populates the people 

pipeline with a more diverse candidate pool, with specific and appropriate skill 

sets. A simpler, more structured, and clearly communicated process will also 

reduce hiring manager frustration. While it is a more labor-intensive process for 

the recruiting team, it yields better outcomes and reduces back-office resource 

needs. 

 A reorganized OHR will be better able to support the SEC both in 

providing tactical guidance to help navigate HR processes and civil service laws, 

but also as a strategic partner on workforce planning and talent management. 

Clear accountabilities for OHR staff will also improve the consistency and quality 

of interaction between OHR and managers in other SEC divisions and offices. In 

addition, stronger front office functions will help ensure that the SEC is equipped 

with the right organizational capabilities and individual competencies to best 

deliver on its mission. This is particularly important as the SEC tries to 

strengthen key capabilities described in Chapter 5. 
© 2011 The Boston Consulting Group, Inc. 120

Implementation approach 

To implement this redesign, the SEC should: 

 Reorganize: Establish clear roles and accountabilities for front, middle, 

and back office functions and invest in OHR’s front office talent 

 Enhance training resources: Develop curricula and implement knowledge 

management systems based on agency-wide training priorities 

 Streamline and target recruiting: Define a targeted recruiting strategy and 

appropriate streamlined hiring processes for various roles at the SEC, 

paralleled by a robust diversity recruiting efforts 

 Manage change: Communicate new roles, policies, and procedures 

Reorganize: OHR should create clear accountabilities to ensure that 

employees understand their roles and responsibilities in the new organization. 

This should be conducted as part of the agency-wide role chartering initiative 

described in Section 6.1.2 and be seen also as an opportunity to upgrade talent. 

Focusing especially on new positions like the HR manager or the recruiting team, 

OHR can develop clear role charters that outline duties, decision rights, and key 

performance indicators. In concert, OHR should also detail distinct 

accountabilities and collaboration mechanisms for the front, middle, and back 

offices. This will help ensure that employees in these offices understand their 

new role, what the reorganization means for them, and how to work together to 

provide seamless support for the SEC going forward. In particular, the role 

charter for the front office should include customer service standards to establish 

consistent, high-quality interaction with SEC managers. Likewise, the middle 

office should also develop an HR policy manual that can be utilized both by OHR 

employees and by the rest of the agency to simplify complex hiring authorities 

and civil service laws into practicable processes. 

 

 The SEC can support OHR by ensuring that the office has sufficient 

resources to fill necessary positions. In particular, the agency should invest in the 

training and recruiting teams, especially if these efforts expand as recommended 

later in this section. In addition, OHR should prioritize filling the front office HR 

manager roles approved in the FY 2011 budget. Benchmarking against external 

organizations indicates that the training team should expand by approximately 

12 FTEs and that the recruiting team should include an additional 10 to 14 

FTEs.109 The majority of the recruiting resources required can be reallocated 

within OHR based on the redesign discussed below. 

Enhance training resources: OHR should continue its efforts to centralize 

training and provide high-quality training services to divisions and offices and 

development of curricula. OHR’s training team should prioritize development of 

training programs to address the capability and competency gaps identified in 

Section 7.2.2 (e.g., manager capabilities, data analytics). 

 

109 Further detail on these benchmarks is provided in Section 7.2.4.2. 
© 2011 The Boston Consulting Group, Inc. 121

 In addition, OHR should work with the Office of Information Technology 

(OIT) to develop a foundational knowledge management system. The 

functionality of this system is discussed in more detail in Section 6.4.2 as an 

enhancement to the SEC’s technology. From a training perspective, however, the 

system should allow managers to capture best practices and examples on a set of 

common topics. In addition to OHR’s training team, each division and office 

should designate staff responsibilities for populating the knowledge management 

system with relevant materials and updating it regularly. 

Streamline and target recruiting: First, OHR should resolve any ambiguity 

with regard to the hiring authority the SEC should use to fill a given staff need, 

including roles that the SEC may wish to expand in the future (e.g., risk 

management).110 Next, OHR should map out an appropriate process for each 

hiring authority that maximizes available procedural flexibilities to source the 

best talent, while remaining compliant with and respecting the objectives of 

federal civil service laws. In general, the SEC should recruit talent directly 

wherever possible using ES and ESHA flexibilities, rather than broadly posting 

vacancies. This will allow the agency to target talent with specific skill sets and 

reduce the number of applicants requiring review. In addition, as OHR posts 

fewer positions, the back office function can likely be streamlined and resources 

reallocated to the recruiting team. 

 As the SEC utilizes more of its flexibility to source talent directly, its 

recruitment and diversity strategies become increasingly important. OHR should 

work with hiring managers to create a detailed, long-term recruiting strategy. 

This strategy should identify key skill gaps and relevant sources to recruit 

appropriate talent with mission-aligned values. This will be especially critical as 

the SEC seeks to build new organizational capabilities where OHR has not 

traditionally had to hire large numbers of employees. In addition, since fewer 

positions will be posted as broadly as they are now, it is imperative that OHR 

develop a robust diversity recruiting strategy to ensure that the SEC has a rich 

pipeline of candidates. 

Manage change: Throughout this initiative, OHR’s leadership should 

execute a change management plan that clearly communicates process, 

accountabilities, and roles internally among staff and externally with 

division/office customers throughout the agency. This will help ensure that OHR 

staff and other SEC managers understand how and why the office is changing 

and what they can expect from OHR going forward. OHR should also be careful 

to engage stakeholders outside the SEC throughout the redesign. For example, it 

is essential that the recruiting process redesign involve the Office of Personnel 

Management (OPM), which designs and implements federal personnel 

management policies. Working successfully with OPM to maximize flexibility will 

be critical to streamlining and simplifying recruiting processes. 

 

 

110 Chapter 7 includes a full discussion of the SEC’s hiring authorities and the restrictions or 

freedoms associated with each. 
© 2011 The Boston Consulting Group, Inc. 122

 OHR leadership should manage the overall reorganization and coordinate 

interaction with division/office customers and external stakeholders. OHR 

should leverage its existing Human Capital Advisory Committee to regularly seek 

input from other division and office managers. The CLO should retain 

responsibility for centralizing and developing the SEC’s training function; the 

OHR leadership should oversee the recruiting process redesign, with 

management guidance and support from the current recruiting team. OIT should 

own the development of a knowledge management system, but the CLO and 

training team should be closely involved. 

 While the extent of this redesign is significant, OHR benefits from plans 

already in place and the redesign could be completed within 12 months, 

assuming that OHR can progress against different aspects of this initiative in 

parallel. However, other agency budget priorities could significantly impact this 

timeline. For example, without additional training team capacity, both 

curriculum development and implementation will be delayed significantly. 

Engagement of stakeholders should occur throughout the process, but OHR 

should place particular emphasis on communication as HR managers are placed 

in other divisions and offices and as new training and recruiting processes are 

rolled out. If possible given hiring timelines, OHR should consider pilot programs 

focused on refining the HR manager role, testing an initial set of curricula, and 

gathering feedback on new recruiting processes. 

Costs 

 Initially, the reorganization will require an investment in leadership time 

to build out OHR’s structure and accountabilities, determine training and 

curriculum development priorities, and engage with OPM on the recruiting 

process. On an ongoing basis, the costs would primarily be associated with 

additional FTEs for the training and recruiting teams. Based on the benchmarks 

and resource reallocation discussed above, OHR could expect ongoing costs of 

approximately $2.5 million for new hires.111 This assumes that the majority of 

investment in the recruiting team is based on reallocation of resources from back 

office to front office staff, as discussed above. This estimate does not account for 

time spent by staff in enhanced training programs, given that this does not 

require a cash outlay. It also does not account for potential savings that may 

result from productivity improvements due to codifying HR procedures and 

streamlining processes. 

Risks 

 The primary risk in OHR’s ability to complete its redesign is the SEC’s 

ability to prioritize this initiative given its available resources. If the redesign 

proceeds, OHR faces additional implementation risks. Rigorous development of 

 

111 Fully loaded FTE costs, including salary, benefits, and overhead charges associated with OHR, 

OIT, OAS, and OFM resources required for new employees. 
© 2011 The Boston Consulting Group, Inc. 123

role charters and a change management plan that keep the redesign on track and 

clearly communicate changes are critical success factors. 

 In addition, there are risks specifically associated with the training and 

recruitment components of this initiative. A centralized training program must 

have credibility throughout the SEC. Otherwise, the training program may not be 

fully utilized, and other divisions and offices may be unwilling to give up their 

existing training programs. One way to establish credibility is to address specific 

office and division training needs; another is to link training programs to areas of 

improvement identified through EBPM. It is critical that SEC managers are 

involved in developing the new program and that the agency’s senior leadership 

support the centralization of this function. Finally, the success of OHR’s 

recruiting process redesign hinges on the SEC’s ability to align with OPM. A lack 

of alignment could result in the reduced effectiveness of the process redesign and 

could impact the agency’s ability to recruit talent. Without successful stakeholder 

engagement to mitigate this risk early in the process, the agency’s ability to fully 

utilize the Excepted Service Hiring Authority may be limited. 

6.1.3.5 Initiative 3e: Complete roll-out of performance management system 

and link to compensation

Description and benefits 

 

 A comprehensive performance management system tied to differentiated 

compensation incentives is an integral driver of talent retention and recognition. 

OHR recently introduced a new Evidence Based Performance Management 

system (EBPM) across the SEC that is structurally strong across a number of 

dimensions. It assesses both employee outputs and work behaviors, links 

individual objectives to agency goals, and is both vertically consistent within roles 

and horizontally consistent by grade. However, the SEC is at a critical juncture in 

the implementation of EBPM. Before the next performance cycle closes, OHR 

should develop a change management approach that communicates EBPM’s 

benefits, conduct robust EBPM training for managers, and implement its plans to 

re-link performance with compensation. The SEC should also look to make 

EBPM data available to the agency’s training program. 

 

 If successfully implemented, EBPM will provide several significant benefits 

for the SEC. First, it could result in increased retention and engagement of top 

performers who are recognized for their commitment to the agency and 

rewarded with meaningful financial incentives. The availability of these rewards 

can also incentivize all employees to exceed expectations, thus resulting in an 

overall increase in staff performance and engagement. Equally important, 

managers will be able to successfully track and document performance, allowing 

them to exit poor performers more quickly and with more transparency. 

Managers will also be better able to develop employees based on the specific 

competencies needed for each position and an employee’s individual goals. 
© 2011 The Boston Consulting Group, Inc. 124

 In addition, once the necessary systems are implemented, EBPM will allow 

OHR to track trends in areas for improvement and employee development goals, 

thus informing more effective training programs. Lastly, clear performance 

expectations, consequences for poor performance, and recognition for 

achievement will drive increases in employee engagement. 

Implementation approach 

 The remaining roll-out of EBPM can be executed in three phases, each 

with parallel activities: 

 Planning and development: Gather feedback and develop a change 

management strategy, manager training program, and performance-based 

compensation plan 

 Execution: Engage in change management efforts, conduct training, and 

implement performance incentives; implement systems to capture 

performance assessment data 

 Refinement: Establish a regular cadence to review EBPM and to use 

performance assessment data to refine training programs 

 In the first phase described above, OHR should develop a change 

management strategy that articulates the vision and rationale for EBPM and 

engages stakeholders across the SEC. This should include executing a 

comprehensive communication plan across the agency, gathering feedback from 

key stakeholders, designating dedicated “owners” for EBPM in each division and 

office, and rigorously reviewing and refining the system. In particular, the SEC’s 

senior management should demonstrate visible support for EBPM and 

commitment to its success. 

 During the planning phase, OHR should also develop robust management 

training on EBPM to be executed prior to the end of the performance cycle. The 

SEC’s training thus far has focused on compliance with the system and the 

necessary paperwork. In addition, training should discuss the benefits of EBPM 

in managing and developing staff. It should also demonstrate an effective 

performance assessment, both in terms of the written documentation and the 

conversation a manager would have with an employee. In particular, managers 

should be coached on how to deliver developmental feedback and address 

unsatisfactory performance. 

 It is also imperative that the SEC develop a plan to re-link pay with 

performance. OHR is already in the process of studying the compensation 

strategy further, with a goal of optimizing the SEC’s compensation budget 

allocation to effectively recruit and retain the best and most critical employees. 

EBPM’s performance incentives should align with this strategy to determine how 

merit pay and performance bonuses are awarded. In addition, top talent should 

be rewarded with a meaningful differentiation in compensation, as should 

employees at a higher grade level and those with management responsibilities. 
© 2011 The Boston Consulting Group, Inc. 125

OHR will need to determine the extent to which this is possible under civil service 

laws and the agency’s collective bargaining agreement, but it is nonetheless a 

critical step in establishing meaningful consequences for both strong and weak 

performance. 

 Effective performance-based compensation requires a meaningful pool of 

funds available for merit pay. This could come from two sources. First, the 

agency could make a percentage of each employee’s annual federal salary 

increase contingent on performance. Another option is that the SEC could 

enlarge the pool of funds available for one-time performance bonuses. Each 

option has different cost implications, discussed in the cost section below. 

 Before the next performance assessment period, OHR should execute its 

change management strategy, including communications and training. It will be 

especially important to engage stakeholders on performance-based 

compensation. Timely and effective consultation and negotiation with the union 

will be critical to successful implementation. Change management and training 

should extend through the performance assessment period. OHR should also 

partner with OIT to implement technologies that facilitate the performance 

review process and make the resulting data easily accessible to OHR and senior 

leadership. 

 Lastly, OHR should both use EBPM to refine its training programs and 

establish regular review of EBPM itself. The training team should regularly 

access performance assessment data to identify trends across the SEC in areas for 

improvement and developmental goals, then create training programs based on 

this information. In addition, OHR should regularly review EBPM’s processes 

and assessment criteria, incorporating feedback from managers and employees. 

 

 Similar to the prior initiatives discussed, OHR should continue to lead the 

implementation of EBPM. OHR should collect ongoing feedback from line 

managers and employees from other SEC offices and divisions. The planning and 

execution phases of this initiative should require up to nine months, while the 

refinement phase should continue on an ongoing basis.

Costs 

 Successful implementation of EBPM will require both upfront and ongoing 

expenditures. Initially, the SEC will need to continue dedicating staff time over 

the next year to managing the roll-out. In addition, managers will require 

training, both upfront and on an ongoing basis. 

 As noted above, effective performance-based compensation would require 

the SEC to set aside a meaningful pool of funds for merit pay. The first option 

described would not require any additional costs, since it would designate a 

portion of the federal salary increase allocated to each employee as performancebased. In fact, this could reduce costs if fewer employees receive the full award. 

However, increasing the SEC’s pool for one-time performance bonuses would 
© 2011 The Boston Consulting Group, Inc. 126

require added costs. Currently, the SEC pays only approximately 0.5 percent of 

its total compensation budget in award bonuses each year ($2 to $3 million). To 

align with public sector benchmarks, the SEC would need to raise this to at least 3 

percent, or $15 to $20 million.112 

Risks 

The SEC risks an unsuccessful roll-out of EBPM if it is unable to convince 

managers of the benefits of the system such that they fully invest in its 

implementation. The ability of an organization to engage and motivate staff 

through performance management relies on front-line managers who fully utilize 

the system. If the SEC’s managers view EBPM as another area for compliance, 

rather than as a useful tool, the organization will not reap all of the potential 

benefits of the system and it may actually be damaging to overall employee 

engagement. 

6.1.3.6 Initiative 3f: Create a surge capacity plan

Description and benefits 

 Historically, the SEC has experienced sudden sharp increases in workload 

as a result of events outside of its control, as well as seasonal variations related to 

fiscal year-end disclosure (e.g., reviewing confidential treatment requests). 

Despite this, the agency is staffed primarily by permanent employees. The SEC 

should develop the ability to quickly scale its workforce up and down to ensure 

that it always has adequate capacity and is able to flexibly respond to changing 

mandates or market conditions. To do so, the SEC should examine past 

shortages, plan for future scenarios by pre-identifying short-term staffing options, 

and ensure that its contracting procedures are streamlined such that the process 

for bringing temporary employees on board is both timely and accessible. 

 The primary benefit of developing a surge capacity plan is that the SEC 

will be better equipped to respond to market events and Congressional mandates 

(e.g., Sarbanes-Oxley, Dodd-Frank) that create sharp but sometimes temporary 

surges in workload. The agency’s ability to adapt to changing circumstances will 

be enhanced by more effective use of contractors and short-term staffing 

solutions. Furthermore, the ability to rapidly scale up staff will help prevent 

burn-out among the SEC’s current employees. Having a plan in place will also 

help the SEC recruit diverse talent with appropriate skill sets even when it needs 

to quickly scale up its workforce. 

Implementation approach 

To implement this initiative, the SEC should: 

 Understand current and past short-term workload increases 

 

112 See Section 7.2.4.2 for additional detail. 
© 2011 The Boston Consulting Group, Inc. 127

 Develop scenarios for future surges and identify short-term staffing 

options 

 Streamline the personnel contracting process and develop guidelines 

 First, the SEC should document current and past capacity shortages to 

learn what kind of events lead to short-term workload surges, how large they are, 

how long they last, and how the agency has dealt with them in the past. This 

effort can build on work performed by BCG to model the SEC’s historic and 

future capacity.113 OHR and the Office of Administrative Services (OAS) should 

jointly lead the effort to gather this data and to identify scenarios that might, in 

the future, lead to sudden increases in workload. 

 In addition, OHR and OAS can develop a menu of options for sourcing 

short-term staff (e.g., Fellows program, SEC retirees and former employees, 

temporary staff, contractors) and determine which options best respond to each 

scenario’s needs, incorporating input from senior managers. This process should 

require no more than six months. Once surge capacity options are identified, 

OHR and OAS can also begin the ongoing process of developing relationships 

with short-term staffing providers (e.g., contractors and universities). 

 

 OHR and OAS should also partner to streamline the personnel contracting 

process, since this may be a significant source of short-term capacity. In 

particular, they should map the required interaction points between managers in 

divisions and offices and OAS to minimize the administrative requirements to 

seek surge capacity in response to an anticipated scenario. OHR should develop 

a clear set of guidelines for managers seeking short-term resources and HR 

managers should be prepared to guide each division or office through the 

process. 

 Lastly, OAS and the divisions and offices should develop a model to 

provide adequate oversight to contractor agreements and performance. 

Simplifying the contracting process, developing guidelines for managers, and 

establishing monitoring and review systems can be completed concurrent with 

the scenario planning described above. OHR and OAS should develop a 

communication plan to explain changes to managers, which should be executed 

over no more than three months. 

 

Costs 

 The primary cost of this initiative is the staff time required to conduct 

scenario planning, formulate a menu of short-term staffing options, and 

streamline the requisite procedures. This will require both dedicated FTEs from 

OHR and OAS, as well as management staff time for scenario planning. 

 

113 For more details, see Section 7.2.3 for a description of BCG’s approach to capacity modeling 

and related findings. 
© 2011 The Boston Consulting Group, Inc. 128

Risks 

 Increasing the ease with which managers utilize contractors brings the risk 

of overuse or lack of appropriate oversight. Without strict guidelines, offices and 

divisions may bring in extra capacity for projects that could be handled in-house 

with only minor strain on human resources, thus driving up costs. OHR and OAS 

should work to control contractor usage and ensure that they are utilized only in 

appropriate circumstances. Conversely, it is possible that the scenario planning 

process could result in underutilization of short-term staff if circumstances do not 

fit one of the predefined scenarios. 

Summary 

 A strong human resources function is critical in organizations like the SEC 

which invest heavily in human capital. To better support the agency’s HR 

function, BCG recommends three initiatives: 

 Execute the planned OHR redesign 

 Complete roll-out of the new performance management system 

 Create a surge capacity plan 

 In sum, these initiatives will cost roughly $2.5 million per year. The 

ongoing cost could increase by as much as $15 million per year if the SEC decided 

to enhance its performance bonus pool to levels comparable with external 

benchmarks. These recommendations will enhance the SEC’s ability to hire and 

retain a diverse high-quality workforce that is aligned with the agency’s long-term 

human capital needs. They will also simplify the use of contractors and other 

sources of short-term staffing and improve employee morale. Thus, 

implementing these initiatives will also help the SEC develop all five of the 

mission critical capabilities discussed in Chapter 5. 

6.1.3.7 Initiative 3g: Enhance Risk Management

Description and benefits 

A strong risk IQ capability is essential for the SEC in its oversight of the 

constantly changing securities markets. The ability to track key market trends 

and developments in a timely and actionable manner is vital in order for the 

agency to apply its focus and resources accordingly. If implemented well, this will 

not only further strengthen the agency’s effectiveness and make its resource 

deployment more efficient, it will enhance its communication across divisions as 

well as external communities with aligned/adjacent interests (e.g., other 

regulators, SROs). 

 In the ideal situation, the SEC would have the ability to surface key market 

trends and market-related as well as enterprise-wide risks, amplify weak signals 

so that they can be normatively compared with stronger signals, analyze and 
© 2011 The Boston Consulting Group, Inc. 129

prioritize these, develop integrated and actionable perspectives based on this 

information, and recommend specific actions to the appropriate division, office, 

or manager to take necessary action. Such a capability will allow the agency to 

look externally for risks, look out in time for them, as well as become more 

capable of anticipating, monitoring, and mitigating internal operational risks. 

 The SEC already has a risk management vision which it has begun 

implementing through the creation of RSFI as a division reporting to the 

Chairman. This division has approximately 60 staff of economists and analysts 

who are experts in assessing cross-divisional risk issues. However, as discussed in 

Section 4.2, the SEC could benefit from strengthening its risk management 

capabilities and building capacity in this area. We recommend that the agency 

invest further to build out this capability consistent with best practices already 

being adopted by peer agencies like the Federal Reserve Bank of New York and 

the FDIC. We also recommend that the agency shape a “distributed model” for 

the risk organization so that, in addition to the analytic resources available within 

RSFI, such resources are embedded in all divisions and offices (starting initially 

with the largest operating divisions and offices and the COO’s office) with dotted 

line reporting to division directors while retaining independence via a direct line 

reporting to RSFI. In this model, the distributed resources would be thought 

partners to their divisional colleagues in their day-to-day responsibilities while 

also acting as a communication channel for market trends and risk signals to and 

from the RSFI. Making this dual reporting model work effectively will require 

effective role chartering (as described in Section 6.1.2) to ensure consistency 

across the organization. 

 The resources within RSFI would liaise with those in the divisions and 

offices as well as with SROs to aggregate information on market trends and risk 

signals, analyze them in an integrated manner, and develop/publish actionable 

perspectives to be shared appropriately for action. In addition, the SEC should 

collaborate with co-regulators (e.g., the CFTC, FINRA) and the Financial Stability 

Oversight Council to leverage data and systems pertaining to systemic risk. To do 

this effectively, RSFI will need access to market data and analytic tools standard 

in risk organizations at sophisticated financial institutions. Sections 4.3 and 

6.1.3.2 describe the required technology systems in greater detail. 

Of course, risk management works well in layers—where the divisions and 

offices are the first line of defense through their day-to-day activities, Risk 

Management acts as a strong second line of defense that provides independent 

perspectives, and periodic audits by the IG/GAO provide a necessary third line of 

defense (especially on enterprise-wide risk issues). 

Implementation approach 

The key steps to implement this initiative include: 

 Design a distributed risk management model (building on public sector 

best practices) 
© 2011 The Boston Consulting Group, Inc. 130

 Develop clear role charters for risk management staff 

 Recruit or train staff with the appropriate skill sets to be embedded in 

divisions and offices and to build out RSFI 

 Develop information exchange mechanisms with SROs and co-regulators 

and invest in market data/analytic tools. 

 First, the SEC needs to differentiate responsibilities between division and 

office risk management functions and RSFI. In concert with the agency-wide role 

chartering initiative described in Section 6.1.2, the agency should also develop 

clear role charters that codify responsibilities, accountabilities, performance 

metrics, and decision rights for risk management staff, as well as required skill 

sets. Finally, the SEC should develop a clear and consistent set of criteria (e.g., 

risk exposure, information needs) to prioritize where risk management resources 

should be allocated first. 

 After defining the relevant role charters and skill sets, the SEC should 

invest in its risk management staff. This can be accomplished either by hiring 

new staff or by training existing staff to fill risk management roles. Overall, BCG 

benchmarks suggest best practice institutions have approximately one percent of 

total staff dedicated to risk management. At the SEC, this would imply 

approximately 40 FTEs dedicated to risk management. While RSFI currently has 

approximately 60 FTEs, many of these are dedicated to specific economic 

analysis and litigation support (an equally important activity but distinct from 

risk management). Given this, an additional 10 to 15 FTEs with the right skills will 

initially be required to build out the distributed model. Because competing 

priorities have the potential to delay the SEC’s investment in risk management, 

resources should be allocated as available, consistent with agency-wide priorities. 

 Lastly, to effectively analyze and mitigate potential risks, the SEC needs 

the ability to regularly acquire relevant data from SROs and co-regulators in a 

consistent and accessible format. This will also require an investment in 

technology that enables the SEC to store and analyze large quantities of market 

data. Section 6.1.3.2 further describes the systems required to develop a 

foundational data management and analytics capability. 

 Given its existing expertise in this area, RSFI should own this initiative. 

However, because risk management will be embedded throughout the SEC, input 

from senior management across the agency is critical. While the timeline of this 

effort will be impacted by resource availability, it should take approximately six 

to twelve months to complete. 

Costs 

This initiative will entail both an initial upfront investment in technology 

and ongoing costs associated with hiring new FTEs. Technology costs are 

incorporated in Initiative 3a, and so they are not included here. Assuming that 

the majority of division and office risk management staff needs are filled through 
© 2011 The Boston Consulting Group, Inc. 131

hiring rather than training, this initiative would cost approximately $2 to $4 

million annually. 

Risks 

The principal risk in this initiative is that the risk management function is 

not designed well and not embraced by the rest of the agency. Such a situation 

can create unproductive communication gaps which defeat the very purpose of 

the organization. 

6.1.3.8 Initiative 3h: Hire staff to build high-priority staff skills

Description and benefits 

 Section 4.2 discusses several areas where the SEC would benefit from 

increasing capacity, building new organizational capabilities, and improving 

individual competencies. Assuming that funding constraints remain, it is unlikely 

that the SEC will be able to hire enough staff to fill these gaps with new 

employees. That does not mean, however, that the agency will be completely 

unable to address these needs. First, the SEC can build high-priority skills by 

filling vacancies caused by attrition with employees who meet these needs. In 

addition, if the SEC executes the initiatives described in Sections 6.1.1 and 6.1.2 

to reprioritize the agency’s activities and reshape its organization, this will likely 

provide some resource flexibility. If funds remain available after investing in key 

capabilities and strengthening oversight, BCG recommends utilizing these 

resources to hire additional staff aligned with the SEC’s highest priority capability 

needs. 

 The primary benefit of addressing these capability gaps will be to better 

align the SEC’s workforce with its human capital needs. In order to continue 

executing on its complex and changing responsibilities, it is essential that the SEC 

develop the right organizational capabilities, hire people with the appropriate 

skill sets and experience, and build capacity in critical areas. 

Implementation approach 

To implement this initiative, the SEC should: 

 Prioritize critical skill and capacity needs across the agency 

 Utilize redesigned processes to fill gaps based on remaining resource 

flexibility 

 Build remaining capabilities through vacancies left by voluntary attrition 

 As discussed in Chapter 4, BCG’s analysis already indicates a number of 

key areas where the SEC could devote additional staff resources (e.g., industry 

expertise, support staff, data analytics). The SEC’s senior management should 
© 2011 The Boston Consulting Group, Inc. 132

use this assessment to prioritize hiring efforts, and target filling these skill and 

capacity gaps across the agency. Given the limited funds available in the current 

context, it is essential to develop a holistic set of priorities that maximize the 

overall utility derived from any investment of resources, rather than each division 

or office optimizing against its specific needs. 

 After executing the other initiatives described in this chapter, the SEC may 

have some remaining resource flexibility. This depends on the extent to which 

the agency is able to reduce costs and reshape its organizational design, as well as 

the cost of investing in human resources, technology, risk management, and more 

effective oversight. Any remaining resources should be applied to the skill and 

capacity needs determined to be the highest priorities. The SEC should utilize 

redesigned recruiting and hiring processes to fill these positions in the most 

timely and efficient manner possible. 

 It is likely that the SEC’s remaining resource flexibility will not be 

sufficient to fill all of the skill and capacity gaps identified. Given the current 

constraints, the agency can continue to address skill gaps slowly, to replace staff 

losses through normal attrition. As employees leave the agency, the SEC may 

choose to hire staff with different skill sets to fill those vacancies or to repurpose 

those positions in order to build new skills or capacity elsewhere. In addition to 

defining priorities, leadership should also identify roles or functions where open 

positions should not be filled automatically and establish a process to regularly 

review vacancies and determine if they would be better utilized in another area. 

 Due to the emphasis on agency-wide alignment in this initiative, as well as 

the potential sensitivity of reallocating resources, the Chairman’s office should 

drive the prioritization process. This will also require participation from senior 

leadership across the SEC’s divisions and offices. The initial process of 

establishing agency priorities should take no more than three months. Once 

priorities are set, OHR should codify and execute this strategy utilizing the 

agency’s redesigned recruiting process. The timeline to begin filling those gaps 

will depend on the speed with which other initiatives are completed and the rate 

of attrition at the agency. Once resources are available, the recruiting and hiring 

processes should take no more than six months. 

Costs 

 The primary cost during the initial phase of this initiative will be 

management time. Once the SEC begins hiring staff, additional ongoing costs 

associated with new FTEs should be offset either by resources identified through 

other initiatives or by attrition of existing personnel. 

Risks 

 This initiative may require resource tradeoffs to be made among division 

and office senior management, and any lack of collaboration could jeopardize 

results. The process described above will require strong leadership from the 
© 2011 The Boston Consulting Group, Inc. 133

Chairman’s office to ensure that the broad interests of the SEC are represented. 

In addition, it is essential that the SEC’s leadership agree on the set of criteria 

used to prioritize areas of investment. 

 In addition, depending on the degree to which resources are made 

available through the SEC’s cost reduction and reshaping efforts, the agency may 

not be able to devote new resources to filling its current skill and capacity needs. 

In this case, it will have to rely on attrition to make resources available. Given 

the SEC’s historically low rate of attrition, this will significantly delay the agency’s 

ability to build high-priority skills. It could also require shifting vacant positions 

to serve a different purpose, which may be a more contentious process than 

hiring for new roles. 

6.1.4 Enhance SRO engagement model 

To oversee the securities markets, the SEC leverages its own capabilities as 

well as those of the SROs. The SEC oversees the SROs in some contexts (e.g., 

when inspecting SRO operations or reviewing SRO rule filings) and regulates 

alongside them in others (e.g., when pursuing joint enforcement actions). 

There are three initiatives that the SEC should undertake to enhance both 

its oversight and co-regulator roles: 

 Strengthen oversight of SROs 

 Centralize and coordinate approach to SRO interactions 

 Strengthen processes for SRO rule proposals 

There are several reasons the SEC should enhance the SRO engagement 

model. First, the markets that the SEC oversees are becoming increasingly 

complex, large and fragmented, suggesting a heightened need for coordination 

with, and oversight of, the SROs that operate in those markets. Second, the 

demutualization of exchange SROs that has occurred over the past two decades 

has increased the potential conflict of interest between an SRO’s regulatory 

operations and their business operations, suggesting a need for stronger 

regulatory standards to ensure consistency across SROs’ structure, governance 

and resourcing. Third, a stronger relationship with SROs improves the SEC’s 

ability to leverage SROs’ expertise and resources to monitor trends and emerging 

risks in the securities markets. 

 A key assumption we make in this section is that the current regulatory 

landscape remains as is. 
© 2011 The Boston Consulting Group, Inc. 134

6.1.4.1 Initiative 4a: Strengthen oversight of SROs

Description and benefits 

Given the role of SROs in the regulatory framework, it is vital that the SEC 

develop both a clear set of standards for how SROs are to regulate and a means 

for assessing whether SROs are complying with those standards. The SEC already 

has certain measures in place for this. To strengthen its oversight of SROs, 

however, there are additional actions that can be taken; each will strengthen the 

SEC’s oversight of SROs: 

 Enhance SRO disclosures regarding their regulatory operations114

 Institute metrics to monitor SROs and minimum standards for their 

regulatory activities 

 Enhance FINRA oversight 

Enhance SRO disclosures regarding regulatory operations: The SEC 

currently oversees SROs in two ways: TM reviews SROs rule proposals and OCIE 

conducts periodic inspections. The SEC could supplement this oversight by 

requiring that SROs make regular disclosures to the SEC regarding their 

regulatory operations. These disclosures could include information such as the 

SROs regulatory budgets and staffing levels every year. Many SROs already 

present annual or quarterly reports containing similar data to their respective 

Board of Directors; these reports could also be made available to staff at the 

agency. Furthermore, the SEC could require that SROs submit a notification if 

certain events take place, such as the implementation of a new surveillance 

system or hiring of a new Chief Regulatory Officer. It may be appropriate that 

heightened disclosures be required for select SROs. Such information can then 

be incorporated into risk-based methodologies for selecting and scoping SRO 

inspections and used to monitor SRO regulatory performance when on-site 

inspections have not been conducted. 

Institute metrics to monitor SROs and minimum standards for their 

regulatory activities: The SEC could also strengthen its oversight of SROs by 

developing a set of metrics to assess SRO regulatory effectiveness. SROs would 

then be routinely scored against these metrics—in effect supplying the SEC with 

a continually updated performance “scorecard” for each SRO. Once created, 

these scorecards would improve the SEC’s oversight of SROs by enabling the 

agency to monitor changes in SRO regulatory effectiveness over time and relative 

to one another. The SRO scorecards could also be used to prioritize inspections 

and inform future discussions with SROs and otherwise supplement the overall 

risk-based inspection program administered by OCIE. Over time, performance 

metrics should also provide the data and analysis needed to establish minimum 

standards for SROs in terms of how their regulatory operations ought to be 

 

114 Indeed, the Commission has suggested similar measures in the past. Self-Regulatory 

Organizations—Various Amendments, 69 Fed. Reg. 71,126 (proposed Dec. 8, 2004). 
© 2011 The Boston Consulting Group, Inc. 135

structured and resourced. Some standards may be applicable to all SROs, while 

others will likely be customized to specific SROs. 

Enhance FINRA oversight: FINRA is the largest SRO under the SEC’s 

jurisdiction115 and is seeking to further expand the scope of its regulatory 

activities.116 As such, the SEC’s current level of oversight over FINRA should be 

enhanced; presently, oversight is limited to TM’s review of FINRA’s rule filings 

and OCIE’s inspection program. The SEC should pay particular attention to 

oversight of FINRA’s Market Regulation, Member Regulation, and Enforcement 

departments, as most of FINRA’s most critical regulatory activities are conducted 

in those groups.117 

Specifically, the agency should assign dedicated inspectors to oversee 

FINRA. These inspectors should work to become familiar with FINRA’s 

operations through frequent on-site inspections and review of FINRA’s financial 

and operational data. Some of these dedicated inspectors should focus on 

FINRA’s Market Regulation department. These staff should have experience in 

securities markets and be well-versed in emerging trends and technologies. In 

addition, a second group of inspectors should focus on the Member Regulation 

and Enforcement departments. These inspectors should be well-versed and 

experienced in broker-dealer and investment adviser operations. The inspectors 

should work with staff in TM to understand the context and substance behind 

rules submitted by FINRA and how those rules impact FINRA’s operations. The 

inspectors should also partner closely with the generalist OCIE examiners 

dedicated to conducting FINRA oversight exams. Such oversight exams are an 

important aspect of maintaining a comprehensive level of oversight for FINRA. 

 A more structured approach to oversight of FINRA will enable the SEC to 

enhance its oversight, “stay out ahead” of any potential regulatory issues and also 

foster increased role clarity for SEC staff. 

Implementation approach 

OCIE, through its SRO Inspections team, is currently conducting a baseline 

assessment of each SRO in order to calibrate its risk-based inspection program.118 

 

115 FINRA oversees approximately 4,600 brokerage firms and is responsible for aggregating and 

providing market surveillance for approximately 80 percent of U.S. equity trading. Indeed, the 

SEC’s oversight of FINRA is already being studied pursuant to Dodd-Frank. Dodd-Frank Wall Street 

Reform and Consumer Protection Act. S 964. 116 Ketchum, Richard G. Financial Industry Regulatory Authority. Comment Letter Re: Commission 

Study on Enhancing Investment Adviser Examinations Mandated by Section 914 of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act of 2010, 2010. Print. 117 FINRA’s Market Regulation department is responsible for conducting market surveillance for 

equity and options trading, including surveillance performed contractually on behalf of exchange 

SROs. The Member Regulation department is responsible for examining all broker-dealers 

registered with FINRA for compliance with FINRA rule and US securities laws. 

118 The staff at OCIE is currently conducting a comprehensive review of FINRA operations, 

including its governance, regulation and enterprise risk management. OCIE is collaborating with 
© 2011 The Boston Consulting Group, Inc. 136

This strategic assessment should serve as a starting point for determining what 

information should be included in the new SRO disclosures, and how 

frequently/under what circumstances the disclosures should be made. OCIE 

should also coordinate with TM, which routinely inspects and gathers data from 

SROs regarding their IT system capabilities. 

The SEC should also leverage its baseline assessment to develop metrics 

and standards for assessing SRO effectiveness. The SEC should develop a 

potential set of metrics and then share these with the SROs and other 

stakeholders for feedback. Once the appropriate metrics are finalized, the SEC 

should formalize them in a “scorecard” that would be rolled out to the SROs. 

This rollout should begin with a pilot program at one SRO and eventually expand 

to all SROs. 

Once initiated, both the enhanced disclosure sub-initiative and the 

metrics/standards sub-initiative should take approximately 12 months to 

implement. 

In terms of enhanced oversight of FINRA, as the initial step, the SEC 

should determine the appropriate number of resources to be fully dedicated to 

inspecting FINRA and ensure that inspectors are adequately trained. The SEC 

should also put in place processes to ensure that resource levels dedicated to 

FINRA oversight are rigorously and regularly reviewed. As part of this 

implementation, the SEC should study what other compliance mechanisms may 

be appropriate for FINRA, leveraging the ongoing GAO report as appropriate.119

The Office of SRO Inspections (located within OCIE) should lead this 

initiative, with input from other divisions and offices as needed. 

Costs 

Implementing the heightened disclosure and metrics/standards will 

require approximately three to five dedicated FTEs at an ongoing annual cost of 

approximately $1 million. These actions will also require some management 

support from OCIE and occasional contributions from staff in TM and other 

divisions to help design the SRO information disclosure protocols and 

metrics/standards. Enhancing oversight of FINRA will involve initially the costs 

of the inspectors, whose number will be determined by the SEC. 

Risks 

With respect to the enhanced disclosure sub-initiative, the end goal is to 

enhance oversight of SROs by conducting risk-based inspections. If the apparatus 

created by this initiative is not managed well, it will become costly or inefficient. 

 

the GAO on this new approach. In addition, OCIE is conducing examinations of high risk FINRA 

areas including its surveillance of high-frequency trading and fixed-income transactions. 119 Ibid. 
© 2011 The Boston Consulting Group, Inc. 137

In terms of the development of metrics and standards, there is the potential that 

the metrics and standards that are developed may not accurately reflect SRO 

regulatory performance. Enhanced oversight of FINRA also poses certain risks. 

First, the inspectors focused on FINRA may not be able to detect broader, 

systemic trends and issues. Second, OCIE may over-emphasize its oversight of 

FINRA over other smaller, but still important SROs. 

6.1.4.2 Initiative 4b: Centralize and coordinate approach to SRO interactions

Description and benefits 

 Currently, the SEC interacts with SROs mostly on an as-needed basis, as is 

the case with oversight inspections, rule filing reviews and enforcement actions. 

These interactions should be centrally managed and documented, and interdivision coordination with SROs should be enhanced. For example, if an SRO 

provides data to OCIE during an inspection, a central coordinating body should 

quickly be able to determine whether someone in TM or RSFI would also benefit 

from that data, and in what form. This initiative is intended to enhance the 

SEC’s functioning as a co-regulator with SROs.

 

Specifically, the SEC should: 

 Create an “SRO Contact Team” to be a central, coordinating point of 

contact for all SROs: This team would serve as a liaison to the SROs and 

coordinate leaders from various divisions and offices. The team would also 

maintain an historical record of all material interactions and information 

exchanged with each SRO. 

More specifically, it should document all SRO interactions, manage 

information received from the SROs, and be a point of contact for all SROrelated questions and concerns. Every SRO should be assigned and 

introduced to a designated contact person on the team. As discussed 

below, the team should also coordinate an internal “college of regulators” 

to collectively engage the SROs and SRO roundtable discussions to 

facilitate information sharing and make new introductions between the 

SROs and agency staff. It should also handle the logistics around 

increasing agency participation at industry events. On a regular basis, the 

team should also issue reports detailing the frequency and impact of 

interactions with the SROs, metrics on what data/information has been 

shared, as well as what industry events the SEC has participated in. 

Finally, the team should regularly survey the SROs and relevant divisions 

and offices at the SEC to ensure the frequency and quality of interactions 

is appropriate. 

The “SRO Contact Team” would have approximately three administrative 

FTEs, including a supervisor. Additionally, each division and office 

previously mentioned should appoint approximately one to two staff 
© 2011 The Boston Consulting Group, Inc. 138

members to work on the team part-time (approximately one FTE 

equivalent). These staff members would serve as the primary points of 

contact to the SROs and act as a liaison between their original 

organizational unit division and office and the SRO Contact Team. Staff 

members from these divisions and offices could serve on a rotating basis. 

 Institute a series of SRO roundtable discussions: The SEC, and specifically 

those individuals who sit on the internal “College of Regulators,” should 

regularly meet with managers and experts at the SROs to discuss general 

market trends, emerging risks and ways to mitigate, and otherwise build 

rapport among the SEC and SROs 

 Enhance agency presence at securities industry events, such as regional 

and national conferences and summits held by SROs, other federal and 

state regulators, and/or market participant associations. This could be 

achieved by maintaining a consistent agency presence at key industry 

events by sending representatives from appropriate divisions 

 Centralizing and coordinating the SEC’s interactions with the SROs 

through the proposed “SRO Contact Team” will help the SEC: 

 Understand and react to market trends and emerging risks faster 

 Improve its dialogue with the SROs 

 Increase access to market and market participant data from the SROs 

 Improve inter- and intra-division collaboration and leverage of SRO 

expertise (i.e. “connect the dots” between ENF, OCIE, TM, RFSI, and the 

SROs) 

 Enhance the agency’s presence in the industry 

Implementation approach 

 

Execution of this initiative, specifically the creation and administration of 

the SRO Contact Team, should be jointly owned and managed by TM, OCIE, 

ENF, and RSFI. Initially, a charter should be written detailing the team’s 

objectives and how it will interact with the key stakeholders (the SROs and the 

relevant agency division or office). The charter should articulate clear role 

mandates for the new team and the other organizational units involved. The 

team should then begin to hire/appoint staff to execute against the charter. This 

process will take approximately six to twelve months to complete, resulting in an 

official launch of the new team. 

Costs 

This initiative will require approximately three administrative personnel at 

an approximate cost of $0.5 million to write the team charter, organize key 

activities and run the SRO Contact Team on an ongoing basis. Additionally, there 
© 2011 The Boston Consulting Group, Inc. 139

will be a cost of approximately $1 to $1.5 million to cover five to seven 

professional staff assigned from TM, OCIE, ENF, and RSFI. If the number of 

SROs or frequency of interactions increases substantially, the SEC may need to 

assign more staff to manage team activities. 

Risks 

 

 One risk with this initiative is that it may be difficult for the new team to 

initially gain credibility and change the current SEC and SRO interaction culture; 

staff members in all the SROs are accustomed to dealing with their personal 

contacts in various divisions, and divisions and offices may neglect to work 

through or notify the SRO Contact Team when they engage an SRO. A second 

risk is that this initiative is not properly coordinated with the other SRO 

initiatives. For example, if SROs are required to disclose certain information to 

the SEC, the SRO Contact Team would need to partner with OCIE to define how 

that information is logged and processed and who is responsible for ensuring the 

disclosures are submitted properly. 

6.1.4.3 Initiative 4c: Strengthen processes for SRO rule proposals

Description and benefits 

 

 As the number of SROs has increased, so has the volume of rule filings. 

Given the increasing workload, this initiative improves the processes and skills 

underpinning TM’s rule review and approval responsibilities. 

 There are several actions the SEC should take to streamline the SRO rule 

review and approval processes; indeed, some of these actions are already being 

executed or considered by TM leadership. Specifically, the SEC should: 

 Clarify and publish clearer standards (e.g., precedents) for when and 

under what circumstances an SRO must file a rule 

 Instill a greater degree of transparency by communicating the status of 

specific steps in the review of a given rule to SROs and publishing a more 

detailed process map 

 Create and publish templates for common rule filings that SROs can use 

 Develop criteria to segment different types of filings and customize the 

approval process for each type. Currently, filings are informally 

segmented by TM staff as they are submitted; there should be more 

explicit standards and methodologies for how each filing should be 

evaluated 
© 2011 The Boston Consulting Group, Inc. 140

 Develop a robust process for identifying and escalating complex rule filings 

to senior division leaders and the Commission, thus reducing the number 

of revisions and iterations between TM staff and the SRO staff 

 Establish a structure for bringing in OCIE when evaluating complex filings 

in order to leverage the expertise OCIE inspectors offer and provide OCIE 

with relevant context so that they know how to inspect for compliance in 

the future 

 Study whether to adopt a portfolio approach to reviewing rules, i.e. in 

addition to reviews of each rule in isolation, consider reviewing similar 

types of rules together and consider the context of all the rules that 

already exist (this may necessitate relaxation of existing statutory timeframes 

for rule reviews, particularly the 45-day window for reviewing SRO rule 

proposals)

 Study whether to recommend that Congress amend the Exchange Act so 

that some rules may be self-certified by the SROs and/or stop reviewing 

certain types of rule filings (these actions require selectively relaxing the 

current statutory requirements) 

 In addition to process improvements, TM should also enhance the skill 

diversity and tools available to the staff attorneys who review the rule filings. TM 

has already begun hiring professionals with first-hand background and expertise 

in securities markets, and is considering whether to develop a separate office to 

focus on market analytics and research. In addition to these efforts, TM should 

develop better training and metrics for how staff members review SRO rules and 

establish policies. The agency should also create a formal internal network of 

experts whom staff attorneys can turn to when they have specific market or 

technology related questions.120 Finally, the SRTS system used to manage rule 

filings should be adjusted to provide more transparency and capture more detail 

on the logic and nuances behind complex rule filing decisions. (Such a system 

upgrade may require additional funding beyond what is possible in the current 

context). 

Implementation approach 

 TM should lead the execution of these change efforts. Senior TM staff 

members should be placed in charge of executing specific actions, such as 

creating rule filing templates or working with the agency’s trainers to design 

customized training modules. The timing of any action will need to be balanced 

against other division priorities. For example, right now TM is focused on 

meeting the extensive rulemaking requirements mandated in Dodd-Frank. Once 

the bulk of that effort is complete, TM should have more resources and 

management bandwidth to implement a significant process change or any of the 

other measures described above.

 

120 Such a network could also support examiners in OCIE. 
© 2011 The Boston Consulting Group, Inc. 141

Costs 

 The level of resources and time required to implement any given change 

will vary depending on the type of action. Implementing an end-to-end process 

redesign could require 12 to 18 months with a dedicated team of four to six FTEs 

at a cost of approximately $1 to $2 million. A simpler, more targeted change, 

such as creating rule filing templates, could likely be implemented more quickly 

with fewer FTEs. Hiring additional staff with first-hand securities markets 

experience would incur costs scalable to the number and seniority of 

professionals recruited. Any improvement to SRTS or other IT systems would 

need to be carefully scoped before assigning a cost estimate. 

Risks 

 The primary risk associated with this initiative is that, if changes are not 

adequately communicated to the SROs and staff attorneys in TM, it could create 

confusion and bottlenecks in the rule review process. TM can best mitigate this 

risk by assigning clear owners for all actions and clearly communicating any 

changes. 

 

Summary 

 The SEC should seek to build stronger relationships with SROs, both as an 

overseer and a co-regulator. Specifically, the SEC should pursue three initiatives: 

 Strengthen oversight of SROs 

 Centralize and coordinate approach to SRO interactions 

 Strengthen processes for SRO rule proposals 

 These initiatives strengthen the SEC’s oversight capabilities and advance 

the SEC’s ability to more effectively partner and collaborate with SROs. 

6.1.5 Implementation plan 

As discussed at the beginning of this chapter, BCG’s recommendations to 

make the SEC more efficient and effective fall into four categories of initiatives, 

as listed below: 

Re-prioritize regulatory activities 

 Initiative 1a: Reprioritize regulatory activities 
© 2011 The Boston Consulting Group, Inc. 142

Reshape the organization 

 Initiative 2a: Systematically redesign the organization 

 Initiative 2b: Seek flexibility from Congress on certain Dodd-Frank 

mandated offices 

 Initiative 2c: Review Commission-staff interaction processes and 

delegation of authority 

 Initiative 2d: Implement a continuous improvement program 

Invest in enabling infrastructure 

 Initiative 3a: Enhance and develop key systems 

 Initiative 3b: Enhance OIT’s ability to deliver technology solutions 

 Initiative 3c: Establish a Technology Center of Excellence 

 Initiative 3d: Execute the planned OHR redesign 

 Initiative 3e: Complete roll-out of the new performance management 

system 

 Initiative 3f: Create a surge capacity plan 

 Initiative 3g: Enhance risk management 

 Initiative 3h: Hire staff to build high-priority staff skills 

Enhance SRO engagement model 

 Initiative 4a: Strengthen oversight of SROs 

 Initiative 4b: Centralize and coordinate approach to SRO interactions 

 Initiative 4c: Strengthen processes for SRO rule proposals 

We recommend these initiatives to be sequenced based on the following criteria: 

 Resource needs: Does this initiative free up or require resources? 

 Dependencies and prerequisites: Is the initiative a prerequisite to the start 

of another initiative? Is commencing the initiative dependent on the 

completion of another initiative or an agency project currently in-flight? 

 Management bandwidth: Do the relevant divisions/offices have sufficient 

management bandwidth to oversee this initiative at the proposed time of 

implementation? 

 Execution capability: Does the initiative require specialized expertise new 

to the agency, e.g., lean process redesign? 

 Initiatives that will eventually free up resources and/or are prerequisites to 

other projects should be launched first. In addition, initiatives should be 

sequenced such that no single division or office is disproportionately burdened 

with too many ongoing projects at once which must be performed alongside their 
© 2011 The Boston Consulting Group, Inc. 143

existing workload. Based on this logic, BCG has developed an illustrative 

prioritization of the initiatives. Given this portfolio of initiatives, a Program 

Management Office (PMO) capability will be required, whose first task should be 

to undertake a much more detailed prioritization and planning effort. 

 Based on our illustrative prioritization, BCG has clustered the initiatives 

into three waves, starting immediately with resourcing the execution teams and 

initiating the planning process. Some of the initiatives will begin to deliver 

efficiency and effectiveness benefits to the SEC in the near term. Other 

initiatives, such as plans to develop new IT systems, will take longer to fully 

implement and begin realizing benefits. 

Wave 1 would consist of the following initiatives: 

 Implement a continuous improvement program 

 Reprioritize regulatory activities 

 Systematically redesign the organization 

 Rollout performance management system 

 Seek flexibility on Dodd-Frank mandated offices 

 Review Commission/staff interaction processes and delegation of authority 

 This first wave of initiatives will immediately contribute to making the 

SEC more efficient. In addition, two of these initiatives are projected to become 

a source of funds. First, the initiative to implement a continuous improvement 

program, such as lean process design, could potentially release up to 

approximately $25 million in annual run-rate savings based on a very high-level 

estimate and BCG experience at other institutions.121 Second, the initiative to

systematically redesign the organization could potentially release up to 

approximately $25 million in annual run-rate savings, although there is potential 

for a lag between when the initiative is launched and when the savings are 

realized. Together, these two initiatives could generate up to approximately $50 

million in annual run-rate savings to the agency. Reprioritizing regulatory 

activities will also create resource flexibility in some areas that can then be 

redirected to other, more mission critical areas. The agency has already begun to 

rollout a performance management system, and such efforts should be 

completed as part of this first wave. Finally, the agency can and should 

immediately begin to review Commission/staff interaction processes and seek 

flexibility on the Dodd-Frank mandated offices to prevent unnecessary 

restructuring and movement of staff and resources. 

 Implementing the Wave 1 initiatives will require the agency to invest in 

certain capabilities and resources. Specifically, the agency will need to incur an 

 

121 This figure is meant to be directional only and could materially change. A more precise 

estimate would need to be developed pending a more detailed cost reduction diagnostic to be 

performed by the SEC. 
© 2011 The Boston Consulting Group, Inc. 144

estimated one-time cost of approximately $7 to $10 million.122 This cost would go 

towards establishing a PMO to oversee implementation of the portfolio of 

initiatives and to staff teams and prepare plans to execute the continuous 

improvement and organization redesign efforts. Additional resources would be 

needed after the organization redesign is complete to meet restructuring costs. 

Given the value and savings these initiatives are expected to generate, BCG 

highly recommends the agency pursue them. 

 The remaining initiatives in the portfolio should be launched in 

subsequent Waves 2 and 3. Exhibit 6.1.5-1 is an illustrative example of how all 

the initiatives could be sequenced from Waves 1 through 3.123 Each wave is 

estimated to take six to nine months to complete, with Wave 1 beginning 

immediately. 

Exhibit 6.1.5-1: Illustrative rollout of initiatives across three waves 

 Initiatives launched in Waves 2 and 3 are estimated to cost approximately 

$35 to $45 million in total. Of this amount, the majority would be towards the 

purchase and maintenance of technology systems. Additional costs reflect the 

need to hire/allocate dedicated staff members. With appropriate sequencing and 

timing, these costs could potentially be off-set by the savings generated through 

the continuous improvement and organization redesign initiatives implemented 

in Wave 1. Of course, to the extent there are excess funds from the continuous 

 

122 Note that this cost estimate does not reflect time required for management oversight of the 

initiatives, external project support, severance, or transitional inefficiencies that may occur during 

implementation of the initiatives. 

123 The precise ordering and launch timing should be determined by the PMO after a more 

detailed assessment of the costs and management bandwidth required for each initiative. 

Source: BCG analysis

Wave 1 Wave 2 Wave 3

Systematically redesign the organization

Implement a continuous 

improvement program

Complete rollout of the new performance management system

Seek flexibility from Congress on 

Dodd-Frank mandated offices

Reprioritize regulatory activities

Review Commission / staff 

interaction processes and 

delegation of authority

Create a surge capacity plan

Enhance key technology systems

Develop new technology systems

Execute the planned OHR redesign

Strengthen oversight of SROs

Hire staff to build high-priority capabilities

Enhance risk management

Centralize and coordinate approach 

to SRO interactions

Establish a Technology Center of 

Excellence

Strengthen processes for SRO rule 

proposals

Illustrative
© 2011 The Boston Consulting Group, Inc. 145

improvement and organization redesign initiatives, these excess funds could be 

used to further invest in required capabilities. 

 Aside from resource availability, delivering on this portfolio of initiatives 

will require precise planning and a systematic change management effort. In our 

experience, there are six core dimensions necessary for creating successful and 

sustained change: 1) create the change agenda; 2) mobilize the organization; 3) 

hardwire change; 4) manage for results; 5) sustain and reinvent; and 6) 

communicate both strategically and consistently. The SEC will need to deliver 

against each in order to be successful. 

Create the change agenda: As an initial step in the effort, SEC senior 

management will need to build a case for change. This begins by articulating a 

desired vision or end-state for the effort. After this, SEC senior management will 

need to ensure the alignment and commitment of the broader leadership team 

across the agency. 

Mobilize the organization: The next step in the effort involves preparing 

the agency’s broader leadership to visibly embody change. The SEC will need to 

set up activist governance vehicles, including a robust and empowered PMO to 

focus on day-to-day implementation and provide guidance and oversight, as well 

as initiative teams to drive the initiatives forward. 

 A strong PMO would perform four key roles: 1) establish clear project 

governance and serve as a liaison among the initiative teams and senior 

leadership, 2) plan, coordinate and monitor the launch of each initiative, 3) track 

progress against milestones and budget, and 4) resolve any cross-team issues that 

may arise. It would seem reasonable that the PMO would be part of the COO’s 

organization and consist of supervisors and staff. Additional external support 

may also be needed depending on the number of initiatives and scale and speed 

of execution proposed. Exhibit 6.1.5-1 provides additional detail on the key 

functions and activities performed by the PMO. 
© 2011 The Boston Consulting Group, Inc. 146

Exhibit 6.1.5-2: Key PMO roles and activities 

Clear project 

governance

Planning and 

coordination

Progress

tracking

Issue

resolution

Establish project 

management office 

(PMO) 

• Serves as single 

point of contact for 

project deliverables, 

updates

• Communicates 

expectations of 

project team

• Facilitates 

communication, 

updates across 

working teams

Develop detailed implementation work 

plan and roadmapping tools

• Clearly define key elements of project 

plan:

– High level tasks and detailed 

activities

– Responsible parties

– Timelines

– Deliverables

– Key milestones

– Interdependencies, stakeholders and 

risks

• Monitor and report on progress against 

work plan and milestones

• Facilitate identification of potential issues 

and delays

Utilize PMO's central 

role

• Manage crossworking team 

interdependencies

• Establish process to 

escalate deviations 

from work plan and 

develop mitigation 

strategies

• Regularly solicit and 

track feedback on 

effectiveness of 

program 

management

Hardwire change: Next, the SEC will need to “hardwire change” into the 

agency to ensure lasting results. To accomplish this, the SEC needs to develop 

specific “roadmaps” for each initiative and rigor-test these to ensure they have 

clear objectives, milestones, and risk mitigation plans. 

Manage for results: The SEC will need to manage the transformation 

initiatives with discipline, rigor and oversight. It should arm its leaders with 

forward-looking visibility to mission-oriented results—by, for example, providing 

a program-wide view of progress while enabling surgical deep-dives on an 

exception basis. 

Sustain and reinvent: As the SEC moves beyond executing on the specific 

initiatives, it should take steps to ensure that all changes are durable and lasting. 

Communicate strategically, consistently: Throughout the effort, the SEC 

should focus on its communication. It should create, monitor and adjust an 

ongoing communications strategy by tailoring messaging to specific stakeholder 

needs, utilizing continuous feedback loops, and crafting a common language. 

*** 

As noted in Chapter 5, we believe it is critical for the SEC to develop a set 

of five key capabilities that will allow the agency to address both the structural 

disconnects that impact the agency as well as prepare it for the challenges of the 

ever changing markets it regulates. The initiatives presented here will not, on 

their own, fully optimize these capabilities absent further constraint relaxation. 

The initiatives will, however, enhance and grow these capabilities. 

Source: BCG analysis
© 2011 The Boston Consulting Group, Inc. 147

6.2 Choice 1: Relax funding constraints to better fulfill current role 

Given that the current context requires the SEC to make hard trade-offs in 

terms of mission critical activities as well as critical organizational capabilities, it 

is incumbent on Congress to carefully evaluate if these trade-offs are 

“acceptable” given its own priorities. As it evaluates this, Congress should 

consider what it would take for the agency to fully implement all regulatory 

activities it would ideally undertake and to build out all key capabilities that will 

enhance its efficiency and effectiveness. 

 While assessing which activities the SEC should undertake is beyond the 

scope of BCG’s study, senior management itself has identified several highpriority regulatory activities they cannot implement today even with the 

efficiencies described above, including the agency’s demand for technology and 

expertise. Implementing these activities will require relaxation of certain 

constraints and increase in resources. Based upon a very preliminary estimate, a 

range of an incremental $200 to $300 million may be required for the initiatives 

described in Choice 1. A more precise estimate is only possible depending on the 

results of the optimization initiatives recommended earlier. 

Building out technology capabilities: As described above, technology has a 

critical role to play in improving the efficiency and effectiveness of the SEC: 

technological capabilities are vital to keeping up with the technology-driven 

evolution of the securities markets. While some of the agency’s technology needs 

have been addressed through efficiency gains within OIT and the rest of the SEC, 

additional funding would be required to fully leverage technology along the 

following initiatives: 

 Fully close OIT’s resourcing gap in application development and project 

delivery (an additional approximately 55 FTEs)

 Continue to build out the Technology COE to include additional analyst 

resources and a technology lab to test and qualify emerging technologies 

for business application within the SEC

 Modernize EDGAR to include business process re-engineering of workflow, 

enhanced usability for internal and external users, and upgrading of 

EDGAR systems 

 Implement a robust knowledge management system (building on the basic 

capability outlined in Initiative 3a) with a richer set of data and 

institutional knowledge, and social-networking functionality to improve 

collaboration 

 Implement an enterprise-wide tracking solution to capture workflow of 

rules, filing reviews, correspondences, etc. across the agency (TCR could 
© 2011 The Boston Consulting Group, Inc. 148

be used as a model, but the tracking solution would extend well beyond 

just tips, complaints, and referrals) 

 Implement a robust enterprise-wide filing solution to allow input and 

storage of a variety of filing types, and enable central access and analysis 

on the filings data by ensuring they are stored with common data formats 

that can be cross-referenced 

 Implement robust data management and analytics, including an 

enterprise-wide data warehouse that will manage intake, cleaning, and 

normalizing of data and also enable analytics capabilities for all classes of 

data (building on the basic capability outlined in Initiative 3a) 

 Build out a new data center that is able to support the complete 

infrastructure needs of SEC and reduce operational risks 

 Supplement the support infrastructure for new staff recruited as necessary 

(e.g., staff hired to address the capacity shortfall) 

Addressing capacity shortfalls in the divisions: Many of the divisions have 

significant shortfalls in the professional staff needed to carry out the current 

scope of activities. Based on a detailed workload analysis, we believe that, in the 

aggregate, the five divisions and OCIE are facing a shortfall of 375 to 425 FTEs to 

cover the current scope of activities, including what is needed to meet DoddFrank requirements. This number will be lower following the implementation of 

the optimization initiatives which will reduce resource need and free up capacity 

for redeployment. 

 Investing in new capabilities: As discussed earlier, the agency has 

identified several mission critical activities that it considers to be high priorities 

for investment. Some of these activities are listed below: 

 Expand the RSFI activities to include more holistic risk management 

functions such as developing risk policies and guidelines, identifying 

metrics to monitor market trends, evaluating systemic risk across 

regulated entities and performing supplemental analyses to provide an 

independent perspective 

 Expand the SEC’s industry and analytic expertise in the different divisions, 

for example, establishing a market analysis group within Trading and 

Markets to analyze the impact of new rules on market performance 

 Increase the coverage, frequency and intensity of examinations of the 

various regulated entities (e.g., investment advisers, investment companies 

and broker-dealers, swap execution facilities) 
© 2011 The Boston Consulting Group, Inc. 149

 Expand disclosure for public company filings, transactions, and proxy 

statements 

 

 Increase the number of enforcement actions including increased follow-up 

on subpoenas and contempt proceedings from earlier enforcement actions 

Enhancing SRO relationships: As discussed above, it is critical that the SEC 

maintain firm oversight of SRO regulatory activities. The optimizing initiatives 

discussed above will certainly enable the SEC to more effectively carry out that 

oversight, but the SEC may determine that it is necessary to go further in 

ensuring that SROs conduct regulation adequately. The SEC can further enhance 

its oversight of SROs through the following: 

 

 Build out systems to automatically manage and track receipt of all SRO 

filings in a standard format. This system should, among other capabilities, 

generate alerts for missing information or significant changes to SRO 

operations, and should be easily searchable and shareable 

 Establish an automated system to track metrics reporting and generate 

customizable scorecards both for internal use and for sharing with SROs 

 Develop the technology systems and resources necessary to routinely audit 

SRO surveillance systems 

 Link SEC systems with FINRA systems to enable the SEC to access all 

relevant data without making individual requests. This capability would 

streamline SEC investigations and enforcements relating to broker-dealers. 

Data could also be leveraged in assessing FINRA124 

 Hire additional staff to serve as permanent points of contact for SROs—

depending on needs, SROs would have one or more dedicated SEC 

personnel 

 Increase SEC participation at securities industry events to raise the 

agency’s profile and strengthen SRO relationships 

 Fill all existing vacancies in OCIE’s SRO Inspections Office 

 Hire and build a broader network of experts, including skills needed for 

reviewing SRO rule proposals 

 

124 This initiative would require the SEC to navigate certain legislative requirements, including 

Privacy Act requirements. 
© 2011 The Boston Consulting Group, Inc. 150

In our estimate, these measures strengthen the SEC’s regulatory activities 

and capabilities to deliver on them. They do not, however, expand the role of the 

SEC by, for example, taking on responsibilities from SROs. As described in 

Chapter 3, there are strong arguments and global precedents to consolidate more 

regulatory activities from SROs into the national regulator. This will reduce real 

and/or perceived conflicts of interest that SROs may have, ensure greater control 

and visibility into market information for the SEC, and clarify the governance of 

securities regulation. 

 Having said this, there are drawbacks to this approach. It will require a 

material expansion of the SEC’s budget. If the agency were to expand its role in 

any material way, the resources required to implement this would also need to 

expand. These resources would either need to be authorized by Congress 

(through the annual budget process), be borne by the industry, or a hybrid of the 

two. Further, the expanded role would create additional organizational 

complexity and place even greater demands on senior leadership management 

capacity. Finally, while the agency will likely take all steps necessary to be close 

to the markets it oversees, it is structurally difficult to have the same market 

awareness as do the SROs in the current structure. 

 This is an ongoing and crucial debate. If Congress determines that the 

SEC’s role should incorporate substantially more activities (presently being 

performed by SROs), the agency will only be able to take on any such change 

with materially expanded resources. Absent this, the agency will absolutely not 

be in a position to take on greater responsibilities. 

6.3 Choice 2: Change current role to fit available funding 

In the event that the funding environment does not change, an alternative 

option is for the SEC’s role to be changed to fit the available budget. The SEC 

would then need to rethink what activities it should perform and delegate greater 

authority to SROs than it does today. It would also need to rethink its operating 

model: This “new SEC” would change from being an “actor” that actively 

regulates markets and market participants to an “overseer” that primarily 

monitors the regulatory actions of others to whom it has delegated regulatory 

activities. It is important to make clear that this would be a change in the role of 

the SEC vis-à-vis SROs and not a change in the mission of the SEC or the extent of 

regulation. 

 As discussed in Chapter 3, there has been significant debate regarding the 

appropriate role of SROs within the overall regulatory framework. The SEC 

would therefore need to actively solicit input from all stakeholders in evaluating 

all options, and consider how it can partner with stakeholders to delegate its 

activities more effectively. 

There are a number of regulatory activities that the SEC would likely want 

to retain even under a scenario where it is significantly more reliant upon SROs 
© 2011 The Boston Consulting Group, Inc. 151

and acts primarily as an oversight body. Chief among these is enforcement and 

the authority to review, approve and revise all rules themselves—regardless of 

whether those rules were originally created by the agency or by SROs. 

Additionally, the SEC would likely want to retain responsibility for monitoring, 

anticipating and responding to emerging risks in the securities markets. Even if 

the agency delegates a significant portion of its regulatory activities, it should still 

possess a strong risk management and analysis function to fortify its oversight of 

SROs and demonstrate its credible presence to market participants and other 

stakeholders. Finally, the SEC would want to retain an unfettered right to pursue 

whatever regulatory action it sees fit—whether it be specific enforcement actions, 

examinations or another activity. 

 For illustrative purposes we provide one option for how such a redistribution might be approached and what the operating model implications 

would be for the SEC. 

 

Redistribution: Broadly, there are two ways for the SEC to think about 

how to increase its reliance on SROs. First, the SEC could “functionally 

outsource”—that is, rely on SROs more heavily (if not completely) for specific 

steps in the regulatory value chain. Second, the SEC could extend its reliance on 

SROs with respect to select regulated entities (e.g., broker-dealers, investment 

advisers). 

 

For example, the SEC could delegate selected regulatory activities for 

investment advisers to one or more SROs. Indeed, to operate in a fundingconstrained environment the SEC could establish an SRO for investment advisers 

to implement registration, examination and some enforcement authority. With 

respect to examinations, an SRO should be able to more effectively pass costs 

onto registered entities, meaning that significantly more investment adviser 

examinations would be possible given the SEC’s funding constraints. Finally, 

delegation of some enforcement authority naturally follows examination 

authority: if the SEC relies on SROs to inspect investment-advisers for violations, 

it would also rely on them to investigate and prosecute those violations. 

However, given the differences between investment adviser oversight and brokerdealer oversight, delegating authority for investment advisers to an SRO under 

this scenario would not necessarily be straightforward: the SEC should develop 

careful guidelines to SROs for overseeing investment advisers and ensure that 

those guidelines are followed meticulously. In addition, the SEC should also be 

mindful of how new regulatory costs will affect the investment-adviser industry: 

investment advisers may pass these new fees on to investors in a way that makes 

investing unaffordable for many. No matter what authorities are delegated, the 

SEC would of course retain the right to undertake any regulatory activity it deems 

appropriate. 

Operating model: With the redistribution of activities, SEC can re-tool its 

operating model, shifting from an “actor” that performs regulatory activities to an 

“overseer” that primarily monitors the regulatory actions of those SROs on whom 

it relies. 
© 2011 The Boston Consulting Group, Inc. 152

 To be successful in this oversight role, the SEC’s core focus would be on 

ensuring that the SROs have the right structure, competencies and processes in 

place to effectively perform the responsibilities that the agency has delegated to 

them. Consider, for example, OCIE’s potential role in this scenario. While today 

OCIE conducts some examinations of broker-dealers along with FINRA, in 

Choice 2 OCIE would likely instead focus its efforts largely on ensuring the 

robustness of various SRO examination programs: for example, ensuring that the 

SROs have the right risk-based prioritization processes in place, assessing the 

examination processes and competencies of SRO examination staff, monitoring 

whether the recommendations from SRO examinations are actually implemented 

in a timely manner, and back-testing SRO performance. Moreover, the SEC 

would likely need embedded agency staff in every SRO, dedicated agency teams 

for each SRO, and a strong cadre of staff who are intimately familiar with the 

SROs and the entities the SROs regulate. The agency would also need linked 

technology systems with SROs and significant access to SRO data. 

 

 Choice 2 is most suitable if constraints on the SEC persist or become more 

severe. No matter the constraints, however, the SEC should only approach this 

option incrementally, as the consequences of insufficient oversight are severe. To 

best ensure that redistribution does not affect regulatory quality, the SEC should 

consider how it can partner with stakeholders to delegate effectively. Again, we 

do not opine on whether it is appropriate to give more or less regulatory 

responsibility to the SROs, nor do we assess whether SROs are conceptually good 

for the regulatory framework. We lay out this option as something for Congress 

to consider as it debates the role of the SEC going forward. 

* * * 

The recommendations outlined as part of the optimization initiatives will 

create real and sustained efficiency and effectiveness improvement for the SEC. 

We would recommend that they be implemented immediately and rigorously on 

a “no regrets” basis, because they are foundational to the agency’s future and 

should, in any case, be the first major initiatives to be launched, whichever of the 

two further options Congress may choose. 

 As noted earlier, carrying out the SEC’s mission requires both a regulatory 

framework with clear authorizations and a robust set of internal capabilities to 

deliver against these authorizations; our study addresses only the second of these 

factors. Ultimately, BCG recommendations on the latter should be considered 

together with the former for their collective impact on the agency’s mission. 

While we recognize the inherent difficulty in developing metrics to measure 

performance against mission, true accountability is hard to attribute absent a 

thoughtful set of outcome-oriented metrics. If designed well, these metrics could 

then be cascaded through the agency to establish clear alignment at the 

division/office, manager, and individual contributor levels. The SEC already 

utilizes a set of performance measures that it reports on annually in its 
© 2011 The Boston Consulting Group, Inc. 153

Performance Accountability Report. However, BCG recommends that the SEC 

conduct a study on the feasibility of such outcome-oriented metrics. 

In the final analysis, however, it may be that the most important measure 

of success will be how effectively the agency addresses three chronic, structural 

disconnects it has historically faced and continues to face today; namely: 

 

 Between stakeholder expectations and its legal authorizations, 

 Between its authorizations and available resources, and 

 Between the dynamism of the markets it oversees and the rigidities from 

its constraints and culture. 
© 2011 The Boston Consulting Group, Inc. 154

APPENDIX 
© 2011 The Boston Consulting Group, Inc. 155

7 Appendix 

As per the Statement of Work—and in context of the changing regulatory 

environment, the evolving capital markets and the constraints placed on the 

SEC—BCG assessed the organization against the four matters of study: 

 Organization design 

 Personnel and resources 

 Technology and resources 

 Relationships with SROs 

 This chapter contains analyses that supplement the observations and 

conclusions in the main document. The following sections describe the approach 

BCG utilized to assess the agency in each matter of study and our findings. 

Wherever possible, we adopted a forward-looking perspective, evaluating the 

SEC in the context of the increasing demands being placed on the organization. 

7.1 Organization design

7.1.1 Approach 

As part of the Section 967 Study mandated by Dodd-Frank, BCG 

undertook an assessment of the SEC’s organization design. Organization design 

encompasses the organization’s structure as well as its collaboration 

mechanisms and accountabilities (such as role charters, which include 

individual and shared accountabilities). The assessment focused on three key 

questions related to the SEC’s structure and collaboration and accountability: 

Structure 

 Organizational units: What organizational units does the SEC have?

 General overview 

 Operating divisions and exam program 

 Administrative support offices 

 Dodd-Frank mandated offices 

 How are these units structured? 

 Balance between regional offices and headquarters 

 Shape of the organizational pyramid 

Collaboration and accountability: What is the interaction model? 

 Communication and collaboration 

 Governance and accountabilities 
© 2011 The Boston Consulting Group, Inc. 156

 At the outset of the study, BCG conducted baseline interviews with the 

directors of each division and office at the SEC, including interviews with 

members from selected regional offices. These interviews were followed by indepth discussions with senior managers of key organizational units. Additionally, 

we leveraged public and confidential studies, and reviewed organizational charts 

and key agency-wide processes such as the strategic planning and budget process. 

To assess the organizational structure vertically, we mapped the reporting lines 

for each SEC employee in the five divisions and OCIE and assessed the shape of 

the organizational pyramid utilizing proprietary BCG methodologies. The 

assessment took into account the history of the SEC as well as recent 

improvement initiatives already undertaken by the SEC. 

7.1.2 Structure: Overview 

7.1.2.1 Key questions explored 

 What organizational units make up the SEC’s structure today? 

 What is the number of direct reports to the Chairman and the resulting 

implications? 

7.1.2.2 Findings

 Currently, the SEC consists of five operating divisions, eighteen offices, 

and eleven regional offices:125 

Five operating divisions 

 The Division of Enforcement (Enforcement), including enforcement staff 

in the regional offices form the SEC’s enforcement program, investigates 

and brings civil charges based on violations of the federal securities laws 

 The Division of Corporation Finance (CF) performs functions to ensure 

that investors have access to materially complete and accurate 

information, and to deter fraud and misrepresentation in the public 

offering, trading, voting, and tendering of securities 

 The Division of Trading and Markets (TM) conducts activities to 

establish and maintain standards for fair, orderly, and efficient markets, 

while fostering investor protection and confidence in the markets 

 The Division of Investment Management (IM) seeks to minimize the 

financial risks to investors from fraud, mismanagement, self-dealing, and 

misleading or incomplete disclosure in the investment company and 

investment adviser segments of the financial services industry 

 The Division of Risk, Strategy, and Financial Innovation (RSFI) covers 

three broad areas of responsibility: risk and economic analysis, strategic 

 

125 Organization of the SEC. U.S. Securities and Exchange Commission. Web. 1 Feb. 2011. 
© 2011 The Boston Consulting Group, Inc. 157

research, and financial innovation. Its activities relate to policymaking, 

rulemaking, and examination and enforcement matters agency-wide 

Program offices 

 The Office of Compliance Inspections and Examinations (OCIE) 

including exam staff in the regional offices form the SEC’s examination 

program, which conducts examinations of registrants such as investment 

advisers, investment companies, broker-dealers, self-regulatory 

organizations, credit rating agencies (before Dodd-Frank), transfer agents, 

and clearing agencies 

 The Office of the General Counsel (OGC) serves as the chief legal officer 

of the SEC and provides independent legal analysis and advice to the 

Chairman, Commissioners, and operating divisions on all aspects of the 

SEC’s activities. The General Counsel also defends the SEC in federal 

district courts, represents the SEC in all appellate matters and amicus 

curiae filings, and oversees the SEC’s bankruptcy program 

 The Office of the Chief Accountant (OCA) serves as the chief advisor on 

all accounting and auditing policy and oversees the PCAOB and private 

sector standards setting 

 The Office of Investor Education and Advocacy (OIEA) serves investors 

who contact the SEC, ensuring that retail investors’ perspectives inform 

the agency’s regulatory policies and disclosure programs. This office also 

works to improve investors’ financial literacy 

 The Office of International Affairs (OIA) advises the Commission and 

coordinates with other offices and divisions on international legal and 

policy issues and advances international regulatory and enforcement 

cooperation. It promotes converged high regulatory standards worldwide 

and facilitates technical assistance programs in foreign countries 

 The Office of Administrative Law Judges (OALJ) adjudicates allegations 

of securities law violations 

Agency direction and administrative support offices 

 The Chairman is responsible for overseeing all aspects of agency 

operations, and the Chairman and Commissioners are responsible for 

the review and approval of enforcement cases and the development, 

consideration, and execution of policies and rules 

 The Office of Legislative and Intergovernmental Affairs (OLIA) works 

with Members of Congress on issues that affect the SEC 

 The Office of Public Affairs (OPA) coordinates the SEC’s 

communications with the media and the general public 

 The Office of the Secretary (OS) reviews all documents issued by the 

SEC, and prepares and maintains records of agency actions 

 The Office of the Chief Operating Officer (OCOO) oversees the Office of 

Freedom of Information Act and Records Management Services (OFOIA), 

the Office of Information Technology (OIT) and the Office of Financial 
© 2011 The Boston Consulting Group, Inc. 158

Management (OFM). The Office of the Executive Director (OED) 

oversees the Office of Human Resources (OHR) and the Office of 

Administrative Services (OAS) and jointly manages OFM with the OCOO. 

Together, the OCOO and OED are responsible for maximizing the use of 

SEC resources by overseeing the strategic planning, information 

technology (IT) program, financial management, records management, 

human resources, and administrative functions of the agency 

 The Office of Equal Employment Opportunity (OEEO) ensures that the 

SEC is an equal opportunity employer in full compliance with all federal 

EEO laws 

 The Office of the Inspector General (OIG) is an independent office that 

conducts audits of programs and operations of the SEC and investigations 

into allegations of misconduct by staff or contractors. Its mission is to 

detect fraud, waste, and abuse and to promote integrity, economy, 

efficiency, and effectiveness in the SEC’s programs and operations 

 The description of the SEC’s divisions, offices and programs as outlined 

above is consistent with the the agency’s 2010 Performance and Accountability 

Report. 

 Under the SEC’s existing organizational structure, the directors of each of 

the five divisions and thirteen main offices,126 the Chairman’s Chief of Staff, and 

the Chief Information Officer all report directly to the Chairman. In addition, 

four of the new offices mandated under Dodd-Frank are statutorily required to 

report to the Chairman, increasing the Chairman’s total span of control to 24.127

 This large number of direct reports generally creates a management 

challenge for the Chairman, which historically has been addressed in different 

ways. Under the previous Chairman, all direct reports had management access 

through regular staff meetings that also included Commissioner counsel; 

however, the large number of participants made meaningful interaction and 

decision-making challenging. In contrast, the current Chairman holds weekly 

staff meetings—in addition to periodic one-on-one meetings with all division and 

office heads—with a smaller group of key decision makers from the agency’s 

main program and support units. Meanwhile, many of the administrative offices 

are connected to the Chairman through regular interactions with the Chief of 

Staff or Deputy Chief of Staff. While the quality of interaction has reportedly 

increased, the trade-off is that smaller offices have fewer opportunities to engage 

directly with the Chairman. In addition, limited leadership capacity necessitates 

a prioritization of issues based on key areas of focus. 

 Sections 7.1.4 and 7.1.5 identify duplicate structures within the SEC’s 

current organization design. These overlaps represent potential opportunities to 

decrease the agency’s organizational complexity. 

 

126 OCIE, OGC, OCA, OIEA, OS, OED, OIA, OLIA, OPA, OCOO, OEEO, OALJ, OIG. 127 United States. Cong. Senate. Dodd-Frank Wall Street Reform and Consumer Protection Act. 111st 

Cong., 2nd sess. S 932(a)(8), 979, 915, and 342. Washington: GPO, 2010. 
© 2011 The Boston Consulting Group, Inc. 159

7.1.3 Structure: Operating divisions and exam program 

7.1.3.1 Key questions explored

 How are the SEC’s operating divisions organized and what are the guiding 

design principles? 

 Is the SEC’s divisional structure adequate? What are its limitations? 

7.1.3.2 Findings 

Description of design principles guiding divisional structure 

 This section discusses the SEC’s divisional structure. While OCIE 

technically does not have division status, we have included it here due to the size 

and importance of the exam program. 

 Today’s operating divisions are organized under a hybrid model. The 

Divisions of Investment Management, Trading and Markets, and Corporation 

Finance are largely organized based on the primary body of law they oversee and 

the respective entities they regulate: 

 Investment Management oversees investment advisers and investment 

companies and administers the Investment Company Act and the 

Investment Advisers Act of 1940 

 Trading and Markets regulates broker-dealers, oversees SROs, and is 

largely in charge of the Securities Exchange Act of 1934 as it applies to 

market practices 

 Corporation Finance is responsible for the Securities Act of 1933 as well as 

the Securities Exchange Act of 1934 as far as it relates to ongoing 

disclosure requirements. In that function, Corporation Finance oversees 

public companies 

 Enforcement, OCIE and RSFI are characterized by their main functional 

expertise and span across the spectrum of applicable laws and registrants. 

 The SEC’s divisional structure has evolved to meet particular needs. Three 

important milestones have shaped the divisional structure over the past 40 years: 

1) the establishment of the Division of Enforcement in 1972, previously 

decentralized within the SEC’s operating divisions and regional offices128; 2) the 

creation of the Office of Compliance Inspections and Examinations in 1995, 

previously housed in the Divisions of Trading and Markets (then Market 

Regulation) and Investment Management; and 3) the creation of the Division of 

Risk, Strategy, and Financial Innovation in 2009. 

 

128 Hawke, Daniel. SEC Historical Society. A Brief History of the SEC’s Enforcement Program 1934–

1981. 25 Sept. 2002. Print. 
© 2011 The Boston Consulting Group, Inc. 160

• Interaction between IM 

and TM for Investment 

Adviser and BrokerDealer Regulation 

• Type of entity 

regulated

• Primary body of law 

(ownership)

• Function performed 

(across Divisions)

• Role of OCIE and 

relationship between 

exams and rulemaking 

functions 

• Structural implications 

of Dodd-Frank on the 

Exam program

Division of

Trading & 

Markets

'34 Act

Primary Law

Division of

Investment 

Management

IC Act IA Act

Primary Law

Division of 

Corporation 

Finance

'33 Act '34 Act

Primary Law

Risk, Strategy and Financial Innovation

Division of Enforcement

Office of Compliance 

Inspections and Examinations

1

2

3

DF Examiners DF Examiners

Source: SEC Organizational Chart, BCG analysis

 As the securities markets continue to become more complex and 

interrelated, the SEC must reconcile the fact that its divisional structure follows a 

rigid set of laws and regulations and basically has not changed in fifteen years, 

while the markets it regulates are fluid and ever-changing. Today, this 

structure—including the structural changes mandated by Dodd-Frank—poses 

challenges in three key areas. 

Exhibit 7.1.3.2-1: Three areas of focus regarding the SEC’s divisional 

structure

Primary design 

dimension Divisional Structure (incl. OCIE) Areas of focus

Primary design 

dimension Divisional Structure (incl. OCIE) Areas of focus

Structural separation of broker-dealer and investment adviser regulation 

 The legal distinctions that define investment advisers and broker-dealers 

date back to the 1930s and 1940s. The SEC’s organizational structure has 

historically reflected these distinctions, with IM primarily responsible for the 

regulation of investment advisers and TM (and its predecessors) primarily 

responsible for the regulation of broker-dealers. However, this line is becoming 

increasingly blurry, as substantive functional differences between the two entities 

continue to diminish. Acknowledging this change, the SEC commissioned a 2008 

study on the investment adviser and broker-dealer industries and their respective 

relationships with customers. Throughout the study, industry experts noted that 

“the current regulatory scheme treats broker-dealers and investment advisers 

differently, when in practice, their role is essentially the same, especially from the 

viewpoint of the individual investor.” Furthermore, the study questioned the 
© 2011 The Boston Consulting Group, Inc. 161

wisdom of traditional definitions and regulatory and legal distinctions between 

the two service providers.129

 This very topic was also the focus of the “Study on Investment Advisers 

and Broker-Dealers” as required by Section 913 of Dodd-Frank.130 The study 

evaluated the effectiveness of current legal or regulatory standards of care and 

assessed whether gaps or shortcomings exist in the protection of retail customers 

that should be addressed by rules or statutes. Based on the findings of the study, 

SEC staff recommended the consideration of uniform fiduciary standards and 

related disclosure requirements that apply expressly and uniformly to both 

broker-dealers and investment advisers. In addition, the staff recommended a 

harmonization of regulation where it adds meaningful investor protection. 

Several areas where investment adviser and broker-dealer regulation differs 

today were identified, such as advertising and other communications, 

supervision, and books and records. 

 The current divisional structure does not align with a market reality that 

requires a largely harmonized approach to broker-dealer and investment adviser 

regulation. Thus, IM and TM will either have to reorganize, with all of the 

associated costs, or find ways to develop strong collaboration mechanisms to 

overcome this separation and implement the recommendations put forth by the 

Section 913 study. While the rulemaking functions for broker-dealers and 

investment advisers are clearly separated as discussed above, OCIE has taken 

steps to enhance the coordination between the exam functions across brokerdealer and investment adviser exams. 

Structural distance between exam and rulemaking functions 

 Prior to OCIE’s creation in 1995, the exam function was contained in TM 

(then Market Regulation) and IM. The rationale for centralizing examiners in 

OCIE included the need to streamline the exam process, reduce duplication, 

increase the quality of training, improve resource allocation, increase objectivity, 

and enhance coordination with regional exam staff, Enforcement, and other 

regulatory agencies.131 

 Over the past year, OCIE—under new leadership—has undergone a 

comprehensive self-assessment and, as a result, has restructured and 

strengthened the exam program nationwide. Given the importance of a 

consistent, efficient, and proactive nationwide exam program, the coordination 

and policy-setting function of the OCIE home office is increasingly relevant. A 

unified exam program under OCIE also allows for a more flexible exam force that 

combines broker-dealer and investment adviser specialists in its exam teams as 

needed. However, leading up to the passage of Dodd-Frank, there was discussion 

around the merits of re-deploying examiners back into their respective divisions 

 

129 Investor and Industry Perspectives on Investment Advisers and Broker-Dealers. 130 Study on Investment Advisers and Broker-Dealers. 131 1995 Annual Report.
© 2011 The Boston Consulting Group, Inc. 162

(i.e., TM and IM). Were the SEC to do this, it would achieve a deeper integration 

of the exam and rulemaking functions. On the other hand, it would also lead to 

very specialized exam groups for broker-dealers and investment advisers, which 

is in contrast to today’s market reality of increasingly blurry lines between the 

two, as evidenced by the “Study on Investment Advisers and Broker-Dealers” 

conducted under Section 913 of Dodd-Frank.132

 As it stands, there is an implicit trade-off by centralizing the exam function 

in OCIE. The agency gains some consistency and coordination as well as 

enhanced independence of the exam function but—by segregating the exam 

function from the policymaking functions of TM and IM—it distances rulemaking 

from exams, which can weaken the critically important information and 

knowledge flow between the two. Exams can provide information about the 

actual workings of markets and the impact of rulemaking on regulated entities 

and, as such, they can help inform the development of policy. At the same time, 

effective exams require in-depth knowledge of the rules. There is recognition of 

the need for close collaboration between these two functions, and OCIE has 

appointed dedicated staff to increase communication with rulemaking functions. 

Beyond information flow, the centralization of the exam function also weakens a 

historical career path for examiners who would over time advance into 

rulemaking roles within the same division. Recognizing this, OCIE and policy 

divisions have implemented several new coordination mechanisms (e.g., “One 

SEC” supervision strategies for large firms). 

Impact of Dodd-Frank mandates on the exam program 

 Section 965 of Dodd-Frank requires IM and TM to establish a staff of 

examiners.133 The distribution of exam resources between OCIE and the two 

divisions is not yet fully specified. However, as a result, exam staff at the agency 

could end up spread across the OCIE home office, regional offices, and operating 

divisions and would reside in all of the following units: 

 Division of Investment Management (as per Dodd-Frank Section 965) 

 Division of Trading and Markets (as per Dodd-Frank Section 965) 

 Office of Credit Rating Agencies (as per Dodd-Frank Section 932) 

 Office of Compliance Inspections and Examinations 

 Eleven regional offices 

 To ensure consistency, efficiency, and alignment across the SEC’s exam 

program, OCIE should play a vital coordination role to ensure continued and 

frequent collaboration across all aspects of the exam program. Coordination 

between the home and regional offices currently happens through OCIE’s newly 

implemented committee structure, which connects regional and home office 

 

132 Study on Investment Advisers and Broker-Dealers. 133 Dodd Frank Act Section 965 states that IM and TM must have a staff of examiners that 

“perform compliance inspections and examinations of entities under the jurisdiction of that 

Division and report to the Director of that Division.” 
© 2011 The Boston Consulting Group, Inc. 163

staff. As examiners spread across the SEC, however, OCIE and the operating 

divisions will need to continue working together to jointly answer questions to 

identify the roles, responsibilities, coordination requirements, and collaboration 

mechanisms needed for the various exam teams. 

Summary 

 Reflecting on the SEC’s divisional structure, this section has outlined three 

potential areas where structural boundaries create challenges, either because 

traditional divisional lines don’t reflect changes in securities markets or because 

they create a structural distance between thematically linked units. It is 

important to note, however, that every organizational structure will have 

inherent weaknesses, which need to be overcome by strong collaboration 

mechanisms. The SEC can address these structural challenges by either 

redrawing organizational units or implementing strong collaborative processes. 

7.1.4 Structure: Operations management and support offices 

7.1.4.1 Key questions explored

 How are the SEC’s administrative support offices structured? 

 Are there any duplicative or overlapping structures and functions? 

7.1.4.2 Findings 

Operations management and support offices

 Historically, the agency’s operational responsibilities were split between 

the Office of the Executive Director (ED) and the division directors. In fact, the 

Code of Federal Regulations gives significant operational responsibility to the 

ED.134 Given the necessary focus on the annual congressional appropriation cycle, 

budgeting process, and administrative duties, however, the ED has traditionally 

been left with limited time for the operational management of support offices. 

As a consequence, the support capabilities and offices (e.g., HR and IT) have not 

received the requisite attention and investment. In addition, the typical division 

director’s focus on policy and rulemaking tended to result in day-to-day 

operations within divisions moving further down the agenda. 

 The SEC’s senior management has recognized the importance of making 

the agency more efficient and effective. One critical step towards achieving this 

goal was the recent creation of a Chief Operating Officer (COO) position for the 

SEC, with the explicit objective of enhancing the agency’s effort to refocus its 

 

134 United States. U.S. Securities and Exchange Commission. Organization; Conduct and Ethics; and 

Information and Requests. 17 CFR 200.13. 1995. Print. 
© 2011 The Boston Consulting Group, Inc. 164

resources and make the agency more efficient and effective.135 Operational 

efficiency has also moved to the top of the agenda for most of the division 

directors, who created, or are in the process of creating, COO-like positions called 

“managing executives” within the major operating units (e.g., Enforcement and 

OCIE). 

 

 However, with the creation of a COO, responsibility for “maximizing the 

use of SEC resources by overseeing the strategic planning, IT program, financial 

management, records management, human resources and administrative 

functions of the agency”136 is currently split between the Office of the Executive 

Director (ED) and the Office of the Chief Operating Officer. The ED manages the 

Offices of Human Resources (OHR) and Administrative Services (OAS) while the 

COO oversees OIT and the Office of FOIA & Records Management Services. 

Together, the COO and ED oversee the Office of Financial Management. The 

current separation of responsibilities between the two has, at times, led to a lack 

of clarity in roles for the COO and ED. This situation weakens the authority of 

both roles and limits them from providing relevant guidance to the operating 

divisions and adopting a broader approach to improving efficiency across the 

agency’s support functions.

External facing offices 

 The SEC has three offices that, in one form or another, perform external 

relations functions: the Office of Investor Education and Advocacy (OIEA), Office 

of Public Affairs (OPA), and Office of Legislative and Intergovernmental Affairs 

(OLIA). OIEA interacts with the public through its role as an investor advocate 

and educator. It responds to questions, complaints, and suggestions from 

members of the public; produces and distributes educational materials; 

participates in seminars and investor-oriented events; and partners with federal 

agencies, state regulators, and others on investor literacy initiatives.137 

Meanwhile, OPA coordinates the agency’s relations with the media and the 

general public, in the United States and around the world.138 Finally, OLIA acts 

as a liaison with House and Senate members and staff, communicating 

legislators’ goals to the SEC and the agency’s own regulatory and management 

initiatives to Congress.139 The office also responds to congressional requests for 

testimony of SEC officials, as well as requests for documents, technical assistance, 

and other information.140 In addition, the Office of the Secretary (OS) is 

responsible for the SEC’s official website beyond its main responsibility for the 

procedural administration of Commission meetings, rulemaking, practice, and 

procedure. Elsewhere, various divisions and offices formally and informally 

 

135 United States. U.S. Securities and Exchange Commission. “Jeff Heslop named SEC Chief 

Operating Officer.” 27 May 2010. Web. 1 Feb 2011. 136 2010 Performance and Accountability Report. 137 The Investor’s Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates 

Capital Formation. U.S. Securities and Exchange Commission. Web. 1 Feb 2011. 138 Ibid. 139 Ibid. 140 Ibid. 
© 2011 The Boston Consulting Group, Inc. 165

communicate externally with different stakeholders as needed. Given the 

fragmentation of communication responsibilities across a number of offices, 

ensuring the consistency of messages and communication priorities can be 

difficult. 

 In light of the disconnect between public expectations and the agency’s 

actual regulatory role and legal authorization, it is critical that the SEC develop a 

clear and consistent communications strategy. An effective communications 

strategy should include: 1) core principles and key messages; 2) communications 

media and formats; 3) stakeholder mapping; and 4) detailed sequencing and 

execution. In addition to formulating a strong and consistent message, the SEC 

also has an opportunity to strengthen OPA’s role; for example, the Office of 

Public Affairs does not have authority over the SEC’s website, which currently 

falls under the purview of the Office of the Secretary, even though it is one of the 

agency’s primary methods of communicating with the public. 

Summary 

 Due to the strong emphasis on mission-related activities and the agency’s 

relatively small size, a focus on operational efficiency and effectiveness have 

inevitably been deprioritized on the management agenda and led to 

compromises in the agency’s support functions. While the establishment of an 

agency-wide COO underscores the commitment to addressing operational issues, 

further steps are necessary to strengthen, clarify, and empower the role of the 

COO to take broader accountability for the agency’s support functions. 

Additionally, opportunities to enhance the SEC’s communications strategy also 

exist. 

7.1.5 Structure: Dodd-Frank mandated offices 

7.1.5.1 Key questions explored

 What is the organizational impact and adequacy of the Dodd-Frank mandated 

offices? 

7.1.5.2 Findings 

 As previously discussed, Dodd-Frank mandates the creation of five new 

SEC offices. With the exception of the whistleblower program, all of these offices 

are required to report directly to the Chairman. The following section will delve 

into the details of each of the four new offices to determine whether there is any 

functional overlap with existing SEC units. In particular, each of the new offices 

will be evaluated along the following dimensions: 1) responsibilities of the new 

office under Dodd-Frank; 2) whether the SEC currently performs these activities; 

and 3) benefits and risks of the structure mandated by Dodd-Frank. 
© 2011 The Boston Consulting Group, Inc. 166

The Office of Municipal Securities 

 The SEC currently has an Office of Municipal Securities (OMS) that resides 

within TM’s Office of Market Supervision. It was created in 1995 as a separate 

office that reported directly to the Chairman and officially moved under TM in 

2001. The goals of OMS include the following: 

 Anticipate potential issues in the municipal securities market 

 Provide expertise to the SEC on municipal securities, particularly with 

regard to investigations and enforcement proceedings 

 Work toward improved disclosure and behavior of market participants in 

the municipal securities industry 

 Under Dodd-Frank, OMS moves from its current position under TM to 

become, once again, a direct report of the Chairman. OMS will continue to 

administer SEC rules for municipal securities broker-dealers, advisors, investors, 

and issuers. OMS will also coordinate with the Municipal Securities Rulemaking 

Board for rulemaking and enforcement actions. This legislation is in part a 

response to the recent financial crisis, during which the municipal securities 

industry experienced failure and illiquidity in the auction rate securities 

market.141

 The primary benefits of returning OMS to its former position are threefold. 

First, it heightens the agency’s focus on the municipal securities industry. 

Second, providing OMS with an independent voice in the budget process could 

enhance the resources dedicated to monitoring the municipal securities market. 

Given its current position in TM’s Office of Market Supervision, OMS competes 

for resources with six other offices. In 2002, OMS was reduced to two 

professional staff and remained at this level until 2010, when OMS hired two 

additional short-term Attorney Fellows. Third, as OMS takes on a greater role in 

regulating the Municipal Securities Rulemaking Board (MSRB), elevating the 

office could provide it with greater clout to influence the MSRB’s rulemaking 

process. 

 However, there are drawbacks to elevating OMS. It requires additional 

overhead to operate as an independent office—it currently relies on TM for 

financial management staff and administrative resources. In addition, it 

represents yet another direct report to the Chairman, thus increasing 

organizational complexity. Finally, OMS will be the only standalone office that 

focuses on a single asset class and reports directly to the Chairman, further 

fragmenting the agency and impeding collaboration across offices that perform 

similar regulatory functions. 

 

141 Anderson and Bajaj. 
© 2011 The Boston Consulting Group, Inc. 167

The Office of Credit Rating Agencies 

 Dodd-Frank mandates the creation of the Office of Credit Rating Agencies 

(OCRA) to administer SEC rules for nationally recognized statistical rating 

organizations (NRSROs), conduct examinations of each NRSRO at least once a 

year, and publish an annual report of exam results. This office arose from the 

controversy surrounding the rating agencies’ assessment of mortgage-backed 

securities and other complex financial instruments leading up to the financial 

crisis.142 OCRA’s responsibilities are currently split between two SEC offices. In 

TM, the Office of Financial Responsibility writes and administers rules related to 

credit rating agencies. Meanwhile, OCIE inspects rating agencies for compliance 

with said rules (without the annual exam requirement or issuance of reports to 

Congress). 

 Under the Dodd-Frank structure, OCRA exists as a separate unit reporting 

directly to the Chairman. Rulemaking and examinations would be housed 

together, which may lead to synergies between the two functions. However, the 

structure required by Dodd-Frank involves trade-offs. First, examiners housed in 

OCRA may be too far removed from the National Examination Program, and a 

dual reporting line to OCIE may cause confusion over accountability. Although 

NRSRO examinations are relatively distinct from examinations of other regulated 

entities, creating a separate office will nonetheless make it difficult to maintain 

consistency among the SEC’s various types of examinations. In addition, staff in 

OCRA will gain expertise in only one area—credit rating agencies—thus 

constraining their career paths at the SEC. This could impair the agency’s ability 

to attract and retain top talent. The creation of OCRA also carries the same risks 

as discussed above with regard to organizational complexity and the need for 

additional funding to support overhead. The resource question is particularly 

important for OCRA because it is one of the main Dodd-Frank offices charged 

with significant rule-writing. Due to a lack of funding, the office’s creation has 

been postponed until Congress approves a FY 2011 budget for the SEC; however, 

the agency is required by Dodd-Frank to complete a number of rulemaking 

projects related to credit rating agencies by the end of 2011. This means that the 

staff eventually hired for OCRA will be interpreting and assessing compliance 

with rules they did not write. 

The Office of the Investor Advocate 

 The Office of the Investor Advocate (OIAD) is charged with assisting retail 

investors in their interactions with the SEC or SROs, identifying problems that 

investors have with financial service providers and investment products, and 

analyzing the impact of proposed SEC and SRO rules on retail investors. OIAD is 

envisioned as an independent office that reports directly to the Chairman and to 

Congress, with primary responsibilities that include the following: 

 

142 Gillen. 
© 2011 The Boston Consulting Group, Inc. 168

 Provide a central point of contact for investor complaints about the SEC or 

SROs 

 Maintain an Ombudsman who will liaise with the public 

 Identify recurring problems that investors have with financial service 

providers or investment products 

 Advocate for investors in the rulemaking process 

 Currently, these functions are assigned to the Office of Investor Education 

and Advocacy (OIEA), TM’s Office of Sales Practices (OSP), and the Office of the 

Inspector General (OIG). OIEA is responsible for managing investor education 

programs and responding to investor questions and complaints. Meanwhile, OSP 

oversees rules regarding sales to retail investors and increasingly works with 

OIEA, which advocates for retail investors in the rulemaking process. Lastly, OIG 

is an independent office within the SEC, responsible for auditing the agency’s 

programs and operations as well as investigating misconduct. OIG maintains a 

hotline to receive information from SEC employees and the general public 

regarding agency misconduct. 

 By creating an independent office focused solely on investors, Dodd-Frank 

provides a clear point of contact for investor complaints via the Ombudsman 

position. But the new office will require additional resources, and with OIAD’s 

budget process less directly under the Chairman’s control, this could divert 

necessary funding away from other divisions and offices. Moreover, the new 

office will duplicate functions that the agency already performs. While some of 

the duplication may be eliminated by consolidating activities in OIAD, other 

functions will continue to be the responsibility of multiple offices. For example, 

OIG will still maintain a complaint hotline, so investor complaints may not be 

completely centralized. Furthermore, the structure mandated by Dodd-Frank 

requires a high degree of coordination across OIAD, OIEA, OSP, and OIG. Lastly, 

the new office represents another direct report to the Chairman. 

The Office of Minority and Women Inclusion

 The creation of the Office of Minority and Women Inclusion (OMWI) was 

primarily motivated by a desire to increase diversity in the federal contracting 

process and on Wall Street.143 OMWI is responsible for all matters relating to 

diversity in management, employment, and business activities at the SEC, 

including contracting processes. In particular, its responsibilities include the 

following: 

 Develop workforce standards and policies related to diversity 

 Increase the participation of minority- or women-owned businesses in SEC 

contracts 

 Assess the diversity policies and practices of regulated entities 

 

143 Roose. 
© 2011 The Boston Consulting Group, Inc. 169

 The majority of activities designated to OMWI are already performed by 

existing SEC offices. Currently, the Office of Equal Employment Opportunity 

(OEEO) examines workforce diversity, develops diversity standards and 

strategies, plans and implements diversity retention programs, and participates in 

diversity recruiting. The Office of Human Resources (OHR) works with OEEO to 

develop and implement the agency’s diversity recruitment strategy. Finally, the 

Office of Acquisitions under the Office of Administrative Services (OAS) tracks 

Small and Disadvantaged Business Utilization (SADBU) goals including the use 

of, among other criteria, women- and minority-owned businesses. One new 

responsibility currently not performed by the SEC, however, is the assessment of 

regulated entities’ diversity practices. 

 The creation of OMWI adds another management voice advocating 

diversity, and it may well increase the SEC’s focus on diversity issues. 

Additionally, it provides a home for the assessment of diversity efforts by 

registrants and may increase consistency among the agency’s policies regarding 

diversity planning and strategy. There are, however, drawbacks to establishing 

the new office. The creation of OMWI duplicates functions already being 

performed elsewhere in the SEC, requires additional resources, and adds yet 

another direct report for the Chairman. In addition, separating diversity 

policymaking from OEEO and OHR diminishes any synergies stemming from 

OEEO’s close familiarity with complaint data and OHR’s expertise in 

implementing recruitment programs. Furthermore, since OEEO and OHR will 

retain responsibilities related to workplace discrimination and diversity 

recruiting, respectively, the new structure requires significant coordination across 

the three offices. Finally, OMWI will need access to OEEO’s knowledge of equal 

employment law to avoid illegal diversity practices (e.g., quota-setting). 

Summary 

 The offices mandated under Dodd-Frank were created to address specific 

areas of concern to Congress. Many of the activities to be performed in the new 

offices are already performed by existing units within the SEC. Placing those 

functions in new offices may increase their visibility, but it also creates 

organizational complexity. Moreover, the new structures could put greater 

distances between related functions, making it more challenging for the SEC to 

leverage the full value of shared expertise and support infrastructure. The 

requirement to create the new offices also puts more stress on the agency’s 

resources, which are already constrained by enhanced activity and other new 

mandates. 

7.1.6 Balance between regional offices and headquarters 

7.1.6.1 Key questions explored

 What is the SEC’s regional structure? 

 How does this structure affect the agency’s exam and enforcement programs? 
© 2011 The Boston Consulting Group, Inc. 170

7.1.6.2 Findings 

 About 1,600 of the SEC’s 3,900 employees—or approximately 40 percent 

of its total workforce—are located in the agency’s eleven regional offices:144

 New York Regional Office (Staff: 391) 

 Boston Regional Office (Staff: 125) 

 Philadelphia Regional Office (Staff: 111) 

 Miami Regional Office (Staff: 106) 

 Atlanta Regional Office (Staff: 96) 

 Chicago Regional Office (Staff: 240) 

 Denver Regional Office (Staff: 96) 

 Fort Worth Regional Office (Staff: 105) 

 Salt Lake City Regional Office (Staff: 25) 

 Los Angeles Regional Office (Staff: 167) 

 San Francisco Regional Office (Staff: 109) 

 The regional offices house SEC staff for the agency’s enforcement and 

exam programs. Each regional office is headed by a regional director, who 

reports to the Director of the Division of Enforcement and to the Director of 

OCIE. The regional director is also responsible for regional operations and 

support functions. Associate directors oversee the enforcement or exam 

programs in their region and report directly to the regional director. 

 The regional model places SEC staff closer to the markets and entities 

regulated by the SEC, and facilitates alignment with local co-regulators. But this 

model also makes it more challenging to ensure the consistency and efficiency of 

the agency’s nationwide enforcement and exam programs. 

Brief historic overview of the SEC’s regional offices 

 When the SEC was founded, the agency vested its regional offices with the 

primary responsibility of conducting investigations and bringing forth 

enforcement actions. Over the next 40 years, regional offices became the first line 

of enforcement.145 After a period of low, limited enforcement activity and 

tightened budgets in the 1950s, an uptick of scandals and fraud in the 1960s 

“convinced Chairman Cary that the SEC needed a home office pre-emptive strike 

capability.”146 Realizing the enforcement program had not focused on misconduct 

of national significance but rather on smaller, local frauds, the SEC began to 

build enforcement capabilities within the home office, leading to the 

establishment of the Division of Enforcement in 1972. 

 

144 Staff levels for regional offices as of October 2010. 

145 Hawke. 146 Ibid. 
© 2011 The Boston Consulting Group, Inc. 171

 The regional offices have seen a variety of reporting structures with 

varying degrees of autonomy. Historically, regional directors have either reported 

directly to the Chairman, to the Executive Director’s office, or to Enforcement. 

The relationship between the regional and home offices has been described as 

strained, leaving regions “disenfranchised” with the SEC. Anecdotally, the 

regional model has had the following shortcomings: 

 Regional offices have not communicated sufficiently with each other (e.g., 

several offices were examining the same entity but were not aware of the 

overlap) 

 Regional offices have followed different procedures (e.g., processing tips, 

complaints, and referrals, conducting exams) 

 Regional enforcement and exam staff have not collaborated sufficiently 

within their programs or with other divisions at headquarters (e.g., they 

did not reach out to experts in TM and OIA) 

 Over the past two years, the Division of Enforcement and OCIE have 

embarked on critical self-assessments that resulted in significant changes and 

addressed, among other issues, the shortcomings mentioned above. 

Changes in the enforcement and exam programs have also improved 

collaboration between regions and headquarters 

 Restructuring the Division of Enforcement: In 2009-2010, Enforcement 

implemented a significant and broad restructuring of its operations. The 

overarching goal of the effort was to increase the efficiency and expertise with 

which the Division investigates and brings its cases, so that time and resources 

can be devoted to matters with greater urgency and impact. Key initiatives of the 

restructuring included the creation of five national units dedicated to highlyspecialized and complex areas of the securities industry, the streamlining of 

management and internal processes, the establishment of an Office of Market 

Intelligence responsible for collecting, risk-weighting, triaging, and referring 

TCRs, improvements to the Division’s metrics, the creation of a Managing 

Executive position, the devolvement of certain decision-making from Division 

senior leadership to senior officers, and the delegation of authority of certain 

matters from the Commission to the Division Director.147 A subset of these 

initiatives is described below: 

 The creation of specialized units: The Division created five national units 

dedicated to highly specialized and complex areas of the securities industry and 

securities law, with a view toward concentrating expertise and making it easier to 

connect the dots. Each unit is headed by a "unit chief" and staffed from offices 

around the country. While the number and nature of the specialized units may 

change over time, depending on market trends and demands, the current units 

are as follows:

 

147 Khuzami, Robert. “My First 100 Days as Director of Enforcement.” New York City Bar. New York, 

NY. 5 Aug. 2009. Speech. 
© 2011 The Boston Consulting Group, Inc. 172

 The Asset Management Unit is focused on investment advisers, investment 

companies, hedge funds and private equity funds. This unit addresses a 

range of issues, including disclosure, valuation, portfolio performance, due 

diligence and diversification, transactions with affiliates, misappropriation 

and conflicts of interest

 The Market Abuse Unit is focused on large-scale market abuses and 

complex manipulation schemes by institutional traders, market 

professionals and others. As part of the restructuring plan, the unit is 

expected to build technological tools and screening programs to analyze 

trading across equities, debt securities, and derivatives markets

 The Structured and New Products Unit is focused on complex derivatives 

and financial products, including credit default swaps, credit default 

obligations and other securitized products

 The Foreign Corrupt Practices Act Unit is focused on new approaches to 

identifying violations of the Foreign Corrupt Practices Act (FCPA). As part 

of its mandate, the group is working closely with foreign counterparts and 

is expected to take a more global approach to these violations

 The Municipal Securities and Public Pensions Unit is focused on several 

areas, including offering and disclosure issues, tax and arbitrage-driven 

activity, unfunded or underfunded liabilities, and "pay-to-play" schemes

 

 In addition to fostering expertise in critical areas, the creation of 

specialized units serves to increase communication and collaboration across the 

regions. Although only 25 percent of enforcement staff is assigned to a 

specialized unit, these units draw from all of the regional offices. The move 

towards specialized units has created a flexible network of experts and has also 

appears to have brought the enforcement program closer together. 

 Streamlining internal management and processes: As part of the restructuring, 

Enforcement has eliminated a layer of management by deploying branch chiefs 

from supervisory positions to the front line where they serve as experienced 

investigators. The idea was that “this flattening of our management structure 

will increase the resources dedicated to our investigative efforts, and will operate 

as a check on the extra process, duplication, unnecessary internal review and the 

inevitable drag on decision-making that happens in any overly-managed 

organization. This flattening will also encourage autonomy and accountability 

throughout the organization by pushing more decision-making to the front-line 

staff.”148 As a result, the front line staff to manager ratio has doubled. Moreover, 

in conjunction with the elimination of the branch chief layer, Enforcement is 

planning to increase the support for its lawyers by roughly tripling the prereorganization number of fulltime paralegals and support personnel. The 

rationale is to free up investigators for critical front-line work by relieving them of 

the burdens of routine administrative tasks. Finally, internal processes were 

streamlined to make action memoranda shorter and less time consuming to draft, 

review, approve, and calendar for Commission consideration. 

 

148 “My First 100 Days as Director of Enforcement.” 
© 2011 The Boston Consulting Group, Inc. 173

 Delegation of authority: Concurrent with the streamlining efforts within 

Enforcement, the SEC delegated to the Division Director the authority to issue 

formal orders of investigation, with their accompanying subpoena power. In turn, 

the Division Director delegated that authority to senior officers throughout the 

Division, such as to the associate directors for the enforcement program in the 

regional offices. The Commission also delegated to the Division Director the 

authority to submit immunity requests to the Department of Justice. 

 Impact on regional offices: Regional directors and enforcement staff have 

largely welcomed the creation of the specialized units while acknowledging the 

challenges that come with every matrix organization, such as dual reporting lines 

for specialized unit staff to both the regional director and the unit chief. In 

addition, the current leadership team has implemented several measures to 

increase transparency and consistency across the agency’s national enforcement 

program. These initiatives include weekly senior staff meetings between all 

regional and associate directors by videoconference, periodic meetings between 

all home and regional office assistant directors and division senior leadership, 

quarterly case reviews between front line staff and supervisors and between 

supervisors and senior officers, creation of a Cooperation Committee comprised 

of home and regional office staff that provides guidance and decision-making on 

matters concerning the division’s recent cooperation initiative, and enhanced 

training offered by the specialized units to all staff throughout the division. 

 Reorganizing OCIE and establishing a National Examination Program: 

Over the past year, OCIE’s new leadership team has undertaken a comprehensive 

self-assessment of its strategy, structure, people, processes, and technology to 

strengthen the exam program.149 As part of its strategy going forward, OCIE is 

establishing an integrated National Exam Program to increase consistency, 

effectiveness, and efficiency across the regions: 

Strategy: OCIE continues to refine its risk-based approach to the 

examination process. Examination candidates are now analyzed along a 

spectrum of risk criteria, which are cross-referenced with tips, complaints, and 

referrals (TCRs) to identify registrants with the highest risk profiles. From there, 

examinations are prioritized based on a further risk assessment of the registrants’ 

business operations, among other factors. OCIE expects to more efficiently 

allocate its resources and focus attention on critical, high risk functions. 

Additionally, OCIE seeks to strengthen the connection to the rulemaking process 

through structured involvement from start to finish, and with dedicated policy 

support teams on key regulatory reform rules, studies, and initiatives. Finally, 

OCIE is working on joint initiatives with RSFI to monitor new and emerging risks 

to investor protection and market integrity. 

Structure: To improve communication, collaboration, and oversight across 

the exam program, OCIE created a new national governance model. The 

 

149 “Remarks at the CCOutreach National Seminar.” 
© 2011 The Boston Consulting Group, Inc. 174

governance structure, which includes senior leaders from the regional offices, 

comprises an Executive Committee and four Steering Committees on the 

following topics: 1) Compliance, Ethics, and Internal Controls; 2) People; 3) 

Technology; and 4) Risk and Exam Process. The Executive Committee is chaired 

by the Director of OCIE and includes members from regional offices and the 

home office. The four Steering Committees are composed of a mix of OCIE home 

and regional office staff and serve as advisory boards to the Executive Committee. 

Each Steering Committee is headed by an associate director who is also a 

member of the Executive Committee, thus linking the two groups together. The 

goal of this new governance structure is to promote the general inclusion of all 

examiners and, through that, the propagation of the NEP. Additionally, OCIE 

established a new Risk Analysis and Surveillance Unit to inform risk-based 

decision-making, launched new Specialization Working Groups dedicated to new 

and complex industry developments, and are working to break down internal 

silos in order to address specific risks in an exam profile (e.g., joint investment 

adviser and broker-dealer exam teams). 

Process: To streamline the exam program, OCIE introduced new 

mechanisms to drive standardization, consistency, and accountability across the 

NEP. In particular, OCIE improved the National Exam Operations Manual and 

launched an automated National Exam Workbook. Furthermore, OCIE 

appointed its first Chief Compliance Officer to enhance and monitor compliance 

with the office’s own policies and procedures. 

People: Similar to Enforcement, OCIE created a Managing Executive 

position to improve the effectiveness and efficiency of operations, and hired 

senior specialized examiners with diverse skill sets to strengthen its knowledge 

base. Furthermore, the exam program is strengthening expertise through focused 

recruiting and enhanced training. OCIE also intends to establish “open 

architecture” staffing, which allows management to draw staff from a pool of 

examiners to match examiners’ skill sets and areas of expertise to the entity 

examined. 

Technology: OCIE has focused on automating the exam process. In 

particular, OCIE set up a Technology Committee to oversee its technology 

resources and strategy, and developed new risk assessment technologies in 

conjunction with RSFI. 

 Impact on regional offices: The establishment of the new committee 

structure has improved communication and collaboration across the regional 

offices and with the home office. For the first time, senior exam staff in the 

regions have a “seat at the table” and is actively involved in setting strategy and 

standards for the SEC’s exam program. One staffer described the change as “the 

best thing that has happened to the exam program in 40 years.” The introduction 

of an updated exam manual and automated workbook harmonize exam 

standards across regions. In addition, senior exam staff is working to develop an 

examiner training program that establishes a consistent baseline for technical 

training and certification standards across the country. 
© 2011 The Boston Consulting Group, Inc. 175

Potential opportunities for improvement 

 The improvements outlined above are largely the result of necessary steps 

taken by the SEC to streamline its enforcement and exam programs. The 

changes are intended to build a truly national, interconnected, and consistent 

program across the regional offices. As part of the next phase, the SEC will need 

to critically assess whether today’s regional structure best supports this new 

direction. The development of a regional strategy should include three topics: 1) a 

clearly defined location strategy; 2) clarification of roles of regional vs. 

headquarter staff; and 3) implementation of the optimal regional structure and 

reporting relationships. 

 Location strategy: The SEC does not currently have a clearly articulated 

agency-wide strategy for its regional office presence. This is partly driven 

by the fact that the regional offices are historically grown, with the 

majority dating back to the inception of the agency in 1934. This lack of a 

long-term strategy makes it difficult for regional directors and offices to 

plan and adequately support regional staff. Going forward, the SEC 

should assess whether the current regional approach best supports its 

national programs given the changes in its external environment, the likely 

continued funding constraints, and the agency’s focus on national 

programs, specialization, and flexibility. A critical assessment should also 

consider the efficiency of the current regional set-up given the offices’ 

different sizes and territories assigned 

 Role clarity: While both OCIE and Enforcement have taken steps to clarify 

the specific roles assigned to its regional and home office staff, specific 

areas of tension remain. In Enforcement, for example, the assignment of 

cases between regional and home office staff has historically been a topic 

of ambiguity and contention. This is largely driven by two reasons: 1) the 

agency’s Washington DC headquarters is the largest office, but it has no 

predetermined geographic jurisdiction; and 2) headquarters is 

geographically close to several other offices. Since cases are usually 

assigned based on the geographic nexus of the activity underlying the case, 

home office staff—by default—work on cases that are technically in the 

jurisdiction of regional offices. In the past, this has led to concerns by 

regional staff that the home office acts as a separate, “duplicative” 

enforcement program that is able to target cases selectively, although 

whether this is more perception than reality is an open question. As a 

result of these and other considerations, Enforcement has undertaken an 

initiative to revise and make transparent the criteria by which cases based 

on tips, complaints, and referrals are assigned throughout the Division. 

This and other initiatives reflect that both Enforcement and OCIE have 

started to clarify the respective roles of regional and home office staff, 

although more needs to be done. This includes areas where regional 

responsibilities overlap between Enforcement and OCIE, such as support 
© 2011 The Boston Consulting Group, Inc. 176

needs that serve both programs or discretionary budget allocated to both 

programs 

 Regional structure and reporting lines: Currently, each regional office is 

headed by a regional director, who reports both to the Director of the 

Division of Enforcement and to the Director of OCIE. The regional director 

is responsible for regional operations and support functions. Associate 

directors in the regions oversee the local enforcement and exam programs 

in their respective regions and report directly to the regional director. Until 

recently, the link between OCIE and the regional exam program has been 

weaker compared to that of Enforcement. This is due to the historic 

context under which the regional offices and the Division of Enforcement 

evolved and to the fact that regional directors traditionally have more of 

an enforcement background. This makes it more difficult for OCIE to 

ensure sufficient knowledge and expertise flow between the home and 

regional offices150

Summary 

 The SEC’s regional model has historically sought closeness to the markets 

and entities regulated, and facilitated alignment with local co-regulators. Having 

had a high degree of autonomy for many years, however, each regional office 

grew accustomed to setting and following its own processes and procedures. This 

resulted in inconsistencies and insufficient communication both within the exam 

and enforcement programs as well as with other divisions at headquarters. 

 The SEC embarked on a critical assessment of its enforcement and exam 

programs, and implemented significant changes to restructure and strengthen 

both. The institution of a National Exam Program and the implementation of a 

new governance structure have improved the consistency across, and 

collaboration among, the entire exam program. Similarly, the creation of 

specialized units in the enforcement program has created a flexible network of 

experts, which connects staff across regional offices. 

 As a next step, the SEC should assess the adequacy of the current regional 

model along three areas: 1) location strategy; 2) roles of regional vs. headquarter 

staff; and 3) regional structure and reporting relationships. By relying on dual 

reporting, this structure potentially weakens the supervisory abilities of—and 

accountabilities to—the central exam and enforcement functions. 

 

150 The new national governance model that OCIE implemented this past year has begun to 

significantly improve oversight, coordination, and accountability (including the participation of 

regional exam staff on national governance committees). These efforts should be continued and 

monitored. 
© 2011 The Boston Consulting Group, Inc. 177

7.1.7 Shape of the organizational pyramid 

7.1.7.1 Key questions explored

 What is the shape of the SEC’s organizational pyramid? 

7.1.7.2 Findings 

 The following section evaluates the SEC’s organizational structure 

vertically, in terms of spans of control and reporting layers, using a proprietary 

BCG layer-level methodology. In conducting this analysis, BCG partnered with 

both the Office of Human Resources and management personnel from the five 

operating divisions and OCIE to map every employee’s reporting relationship and 

assess the median span of control (SoC)151 and fully-loaded cost152 at each layer 

and level. 

 Under this approach, employees are first classified by layer based on the 

number of intervening reporting relationships between the employee and the 

head of the organization. For example, the Chairman is layer 1 and a division 

director is layer 2. Employees are then plotted on the basis of their level (i.e. 

grade designation in the SK or SO system). The resulting layer-level analysis 

enables an assessment of the shape of the organization and allows for 

benchmarking against comparable entities. 

 The layer-level analysis of the five divisions and OCIE, presented in Exhibit 

7.1.7.2-1, identified four key themes that, if addressed, could result in a faster and 

lighter organization that is better able to meet new challenges: 

1. The SEC is a deep organization for its size, extending into eight layers. An 

overly deep organization typically faces challenges in communication and 

engagement, as it is more difficult for information to travel up and down 

the organization 

2. While they vary by office, spans of control (SoC) are relatively low at the 

SEC, which contributes to the high number of layers described above. 

Many organizations face this issue as structures change over time, new 

responsibilities are absorbed, and high performers are promoted. The 

SEC’s median SoC is four across most layers. Although a narrow SoC may 

appear to lessen the burden on supervisors, it also introduces the potential 

for unnecessarily high levels of oversight. Especially with relatively small 

team sizes, managers continue to maintain a high degree of involvement 

with the content, potentially at the expense of developing people 

management, leadership, and operations skills 

 

151 The number of employees directly managed by a supervisor. 

152 Base salary and benefits, modified if necessary by an employee’s part-time status. 
© 2011 The Boston Consulting Group, Inc. 178

3. More than 80 percent of often long-tenured SK-14 lawyers, accountants, 

and economists sit in the lower layers (layers six through eight) of the 

organization. With significant portions of senior staff quite deep in the 

organization, the SEC could potentially be under-leveraging this 

experienced talent, who are compensated at a relatively high pay-grade 

4. Over 40 percent of employees in layers three and four are non-managerial 

staff (individual contributors [ICs]). Having these ICs high in the 

organization contributes to lower SoC throughout the top and middle of 

the organization. Low spans of control perpetuate gaps in management 

capabilities and empowerment, incenting managers to engage in detailed 

content instead of providing direction and developing employees 

Exhibit 7.1.7.2-1: Layer-level analysis for divisions & OCIE 

8 2 166 18 5 0 191 191

1

0

1

N/A

EX 3

1

4

2

2

3

AD 0

4

149

147

2

5

SK 1-12

41

77

23

3

145

144

1

5

SK 13

46

63

13

5

730

726

4

6

SK 14

125

303

128

6

2

ICs 250 10 163 20

Managers 6 27 16 144 1 111

1219

226

504

223

57

18

0

0

ICs

315

45

46

113

74

30

6

1

Managers

Total 6 32 18 154 164 131

549 5 1 4 Median 

SOC

Level SO 3 SO 2 SO 1 SK 17 SK 16 SK 15 4 1534

7 1 14 44 4 271

6 25 52 30 5 550

5 2 69 51 50 5 336

4 12 7 58 34 6 4 131

3 18 11 1 11 1 4 48

2 6 9 6

1 N/A 1

Layer

Total

Median 

SoC

Headcount by layer and level – Divisions incl. OCIE

(ex. regional staff & office automation)

8 2 166 18 5 0 191 191

1

0

1

N/A

EX 3

1

4

2

2

3

AD 0

4

149

147

2

5

SK 1-12

41

77

23

3

145

144

1

5

SK 13

46

63

13

5

730

726

4

6

SK 14

125

303

128

6

2

ICs 250 10 163 20

Managers 6 27 16 144 1 111

1219

226

504

223

57

18

0

0

ICs

315

45

46

113

74

30

6

1

Managers

Total 6 32 18 154 164 131

549 5 1 4 Median 

SOC

Level SO 3 SO 2 SO 1 SK 17 SK 16 SK 15 4 1534

7 1 14 44 4 271

6 25 52 30 5 550

5 2 69 51 50 5 336

4 12 7 58 34 6 4 131

3 18 11 1 11 1 4 48

2 6 9 6

1 N/A 1

Layer

Total

Median 

SoC

Headcount by layer and level – Divisions incl. OCIE

(ex. regional staff & office automation)

Overall median span of control: 4

Source: HR database as of Oct 2010; BCG analysis

1

2

3

4

SoC: Span of control

Manager: has one direct report

IC: Individual contributor

Summary 

 The analysis discussed above forms the starting point for further inquiry 

into whether the agency optimally deploys its scarce resources. The SEC should 

de-average this analysis by division and office to critically address the four areas 

highlighted above. 

7.1.8 Communication and collaboration 

7.1.8.1 Key questions explored

 What is the ability of the existing organizational structure to promote efficient 

and effective communication and collaboration between offices and divisions? 
© 2011 The Boston Consulting Group, Inc. 179

7.1.8.2 Findings

 Collaboration is critical at the SEC and enables the agency to connect the 

dots across its divisions and offices. In addition, collaboration is needed to ensure 

consistency in the regulation of similar entities, enable communication between 

home and regional offices, increase the effectiveness of special projects, and 

enhance alignment between the business divisions and support offices. There is 

recognition of the need for heightened collaboration, and the agency’s senior 

management has promoted a culture of collaboration—stressing the importance 

of sharing information and sharing ideas. One notable example is the crossdivisional tips, complaints, and referral (TCR) project. The objective of the 

project was to revamp the SEC’s technology and cross-divisional processes for 

handling the approximately 30,000 substantive tips and complaints it receives 

each year. Over the past year, the project team—which included senior members 

of key divisions, offices and regions—developed a process to ensure consistent 

TCR processing and the sharing of critical information across units. As with TCR, 

the SEC has also established cross-divisional task forces in other key areas of 

focus, such as the Consolidated Audit Trail and Life Settlements. In addition, a 

series of newly established meetings also help facilitate collaboration: 

 The monthly “Trends Meeting” is a forum for individuals across divisions 

and offices to meet and discuss topical trends or events in the market. The 

meeting is intentionally unstructured; attendees are encouraged to discuss 

whatever concerns or market observations that are on their minds 

 The General Counsel has instituted regular meetings of all rulemaking 

functions to align and ensure consistency of the rulemaking efforts 

resulting from Dodd-Frank provisions 

 The Office of International Affairs has established an agency-wide “Task 

Force on International Implementation” that meets regularly to discuss 

international issues arising from Dodd-Frank rulemaking to facilitate 

awareness and consistency, where appropriate, across the rulemaking 

process 

 OCIE and Enforcement have introduced regular coordination meetings to 

discuss the status of examinations and enforcement referrals 

 The SEC’s divisions have also focused on breaking down silos across, and 

within, their divisions. For example, the exam program has begun integrating 

broker-dealer and investment adviser exams. For Enforcement, the creation of 

specialized units has made it easier for other divisions to find the right points of 

contact (e.g. IM now liaises closely with Enforcement’s Asset Management unit). 

Aside from structural changes, Enforcement has also undertaken small yet 

effective changes to foster a more collaborative culture. For example, it allows 

staff to send questions to all enforcement staff via email—a practice that was 

formerly frowned upon—and holds a series of town hall meetings to discuss 

progress and milestones of the enforcement program’s restructuring effort. 
© 2011 The Boston Consulting Group, Inc. 180

 Despite these advances, the existing structure, agency culture, lack of 

supporting technology infrastructure, and processes continue to impact 

communication and collaboration. The SEC’s segmentation into units, together 

with the divisions’ own internal structures, has created barriers to collaboration. 

For example, in order to work towards a harmonized regulatory approach for 

investment advisers and broker-dealers or to ensure the flow of information 

between exam insights and rulemaking as outlined in Section 7.1.3.2, the SEC 

needs to overcome divisional lines. In addition, each division’s internal structure 

is tailored to division-specific needs, and there are few formalized cross-divisional 

collaboration mechanisms. As a result, communication tends to be informal, ad 

hoc, and based on personal relationships. The communication with Enforcement 

is probably the most formalized, with a clear referral process and “dedicated 

liaison offices” in some divisions. It is important to note, however, that no 

organizational structure is perfect—at the SEC or any other organization. While 

changes to the organization design can offer solutions, structural weaknesses can 

also be overcome by implementing strong collaboration mechanisms. 

 The SEC’s traditionally siloed nature is also driven by several cultural 

factors such as the agency’s informal incentive structure and its hierarchical 

culture. For example, enforcement success was informally measured by statistics 

(i.e. number of cases) and high profile cases, resulting in internal competition for 

“hot” cases and limited information sharing across teams. Enforcement has since 

taken steps to address this issue by including collaboration across regions and 

units in its processes and measuring qualitative factors. Division management 

has developed: 1) metrics for measuring the disposition of aged cases so that old 

and stale matters can be identified and resolved; and 2) a national priority case 

report comprised of enforcement investigations and actions that meet 

programmatically significant case criteria. The SEC’s hierarchical culture also 

contributes to the agency’s traditionally siloed nature. This culture is more 

prevalent in some divisions than others and impairs collaboration. While good 

communication and collaboration exists at the most senior level, information 

does not always cascade through the chain-of-command as efficiently as it should. 

 

 Effective communication and cross-divisional collaboration are also 

affected by the SEC’s technological infrastructure, which does not readily enable 

information sharing across the agency. Each division maintains its own 

independent database, and the agency still depends largely on written memos to 

keep track of, and communicate, staff actions or key decisions. This also makes it 

hard to clarify which activities other divisions are responsible for and working on. 

 Some unpredictability in its workload and resourcing has also prevented 

the SEC from fully utilizing mechanisms that usually foster collaboration across 

divisions, such as the strategic planning process. The SEC’s latest strategic plan 

was developed collaboratively with an Executive Steering Committee and crossdivisional working groups. However, it was not fully communicated, largely 

because of uncertainty around Dodd-Frank and funding, to the divisions and 

staff. As a result, is not used to guide divisional strategies, goals, or metrics. 
© 2011 The Boston Consulting Group, Inc. 181

Summary 

 Historically, the SEC has been a fragmented agency. It operated in distinct 

divisional silos with limited emphasis on formal, cross-divisional collaboration 

between organizational units. As a result, communication tends to be informal, 

ad hoc, and built on personal relationships. The SEC has taken considerable steps 

towards overcoming these divisional silos and increasing collaboration. The 

continued commitment of the leadership team will be needed to ensure such 

collaboration cascades through the organization and becomes a part of the 

agency’s culture. 

7.1.9 Roles and accountabilities 

7.1.9.1 Key questions explored

 Does the SEC have clearly defined roles and accountabilities? 

7.1.9.2 Findings

 BCG experience shows that clear role charters, which clarify missioncritical individual and shared accountabilities, significantly increase 

organizational efficiency and effectiveness by: 

 Enhancing engagement, motivation and empowerment

 Improving and speeding up decision-making

 Reinforcing strategic imperatives throughout the organization

 As a result of changes the SEC has undergone over the past two years, and 

considering the agenda ahead, the separation of responsibilities is far from static. 

While the SEC has developed clear role charters in some instances, such as OCIE, 

other areas require further clarification, as illustrated by the examples below: 

 Dodd-Frank requires TM and IM to establish groups of examiners within 

their divisions. The agency needs to develop a clear definition of roles and 

accountabilities in these divisions to ensure an efficient alignment with 

OCIE’s National Exam Program and to avoid duplication of effort 

 Similarly, the “Study on Investment Advisers and Broker-Dealers,” which 

was mandated by Section 913 of Dodd-Frank, recommends increased 

harmonization of broker-dealer and investment adviser regulation. 

Consequently, TM and IM will have to clearly define shared and individual 

accountabilities of their teams as the divisions further work on their 

recommendations 

 The enforcement and exam programs have implemented efforts to 

strengthen the national programs. As a result, the roles and 

accountabilities of regional directors and division directors have shifted 
© 2011 The Boston Consulting Group, Inc. 182

slightly, requiring further clarification of joint and individual 

responsibilities (e.g., budgetary authority) 

 There are shared responsibilities and overlaps in the roles of the Executive 

Director and the Chief Operating Officer. There is also some uncertainty 

regarding the relationship between the agency’s COO and divisional COOs 

7.1.10 Commission and staff interaction processes and delegation 

The role of the Commission has changed over time. Historically, 

Commissioners were closely involved in day-to-day decision-making. However, 

as part of the Reorganization Plan 10 of 1950, all executive functions were 

consolidated under the Chairman. In addition, a 1962 amendment to the 

Exchange Act allowed the Commission to delegate responsibilities other than 

rulemaking to SEC staff. The Commission has since delegated many decisions to 

the staff, such as the authority to approve certain types of exemptive orders, issue 

no-action letters, and approve SRO rule filings. In addition to rulemaking and 

novel exemptive relief, the Commission retains authority over decisions on 

enforcement actions. While the Commission has delegated to Enforcement the 

authority to 1) submit witness immunity orders to the Department of Justice and 

2) issue formal order of investigation, including the accompanying subpoena 

power, it approves every enforcement action, from settlement to litigation. 

 

 As in every situation with delegated authority, the SEC faces two sets of 

challenges. Delegated authority helps increase the agency’s efficiency of 

operations and speed of decision-making by empowering staff. However, where 

authority is delegated to staff, Commissioners may have limited visibility into 

decision-making without formal mechanisms to inform the Commission of 

ongoing issues. Conversely, where authority is retained by the Commission, it 

has substantial control over decision-making. However, the process of gaining 

input and approval can be cumbersome and time-consuming. 

7.2 Personnel and resources 

7.2.1 Approach 

As part of the Section 967 Study mandated by the Dodd-Frank Act, BCG 

undertook an assessment of the personnel and resources at the SEC. The 

assessment focused on several key aspects of resourcing: 

 Organizational capabilities and job-specific competencies 

 Workload capacity 

 People pipeline and supporting HR processes 

 Workforce engagement 

 In the course of the assessment, BCG conducted interviews, reviewed 

documentation, analyzed data, and collected input from relevant stakeholders. 
© 2011 The Boston Consulting Group, Inc. 183

Specifically, we conducted a capability / competency assessment to collect 

feedback on staff skill sets and designed a workload model to detail agency 

capacity. BCG also analyzed the SEC’s people pipeline by reviewing existing 

strategies, hiring authorities, recruiting processes, contracting processes, training 

resources and planning, performance management and talent management. In 

addition, BCG employed its proprietary Engaging for Results methodology to 

assess employee engagement, and compared SEC engagement levels against a 

database of over one million benchmarks. Wherever possible, we adopted a 

forward-looking perspective, evaluating the SEC’s personnel and resources in the 

context of the increasing demands being placed on the organization. 

7.2.2 Capabilities and competencies 

7.2.2.1 Key questions explored

 Are there key organizational capabilities that are underrepresented on the SEC 

workforce? 

 Do employees have the job-specific competencies needed to fulfill the SEC’s 

mission? 

 How should capability and competency gaps be filled? 

7.2.2.2 Methodology 

 To assess broad organizational capabilities as well as job-specific skill sets, 

BCG conducted a skills assessment with division and office senior management. 

The SEC’s senior management was asked to consider the roles, capabilities and 

specific skills their teams need in order to fulfill their missions. To assess broad 

critical capabilities, BCG collected information regarding the presence and depth 

of industry, risk management, analytic and sophisticated technology expertise. 

To assess existing and job-specific skill sets, we collected feedback on the 

competencies aligned against the various roles at the SEC. For each specific job 

competency, BCG collected information regarding the current level of mastery, 

desired level of mastery and the mastery levels needed in the future. Leadership 

was also asked to provide suggestions on how best to fill any capability or 

competency gaps. 

7.2.2.3 Findings

Broad organizational capabilities 

 

 BCG evaluated organizational capabilities in four areas: industry expertise, 

risk management, analytics, and technology sophistication. While 

implementation of Dodd-Frank necessitates further development of these 

capabilities, BCG found that the agency is already evolving to both incorporate 

these new capabilities and increase resources for those currently represented. 

For example, the initiation of RSFI is a first step towards developing risk 
© 2011 The Boston Consulting Group, Inc. 184

management and analytic capabilities. Enforcement has created specialized units 

with expertise in structured and new products, as well as municipal securities. 

Similarly, OCIE has recruited senior specialized examiners to cover specific topic 

areas (e.g., structured products, trading practices, valuation). The agency has also 

begun hiring additional expertise in hedge funds and Value at Risk modeling. 

 Industry expertise: While the SEC’s staff has a deep knowledge base, 

Dodd-Frank requires new and specific expertise. OTC derivatives, assetbacked securities and corporate governance were all identified as areas 

where the agency should invest in additional capabilities. Some of the 

required expertise is completely new to the agency and is essential to 

fulfilling the agency’s expanded scope. Private equity, NRSROs and 

municipal securities expertise are also content development areas, though 

this expertise already exists in some places at the agency. The desire for 

this expertise spans most of the SEC’s divisions. Recruiting will be critical 

to developing these capabilities 

 Risk management: Across the agency, SEC staff members are increasingly 

aware of the need to manage risk. Leadership noted that their employees 

almost always take mission-risk153 into account, and generally incorporate 

operational, systemic, and reputational risk into daily operations. While 

this demonstrates an awareness of the need to manage risk and a 

readiness to try, few agency employees have specific risk management 

expertise. For example, in RSFI just four employees out of 59 have prior 

experience in risk management. Effective risk management capabilities 

across multiple divisions could enable the SEC to better manage all types 

of risk. In addition, with more appropriate risk management capabilities, 

the agency could more efficiently identify and evaluate high-risk entities 

and situations in a timely, comprehensive and anticipatory manner, as 

envisioned in Dodd-Frank. Both recruiting and training efforts could 

improve this area of expertise 

 Analytics: As in risk management, there is a clear emphasis on developing 

analytic capabilities. Senior management believed that employees 

support decisions with analytics where possible, but that there is a 

shortage of specific expertise, training, resources and tools to provide topquality analytics. Over half rated existing analytic capabilities as average 

or below. This suggests that employees have tried to bridge the analytics 

gap on their own, even though they may lack the necessary skills. This 

need for improvement was broad, with leadership indicating both 

employees and managers would benefit from improved analytic 

capabilities. In addition, greater analytic capabilities would be necessary if 

the SEC were to decide to perform a market surveillance function (see 

Sections 7.3.2.2 and 7.4.2.2). Boosting capabilities through recruiting and 

 

153 Mission-risk defined as risks to the fairness, orderliness, and efficiency of the capital markets 

and its investors. 
© 2011 The Boston Consulting Group, Inc. 185

training will allow the agency to better review market data, trends and 

risks and support the rule-writing process 

 Technology sophistication: Senior management perceived this capability as 

new to the agency—existing capabilities were described as “basic” to 

“intermediate”—but developing rapidly. In all divisions, leadership noted 

a clear desire to invest in additional resources with high degrees of 

technology awareness and sophistication. Improving the agency’s skill 

level in sophisticated technologies is necessary to keep pace with the 

technology and tools used by market participants and SROs. For example, 

high-frequency trading is becoming a significant force in the marketplace 

and uses sophisticated and highly-technical trading algorithms; today, the 

SEC does not have sufficient in-house the expertise to thoroughly 

investigate the inner-workings of such algorithms should the need arise. 

Leadership advocated both training and recruiting to improve this 

capability 

Job-specific competencies 

 To assess existing and job-specific skill sets, BCG collected feedback on the 

competencies aligned against the various roles at the SEC. These roles are 

grouped into “job families” with broadly similar skill sets. For each job family, 

leadership commented on existing and desired skill sets, as well as the best path 

for further developing focus areas (e.g., train, recruit, replace, utilize the Fellows 

Program, contract, outsource). In most cases, the optimal path forward for the 

agency is to implement a rigorous training program to improve a focus 

competency, while recruiting where necessary. 
© 2011 The Boston Consulting Group, Inc. 186

Exhibit 7.2.2.3-1: Job family descriptions 

Management job families 

 Executive: Within the executive job family, respondents noted that 

additional training would help enhance strategic planning and technology 

management skill sets 

 Manager: Leadership identified a strong need to enhance people 

development, situation management, strategic planning, and technology 

management skill sets. They suggested training as the primary method to 

build these competencies, but also noted that targeted replacement would 

be an option to ensure skill set sufficiency 

Professional job families 

 Attorney: Leadership noted that competence in legal guidance, research 

and analysis is quite high, a testament to the quality of the SEC’s 

professional staff. Applied competencies, including litigation, 

investigations, and disclosure examinations, were not as strong as the basic 

skill sets; respondents suggested training and use of the Fellows Program 

to develop these skill sets 

 Accountant: Leadership generally viewed accountants as strong 

performers, with areas for development in litigation support and 

accounting disclosure examinations. As with attorneys, training and 

utilizing the Fellows Program were recommended as methods for 

improvement 

 Examiner: Key areas of development for examiners include increasing risk 

mitigation, securities laws and compliance guidance skill sets, and industry 

Business operations Coordinates and manages the internal operations of the division, e.g., budget, workforce planning

Executive Provides strategic direction and oversight, determines division/office policies and priorities

Manager Directs and monitors day-to-day work effort and develops human resources

Communications Liaises with the public or Congress on behalf of the SEC verbally and through publications

Administration Provides support, coordination and clerical assistance for division operations

Data analyst Collects data and performs statistical, quantitative, and qualitative analysis

Industry expert Provides specialized industry knowledge in critical areas, e.g., derivatives, clearing agencies

Economist Uses economic methods to inform rule-making and enforcement, and identifies market trends

Examiner Inspects registered firms for indications of securities law violations

Examines financial statements, drafts rules related to accounting issues, participates in 

investigations

Accountant

Attorney Reviews and analyzes filings, drafts and interprets rules, investigates violations, and litigates cases

Job families Description

Manager Professional Support

Business operations Coordinates and manages the internal operations of the division, e.g., budget, workforce planning

Executive Provides strategic direction and oversight, determines division/office policies and priorities

Manager Directs and monitors day-to-day work effort and develops human resources

Communications Liaises with the public or Congress on behalf of the SEC verbally and through publications

Administration Provides support, coordination and clerical assistance for division operations

Data analyst Collects data and performs statistical, quantitative, and qualitative analysis

Industry expert Provides specialized industry knowledge in critical areas, e.g., derivatives, clearing agencies

Economist Uses economic methods to inform rule-making and enforcement, and identifies market trends

Examiner Inspects registered firms for indications of securities law violations

Examines financial statements, drafts rules related to accounting issues, participates in 

investigations

Accountant

Attorney Reviews and analyzes filings, drafts and interprets rules, investigates violations, and litigates cases

Job families Description

Manager Professional Support
© 2011 The Boston Consulting Group, Inc. 187

expertise to better meet the agency’s needs in light of Dodd-Frank. 

Respondents suggested training existing staff in these areas 

 Economist: While economists at the SEC are viewed as above average, 

leadership indicated a desire to have best-in-class economist talent across 

all competencies within five to seven years. Suggested methods to reach 

this goal include recruiting, utilizing the Fellows Program, and training 

existing personnel 

 Industry experts: In general, industry experts were viewed as above 

average, but again leadership made clear their need for best-in-class 

industry expertise. Recruiting was the most widely suggested method to 

further improve industry expertise, though training and use of the Fellows 

Program were also suggested 

 Data Analyst: Respondents sought significant improvements from data 

analysts over the next five to seven years to bring staff expertise in line 

with the high bar set by the requirements of Dodd-Frank. Training and 

recruiting were suggested to bridge the gap between current and desired 

competencies

Support staff 

 Business Operations: Business operations staff are perceived to be strong 

performers, especially in procurement and risk mitigation. Respondents 

noted that workforce planning and budget administration support are key 

focus areas; training was the most commonly suggested method to 

improve these competencies

 Communication: Communication staff have some room for improvement 

in external awareness, proactive management, and communication 

flexibility. These competencies are essential to actively managing the 

SEC’s profile in the marketplace. Training, recruiting, and utilizing 

contractors were all noted as methods to advance skills

 Administration: Respondents generally perceived performance as average 

to below average. Document management and control was noted as 

especially lacking. Training and targeted replacement were suggested to 

help improve skill sets

Summary 

 As the SEC works to operationalize the requirements of Dodd-Frank, it 

must continue to grow both its organizational capabilities and job-specific 

competencies. The agency has made progress in addressing these needs over the 

last several years. Although the creation of RSFI and the pilot leadership training 

program are testaments to the agency’s progress, the process of reorienting the 

SEC to these new organizational capabilities is in the early stages. The SEC must 

continue to focus on training and recruiting to fully develop key capabilities. In 

some areas, particularly in management and administrative job families, 

respondents recommended training or replacement to improve job-specific 

competencies. By further developing its highly skilled staff and building the 
© 2011 The Boston Consulting Group, Inc. 188

required organizational capabilities, the SEC will be in a stronger position and 

will build credibility among market participants and regulating partners. 

7.2.3 Workload capacity 

7.2.3.1 Key questions explored

 What is the workload at the SEC, given the new requirements of Dodd-Frank 

and going forward? 

7.2.3.2 Methodology 

 The question of adequate capacity is increasingly relevant given the 

expanded mandate conferred on the SEC by Dodd-Frank. It is not surprising, 

then, that the need for additional human resources was a consistent theme 

throughout BCG’s interviews at the SEC. To test this, BCG used a workload 

modeling approach to estimate capacity needs by organizational unit. This 

section will first address aspects of BCG’s methodology that applied across the 

organization, and then discuss specific methods for each organizational unit that 

was analyzed. 

 It is necessary to note that this analysis, while rigorous, provides high-level 

guidance regarding the SEC’s capacity. The inputs to the model are based 

primarily on interviews, document reviews, and external benchmarks. BCG did 

not perform deeper analyses, such as activity-based costing or time studies to 

identify the SEC’s resource need at a more granular level. In addition, this 

approach focuses on the SEC’s activities and business processes as they exist 

today. It does not include new initiatives that would expand the agency’s 

activities beyond what is required by Dodd-Frank. The model also does not 

account for process improvements or technology enhancements that would 

increase productivity, thus reducing the time and human resources required to 

complete a task. Overall, BCG’s analysis is intended to provide a directional 

understanding of the SEC’s capacity needs, rather than detailed estimates. 

 To construct its capacity model, BCG examined workload drivers for the 

professional job families (described in Section 7.2.3) by organizational unit, 

focusing on the SEC’s largest programmatic areas: Enforcement, OCIE, CF, IM, 

TM, and RSFI. These six areas comprise approximately 75 percent of the SEC’s 

personnel and the bulk of its mission-related operations. BCG conducted over 60 

interviews with SEC managers to understand current activities in these units, key 

workload drivers, and the impact of Dodd-Frank. 

 BCG modeled management and support staff based on internal and 

external benchmarks. The analysis assumed that administrative tasks currently 

performed by professionals would be taken on by support staff, thus increasing 

the amount of time spent by professionals on core, mission-related activities. 
© 2011 The Boston Consulting Group, Inc. 189

BCG applied a ratio of one support FTE per 15 professional staff; this recognizes 

the trend towards higher numbers of professionals to support staff across the 

industry.154 In addition, functions that provide internal expertise for each unit 

(e.g., accounting) were scaled with the division or office’s professional staff. 

Lastly, BCG quantified the budget implications of each capacity surplus or 

shortfall based on average fully loaded salaries for current staff in each high-level 

job family group. Job family groups included managers (executive and manager 

job families), professionals (attorneys, accountants, examiners, economists, 

industry experts and analysts), and support staff (business operations and 

administration). IT staff was not included in this analysis, given the additional 

modeling effort discussed in Section 7.3.3.2. Communications staff were not 

included, based on their rarity among the units analyzed. Lastly, headquarters 

capacity is combined with staff in the regional offices. Key workload drivers and 

relevant trends are detailed below for each organizational unit. 

Division of Enforcement 

 Enforcement’s activities can be viewed as a set of sequential steps 

beginning with tips, complaints and referrals (TCRs) and ending, in some cases, 

with a settlement or court decision. The division receives TCRs each year from a 

variety of sources, including the public, SROs, and other parts of the SEC. 

Enforcement’s ability to triage this information flow has increased in recent years 

as the division underwent efforts to streamline the TCR system and reduce the 

volume of duplicative, less valuable or inapplicable TCRs. Thus, TCRs have 

declined from approximately 1.6 million in 2007 to approximately 382,000 in 

2010. BCG assumed that the number of TCRs would increase minimally in 2011 

and 2012, though it may rise more due to the SEC’s new whistleblower program. 

This program, which was mandated by the Dodd-Frank Act, provides monetary 

incentives to whistleblowers. 

 Approximately three to five percent of TCRs are significant enough to 

merit opening a Matter Under Investigation (MUI). Enforcement staff may open 

MUIs on their own or at the direction of division or SEC leadership. BCG 

assumed that the conversion rate of TCRs into MUIs would remain constant at 

five percent. Overall, the TCR and MUI process results in about 900 to 950 

investigations opened each year. These investigations range in priority and 

complexity, depending on the violations and parties involved. Enforcement may 

recommend, and the Commission may approve, a formal action against the 

parties under investigation. Historically, 65-75 percent of formal investigations 

result in an enforcement action. BCG assumed that formal investigations would 

convert to enforcement actions at a rate of approximately 70 percent going 

forward. 

 Once an enforcement action is authorized, the Commission will decide 

whether to bring a case through administrative proceedings or in civil court. 

 

154 International Association of Administrative Professionals, Results from IAAP February 2009 

Benchmarking Survey. Print. 
© 2011 The Boston Consulting Group, Inc. 190

Often, the Commission will settle with the party charged before a formal 

proceeding occurs. If no settlement is reached, a decision regarding culpability 

and potential sanctions will be issued by either an administrative law judge (ALJ) 

independent of the SEC, or by the court. If the sanctions include monetary fines, 

Enforcement’s Office of Collections and Distributions is responsible for tracking 

the funds collected and disbursing them to appropriate parties. 

 To assess Enforcement’s workload and the division’s capacity needs, BCG 

estimated the effort and staff required at each step of the process described 

above. FTEs and weeks of effort were assigned to each activity; an estimated 

number activities per employee was also estimated. Furthermore, investigations 

were divided into routine and high-priority segments, with different levels of 

effort for each. Similarly, settlements, administrative proceedings, and civil 

actions were treated separately. BCG also included a premium to account for the 

time that Enforcement’s investigative staff will continue to spend on a case once 

it is in litigation. 

Office of Compliance Inspections and Examinations 

 OCIE administers the SEC’s nationwide examination program. Currently, 

OCIE conducts inspections of all registered entities, including: broker-dealers, 

transfer agents, investment advisers, investment companies, exchanges, clearing 

agencies, nationally recognized statistical rating organizations (NRSROs), and 

self-regulatory organizations (SROs). OCIE’s primary workload drivers are the 

number of examinations performed and the intensity of those exams. BCG 

segmented these examinations by the type of registered entity. Based on 

historical estimates and current practice, BCG assumed that the SEC inspects 

about 10 percent of broker-dealers, transfer agents, investment advisers, and 

investment companies each year. Municipal securities advisors and private fund 

advisors were included, beginning in 2011. BCG assumed that OCIE would 

continue to inspect the same percentage of registered entities, even as these new 

entities increase the overall number of examination candidates. This increases 

the capacity required by OCIE significantly; the alternative would be to maintain 

the number of inspections conducted, but decrease the percentage of registered 

entities examined. 

 For broker-dealers, this percentage includes examinations that the SEC 

conducts to audit SRO inspections, as well as independent examinations. In the 

investment adviser exam program, OCIE is able to inspect approximately nine 

percent of regulated entities each year, which are chosen using a risk-based 

approach to identify registrants and areas of particular concern. This does not 

include any inspection of newly-registered entities, unless they fall within that 

group. For each entity, inspections were further divided by type of exam. In 

order of effort required, these include full, risk-based exams; exams resulting 

from TCRs; and limited correspondence reviews. BCG also incorporated OCIE’s 

plans for SRO and NRSRO inspections going forward, segmenting the most 

systemically important SROs and NRSROs for more intensive review. This also 

includes inspections of new SROs and the Dodd-Frank Act’s requirement for 
© 2011 The Boston Consulting Group, Inc. 191

annual inspections of all NRSROs. BCG added time premiums to allow for sweep 

exams, which investigate a specific issue across an entire class of registered 

entities, based on the amount of time currently dedicated to these exams by 

OCIE professional staff. The required work effort was allocated to attorneys, 

accountants, and examiners based on OCIE’s current breakdown among these 

professional staff job families. 

 It is important to note that the activities included in BCG’s analysis of 

OCIE reflect only the agency’s current level of activity (driven by resource 

availability) and its Dodd-Frank requirements. For example, as noted above, 

BCG assumed that OCIE inspects only nine percent of investment advisers 

annually, and that this percentage would apply to newly-registered entities under 

Dodd-Frank as well. This is down from 18 percent per year in 2004 and 

significantly lower than the 45 to 60 percent of broker-dealers inspected by 

FINRA each year. Likewise, OCIE did not have sufficient resources to examine 

any newly registered investment advisers in 2010 unless they were also targeted 

as one of the riskiest. In contrast, FINRA and some foreign regulators are able to 

examine new registrants to preemptively identify potentially damaging market 

participants. 

 To increase the SEC’s efforts in the areas described above, OCIE would 

need a significantly expanded staff. For example, to examine an additional 10 

percent of investment advisers would require approximately 550 to 600 FTEs. 

Likewise, to inspect 10 percent of new registrants within the first year of market 

entry—in even a cursory manner—would demand 100 to 150 additional staff. 

The SEC’s capacity gap would increase significantly if it were to attempt a level of 

examination for investment advisers comparable to FINRA’s oversight of brokerdealers. Furthermore, Dodd-Frank expands the number of regulated entities 

under OCIE’s purview. The agency is now required to examine all NRSROs on an 

annual basis, as well as those clearing agencies deemed “systemically important” 

by FSOC. In addition, as the SEC begins registering municipal securities advisors 

and a variety of participants in the security-based swaps market, these entities 

may also require examination. As noted above, BCG assumed that the SEC 

would inspect these newly-registered entities at the same rate as it currently 

examines investment advisers,. Even at this rate, however, OCIE’s current 

capacity would be strained by these new oversight obligations. 

Division of Corporation Finance 

 The primary activities performed in CF include: disclosure review, rulewriting, processing exemptive applications, and responding to requests for 

interpretive guidance and no-action letters. The primary driver of CF’s workload 

is disclosure review. The division is responsible for administering rules stemming 

from the Securities Act of 1933 and the Securities Exchange Act of 1934 that 

regulate the offering and sale of securities and reporting by public companies. 

BCG segmented this activity by type of filing, intensity of review, and type of staff 

involved. The number of filings was estimated using historical data and then 

projected based on an average growth rate. In addition, issuers of asset-backed 
© 2011 The Boston Consulting Group, Inc. 192

securities are now required to file each year, and BCG included these additional 

disclosures in the estimate. CF also has a second reviewer examine each filing; 

BCG added an effort premium to account for this. 

 CF’s rulemaking workload is primarily a function of the number of rulewriting projects and the complexity of those rules. BCG used rulemaking 

proposals as a proxy for overall rulemaking activity in a division, recognizing that 

some projects never reach the proposing stage and that others require further 

iteration prior to adoption. In addition, BCG weighted rulemaking proposals by 

relative complexity. Complexity is driven by a number of factors, including the 

scope of a rule, the amount of iteration with market participants, and the level of 

pre-existing knowledge on a topic. Lastly, requests for interpretive guidance are 

largely driven by rulemaking activity in preceding years as companies address 

new requirements; these are likely to increase following the adoption of new 

rules mandated by Dodd-Frank. BCG’s estimate incorporated the Dodd-Frank 

rulemaking requirements applicable to CF, namely those related to corporate 

governance, asset-backed securities, and specialized corporate disclosure. In 

addition to these rulemaking projects, it includes the capacity required during a 

normal year’s rulemaking agenda. 

Division of Investment Management 

 The bulk of IM’s staff are attorneys, which reflects the division’s primary 

activities: disclosure review, rule-writing, processing exemptive applications, and 

providing interpretive guidance. To estimate its workload, BCG examined drivers 

for each of these activities, segmenting them where tasks within the same activity 

would require different levels of effort. To assess IM’s rulemaking capacity, BCG 

used the same approach described above for CF. Historically, IM’s rulemaking 

workload has remained fairly consistent, with the exception of an increase in 

2008. This spike presaged what the division is experiencing now as a result of the 

Dodd-Frank Act, which is equivalent to completing two typical years’ work in 18 

months. Additionally, the work undertaken in 2010 thus far indicates that these 

projects are more complex than IM’s typical rules. 

 IM is responsible for reviewing disclosures made by investment companies 

and those related to insurance products. BCG segmented these disclosures both 

by type of filing and by level of review. The types of filing include registration 

statements, post-effective amendments, proxy statements (including merger 

proxies), and financial statements. The level of review is categorized as a fullscope, comprehensive review or a more limited, targeted review. BCG also 

assumed that IM would review all new registrations, any post-effective 

amendment that contains significant changes from the prior year’s operations, all 

proxy statements, and approximately one-third of financial statements filed. IM 

is also responsible for the registration system for investment advisers, which is 

operated under contract to FINRA. BCG included staff dedicated to managing 

this relationship, as well as for the new system required for private fund advisor 

registration. 
© 2011 The Boston Consulting Group, Inc. 193

 In addition to disclosure and rulemaking, IM also processes exemptive 

applications and provides interpretive guidance. While exemptive applications 

are not projected to increase overall, it is likely that interpretive requests will rise 

following the adoption of new rules under Dodd-Frank. 

Division of Trading and Markets 

 TM provides oversight of major securities market participants, including 

exchanges, clearing agencies, transfer agents, securities firms, SROs, and 

NRSROs. As such, the division’s activities are particularly varied. TM holds 

similar responsibilities as CF and IM with respect to specific rules: rulemaking, 

processing exemptive applications, and providing interpretive guidance. The 

division also reviews and approves proposed rules and rule changes from SROs. 

Lastly, TM administers the Risk Assessment and Alternative Net Capital (ANC) 

programs for broker-dealers, and inspects the technology systems of large 

exchanges and clearing agencies. A significant portion of the requirements of 

Dodd-Frank fall under the division’s purview. In particular, TM is responsible for 

writing and interpreting new rules related to clearing and settlement, OTC 

derivatives, municipal securities, and NRSROs. It will be responsible for 

registering and monitoring new clearing agencies, security-based swap data 

repositories, exchanges and execution facilities for security-based swaps, securitybased swap dealers, additional major security-based swap participants, and 

municipal securities advisors. The division is also likely to see an increase in rule 

filings from SROs and security-based swap execution facilities as they respond to 

Dodd-Frank. 

 BCG used the same approach described in previous sections to assess TM’s 

rulemaking and interpretive guidance capacity. From 2006 to 2009, TM’s 

rulemaking load was relatively consistent, with 2007 and 2009 bearing a slightly 

heavier agenda. The requirements of Dodd-Frank dramatically increase the 

division’s rulemaking workload. Whereas previously TM would release between 

six and 10 rule proposals in a given year, Dodd-Frank required 10 rulemakings in 

2010. It requires 18 in 2011. These rules are also more complex than TM’s typical 

projects, which is unsurprising given TM’s responsibility for establishing the 

regulatory framework for new classes of entities and for the security-based swap 

market. BCG also anticipated that interpretive requests would increase as a 

result of new rules. 

 In addition to its own rules, TM is also responsible for registering SROs 

and approving the rule filings they submit. The division typically sees two to 

three new exchange SROs register in a given year, often “sister exchanges” that 

are very similar to existing SROs. In 2011 and 2012, however, they anticipate 

approximately 10 new swap exchanges and execution facilities to register as a 

result of Dodd-Frank. Not only will this increase the number of registrations for 

review, these swap facilities are relatively novel and will require more intensive 

review. Historically, the number of SRO rule filings has stayed relatively 
© 2011 The Boston Consulting Group, Inc. 194

consistent, between 1,000 and 1,300 per year.155 BCG assumed that the number 

of filings per SRO would remain constant going forward, so that growth in the 

number of rules would be based on the addition of new SROs. Rule filings were 

segmented based on the level of review required, including those that require 

Commission engagement. 

 TM’s clearing agency oversight involves registering clearing agencies and 

transfer agents. For clearing agencies, TM also reviews proposed rule changes, 

monitors risk, and performs inspections. TM expects at least four additional 

clearing agencies to register in 2011 and 2012 as a result of Dodd-Frank’s 

requirement for mandatory clearing of certain security-based swaps. Both 

existing and new clearing agencies must file rule changes with TM. TM also 

expects to register three security-based swap data repositories, a new class of 

entities under Dodd-Frank. Security-based swap clearing agencies will be 

required to submit information on new security-based swaps that the clearing 

agencies intend to clear. TM will be required to review these submissions to 

determine whether the security-based swaps should be subject to mandatory 

clearing. BCG estimated a consistent number of rule filings each year and 

segmented them by systemic importance of the clearing agency and complexity 

of the rule. Lastly, BCG assumed that TM’s clearing risk monitoring program 

would expand to cover these new security-based swap clearing agencies. 

 While the majority of broker-dealer oversight is delegated to SROs, the 

SEC retains that responsibility in several areas. First, the agency requires 

additional disclosure from broker-dealers that are part of a holding company, 

particularly with respect to organizational structure and governance. TM expects 

this program to expand as the agency identifies broker-dealers who should be 

monitored but are not currently part of the program. Second, the SEC maintains 

close oversight of broker-dealers, making use of the ANC exemption to regulatory 

net capital requirements. TM strictly monitors those broker-dealers’ internal risk 

and audit controls. If the ANC exemption is extended to swap dealers, TM 

expects at least 20 additional firms to apply, potentially requiring a significant 

level of additional oversight. In addition to attorneys, the program also requires 

significant quantitative expertise to assess companies’ risk practices. 

 TM also maintains a group of examiners that regularly inspect the 

technology and systems of exchanges and clearing agencies to ensure that they 

are sufficiently robust to maintain market continuity. These exams are 

conducted with varying frequency depending on the entities’ systemic 

importance to the financial markets. BCG estimated the work effort required for 

each examination after dividing the entities into three tiers of importance, with 

the most systemically critical receiving more frequent and intense examination. 

Going forward, TM will need to extend its market continuity examinations to 

include clearing agencies and exchanges for security-based swaps. 

 

155 In Brief FY 2006 – 2011 Congressional Justification.
© 2011 The Boston Consulting Group, Inc. 195

 Lastly, TM is responsible for co-chairing or participating in several 

international collaborations. While this workload was not modeled, it provides 

important context. These activities are, at times, sacrificed in order to accomplish 

other work or often get completed in addition to workload already assigned. For 

example, as a founding member of the International Organization of Securities 

Commission (IOSCO), the SEC travels internationally and provides direct support 

on six subcommittees, ensuring IOSCO and SEC standards are consistent. As it 

relates to OTC derivatives, the SEC participates in the OTC Derivatives 

Supervisors Group, charged with improving market infrastructure, central 

clearing, trade repositories, collateral management and electronic processing and 

confirmations; the SEC also participates in the broader OTC Derivatives 

Regulators’ Forum (ODRF), exchanging views and sharing information and 

developments regarding CCPs and trade repositories. TM is a key participant in 

the Financial Action Task Force (FATF), an international standards-setting 

organization. The SEC was also a founding member of the Joint Forum, 

established in 1996 to bring together international representatives from bank, 

insurance and securities supervisors. Finally, division staff also serve on the 

Financial Stability Board (FSB). Again, these activities require additional time 

commitment from staff, in addition to the workload modeled herein. 

Division of Risk, Strategy, and Financial Innovation 

 RSFI’s responsibilities include partnering with the SEC’s rule writers to 

conduct economic analyses of proposed rules, supporting Enforcement in 

investigations and actions, and quantitative and qualitative risk identification. 

RSFI houses the great majority of the SEC’s economists and quantitative analysts. 

While the Dodd-Frank Act does not make specific requirements of RSFI, the 

increasing focus at the SEC and in Congress on risk, systemic issues, and a 

proactive approach requires greater capacity in this division. RSFI’s current 

activities primarily involve litigation support and economic analysis in 

conjunction with rulemaking projects. The division also constructs some 

quantitative models to examine market trends and identify high-risk entities, 

participates in SEC studies, and publishes methodological research. RSFI’s 

current workload depends in large part on the rest of the agency’s work and the 

extent to which RSFI provides support. 

 The primary drivers of RSFI’s litigation support efforts are the number of 

enforcement investigations, actions, and monetary sanctions, as well as the 

percentage of enforcement cases that involve RSFI. The work effort required for 

enforcement actions varies by type of action, including settlements, 

administrative proceedings, and civil court proceedings. In addition, RSFI often 

assesses the harm caused by a violation to particular investors and reviews or 

creates distribution plans for funds collected through monetary sanctions. 

 The release for each rule proposed by the SEC contains a cost-benefit 

analysis, typically structured by RSFI and performed in partnership by RSFI and 

the rulemaking division. The division will assess the economic effects of a 

proposed rule including: effects on competition, economic efficiency, capital 
© 2011 The Boston Consulting Group, Inc. 196

formation, and where applicable, any unintended consequences. In addition to 

specific rulemaking projects, RSFI conducts economic studies on the SEC’s impact 

on financial markets and relevant market trends, as well as provides economic 

analyses for studies led by other divisions. RSFI currently has four offices 

dedicated to providing these analyses, each focused on a different set of market 

participants. 

 To estimate RSFI’s capacity need in the area of rulemaking and economic 

studies, BCG used historical data regarding the number of SEC rulemaking 

projects and studies released to the public. Rulemaking projects were weighted 

by complexity and studies were segmented based on those which were primarily 

economic in nature and those where economic analysis was less central. BCG 

also assumed that the 20 studies required by the Dodd-Frank Act would be 

equally divided between 2011 and 2012, and that they would augment, not 

replace, the SEC’s usual research agenda. 

 Beyond the activities currently performed and those triggered by DoddFrank, there are additional analyses or methodological initiatives that RSFI could 

undertake to benefit the agency’s mission. For example, with increased capacity, 

RSFI could develop a more mature risk management function that would 

establish robust processes and sophisticated analytics and models to ensure that 

key risks are identified, measured, mitigated and monitored. The division could 

also undertake initiatives to improve horizontal and vertical information flow 

and data sharing. In addition, it could develop mechanisms to provide a 

comprehensive, up-to-date view of organizational risks. This kind of expansion is 

not included in BCG’s capacity analysis, but the SEC could nonetheless benefit 

from such enhanced risk management capabilities. 

7.2.3.3 Findings

 Based on the approach described above, BCG estimated the capacity 

required in these organizational units to perform both the SEC’s current activities 

and the requirements of Dodd-Frank. Again, this estimate did not include 

potential efficiencies resulting from business process improvement or technology 

enhancements. It does account for enhancements in productivity gained by 

shifting administrative work from the agency’s professionals to new support staff. 

BCG’s analysis resulted in four primary findings: 

 The SEC has a net capacity gap of 375 to 425 FTEs for the five divisions and 

OCIE in 2010 and 2011; this shortage accounts for the SEC’s current 

activities and the majority of the requirements of Dodd-Frank, but not for 

new mission-driven initiatives 

 Part of this capacity gap is temporary, driven by the dramatic increase in 

rulemaking, but the shortage becomes permanent and continues to grow as 

the agency administers the new rules and as new entities come under the 

SEC’s purview 
© 2011 The Boston Consulting Group, Inc. 197

 The SEC could benefit from shifting resources from management positions 

to professionals and support staff 

 Budget and other constraints force the SEC to make trade-offs between 

different activities that are each valuable to the agency’s mission 

 Net of any management surplus, the SEC faces a capacity shortage of 

approximately 375 to 425 FTEs for the five divisions and OCIE in 2010. As a 

percentage of current staff, the percent shortage is most pronounced in IM, TM 

and RSFI. Initially, the capacity gap can be traced primarily to an increase in 

rulemaking requirements resulting from Dodd-Frank. TM also faces an extra 

burden as it becomes responsible for processing additional SRO rule filings and 

monitoring new clearing and execution facilities related to security-based swaps. 

These new entities, along with NRSROs, private fund advisors and municipal 

securities advisors, also become candidates for examination and enforcement.156 

The addition of new registrants is not a temporary issue. Once registered, the 

firms become subject to SEC oversight, including examinations, going forward. 

Based on the assumptions described above regarding ongoing regulation and 

examination of new registered entities, the SEC’s capacity shortage will continue 

to grow through 2013. 

 Approximately 40 percent of the SEC’s gap in 2010 and 35 percent in 2011 

could be filled with temporary staff (e.g., former SEC employees hired back on a 

temporary basis, contractors, Fellows Program), particularly for rulemaking. For 

the divisions most impacted by Dodd-Frank, the rulemaking requirements will 

lessen once the final rules are adopted. While the SEC already utilizes some 

contractors and its two-year Fellows program to meet temporary staffing needs, 

the recurring but short-term nature of these shortages emphasizes the need for 

effective surge capacity solutions. 

 However, while temporary workforce needs taper off in 2012, an increase 

in the number of regulated entities and the resulting additional work prompted 

by the new rules (e.g., interpretive requests, review of new filings) will require 

further permanent staff such that the agency’s overall capacity gap continues to 

grow. Without sufficient human resources, the agency will be unable to complete 

the requirements of Dodd-Frank while maintaining its activities as currently 

performed. Although some gains in productivity may be possible, they are 

unlikely to fully substitute for an increase in workforce. Thus, the SEC will be 

forced to shift resources away from existing activities toward items required by 

Dodd-Frank. Activity trade-offs are discussed in Section 6.1.1. Exhibit 7.2.3.3-1 

illustrates the SEC’s capacity gap in 2010 and projected future gap for the 

agency’s five divisions and OCIE. 

 

156 Apart from NRSROs the parameters of these new activities are not explicitly defined by the 

Dodd-Frank Act. 
© 2011 The Boston Consulting Group, Inc. 198

Exhibit 7.2.3.3-1: Capacity gap for SEC divisions and OCIE, 2010-2013 

 

 BCG found that the SEC’s organizational units could benefit from 

reallocating resources away from its excess management capacity and toward 

professional and support staff. In fact, it has already taken steps in this direction 

during the recent reorganization of Enforcement. Reallocating headcount to 

support staff would likely improve the productivity of the SEC’s professional staff. 

Furthermore, the finding of surplus of management staff accounts for an 

expansion of the professional and support staff to the projected levels. Absent 

this expansion, the excess number of managers would be even more pronounced 

given the lower number of staff requiring management oversight. BCG’s 

estimate of the SEC’s overall capacity shortage assumes that the agency can 

implement such a resource reallocation. In addition to the savings implications 

of surplus managers, there are other benefits to reducing management layers. 

With larger management spans of control, organizations typically achieve faster 

communication and decision-making, and enhance accountability. Managers and 

employees are given broader responsibilities and decision rights, resulting in 

empowerment and improved morale. Thus, by reallocating resources consistent 

with agency needs, the SEC has an opportunity to both optimize its use of scarce 

resources and develop a more empowered and productive workforce.

 It is important to reiterate that BCG’s analysis incorporates only current 

activities performed at their existing level, as well as the requirements of DoddFrank. It does not include new activities authorized but not required by DoddFrank (e.g., review of disclosures relating to short sales). It also does not include 

the support the SEC provides to FSOC; the SEC currently has over 50 employees 

participating in FSOC committees part-time. Furthermore, in every 

organizational unit, a lack of resources, coupled with Congressionally-dictated 

-200

0

200

400

600

800

FTEs

Management

Professional

Support

2010 2011 2012 2013

Note: Support includes Administration and Business Operations job families; Professional includes Attorneys, Accountants, 

Examiners, Economists, Industry Experts and Data Analysts; Management includes Executives and Managers.

Source: BCG analysis

40% 35%

Percentage of gap in a given year filling temporary need

425

375

425

375

450

400

635

585

0% 0%

Net gap range

Gap

Surplus
© 2011 The Boston Consulting Group, Inc. 199

priorities, makes it difficult to undertake new activities that, while not explicitly 

mandated, could still contribute significantly to the agency’s mission. For further 

discussion of example activities that each division would seek to strengthen or 

add, see Section 6.1.1. 

Summary 

 BCG’s analysis of the SEC’s current activities and the requirements of 

Dodd-Frank clearly indicate that the agency faces an increase in workload not 

commensurate with its current human resources. Delivering upon this workload 

would require either an increase in capacity and/or realignment of required 

activities. A portion of the agency’s near-term shortage is temporary, but as 

short-term activities abate, permanent requirements will likely replace them. 

This estimate assumes that the agency can fill some of its capacity gaps by 

shifting resources within the organization, primarily from management positions 

to professional and support staff. This will both optimize the agency’s use of 

resources, as well as create a more empowered and productive workforce. 

However, this is unlikely to fully address the SEC’s current shortage. An ongoing 

shortage places a burden on existing staff and requires the agency’s leadership to 

shift its focus away from other mission-related activities. Overall, the lack of 

resources and abundance of required activities could impede the ability of the 

agency to realize the full potential of its mission. 

7.2.4 People pipeline and supporting HR processes 

7.2.4.1 Key questions explored

 Does the compensation strategy effectively support the agency’s strategy and 

mission? 

 How has the agency applied its hiring authorities, and does its recruiting 

approach support its vision? 

 Are there opportunities to streamline the process for hiring temporary or 

contract employees? 

 Is the training program sufficient to strengthen staff skills and support the 

ongoing development of SEC personnel? 

 Does the performance management system link personnel objectives to agency 

objectives, provide meaningful feedback, effectively reward performance and 

manage underperformance? 

 How does the agency incorporate long-term talent management into its people 

strategy? 

 Does the SEC have a well-functioning human resources function that can 

effectively support all steps in the people pipeline? 
© 2011 The Boston Consulting Group, Inc. 200

7.2.4.2 Findings

 The people pipeline denotes the set of processes by which Human 

Resources (HR) functions form strategies, recruit, train, develop and manage 

their talent. Having a well-functioning HR team is critical to supporting this 

pipeline. The following sections discuss each step in the people pipeline as well 

as the HR capabilities necessary to support them. 

Compensation strategy

 A compensation strategy is critical to attracting and retaining the agency’s 

talent. The existing system at the SEC is the result of incremental adjustments to 

a legacy structure. The result is a system that has some merits but should be 

rethought to provide a coherent, comprehensive long-term strategy. 

 In the 1990s, the SEC experienced relatively high turnover rates. From 

1996-2001, voluntary attrition at the SEC was, on average, 4.7 percent higher than 

that of the federal government. Moreover, turnover in certain critical positions, 

including attorneys, accountants and examiners, was above 10 percent per year, 

consistently exceeding the rate of attrition in similar positions in the rest of the 

federal government.157 The agency found that employees were leaving for 

positions at other FIRREA agencies for pay premiums of 18 to 39 percent over 

their SEC positions.158 While other FIRREA agencies had the ability to determine 

customized pay scales, the SEC was aligned to the “General Service” scale. As a 

result of the pay differential, qualified talent migrated from the SEC to these 

other government agencies.159

 At the same time, the SEC faced increasing responsibilities. The GrammLeach-Bliley Act of 1999 increased regulatory complexity by allowing the merger 

of commercial banking, investment banking, securities firms, and insurance 

providers.160 Growth in IPO activity also demanded additional resources.161 The 

corresponding growth of the SEC’s workload, coupled with the relatively high 

rate of attrition, hindered the agency’s ability to fulfill its mission. To lower its 

attrition rate and compete for talent, the SEC sought similar pay freedoms 

provided to other FIRREA agencies.

 On the heels of a GAO report supporting the SEC’s position, Congress 

passed the Investor and Capital Markets Fee Relief Act (also called the Pay Parity 

Act), which gave the SEC the authority to adjust its compensation scale. This 

 

157 United States. U.S. Securities and Exchange Commission. Special Study: Pay Parity 

Implementation Plan and Report. Washington: GPO, 2002. Print. 

158 United States. U.S. General Accounting Office. Securities and Exchange Commission – Human 

Capital Challenges Require Management Attention. Washington: GPO, 2001. Print. 

159 Ibid. 160 United States. Cong. Senate. Gramm-Leach-Bliley Act of 1999. 106th Cong., 2nd sess. Washington: 

GPO, 1999. Print. 

161 United States. U.S. General Accounting Office. Increased Workload Creates Challenges. GAO-02-

302. Washington: GAO, 2002. Print. 
© 2011 The Boston Consulting Group, Inc. 201

authority allowed the SEC to develop a new compensation system, benchmarked 

against other FIRREA agency systems. In addition, the new act required the SEC 

to adopt merit-based principles for its compensation system.162 The agency used 

this authority to establish a new pay scale. This system, designated the SK pay 

scale, was calibrated against other federal financial regulators. Additionally, the 

agency employed a new merit system that played a direct role in determining pay 

raises; based on an employee’s performance, supervisors could award a pay raise 

between 0 and 4.5 percent.163 

 Pay Parity was highly successful in curbing attrition. The SEC expanded by 

33 percent following Pay Parity, and was able to absorb the workload increase 

associated with Sarbanes-Oxley. Attrition dropped from a rate of 8.5 percent in 

2001 to 6 percent just after the new system’s implementation.164 Agency data 

from 2005 to 2010 indicate that the SEC maintained a below-average rate of 

voluntary attrition through both the economic boom and the recession (see 

Exhibit 7.2.4.2-1). In some cases the SEC pays a premium for key professions 

critical to its mission. For example, attorneys at the SEC are paid a 10 percent 

premium to the average FIRREA agency attorney salary, ensuring that the SEC 

can staff these key roles and attract the sufficient talent.165 

Exhibit 7.2.4.2-1: Voluntary attrition in the federal government and the SEC 

 

162 United States. Cong. Senate. Investor and Capital Markets Fee Relief Act of 2002. 107th Congress, 

1st sess. Washington: GPO, 2002. Print. 163 Special Study: Pay Parity Implementation Plan and Report. 164 Ruiz, Diego. “Testimony Concerning the SEC’s Pay-For-Performance System.” Subcommittee on 

Federal Workforce, Postal Service, and the District of Columbia, Committee on Oversight and 

Government Reform, U.S. House of Representatives. Washington, DC. 12 Feb. 2008. Speech. 

165 BCG analysis based on FIRREA Compensation Survey. Towers Watson, 2010. Print. 

0

5

10

15

2005 2006 2007 2008 2009 2010

% staff

turnover

SEC

Federal Govt

Note: 2010 attrition estimated based upon partial year 2010

Source: BLS JOLTS Quits data 2005-2010; SEC vacancy database 2010; SEC FY2009 Turnover; SEC Official Turnover 2005-2008; BCG analysis.
© 2011 The Boston Consulting Group, Inc. 202

 Despite Pay Parity’s success, the SEC’s compensation system can still be 

improved. Following a union grievance and ruling by the Federal Services 

Impasse Panel early in the new system’s implementation, the SEC made 

temporary alterations to its merit pay until a new performance management 

system was developed. Instead of providing variable increases in base pay to 

reward high performers, the SEC migrated to a standard percentage base pay 

increase for any employee rated “acceptable.” This alteration makes it very 

difficult to measure, recognize or reward high performance. In addition, because 

the percentage of compensation allocated to the merit pay pool is just 1.5 

percent, the SEC struggles to differentiate high performers through merit 

compensation. The SEC can also reward performance through one-time 

monetary awards, but these award budgets are minimal, at ~0.5 percent of the 

overall compensation budget for the agency. The median government award 

budget is approximately 6 percent and goes as high as 12 percent.166 

Despite its many benefits, the altered system also had some unintended 

consequences, especially related to manager compensation. The difference in 

pay for managers, despite taking on very new and challenging responsibilities, is 

minimal to nonexistent. There are cases where an SK-14 non-management 

professional earns more than an SK-15 manager, and of the nearly 300 SK-15s at 

the agency, 18 percent earn below the SK-14 average salary.167 By maintaining a 

clear compensation differential between managers and senior line staff, the SEC 

can motivate high performers to take on managerial duties, create more desirable 

career paths within the agency, develop a pipeline of top talent to build 

succession plans to senior officer levels, and develop people management skills. 

 Finally, in the wake of Dodd-Frank, there is a growing emphasis on 

attracting and retaining industry expertise. However, in some areas this talent is 

very well-compensated in private sector firms. While the SEC has been able to 

attract some of this talent during the recession, it is possible that retaining or 

recruiting such talent will become difficult. In this case, the compensation 

allowances of Pay Parity may not be enough. The SEC cannot match private 

sector compensation for these roles, and attrition will likely be above that of 

other professional roles at the SEC. However, a moderate amount of attrition 

here can be helpful to the agency’s mission. Turnover in expert roles ensures 

that the agency is always seeking new talent, with the latest understanding of the 

industry. The SEC will need to carefully monitor the recruitment and turnover of 

industry expertise carefully to determine the benefits of slightly higher attrition in 

this area, and the extent of possible pay reform required, if any. 

 While Pay Parity has been and still is undeniably successful, further 

improvements in the compensation strategy can increase its effectiveness in 

attracting and motivating staff. For example, a clear and significant award pay 

differential can foster a spirit of healthy competition and a drive to improve 

performance across the agency, boosting morale in the process. Creating clear 

 

166 Guide to HR Benchmarks 2010. IOMA. Web. 1 Feb. 2011. 167 SEC HR database. 
© 2011 The Boston Consulting Group, Inc. 203

differences in manager and non-manager compensation also ensures that those 

taking on more responsibility feel recognized for their achievements and 

encourages them to continue their efforts. 

Recruiting 

 The SEC’s recruiting process is defined by three federal hiring authorities 

that vary depending on the type of position being sought: 

 The Competitive Service hiring process applies to the hiring of typically 

administrative and support positions such as human resources, business 

operations, financial management, acquisitions and administrative 

support. In this process the SEC is required to provide public notice and 

post the job on a national website for those searching for government 

employment. In addition, the agency applies the OPM minimum 

qualifications to each job posting; minimum qualifications are used to 

filter applications for qualified applicants. An assessment tool is created to 

score the qualified applications. HR and the hiring manager define 

“categories”, or ranges of scores, to group applications. Under the 

Competitive Service, veterans’ preference applies and veteran applications 

rise to the top category. For postings that attract a lot of interest, this 

process can become quite lengthy and cumbersome, making it difficult to 

find the right talent 

 The Excepted Service Hiring Authority (ESHA) is an SEC-specific authority 

intended to aid the agency in attracting qualified talent; ESHA applies to 

accountants, economists, examiners, IT positions, and industry experts. 

This authority waives the requirements of the Competitive Service hiring 

process and allows the agency great flexibility to fill these positions using 

excepted hiring procedures. Currently, the SEC exercises some of this 

flexibility in its targeted recruiting campaigns, but it also provides the 

standard public notice, which is not required. Under ESHA, hiring 

managers receive an unranked list of applicants who meet minimum 

qualifications. They may review all the applicants, but must consider 

them in preference order, with qualified veterans considered first 

 The Excepted Service (ES) approach is a government-wide authority 

granted to agencies hiring attorneys and other positions set out in the 

code. The process to fill an ES position is similar to the process used to fill 

an ESHA position 

 Navigating these three separate processes is cumbersome to the HR team. 

The hiring managers are confused by the multiple and complex processes, 

overwhelmed by the number of applications that come in, and stymied by rules 

that limit their decisions. Managers also add workload to themselves and the HR 

team by posting positions many times—and at varying grade levels and job 
© 2011 The Boston Consulting Group, Inc. 204

types—to increase the applicant pool and their chances of finding top talent. 

This leads to a slow and inefficient recruiting process. 

 While these authorities can be viewed as constraints, much can be 

accomplished within them. Doing so will require the SEC to take more advantage 

of the flexibilities offered by ES and ESHA hiring. Though over 80 percent of the 

positions at the SEC fall into the ES or ESHA authorities with the most flexibilities, 

the agency defaults to the more cumbersome federal agency hiring process by 

posting all positions. Employees are familiar with the legacy process and its 

requirements. However, this process requires additional time to prepare the 

posting, wait the appropriate time for responses, and filter hundreds of resumes. 

The SEC has some ability to streamline this process, but this requires training, 

process redesign and alignment with OPM. It is also difficult, given the variable 

budget cycle year-to-year, for the agency to implement forward-looking 

recruitment and diversity strategies and maintain dialogue with top talent. This 

has been particularly difficult when the agency must respond quickly to increases 

in workload that require significant recruiting efforts. At a time when the SEC 

requires more experienced talent and specific skill sets (see Section 7.2.2.3), it 

should aim to fully utilize its hiring flexibilities. Within any new targeted 

recruiting approach, the agency should consider diversity as part of the strategy. 

Contracting 

 In addition to recruiting for permanent positions, another method of 

finding the right talent is to contract with external providers, especially during 

surges in workload. There are four acquisition processes that vary by type of 

purchase: 

 Products costing less than $3,000, 

 Products costing greater than $3,000 

 Expedited process with flexibility to respond to emergency situations 

 Custom product or services (personnel) 
© 2011 The Boston Consulting Group, Inc. 205

Exhibit 7.2.4.2-2: Acquisition processes 

 

 

 The process for hiring contract personnel is the most complex of the 

procurement processes, and requires close coordination between acquisitions and 

the relevant office or division. There is a lack of clarity regarding specific 

accountabilities in each step of this process. For example, the responsibility for 

initiating a statement of work must be a collaborative effort, with divisions and 

offices providing content expertise, and acquisitions guiding the process. In the 

absence of a standard set of known accountabilities, the speed and smoothness of 

the process vary widely. Similarly there is no clear accountability for contract 

portfolio management; this could result in out of date or expired contracts and 

potential redundancy of work. It is possible that this process inhibits the effective 

use of contractors; other federal agencies employ temporary contracting support 

regularly to supplement resource needs in a timely fashion. Currently, the SEC 

utilizes its personnel contracting process mostly for IT contractors. If the SEC 

needs to ramp up its use of contractors in order to adapt to new circumstances 

and talent requirements, streamlining this process would be critical. 

 

Training 

 The SEC has recently hired a new Chief Learning Officer with FIRREA 

agency training experience to guide the development of a curriculum and 

training program. The agency also on-boarded a new Dean for the College of 

Leadership Development who also has FIRREA agency training background. 

Many of the training program needs have already been identified, and plans have 

been developed to make the necessary improvements. 

 The SEC does not yet have an agency-wide training program or 

curriculum, but initial efforts are underway. The training team recently 

End user 

identifies 

need

End user 

identifies source

Acquisitions 

posts on GSA 

Sched. E-Buy or 

Fed Bid Auction

End user 

identifies 

possible 

vendors

End user 

identifies 

contractor

End user 

purchases with 

P-card

Vendors given 2 

days to respond

Acquisitions 

posts on Fed 

Bus Ops or 

E-Buy

Vendors given 

up to 30 days to 

respond

Acquisitions 

writes "Letter of 

Contract"

Vendor begins 

work

Acquisitions 

defines contract 

with $ amount

Apply criteria

Create technical 

eval person/team 

and criteria

Meet/ follow- up 

questions; 

decision made

Acquisitions 

creates contract Vendor delivers

Catalog 

items <$3k

Catalog 

items >$3k

Custom 

items & 

personnel

Expedited for 

emergency

Source: BCG analysis End User Acquisitions Vendor Personnel contracting process
© 2011 The Boston Consulting Group, Inc. 206

catalogued the training programs run by the divisions and offices. Plans are in 

place to aggregate the programs and further develop several learning “colleges,” 

along with a full curriculum. As a first step, OCIE and the training team are 

working on a new Certified Examiner Training program to establish consistent 

standards nation-wide. The systems required to link training to the performance 

management system and Individual Development Plans are planned but not in 

place. In addition, the SEC recognizes the need to develop internal online 

communities and a knowledge management system in order to strengthen best 

practice sharing. An internal networking program is in pilot, and some early 

knowledge management efforts have been made. For example, training is 

teaming with OCIE to develop an online Risk Library. Further knowledge 

capture and knowledge management tools and procedures will be necessary, 

especially as more industry talent rotates through the agency. Recent purchases 

of a learning management system and mentoring and metrics tracking software 

will aid the training team as it grows its capabilities. In the coming weeks, they 

will complete the first round of their new 12-month, three-part leadership 

program. Further development of the training team and program is on hold 

pending release of the budget. (See the following section on the HR function for 

further detail on training resources.) 

 With a well-functioning training program, the SEC will be able to better 

address the competency and capability focus areas previously described. Training 

directly affects the ongoing development of top talent, which is critical—in their 

interactions with stakeholders, the SEC’s people leave a lasting impression of the 

agency’s strengths and capabilities. 

Performance management 

 To further develop the talent at any organization, there must be a robust 

performance management system in place. In 2008, the SEC began 

implementing its new Evidence-Based Performance Management system, and 

has since rolled it out to much of the agency. The new system addresses both 

work outcomes as well as behaviors. It requires the development of a 

Performance Work Plan (PWP), with individual objectives aligned to agency-wide 

objectives. In addition, Individual Development Plans (IDP) are created and 

tailored to individual employees to track professional and technical development 

opportunities. Performance measurement is no longer an “acceptable” or 

“unacceptable” binary rating, as with the old system, but instead allows for 

further differentiation of high and low performance. Though the system is not 

currently linked to compensation, there are plans to do so once fully rolled out. 

 While the agency has made significant progress, the success of the new 

system very much depends on its full adoption, its linkage to meaningful

compensation, and the active and visible support of leadership. The current 

implementation strategy is largely focused on educating people about processes, 

forms and compliance. Placing more emphasis on the purpose and benefits of 

the system would support meaningful adoption by managers. Otherwise, 

managers might hesitate to spend time utilizing it purely for employee 
© 2011 The Boston Consulting Group, Inc. 207

development benefits. Managers do not yet recognize the potential of the 

system, which underscores the need to further explain its benefits. A successfully 

implemented performance management system will enable leadership and 

managers to recognize and reward top talent while supporting all staff in their 

professional development. However, managerial ambivalence toward the new 

system will jeopardize its implementation. It is imperative that the SEC take 

advantage of the months immediately following the system’s introduction to 

embed it in the organization and ensure its long-term success. 

 In addition, a performance management system that does not support 

necessary involuntary attrition will reduce the agency’s overall effectiveness. 

When performance requires improvement, managers may put employees on a 

Performance Improvement Plan (PIP). The PIPs do not have clear metrics to 

mark improvement, making it quite difficult to defend or refute claims made 

either by managers or employees with regard to continued performance. The 

SEC must use its performance management system to fully document a failure to 

improve poor performance and support management decisions to dismiss poor 

performers in a timely manner. In contrast to Federal involuntary attrition rates 

of 4-8 percent per year,168 the SEC’s rate is less than 1 percent per year.169 

Currently, a number of concerns—including unclear processes and cultural 

norms—can discourage managers from addressing poor performance, with the 

expected outcome clearly evident in the SEC’s attrition data. For example, 

managers are not equipped with a performance management system that 

enables them to document performance history. The related complexities 

increase risk-aversion among managers to consider dismissal as a real option for 

poor performance. Frequently, managers resolve this by either enduring poor 

performance or moving poor performers to new roles. The SEC’s new 

performance management system, while already a great step forward for the 

agency, can help address this concern by codifying clear best practices for 

supporting and, if necessary, dismissing poor performers. Implementing such a 

system enables the SEC to proactively manage its talent pool. 

Talent management 

 On an ongoing basis there must be clear accountability for talent 

management, including high potential planning, succession management, and 

career pathing. At the SEC this responsibility may be carried out in part, but in 

many places it is missing altogether. The HR team has begun taking steps to 

develop this practice. They have defined a new HR Manager role that will 

support managers in identifying and filling human resource needs. While the 

role has been defined, the tools for supporting them have yet to be developed 

(e.g., best practice manual, decision rights and accountabilities, expected reports 

and analyses, collaboration mechanisms). In addition, a robust changemanagement plan will support the integration of HR Managers into this new 

strategic role and help set expectations with other HR employees, hiring 

 

168 BLS JOLTS Layoffs and Discharges data 2001-2009. 169 SEC vacancy database 2010; SEC FY2009 Turnover; SEC Official Turnover 2005-2008. 
© 2011 The Boston Consulting Group, Inc. 208

managers and division and office leadership. Staff for these new roles was 

approved, but hiring is on hold pending release of the budget. Here again, 

division and office leadership look to HR to continue building the agency’s talent 

management capabilities, especially with regard to expertise in workforce 

planning, recruiting and succession planning. Investing in talent management 

will allow the agency to deploy the appropriate talent against operational needs 

in a timely fashion, providing the foundation necessary for the SEC to achieve its 

objectives. 

Human resources function 

 If the SEC is to staff itself with the talent required to fulfill its mission, it 

must have an excellent HR function that can support this talent on an ongoing 

basis. A well-functioning HR team will be critical to the ongoing success of the 

people pipeline. 

 As mentioned above, the HR team has developed a new position to liaise 

with the divisions and offices, in a strategic partnership role designed to take on 

talent management and recruiting responsibilities not previously performed. In 

parallel, the HR team is taking steps to organize distinct front, middle, and back 

offices to better support the SEC. The distinct accountabilities and structure of 

these offices have not yet been communicated. 

 As part of this reorganization and redefinition of roles, the HR team 

should consider investing in other areas critical to supporting the people pipeline. 

For example, the training team currently has 10 people, which means they are 

supporting employees at a ratio of 390 FTE per learning staff member. 

Organizations tend to support 240 FTE per learning staff member, and best-inclass training organizations support 180 FTE per learning staff member.170 Based 

on BCG experience, support levels provided by training at other regulators can be 

even higher. The SEC could benefit from an additional 6 to 12 learning staff to 

support training needs. Additionally, given the narrow recruiting approach used 

historically, the recruiting capacity is relatively low. With 2 FTEs assigned to 

recruiting responsibilities, just approximately 2.5 percent of the HR team is 

focused on recruiting. On average, about 20 percent of HR teams are dedicated 

to recruiting efforts.171 To reach a similar percentage and to employ a more 

rigorous, targeted recruiting strategy as described above, the SEC would need to 

redeploy approximately 10 to 14 staff members to the recruiting team. The 

recruiting team is also at layer six of the organization, with three layers between 

them and the Chief HR Officer, likely reducing the importance placed on 

recruiting. As recruiting becomes a more critical component of HR’s function, 

care will be needed to ensure it is given the level of attention required. The size 

 

170 2010 State of the Industry Report: Definitive Review of Workplace Learning and Development 

Trends.

171 BCG proprietary benchmarking. 
© 2011 The Boston Consulting Group, Inc. 209

of the overall HR team (not including training) is in line with industry and public 

sector benchmarks, at 1.9 percent of the overall SEC.172 

 With its reorganization on hold, the HR team would benefit from 

developing tools to effectively communicate with its stakeholders. New roles 

have not yet been fully developed and communicated, customer service 

standards have been partially developed, and there remains a lack of clarity 

regarding accountabilities among HR personnel and division personnel. 

Especially in recruiting, disconnects between HR and the hiring manager can be 

damaging to the SEC brand among potential candidates. In addition, HR policies 

that should guide coordinated HR practices among team members and across the 

SEC sit in hard copy papers, old emails, and statutes. There is no practical policy 

or process “play book” to guide the various stakeholders through specific and, 

often times, confusing processes. By codifying these policies and procedures, HR 

will be better able to coordinate with division personnel and optimize its existing 

resources to streamline the recruiting process and improve the service it offers 

the rest of the agency. 

Summary 

 The SEC has made progress in developing the people pipeline, especially 

in the areas of training and performance management, and has plans for further 

developments. These successes can be further built upon to improve 

performance management implementation and develop a centralized training 

program. In addition, there remains a need for a compensation strategy, a 

refined recruiting process, and strategic talent management. Going forward, the 

HR team’s development of a strategic HR Manager role to partner with the 

divisions and offices will be a critical component of improving the people 

pipeline. All of these processes will require the support and effective 

implementation by a well-functioning HR team. In combination, further 

improvements in the people pipeline and HR function can improve agency talent, 

capabilities, and performance. 

7.2.5 Workforce engagement 

7.2.5.1 Key questions explored

 Is the SEC workforce engaged in the future of the agency and motivated to 

invest their effort in fulfilling the agency’s mission? 

7.2.5.2 Methodology

 Engagement describes the degree to which employees feel a strong bond 

with their organization and are motivated to give their best.173 It is distinct from 

 

172 Guide to HR Benchmarks 2010.
© 2011 The Boston Consulting Group, Inc. 210

satisfaction, which assesses happiness with a past experience.174 Engaged 

employees care about the future of an organization and are willing to invest 

discretionary effort in its success.175 At its core, engagement is achieved by a 

successful balance of organizational disciplines and motivators. Disciplines 

describe the systems and processes that ensure employees clearly understand 

their duties, how they contribute to organizational success, and how they will be 

evaluated. Motivators describe the degree to which employees feel proud, 

empowered and recognized by the organization. 

 Overall engagement is composed of four domains, each containing 

relevant disciplines and motivators. First, the organization must have defined 

objectives and aspirations. Senior management must articulate and be visibly 

committed to a clear vision that inspires employees. The vision must be 

advocated internally and it should have clearly defined goals and executive 

accountabilities. Next, accountabilities and collaboration require a system 

that clarifies management accountabilities and decision rights while identifying 

areas where collaboration is mission-critical. In addition, highly visible 

performance management and recognition systems provide employees with 

an understanding of how they will be held accountable and recognized for their 

achievements. Lastly, people manager capabilities and interactions are the 

foundation for the other building blocks of engagement. Strong leadership 

behaviors are required for managers to translate organizational objectives into 

actionable employee goals, hold employees accountable and foster collaboration, 

and implement performance management and recognition systems. 

 To assess engagement at the SEC, BCG drew on the Federal Employee 

Viewpoint Survey (FedView), which is administered every two years by the OPM 

across the federal government.176 FedView results for the last six years were 

mapped to a proprietary BCG survey where each question was linked to one of 

the engagement domains described above. This survey has been statistically 

validated using a benchmark database containing over one million data points (as 

of October 2010). Responses to each question are compared to public and/or 

private sector organizations. Each domain, as well as the disciplines and 

motivators within it, was assigned a quartile ranking. 

7.2.5.3 Findings 

 Given the challenges of the last three years, it is unsurprising that the 

SEC’s level of engagement is low compared to other private and public sector 

organizations. The agency ranked in the bottom quartile in overall engagement 

 

173 Konrad, Alison M. “Engaging Employees through High-Involvement Work Practices.” Ivey 

Business Journal. 2006. Print. 174 Locke, 1976 as cited by Brief, Arthur and Howard Weiss. “Organizational Behavior: Affect in 

the Workplace.” Annual Review of Psychology. 2001. Print. 

175 Seijts, Gerard and Dan Crim. "The Ten C's of Employee Engagement." Ivey Business Journal. 

2006. Print. 

176 United States. U.S. Office of Personnel Management. Results from the 2008 Federal Employee 

Viewpoint Survey: Securities and Exchange Commission. Washington: GPO, 2010. Print. 
© 2011 The Boston Consulting Group, Inc. 211

and in the four domains, although some disciplines were ranked in the third 

quartile. Low engagement is a relatively common problem, often exacerbated by 

the management structure discussed in Section 7.1.7.2, which leaves middle 

managers feeling disempowered. It is also a symptom of the challenges related 

to performance management and training discussed in Section 7.2.4.2, as those 

are key components of engagement. 

 While there was little meaningful variation by division or office, the SEC’s 

engagement differs significantly by grade level. The energy and commitment of 

newly-appointed senior leaders is evident in the high engagement scores among 

the SEC’s Senior Officers (SOs). Among these executives, engagement ranked in 

the first or second quartile along all dimensions. The SEC’s lowest level staff (SK1 to SK-6) was also much more engaged, with scores in the second quartile on 

four of eight dimensions. These staff rated the agency’s disciplines particularly 

high, while motivators were less engaging. 

 A historical analysis of FedView and its predecessor, the Federal Human 

Capital Survey, found that engagement has declined steadily since 2004. While 

the events of the financial crisis likely impacted engagement levels in the last few 

years, even in 2004 overall engagement still ranked only in the third quartile. 

Measures for each of the four domains continuously ranked in the bottom 

quartile year over year. The SEC has a clear opportunity to improve staff morale 

and engagement, which can have benefits for the agency’s overall performance. 

Engaged employees are typically more productive and willing to apply 

discretionary effort for the benefit of their overall organization. This kind of 

commitment will significantly bolster the agency’s ability to succeed in a rapidly 

changing and resource-constrained environment. In addition, engagement can 

improve retention of high performing employees, which will be paramount both 

as the economy begins to recover and as the SEC tries to attract talent with 

specialized expertise. 

Summary 

 The persistently low levels of employee engagement at the SEC indicate 

the agency has an opportunity to re-energize its staff and middle managers, 

thereby increasing productivity and better equipping the agency to undertake 

new duties. The initiatives in Chapter 6 provide a roadmap to improve employee 

engagement. While many of these recommendations are intended to improve a 

specific aspect of organization or personnel management, initiatives such as role 

mandating, training, and performance management also contribute to employee 

engagement. 
© 2011 The Boston Consulting Group, Inc. 212

7.3 Technology and resources 

7.3.1 Overview 

As part of the Section 967 Study mandated by Dodd-Frank, BCG 

undertook an assessment of the SEC’s technology infrastructure and capabilities, 

with a focus on evaluating the agency’s ability to meet its mission in its changing 

context. The assessment focused on three key aspects of technology at the SEC: 

 Technology systems 

 OIT’s ability to deliver IT services 

 Technology expertise, which is primarily addressed in Section 7.3.3 

 Technology at the SEC has been hindered by a history of neglect and 

constrained funding. This has degraded OIT’s ability to deliver the necessary IT 

services and consequently, has led to a reduction in leverage from IT in the form 

of advanced systems. 

 

 Despite this history, OIT’s recent momentum is promising. The 

Chairman’s office has recognized that technology is a critical path for the SEC 

and has taken steps to address the issues that have limited its implementation 

and use. In particular, the SEC recently made two key leadership hires, a COO 

and new CIO, and made the implementation of an agency-wide TCR system a top 

priority. 

 OIT’s new leadership is working to address its current management 

inefficiencies. For example, it is: exploring new models for engaging with the 

business side of the SEC, with the intent of improving coordination and its 

understanding of internal client needs; conducting a thorough review of its 

capital investment process aimed at improving initiative prioritization and 

management; and putting in place the mechanisms necessary to better leverage 

key project management tools and drive accountability. 

 While this progress is notable, significant work remains. This assessment 

identifies meaningful shortfalls in the SEC’s existing technology capabilities and 

OIT’s ability to deliver the IT services the agency requires. 
© 2011 The Boston Consulting Group, Inc. 213

7.3.2 Technology systems 

7.3.2.1 Key questions explored

 What is the adequacy of the SEC’s existing technology systems for meeting the 

SEC’s current and emerging needs? 

7.3.2.2 Findings 

 In the context of growing complexity in the securities markets, technology 

systems have become increasingly critical enablers for the SEC. To fulfill its 

mission, the SEC must have a robust set of systems that are capable of supporting 

the organization’s key functions, today and in the future. 

 While the SEC has made progress in developing its systems, gaps remain. 

In particular, the SEC has a need for new systems in the areas of data 

management, analytics, and knowledge management. The SEC also needs to 

modernize existing systems, such as EDGAR, to improve their operational 

efficiency, create additional functionality, and provide for the sharing of 

information across systems, divisions, and offices. 

Overview of the SEC’s current technology solutions

 The SEC currently has 196 technology solutions in place. Of these, three 

business applications—EDGAR (public filing store), Hub (case management), and 

TCR (tips, complaints, and referrals)—are of particular note given their broad 

scope, wide deployment, and relative import to the core mission of the SEC. 

Exhibit 7.3.2.2-1: Technology solutions 

Solution category # of Solutions 

Data analytics 10 

Data inputs 11 

Case management 12 

Filing 11 

EDGAR 1 

Tracking 56 

Administrative 56 

IT Support 38 

Inactive 1 

Total technology solutions 196 

Source: BCG analysis
© 2011 The Boston Consulting Group, Inc. 214

Data analytics solutions 

 Given the demands placed on it, the SEC has a growing need for the ability 

to analyze large quantities of market data. By leveraging such a capability, the 

SEC can drive increased efficiency and effectiveness, particularly in the areas of: 

 Registrant risk analysis: Perform risk analysis using data such as 

counterparty information, holdings, trading patterns, and short sale 

positions on the registrant pool, such as broker-dealers, investment 

advisers and investment companies, to identify individuals and groups of 

registrants on which to conduct targeted exams 

 Policy impacts: Evaluate trading activity in the securities-based swaps 

market for how rule modifications may impact market structure 

 Enforcement: analyze patterns of placing orders and trades to assess 

potential market manipulation 

 SRO oversight: Replicate an SRO’s own surveillance analyses to test the 

performance of its surveillance systems 

 Exam sweeps: Analyze order and cancellation patterns over many 

participants to identify any that placed and cancelled a significantly high 

number of orders, which could be indicative of weaknesses in their trading 

systems 

 Dodd-Frank expands the purview of the SEC in several areas, as described 

in Section 3.3.1. The legislated responsibilities do not explicitly require the SEC 

to implement new surveillance or analytic tools; however, having a robust data 

analytic capability will better enable the SEC’s regulatory activities. For example: 

 Credit rating agency regulation: The SEC is required to register and 

examine each of the NRSROs annually. There is no requirement for 

surveillance or analytics solutions to support these registrations or 

examinations. However, the ability to review trends in ratings over time 

may provide the SEC better insight into the core drivers of ratings changes 

 Derivatives regulation: The SEC is required to have securities-based 

derivatives cleared through central clearing organizations and traded 

through regulatory exchanges or swap execution facilities. The 

surveillance of participant and market activity will be conducted by the 

exchanges or swap execution facilities, as is done today for other 

securities. Thus, with regard to derivatives regulation in the context of 

Dodd-Frank, the SEC does not require additional surveillance capabilities. 

However, with additional analytical tools, the SEC will be better 

positioned to monitor the swap markets through data provided by swap 

data repositories (SDRs) 

 Private fund and municipal securities regulation: The SEC is required to 

register an expanded set of private fund advisers and to register municipal 

securities advisors. Performing these registrations does not require market 

surveillance or analytic solutions. However, the ability to compare profiles 
© 2011 The Boston Consulting Group, Inc. 215

of new registrants to existing ones may help the SEC understand how the 

private adviser or the municipal advisor markets are evolving 

 Conducting these analyses requires systems capable of performing both 

rules-based analyses (e.g., using defined algorithms to identify and take action on 

targeted data) and ad hoc analyses (e.g., analyses without defined algorithms). 

Such analyses will also require access to a sufficient body of structured data (e.g., 

trade, order, and quote data) and unstructured data (e.g., information taken from 

business documents such as internal emails). 

 The SEC’s current data analytics solutions are designed to provide much of 

the functionality that the SEC requires. They support the analysis and 

management of structured and unstructured data, including market data, filings, 

and documents captured or created during the examinations and enforcement 

processes. The primary tools in place, Business Objects and SAS, are robust. The 

SEC has also deployed a Fujitsu system to mine and conduct rules-based analyses 

on corporate XBRL filings data in EDGAR. The SEC also has several tools, e.g. 

Autonomy and Concordance, which are designed to search unstructured data 

generated during electronic discovery. 

 However, these solutions are not sufficiently implemented to support the 

SEC’s emerging analytic needs. For example, the current suite of analytic tools 

was not fully utilized as part of the SEC’s evaluation of the market events of May 

6, 2010. The toolset was insufficient for the large volume of structured market 

data that was necessary for the analysis. Furthermore, the current set of 

analytical systems is not able to perform a number of analyses that would be 

beneficial for the SEC. For example, they do not enable the type of rules-based 

analyses necessary to support independent market surveillance or the robust 

oversight of SRO surveillance activities. 

Data inputs 

 To more effectively leverage analytical tools, the SEC requires access to a 

sufficient body of data. Specifically, the agency needs three types of information: 

 Market data: Trade, order, and quote data from the various markets and 

market participants 

 Market participant data for investigations and exams: Individual market 

participant’s internal transaction data as well as its business data 

 Internal SEC business data: Case data, filing data, market participant 

profile data, tips, complaints, referrals, etc 

 
© 2011 The Boston Consulting Group, Inc. 216

 Today, the SEC has the following primary sources of data. In some cases, 

the data are not easy to access or are not in a format conducive to performing 

analysis: 

 Corporate filings 

 Broker-dealer registrations and risk assessments 

 Investment Adviser and Investment Company registrations 

 Selected trade data as provided for exam purposes 

 Evidentiary data from enforcement cases 

 SEC business data (correspondence, case management information, etc) 

 The SEC does not currently have broad access to market data. Instead, it 

routinely receives only the small slices of data it specifically requests for exam or 

enforcement purposes. As a result of its limited access to market data, the SEC 

faces technical and logistical challenges in developing a comprehensive, 

consolidated view of market activity. When the SEC investigated the market 

events of May 6, 2010, for example, it had to acquire and consolidate market data 

from a significant number of trading venues, including all of the nationallyregistered exchanges. This was a time-consuming undertaking that delayed the 

SEC’s assessment. In response, the SEC has proposed the development of a 

Consolidated Audit Trail (CAT), which would create a single, comprehensive 

repository of market data that can be utilized by the SEC and its peer regulators. 

Data warehousing 

 Market data is voluminous. It is estimated that a comprehensive catalog 

of trade, order and quote data for the products under the SEC’s authority will 

amount to 20 terabytes of data per month. This dataset will grow in size and 

complexity as trade volume, the number of products and entities under 

regulation, and the universe of trading venues expand. As a result of this growth, 

it is important for the SEC to have a flexible capability to acquire, store, 

transform, and load a significant quantity of structured data. 

 The SEC currently stores a significant quantity of data for corporate filings 

in EDGAR. Financial statement data is structured in the XBRL format, but this 

makes up a small percentage of EDGAR filings; the rest is largely unstructured. 

In addition to EDGAR, the SEC also stores considerable evidentiary data in a 

Concordance system. This data is typically unstructured. Cross-referencing data 

between these and other SEC systems is challenging due to a lack of common 

data standards, identifiers, interfaces, and a clear link between data formats. 

 The SEC’s current data repositories may serve as a foundation for a full 

data warehousing solution; however, they are insufficient for fully meeting the 

agency’s emerging data needs. Several limitations exist in their current state. 

The SEC’s store of corporate filing data is extensive, but it is stored in a solution 

designed for rapid data intake versus a solution targeted at data mining and 

supporting analytical needs. Concordance data is stored in the solution’s 
© 2011 The Boston Consulting Group, Inc. 217

proprietary database which makes it difficult to access and use in other systems. 

Finally, the SEC does not have a system that is designed to manage both the 

quantity and type of trade, order, and quote data that will be available through 

CAT. 

Case management 

 To support its exam, investigation, and enforcement activities, the SEC 

requires a robust case management solution. Such a solution needs to provide a 

dynamic and comprehensive repository for case-related materials, including 

evidentiary materials. 

 Currently, the SEC has two case management systems: Hub, which 

supports enforcement cases, and STARS, which manages the examination 

process for OCIE. Both systems define and track workflow for a 

case/examination and capture relevant information including status, findings, 

memorandums, and next steps. 

 Hub tracks investigations at their initial stages by allowing entry of 

relevant data and references to materials. As the case progresses, Hub tracks the 

case and stores key data at each stage including final court proceedings. 

Evidentiary data is currently stored separately and is not captured directly in the 

system. In future versions, evidentiary data will be more directly associated with 

tracking information for cases. 

 STARS supports the exam process by allowing users to document and 

report risks identified during exams. Data is entered for document references 

and exam tracking, and the system provides reports and basic analysis of this 

data. 

 Hub is a robust solution that largely meets the SEC’s existing enforcement 

case management needs. STARS is obsolete and in the process of being replaced. 

The Oracle platform that supports Hub and the STARS replacement has a robust 

document management capability, and both Hub and STARS (until it is 

decommissioned) will leverage this capability in the future. However, 

evidentiary data for cases is currently stored separately and is not directly 

captured in the systems. The agency anticipates addressing these gaps in future 

versions of Hub, STARS, and Electronic Discovery 2.0 (replacement for 

Concordance). 

 Hub and the replacement for STARS also utilize a common platform—the 

same platform as the TCR solution—and are therefore able to share data, drive a 

seamless workflow, and enable different offices and divisions to utilize the same 

data in their respective activities. This shared use of a single architecture reduces 

support and maintenance costs and lays the groundwork for leveraging shared 

systems across divisions and offices. This architecture is a departure from the 

siloed, single-purpose solution approach that the SEC has historically employed. 
© 2011 The Boston Consulting Group, Inc. 218

Filing systems 

 Filing systems enable the input and storage of regulatory filings from 

market participants. They are, as a result, perhaps the most public-facing and 

critical of the SEC’s systems. While EDGAR is a filing system, its prominence and 

size warrants a broader discussion; it will be addressed in the next section of this 

document. 

 In addition to EDGAR, the SEC has access to two categories of filing 

systems: those owned by FINRA and those owned by the SEC. The FINRA filing 

systems are used to gather and store filings for broker-dealers and investment 

advisers. These solutions are both owned and supported by FINRA; the SEC 

maintains access to these filings through a web portal. Direct filing data is also 

accessed via a data feed that FINRA defines and provides to the SEC. The SEC 

also has its own systems that store various filings for SROs related to 

investigations, referrals, and market surveillance. These systems perform the 

basic tasks of receiving a filing, validating the input, routing the filing to a 

searchable repository, and performing simple reporting such as a notification of 

late filings. 

 The filing systems at the SEC are primarily small solutions, customized for 

each filing or groups of filings. While the solutions use similar underlying 

technologies, they are not functionally and technically easy to scale or adapt to 

new user requirements. The presence of multiple filing systems creates 

additional maintenance requirements for OIT. In addition, filing information is 

not stored in a central database, which hinders efficient search and analysis of 

the data. The lack of common identifiers, a consistent format, and a well-defined 

mapping between systems also prevents efficient cross-referencing of data across 

filing systems. Furthermore, the SEC only has access to a limited set of the filing 

data FINRA gathers. Neither of these categories of filing systems easily enable 

the use of the underlying data in the SEC’s other technology solutions, thus 

complicating analyses. 

EDGAR 

 EDGAR is the SEC’s filing management system for public company filings. 

It is designed to perform automated collection, validation, indexing, acceptance, 

and dissemination of submissions to the SEC. In many ways, EDGAR is the 

public face of the SEC. For most filers and investors, EDGAR is the only direct 

contact they will have with the SEC. Combined with the critical functionality that 

EDGAR provides investors, filers, and SEC staff, this argues that EDGAR should 

be a best-in-class filing system with a strong emphasis on the easy access and 

analysis of filing data. 

 EDGAR largely supports the SEC’s operations today but is in need of 

modernization, particularly with regard to its business process workflow and 

system design. The last significant modernization took place in 1997; since then, 

all updates have focused on minor technology upgrades and small-scale 
© 2011 The Boston Consulting Group, Inc. 219

improvements to subsystems such as the EDGAR Workstation and the fee 

collecting service. The agency intended to undertake a large-scale modernization 

of EDGAR in 2006, but the initiative was delayed due to competing development 

priorities. 

 Due to the lack of modernization, EDGAR has several functional and 

architectural shortcomings. For example: 

 

 System design: The system is complex and has duplicative components, 

interdependencies between components, and not enough standardization 

in business process logic. For example, duplicate code and validation 

methods are in place to support each source of filer input (i.e. professional 

filers, individual filers, and filers that employ software interfaces) 

 End-user experience: A proliferation of filings, inconsistent processes, and 

different forms can create confusion for end-users which results in 

application support calls. Streamlining the filing process and creating 

online Q&A tools would improve filer efficiency and reduce EDGAR 

support costs 

 Data store and analytics: EDGAR has its own data store that is replicated 

within the SEC. This store could be improved to better support retrieval 

and analyses. Frequently, analysis of EDGAR data is performed through 

single-purpose solutions within various offices and divisions 

 Data structure: Most of the filing data in EDGAR resides in text or HTML 

files and is largely unstructured. For data that is structured, formats are 

not always consistent. For example, US GAAP corporate filings are 

beginning to use XBRL, while some other structured filings use XML. This 

inconsistent use of formats makes consolidation, cross-referencing, and 

efficient analysis of the data more difficult 

 The delay of EDGAR’s modernization has resulted in a more limited use of 

EDGAR data in internal SEC analysis and workflow, increased support and 

development costs, and sub-optimal filer usability. The agency is aware of this 

and is planning for a future, long-overdue modernization effort. 

Tracking systems 

 The SEC has systems that track the workflow and progress of activities 

such as rule-writing, filings reviews, and the flow of correspondence within the 

organization. These systems enable the basic capture of information to reflect 

progress against an activity. 

 

 The largest tracking system is the new TCR system, which provides a 

single, comprehensive view into the full lifecycle of individual tips, complaints, 

and referrals. In the intake stage, TCR consolidates these pieces of information 

from various sources into a central repository that is accessible throughout the 

organization. It then establishes triage and resolution stages in which risks can 

be classified, priorities assigned, and work items established. TCR also shares a 
© 2011 The Boston Consulting Group, Inc. 220

common architecture with key case management systems, allowing for a simple 

interface to efficiently share information across the systems. Given the critical 

role of tips, complaints, and referrals to the SEC’s investigation and enforcement 

activities, the TCR system is seen as a particularly valuable enabler for the SEC. 

 The SEC’s other tracking solutions are primarily small solutions 

customized for a specific task. Though these solutions may share some 

underlying technical components, they do not share business logic components 

that would enable extensibility. For example, there are no shared components to 

validate inputs according to a set of rules, and as a result the custom solutions 

cannot benefit from a reusable component that enables this function. 

Additionally, there is no uniformity in end-user access or presentation. The data 

from some systems is accessible via web interfaces, but other systems are 

primarily local Microsoft Access databases or customized applications that are 

not as easily accessible to a larger set of users. 

 Moreover, the agency’s tracking solutions do not capture underlying data 

such as SEC comment letters, filing commentary, and the actual text of 

correspondence. For the data that is captured, there is no efficient means of 

cross-referencing tracking data across systems as a result of differing data formats 

and the lack of robust data mapping between systems. 

Administrative systems 

 The SEC’s administrative systems are a set of technology solutions 

required for organizational support such as web support for internet and intranet 

sites, financial management solutions, personnel management, and other 

administrative activities. 

 The agency recently decided to migrate its financial management solutions 

(not including procurement management and contracting systems) to a shared 

platform used by many other federal agencies. This platform is hosted at the 

Department of Transportation, and its adoption allows the SEC to use a 

comprehensive system for billing, invoice tracking, and budgeting that is wellsupported. 

 These systems are adequate for the SEC’s needs today. 

IT support solutions 

 IT support solutions enable day-to-day activities and support IT 

infrastructure operations, the IT needs of the SEC staff, and OIT’s needs for 

system development. Current solutions include communications solutions for 

mobile, desktop, and e-mail as well as remote access services and network 

management solutions. To meet OIT’s needs, the SEC has several systems for 

project tracking, project change management, help desk management, disaster 

recovery, and data center management. 
© 2011 The Boston Consulting Group, Inc. 221

 The SEC’s IT infrastructure solutions for communications and network 

management are largely adequate. The SEC’s IT tools for project management 

are further discussed in Section 7.3.3.2. 

Agency-wide knowledge management solution 

 For information to be of value to the SEC, it must be captured, cataloged, 

and made accessible. By bringing together all source information—information 

formally and informally collected in the course of operations combined with the 

institutional knowledge and expertise of the SEC staff—the organization would 

be better positioned to make the fullest use of its resources. For example: 

 Connect the dots: In the course of examinations, enforcement activities 

and other external interactions, SEC staff learns significant information. 

Capturing all of this information—regardless of whether it is relevant to 

the immediate work at hand—and making it available, searchable, and 

analyzable, can help the SEC to effectively “connect the dots” 

 Knowledge capture: Agency staff has built up significant knowledge about 

the securities markets, the participants it regulates, and effective ways to 

conduct its work. Capturing those insights in the forms of training 

materials and best-practice guidelines can help build institutional 

knowledge across the SEC 

 Emerging topics education: The pace of change in the securities markets is 

rapid. As the SEC develops knowledge regarding emerging topics (e.g., 

new technologies and new trading strategies), capturing it and making it 

available allows the entire agency staff to benefit from the knowledge that 

SEC’s leading experts develop 

 Internal collaboration: Enabling agency staff to network internally, 

collaborate on topics of interest, and easily share information and 

expertise allows for the more effective leveraging of SEC staff and 

information resources 

 Today, the SEC has a limited knowledge management capability—most 

notably, via a small deployment of Microsoft SharePoint. It is not enterprisewide and does not provide the full range of functionality that the SEC requires. 

As a result, information is neither consistently captured nor easily accessible. 

The staff, meanwhile, is without an effective internal collaboration tool. 

Summary 

 The SEC’s two most important gaps in technology solutions are in the 

areas of 1) data management and analytics tools and, 2) knowledge management. 

The limits of the current data management and analytic capability hampers the 

SEC’s risk management efforts. The lack of a knowledge management solution 

hinders awareness of operational issues and prevents sharing of market insights 

and best practices across the organization. 
© 2011 The Boston Consulting Group, Inc. 222

 Additionally, the current architecture of many of the SEC’s existing 

systems limits their functionality, efficiency, and use. For example, a significant 

number of the agency’s systems are single-purpose; they cannot be leveraged by 

multiple offices or divisions, and thus drive inefficiencies in solution 

development. The current state of EDGAR is another example of system 

architecture creating operational inefficiencies and functional gaps, and leading 

to a sub-optimal end user experience. 

 There is awareness of these needs and the agency is taking some initial 

steps to address them. There is wide recognition that the agency should 

modernize key systems and leverage their architecture more broadly. In terms of 

data management and analytics, OIT is establishing a data governance board to 

map out existing and future data needs and explore new analytical tools that can 

strengthen its existing analytics capabilities. 

7.3.3 OIT’s ability to deliver IT services 

7.3.3.1 Key questions explored

 How effectively can the SEC’s IT personnel and resources deliver and support 

technology solutions? 

7.3.3.2 Findings

 The implementation and management of the SEC’s technology systems 

requires a strong IT delivery capability. 

 At the SEC, the IT function is primarily carried out by OIT. This 

centralized group has agency-wide responsibility for the development, 

maintenance, and operation of IT systems. Currently, it comprises 121 staff 

members. This relatively small staff is supplemented by approximately 540 

contractors who primarily focus on application development, operations, and 

infrastructure engineering. 

 OIT is complemented by IT resources embedded in the SEC’s divisions and 

offices. These “shadow” IT groups, which primarily perform localized application 

and desktop support roles, report to their divisions or offices and do not have a 

reporting relationship with OIT. In total, the SEC has approximately 60 staff 

members fulfilling IT functions in this manner. 

 As previously noted, the SEC has taken some initial steps toward 

improving OIT’s ability to deliver IT services. The hiring of a new CIO and the 

ongoing review of OIT’s investment governance process are promising steps. OIT 

has also recently delivered key systems, in particular TCR and an improved case 

management system (Hub). The recently launched TCR system collects a rich set 

of information from multiple internal and external sources and catalogs them in 
© 2011 The Boston Consulting Group, Inc. 223

a single location, making it easily searchable. This single-system approach 

reduces duplication of effort and allows the SEC to establish agency-wide 

priorities for follow-on action. TCR’s system design allows for sharing of data 

across systems, increased re-use of system components, and improved efficiencies 

in processing incoming tips, complaints, and referrals. The TCR data can be 

integrated with the SEC’s case management systems to better enable 

examination and enforcement efforts and provide analysts with a more 

comprehensive view of information that may be relevant to an investigation or 

topic area. 

 Even with these initial steps, however, significant OIT capability gaps 

remain, particularly in the context of the additional demands that will be placed 

on OIT as the relative importance of technology at the SEC increases. These gaps 

exist along the following six dimensions: 

 Technology vision and long-term strategy 

 An understanding of business needs 

 Investment governance 

 Tools and methodologies 

 Expertise to develop and manage complex IT systems 

 Organization design 

Technology vision and long-term strategy 

 Given the increasingly critical role of technology, the SEC must have a 

clearly articulated technology vision, coupled with a multi-year strategy that 

defines the path for realizing it. Such a vision and strategy would: 

 Comprehensively outline the SEC’s technology needs, including enterprise 

applications, enterprise infrastructure, and end-user technology 

 Establish a clear set of priorities for delivering against those needs 

 Align the organization with a long-term enterprise architecture 

 Provide a framework for determining whether existing solutions should be 

retained, replaced, or enhanced 

 Establish a broad set of metrics for measuring service delivery 

performance 

 Drive a well-articulated operating and service delivery model 

 Today, OIT does not have the well-articulated and clearly communicated 

vision and strategy that it requires. Rather, OIT operates in a more reactive 

posture, responding ad hoc to the SEC’s technology needs as they arise and are 

deemed critical. Strategic planning is typically short-term and lacks the broad 

organizational support necessary to be made effective. We note that the SEC’s 

new CIO is taking steps towards correcting this deficiency, in part through 

workshops with the OIT leadership team to outline key technology priorities for 

the organization. 
© 2011 The Boston Consulting Group, Inc. 224

 OIT’s reactive posture is reinforced by the lack of engagement between 

OIT and the broader organization. The SEC’s divisions and offices generally do 

not look to leverage OIT as a strategic partner. As a consequence, OIT is typically 

not engaged as part of the operations of the divisions and offices. For example, 

OIT is not involved in the early stages of rule-writing, when its guidance on a 

rule’s technical feasibility and systems impact would be most valuable. As a 

result, OIT finds itself responding to short-fuse and complicated requests that 

impact the existing development schedule, further reducing engagement with its 

internal clients and contributing to its reactive stance. 

 OIT lacks a formal strategic planning function; other than the CIO, no OIT 

staff member is specifically responsible for developing or monitoring progress 

towards fulfilling a strategy. Meanwhile, the broader SEC’s strategic planning 

functions lack the technical depth or mandate for fulfilling such a role. For 

example, the SEC’s Strategic Plan 2010 – 2015 outlines a number of technology 

capabilities that the organization plans to develop. However, the initiatives it 

describes exist only as high-level concepts. The Strategic Plan is not designed to 

address questions of specific technology architecture and detailed 

implementation planning. 

 OIT’s current performance metrics are narrow in scope; they do not 

comprehensively test the organization’s performance across key functions. For 

example, in some systems, the performance metric for server up-time is whether 

the server has simple network connectivity, not whether the server is available 

and effectively fulfilling its designated function. OIT’s new leadership team has 

recognized this deficiency and taken concrete steps to address it. For example, it 

has begun implementing industry-standard metrics (ITIL) throughout OIT; rollout should be complete within the next two years. 

 The overall lack of strategic planning in OIT: 1) makes engagement with 

internal clients more difficult due to OIT’s reactive posture; 2) leads to a 

fragmentation of resources as a result of a lack of explicit prioritization; 3) delays 

decisions relating to existing architecture, such as modernization or 

decommissions; and 4) and makes the task of assessing OIT’s performance more 

difficult. 

An understanding of business needs 

 Currently, OIT and the SEC’s offices and divisions are not tightly aligned. 

As a consequence, OIT does not sufficiently understand the needs of its internal 

constituents. The problem stems from issues in: 1) relationship management; 2) 

demand generation; 3) project prioritization; and 4) project execution. 

Relationship management 

 The interaction model between OIT and offices/divisions is not welldeveloped. There are currently no dedicated contacts within either the 

divisions/offices or OIT to coordinate priorities. Some groups have an unofficial 
© 2011 The Boston Consulting Group, Inc. 225

OIT champion who represents the division’s or office’s priorities within OIT. 

However, such an OIT champion is not consistently present in all divisions and 

offices. This leads to the use of informal channels of communication and 

discourages the coordination of IT requests. As a result, there is a lack of clear 

expectations for both solution delivery and project priorities between a 

division/office and OIT. To address these relationship challenges, the 

organization is in the process of examining new business models that would allow 

IT to interact and coordinate more effectively with offices and divisions. 

 Also, the coordination between OIT and “shadow” IT groups is 

insufficient, occasionally resulting in a duplication of effort and an inability to 

fully capture the benefits of scale. The absence of a formal and unified reporting 

structure makes it difficult to address this situation. 

Demand generation 

 Only a few leaders within a division or office determine the IT needs that 

should be communicated to OIT. This is due to the absence of a centralized, 

formal checkpoint for business ideas within the division or office. The result can 

be a lack of input from stakeholders and a fragmented view of business demand. 

Project prioritization 

 Typically, divisions and offices do not formally prioritize their demands for 

IT investment at the office or division level. Projects are prioritized in an ad hoc 

manner and most requests are ordered in a first-in-first-out (FIFO) fashion. 

Although most significant priorities are identified, there is no clear prioritization 

of secondary initiatives. This can lead to an inefficient deployment of resources. 

 Typically, there is limited coordination between divisions/offices and OIT 

when assigning priorities and project deliverable dates, and the coordination that 

does occur is often informal. This can lead to divergent views between 

divisions/offices and OIT on a range of important matters, including project 

priorities, delivery dates, and the quality of technology solutions. 

Project execution 

 During project execution, divisions and offices typically do not engage in a 

formal sign-off with OIT at the end of each stage of the development lifecycle or 

at the close of development milestones. Formal verification of sign-offs is also 

not monitored in a project tracking system. This can lead to a lack of 

coordination and oversight, where gaps in alignment between OIT and project 

owners or other project-related “red flags” could go unnoticed. 

 Historically, divisions and offices have not had a view into the status of 

their ongoing projects due to the lack of a comprehensive project status 

dashboard. OIT recently began instituting project status dashboards to address 

this challenge. 
© 2011 The Boston Consulting Group, Inc. 226

Investment governance 

 Investment governance describes how an organization plans, funds, and 

monitors IT service delivery. It is primarily a strategic function, as it defines the 

organization’s IT investment priorities and determines which projects will be 

undertaken to meet them. 

 The SEC’s IT governance structure is largely well-designed; its primary 

features largely mirror current private and public sector best practice. In 

particular, the structure as designed: 

 Comprises multiple entities, each with a clear mandate and a membership 

well-suited in role and seniority to meet it 

 Creates a forum for significant business involvement in strategic priority 

setting and investment decision-making 

 Establishes appropriate technical bodies, designed to assess and advise on 

the technical merits of investments 

 As described in Exhibit 7.3.3.2-1, governance decision-making is divided 

between five entities with mutually-reinforcing mandates and decision rights. 

Exhibit 7.3.3.2-1: Existing IT governance structure 

 

 Though the SEC’s governance structure is well-designed, there are gaps in 

the governance process and the execution of that process. These gaps, which 

reduce the effectiveness of the SEC’s investment governance function, are in the 

following areas: 1) up-front project planning; 2) consideration of project portfolio; 

IT

Capital

Planning

Committee

Information Officers

Council

Project Review Board

Budget &

direction

Enterprise-wide

budget demand

Project approval & Budget & direction

oversight recommendations

Technical

Review Board

Technical recommendations

on specific projects

Technical

recommendations

on specific projects

Enterprise

Architecture

Board

Architecture

standards

Architecture standards

Demand for IT investment

IT

Capital

Planning

Committee

Information Officers

Council

Project Review Board

Budget &

direction

Enterprise-wide

budget demand

Project approval & Budget & direction

oversight recommendations

Technical

Review Board

Technical recommendations

on specific projects

Technical

recommendations

on specific projects

Enterprise

Architecture

Board

Architecture

standards

Architecture standards

Demand for IT investment

• Develops overall enterprise architecture 

standards

• Membership: OIT architects, technical reps 

from divisions

Enterprise Architecture Board (EAB)

• Develops overall enterprise architecture 

standards

• Membership: OIT architects, technical reps 

from divisions

Enterprise Architecture Board (EAB)

• Develops IT budget

• Defines strategic direction for IT

• Membership: Chairman's rep; division 

directors; CIO; General Counsel; CFO; COO

IT Capital Planning Committee (ITCPC)

• Develops IT budget

• Defines strategic direction for IT

• Membership: Chairman's rep; division 

directors; CIO; General Counsel; CFO; COO

IT Capital Planning Committee (ITCPC)

• Reviews & approves IT investment proposals

• Reviews project performance as warranted

• Membership: CIO; Deputy Director of OIT; 13 

senior division reps

Information Officers Council (IOC)

• Reviews & approves IT investment proposals

• Reviews project performance as warranted

• Membership: CIO; Deputy Director of OIT; 13 

senior division reps

Information Officers Council (IOC)

• Performs an initial review of IT investment 

proposals, with emphasis on ensuring accuracy

• Reviews each program and project on a 

monthly basis; provides oversight function

• Membership: CTO; budget; 7 OIT assistant 

directors; security and contracting officers

Project Review Board (PRB)

• Performs an initial review of IT investment 

proposals, with emphasis on ensuring accuracy

• Reviews each program and project on a 

monthly basis; provides oversight function

• Membership: CTO; budget; 7 OIT assistant 

directors; security and contracting officers

Project Review Board (PRB)

• Assesses suitability of specific technologies for 

use in projects

• Provides technical guidance when needed

Technical Review Board (TRB)

• Assesses suitability of specific technologies for 

use in projects

• Provides technical guidance when needed

Technical Review Board (TRB)

Source: SEC; BCG analysis
© 2011 The Boston Consulting Group, Inc. 227

3) consideration of resource availability; and 4) evaluation of technical 

architecture. 

Up-front project planning 

 The supporting materials for projects that are formally submitted for PRB 

and IOC consideration often lack the rigor required for a substantive evaluation 

of their merit. Businesses cases, when included, are typically limited in depth 

and rigor. Project scopes often lack specificity, and business requirements are 

not always fully developed. Additionally, projects are considered for approval 

without an explicit agreement from the sponsor that the proposed project—as 

submitted for approval—will meet the business need. 

 As a result of limited up-front planning, decision-makers often lack the 

information required to make informed investment decisions. The IOC and PRB 

are not always able to fully assess whether a proposed project will meet the 

business need or whether the solution has technical merit. Projects that lack 

sufficient up-front planning are more likely to face time and budget overruns or 

require mid-course adjustments. 

Consideration of project portfolio 

 At the SEC, proposed projects are evaluated individually and in the 

approximate order they are submitted. Neither the IOC nor the PRB makes an 

explicit attempt to evaluate a project proposal in the context of the overall 

project portfolio across all divisions and offices, making it difficult to prioritize 

resources and weigh the trade-offs between projects. In the words of one staff 

member, “Projects are examined on a discrete basis; there is no attempt to 

prioritize or consider their impact on the SEC as a whole.” 

 The lack of a portfolio-wide view, together with the informal prioritization 

allowed by the governance process, may result in two situations: 1) projects may 

be prioritized sub-optimally, and 2) opportunities to implement enterprise-wide 

solutions in place of multiple systems with overlapping functionality may be 

missed. 

Consideration of resource availability 

 When evaluating proposed projects, the IOC and PRB consider funding 

availability, but do not typically assess whether OIT has the available personnel 

and skill-sets required to effectively execute the project. According to one staff 

member, “Projects are approved depending on funding availability; no one is 

looking at whether we actually have the resources to carry them out.” This fact is 

inconsistent with the PRB’s charter, which states that the PRB must “identify 

adequate resources” prior to approving projects. 

 That specific resources are not identified prior to approval may be due in 

part to the fact that there is no formal, consolidated view into OIT’s available 
© 2011 The Boston Consulting Group, Inc. 228

capacity. Resourcing and capacity is tracked in an ad hoc way, and the outputs 

do not factor directly into investment decision-making. When project demand 

outstrips resource supply, or when projects are not properly scoped in the first 

place, adequate resources cannot be provided to all approved projects. 

Evaluation of technical architecture 

 The IOC and PRB do not always take into account the technical design 

elements of a proposed project. On occasion, the PRB or IOC may request the 

input of the Technical Review Board, but this is atypical and usually only occurs 

when the project seeks to employ a new or unconventional technology. 

 The lack of technical evaluation of project proposals may result in two 

outcomes: 1) SEC architecture standards are not as closely adhered to as they 

otherwise would be, and 2) projects must occasionally be re-worked due to suboptimal design, resulting in duplication of effort. 

Tools and methodologies 

Tools: Technology tools include tools that OIT uses to manage projects, 

track project-related documents, perform routine functions such as end-user 

support, and carry out non-critical administrative tasks. 

 In their current state, tools that support administrative tasks and end-user 

support tasks meet the needs of the organization and have widespread adoption. 

For example, the TeamTrack too, which tracks change requests to the production 

environment, is widely seen as successful. 

 OIT’s tools for project management, however, are limited. For instance, 

there is no comprehensive tool that allows for end-to-end management of 

business and technical requirements. Although documents at each stage of 

project execution may be tracked independently, there is no central tool to track 

such documents. Additionally, the version management tool in use lacks 

functionality to fully meet OIT’s needs. These shortcomings can give rise to 

inefficiencies during project execution, such as ongoing scope changes and delays 

in fixing application defects. 

 Tool usage within OIT is also inconsistent. The SEC is keeping pace with 

other organizations by using Clarity, a leading project and portfolio management 

software system. However, OIT only uses a few of Clarity’s capabilities, and 

those efforts are inconsistent across projects. Data such as scope changes and 

date adjustments are largely entered at the project managers’ discretion. 

Additionally, there are several Clarity features that OIT does not use such as 

portfolio management, resource planning, and business process automation. The 

result of this partial usage of the project management system is reduced oversight 

visibility into projects. 
© 2011 The Boston Consulting Group, Inc. 229

 Recently, OIT has sought to improve project tracking and its use of Clarity 

features. Such efforts can significantly improve OIT’s ability to successfully 

manage projects. 

Methodologies: Development methodologies are well-defined approaches 

to software development that lead to predictable stages of execution across 

projects, ultimately resulting in simpler and more thorough review processes.

 Currently, OIT has a well-defined and documented software development 

lifecycle (SDLC), but less than half of all projects follow the SDLC as prescribed. 

Many project managers are unaware of the standard SDLC and its benefits, and 

instead use a variety of alternative development methodologies. When project 

managers are aware of the SDLC, they often lack incentives to adopt it. This 

underutilization of the SDLC leads to project oversight challenges during the 

quality assurance phases of system development. 

 The low rate of adherence to the SDLC is also driven by a lack of 

management vigilance. Although the Configuration Management and Quality 

Assurance (CMQA) branch is charged with this mandate, this branch has a 

significant staffing shortage. Another board, the Lifecycle Configuration Control 

Board (LCCB), could test for SDLC compliance during its technical review of 

projects, but its focus in practice is on system compatibility. 

Expertise to develop and manage complex IT systems 

 Meeting the technology needs of the SEC requires that OIT be expert in 

developing and managing complex IT systems. 

 To develop the new systems required by the SEC, OIT must have 

significant skill in business systems analysis, technical architecture, and software 

development/integration. Maintaining these new and existing systems and 

implementing required day-to-day technology advancements dictates that OIT 

have infrastructure skills such as application support, operations support, 

networking and storage support, and end-user support. To support its staff, the 

SEC needs strong project leadership and comprehensive administrative functions 

such as budgeting and capital planning. 

 The SEC’s current business systems analysis, project management, and 

technical architecture and development resources are insufficient to deliver in a 

timely and efficient manner the full breadth of systems that the agency requires. 

BCG analysis concluded that to meet the current level of demand, OIT faces a 

shortfall of approximately 125 FTEs in these roles. In interviews, senior staff 

indicated that these resource shortfalls were hindering OIT’s ability to meet the 

demands of the SEC. 

 To date, OIT has relied heavily on outsourcing to close skill gaps in critical 

functions. Analysis of the existing resource mix between staff and contractors in 

OIT determined that over 80 percent of FTE resources are from external 
© 2011 The Boston Consulting Group, Inc. 230

contractors. While effective for many role types, outsourcing critical functions 

such as business analysis, project management, and technical architecture has 

reduced OIT’s understanding of its customers’ needs. OIT’s senior leadership 

team recognizes this fact and has held preliminary discussions regarding potential 

strategies for adjusting the resourcing mix between staff and contractors. 

 OIT’s staff and budget resources are primarily deployed in support of 

existing systems rather than the development of new systems. According to 

senior OIT staff, this phenomenon is largely driven by a lack of robustness in 

existing systems, a proliferation of single-purpose solutions, and a failure to 

capitalize on automation. By addressing these shortcomings, OIT could deliver 

significant internal efficiency gains. As an example, BCG estimates that OIT’s 

infrastructure and support team will require approximately 65 fewer FTEs once a 

planned infrastructure improvement initiative is implemented (currently targeted 

for mid-2011, pending a planned investment of approximately $1 million). 

 The current gap in system development skills and inefficiency in resource 

allocation leads to: 1) a reduced capability to deliver new technology systems to 

improve operations and keep pace with market technologies, 2) the loss of 

institutional knowledge as roles are filled with short-term staffing, and 3) a 

weakened relationship with the SEC’s divisions and offices. 

Organization design 

 An organization design that is optimized for business alignment and 

effective service delivery is an important component to a high-performing IT 

delivery organization. In the case of OIT, such a design would: 

 Enable strong alignment between OIT and the SEC’s offices and divisions 

 Align central IT resources with those deployed within the divisions and 

offices 

 Create synergies in activities across OIT, e.g. consolidating application 

development efforts in a single department 

 Enable internal excellence in requirements gathering, project 

management and architecture design 

 Support robust technology strategy and planning functions 

 OIT’s current organizational structure, outlined in Exhibit 7.3.3.2-2, is 

hindered by three issues: 1) insufficient roles for addressing key functions; 2) a 

lack of internal alignment of roles with similar responsibilities; and 3) limited 

alignment with “shadow” IT staff deployed in divisions and offices. 

 First, the current OIT organization does not have formal roles for strategy 

development and data management, which exacerbates OIT’s previously noted 

gap in technology vision and strategy. Though there are plans to emphasize the 

importance of data management and analytics in the organization, the lack of a 
© 2011 The Boston Consulting Group, Inc. 231

strategy development role may limit the attention these capabilities receive 

within OIT. 

 Second, the organization currently separates the application development 

efforts for EDGAR from the development efforts for other projects. This 

separation focuses necessary attention on EDGAR, but there may be a loss in 

synergies from separating such similar application development efforts. Key 

roles supporting application development (e.g., requirements gathering, project 

management, and architecture design) are split between different departments, 

limiting the opportunity to develop best practices and better utilize a central pool 

of resources. 

 Finally, several challenges arise from the limited coordination between 

OIT and the division or office-specific “shadow” IT organizations. This results in 

a duplication of activities (e.g., development of multiple division or office-specific 

single-purpose solutions for tracking and filing) and poor standardization for 

support and development activities. Additionally, there is a further opportunity 

for centralized automation of routine activities (e.g., password resets) that could 

result in increased efficiencies. 

 OIT’s leadership is considering plans to restructure the organization to 

better align OIT with “shadow” IT groups. Though no initiatives are under way, 

OIT’s leadership is aware of the alignment challenges and recognizes the need to 

develop a plan for better utilizing the SEC’s IT resources. 

Exhibit 7.3.3.2-1: Current OIT organization design 

CIO

Project 

Management

Finance and 

Admin. EDGAR Infra. Ops.

CTO

App & Dev Infra. Engineering

CISO Enterprise 

Architecture

Source: SEC Organizational Chart, BCG analysis
© 2011 The Boston Consulting Group, Inc. 232

Summary 

 OIT faces important capability gaps that degrade its ability to proactively 

identify business needs and deliver technology solutions that meet them. These 

are: 1) the absence of a well-articulated technology vision and strategy; 2) an 

incomplete understanding of internal client needs; 3) an inconsistent investment 

governance process and execution of that process; 4) limited use of modern tools 

and methodologies; 5) a lack of skills and resources necessary to develop complex 

IT solutions; and 6) an organizational structure that is fully optimized to fulfill 

agency objectives. 

 Recently, OIT has made progress in addressing these gaps. The new 

leadership team has begun focusing attention on key items such as performance 

metrics, strategy definition, and greater consistency in the use of critical project 

management tools. However, while these steps are promising, much remains to 

be done to fully address OIT’s capability gaps and position the organization to 

successfully deliver the complex IT solutions required by the SEC. 

7.4 Relationship with SROs 

7.4.1 Approach 

As part of the study, BCG examined the SEC’s relationship with SROs, 

focusing on two key aspects: 

 The SEC’s reliance on SROs as a co-regulator 

 The SEC’s oversight of SROs 

 This section discusses the SEC’s dual role as a co-regulator to, and 

oversight body for, SROs. For both roles, BCG studied current activities, 

identified gaps, and noted any initiatives underway to mitigate those gaps. 

Observations and conclusions in this section are drawn from information 

collected through primary and secondary sources. Primary sources included 

interviews and reviews of internal and external documentation, and secondary 

sources consisted of publicly available information and official government, 

industry and academic reports. 

 BCG conducted interviews with SROs and staff members at the SEC, 

primarily in TM and OCIE. Additional interviews were held with other financial 

regulators. 

 Additionally, BCG leveraged studies, articles and memorandums drafted 

by the SEC, other regulatory agencies, regulated entities, and other market 

participants.177 

 

177 Secondary sources in the private sector include, but are not limited to, law firm publications, 

financial newspapers, and academic journals and papers. 
© 2011 The Boston Consulting Group, Inc. 233

7.4.2 SEC acting as a co-regulator 

7.4.2.1 Key questions explored

 How does the SEC partner with SROs to regulate the securities markets? 

 What are the key areas for improvement, if any, in the SEC’s ability to partner 

with SROs? 

 How is the SEC capitalizing on these opportunities for improvement? 

7.4.2.2 Findings

 As discussed in Chapter 3, the SEC has historically relied on and worked 

with SROs to perform a range of regulatory activities across different regulated 

entities. Many of these regulatory activities require the SEC to coordinate and 

partner with the SROs. Consider the example of broker-dealers: 

 Broker-dealers must register with the SEC and at least one SRO 

 The exchanges, FINRA, and the MSRB write and interpret rules governing 

market structure and broker-dealer behavior 

 The exchanges and FINRA conduct market surveillance, which covers 

broker-dealer trading activity 

 Broker-dealers can be examined by the SEC through OCIE, FINRA, and/or 

another designated SRO at any given time. The SEC coordinates with the 

SROs to ensure all broker-dealers are examined regularly 

 Broker-dealers can be investigated and sanctioned by the SEC through the 

Enforcement and by the relevant SRO(s) 

 Within the SEC, multiple divisions and offices work with the SROs as coregulators. Such interactions include: 

 TM works with SROs to write and interpret SEC and SRO rules governing 

markets and market participants 

 Enforcement sends and receives referrals to and from SROs. Enforcement 

also leverages SRO capabilities, data, and resources to support 

investigations 

 OCIE shares their broker-dealer examination workload with FINRA and 

relies on FINRA data and systems to support exams 

 OCA collaborates with the PCAOB to write rules governing audit and 

accounting firms and evaluate trends and risks in the audit space, both in 

general and for specific firms 

Across structure, competencies and processes for SEC/SRO interactions, 

BCG identified four areas for focus relating to the SEC’s role as a co-regulator 

with SROs: 

 
© 2011 The Boston Consulting Group, Inc. 234

Structure 

 The SEC has an opportunity to organize and consolidate multiple points of 

contact with SROs and create a clear relationship owner 

 There is potential for the SEC’s divisions and offices to be more coordinated in 

how they partner with, and share information received from, SROs 

Competencies

 The SEC can benefit from better visibility into the surveillance systems and 

activities conducted by the SROs 

Process 

 The SEC can more deeply engage with SROs and the other industry stakeholders 

to understand and respond to evolving market trends and risks 

 Building strength in these four areas can improve the SEC’s ability to 

promote more efficient and effective governance for the securities markets. The 

following describes these areas of focus in more detail and summarizes related 

initiatives currently underway at the SEC. 

Structure 

Opportunity to organize and consolidate multiple points of contact with SROs 

and create a clear relationship owner: SROs interact with multiple divisions and 

offices within the SEC—there is no centralized point of contact. When 

interviewed, many SROs were unable to articulate whom they viewed as their 

primary contact at the SEC—most responded by saying it was a mixture of OCIE, 

TM and Enforcement, with the primary contact varying based on the nature of 

the interaction. This lack of a central, coordinating body to manage SRO 

interactions can create inefficiencies and missed opportunities for staff at the SEC 

and at the SROs. SEC staff in TM and OCIE expressed mild frustration over the 

fact that sometimes information submitted by an SRO to one department was not 

automatically documented, readily accessible and shared with staff in other 

departments. Managers at several SROs also said that on occasion they had to 

spend time calling their personal contacts at the SEC to find the appropriate staff 

member for a given issue. Such interactions could be better documented and 

managed.

 The lack of a central, coordinating body means that there is no 

authoritative person or persons at the SEC who monitors all aspects of an SRO 

relationship, including a history of past and ongoing interactions, data received 

and sent to the SRO, changes in the type of regulatory activities the SRO 

performs, and business model, governance, or leadership changes at the SRO. As 

a co-regulator, the SEC can do more to leverage an SRO’s capabilities. For 

example, if an SRO provides data or a piece of analysis to OCIE as part of a 
© 2011 The Boston Consulting Group, Inc. 235

routine inspection, a central, coordinating body could quickly determine whether 

someone in TM or RSFI may also benefit from that data. Today, that opportunity 

would be lost unless someone within OCIE had the foresight and initiative to 

contact other divisions, or if someone at the SRO actively sought to share the data 

with other divisions in addition to providing it to OCIE. 

Potential for divisions and offices within the SEC to be more coordinated in how 

they partner with, and share information received from, SROs: The various divisions 

and offices in the SEC, both at the home office and in the regions, coordinate 

only to a limited extent in the sharing of information received from the SROs or 

in collaboration with the SROs. For example, TM regularly interacts with the 

SROs to review proposed rules. These interactions may surface new data or 

capabilities that RSFI could leverage or incorporate. While TM already transmits 

some information to RSFI, such exchanges can be made more efficient by 

ensuring only relevant, actionable insights are shared. A regular series of 

meetings and assigned liaisons between the two divisions would help uncover 

such opportunities more quickly and frequently.

 In the last few years, SEC senior management has increasingly advocated 

for a culture of cross-functional openness and sharing. This is a positive 

development and has led to an increase in inter- and intra-division/office 

collaboration. However, most interactions are still ad hoc and rely on personal 

networks built by agency staff over the years. 

 While the SEC has moved to clarify roles and responsibilities within each 

of the divisions and offices it has not yet taken steps to create a central point of 

contact or an internal “College of Regulators” to engage the SROs. 

Competencies 

The SEC can benefit from better visibility into the surveillance systems and 

activities conducted by the SROs: The SEC does not have any automated market 

surveillance systems. This aspect of the regulatory framework is mostly 

delegated to the SROs—most notably FINRA and the exchanges. Therefore, it is 

critical that the SEC better link its surveillance activities with those performed by 

SROs wherever possible. For example, the SEC could develop technology systems 

and resources to routinely check the surveillance systems and outputs that 

FINRA and the exchanges generate. 

While these efforts would potentially require significant investments in 

technology (and therefore could be challenging given the agency’s constraints), 

they would enable the SEC to be a more effective partner to the SROs and give 

more robust feedback on how surveillance systems could be improved.
© 2011 The Boston Consulting Group, Inc. 236

Process 

Opportunity for the SEC to more deeply engage with SROs and other industry 

stakeholders to understand and respond to evolving market trends and risks: 

Currently, the SEC interacts with SROs most often when there is a specific issue 

at hand. For example, OCIE will visit an SRO to inspect a specific aspect of their 

operations, TM will hold meetings with an SRO’s General Counsel to review a 

specific rule filing (sometimes with other divisions/ offices present), and 

Enforcement may solicit information regarding a specific referral received from 

an SRO. It is less common for the SEC to engage the SROs and discuss broader 

market trends and risks. More generally, there is an opportunity to better 

leverage the market proximity, expertise, capabilities, and resources that the 

SROs offer.

 Many SROs interviewed expressed their desire to meet with the SEC on a 

more informal basis to discuss what they are observing in the market, hear what 

is on the SEC’s agenda, and collectively work to mitigate emerging market risks. 

At the same time, staff members at the SEC said that it is not sustainable for the 

SEC to constantly react to market incidents as they occur, and that engaging the 

regulatory staff at SROs would help the SEC be more proactive and strategic in 

understanding and responding to market risks. One idea to consider is to hold a 

regular series of roundtable discussions with SROs, where representatives from 

the various SROs could meet with leaders in TM, OCIE, and other divisions and 

offices to share information and discuss emerging risks. The format of such a 

meeting could build upon, and be modeled after, the regional summits attended 

by the SEC’s regional staff and various other industry participants and regulators. 

Summary 

 The SEC’s most important areas for development as a co-regulator to the 

SROs involve structure, competencies, and processes. Structurally, the SEC lacks 

a consolidated point of contact to the SROs, and divisions/offices would benefit 

from mechanisms to coordinate their interactions with SROs. From a 

competency standpoint, the agency can gain better visibility into the SROs’ 

surveillance activities. Finally, there is an opportunity to work more closely with 

SROs and leverage their expertise and resources in dealing with market trends 

and risks. 

7.4.3 SEC acting as an oversight body 

7.4.3.1 Key questions explored

 How does the SEC oversee SROs? 

 Are there opportunities for the SEC to improve its oversight of SROs? 

 What, if anything, is the SEC doing to capitalize on these opportunities today? 
© 2011 The Boston Consulting Group, Inc. 237

7.4.3.2 Findings

 Given the important role SROs play in the governance of securities 

markets today, it is critical that the SEC maintain a robust level of oversight over 

their regulatory operations. 

 Currently, oversight of SROs is primarily conducted by TM, OCIE, and 

OCA: 

 TM reviews all rules submitted by the SROs. TM also conducts risk 

monitoring for the clearing agencies and assesses system security at the 

exchanges178

 OCIE inspects all the exchange SROs, FINRA, and the MSRB. OCIE visits 

each SRO on a regular basis and conducts in-depth inspections of various 

aspects of their operations. For example, OCIE may visit an exchange and 

closely examine aspects of their surveillance systems, or it may visit FINRA 

and closely examine aspects of FINRA’s broker-dealer registration process. 

During inspections, OCIE staff visit the SRO on-site, interview SRO staff, 

request and review data, and make recommendations for operational 

improvements 

 OCA oversees the PCAOB and FASB. Under the PCAOB’s charter, OCA 

reviews and approves the PCAOB’s rules, standards and budget, and 

appoints the members of the PCAOB Board. OCA also partners with OCIE 

to conduct oversight inspections of the PCAOB. OCA also has the 

authority to change or disapprove accounting rules proposed by the FASB, 

although this authority is rarely executed 

 The SEC has undertaken several initiatives to strengthen its oversight of 

SROs. For example, OCIE is currently moving to a more continuous risk-based 

assessment of all SROs, which should improve the agency’s oversight program by 

focusing SEC resources on critical components of an SRO’s regulatory operations. 

Additionally, OCIE is conducting a baseline assessment of each SRO, which will 

help the SEC assess changes in SRO regulatory effectiveness over time. In light of 

Dodd-Frank, OCIE is also conducting a thorough review of FINRA’s operations.179 

This is critical, given the depth and range of FINRA’s regulatory activities. 

Further, TM is hiring more financial industry experts and redesigning some 

aspects of the organization. While such actions are primarily being taken to help 

TM meet various Dodd-Frank requirements, they will also improve TM’s ability to 

review SRO rules and monitor market risks. 

 In the preceding section, this report identified four areas of focus where 

the SEC has opportunities to become a more effective co-regulator to SROs. 

 

178 TM administers the Automation Review Program, which reviews the exchange systems for 

adequate capacity and security. 

179 Section 964 of the Dodd-Frank Act directs the GAO to submit to Congress a report about the 

SEC's oversight of FINRA every three years 
© 2011 The Boston Consulting Group, Inc. 238

Those four areas also apply to the SEC as it seeks to be a more efficient and 

effective oversight body. Briefly: 

 First, when there is not a central point of contact responsible for the SRO 

relationship, it is more difficult to centrally track changes in SRO policies, 

personnel, operations, and regulatory effectiveness. Centralizing activities 

can help the SEC be more thorough and organized in its oversight duties 

 Second, coordination between TM and OCIE is currently informal and ad 

hoc. This makes it harder for the two departments to integrate their joint 

oversight responsibilities for any given SRO 

 Third, bolstering the SEC’s ability to oversee surveillance systems should 

improve the quality of audits and inspections conducted on SRO 

surveillance systems. This capability becomes even more important as 

markets continue to fragment and more equity trading moves offexchange onto alternative trading systems, e.g., dark pools 

 Fourth, if the SEC were to more deeply engage the SROs, it would be 

easier to maintain a continuous pulse on the SRO community and the 

markets they regulate 

 In addition, there are four other major areas where the SEC can enhance 

its SRO oversight capabilities: 

 

 The SEC could benefit from more tailored oversight of FINRA 

 There is an opportunity to develop improved metrics and standards to measure 

SRO regulatory effectiveness 

 The process for SRO rule review can be optimized 

 Staff in TM can benefit from greater skill diversity and improved training in 

market structure and trading operations 

The SEC could benefit from more tailored oversight of FINRA 

 FINRA is the largest non-government regulator for all securities firms in 

the US and is the largest SRO under the SEC’s authority. FINRA has 

approximately 3,000 employees and 20 regional offices around the country, and 

is roughly comparable in size to the SEC, which has approximately 4,000 

employees and 12 US offices.180 FINRA’s operating expenses in 2009 totaled $877 

million, compared to the SEC’s 2009 fiscal year operating cost of $980 million.181 

 FINRA is responsible for conducting the vast majority of broker-dealer 

examinations, administering broker-dealer registration and disclosure, and 

 

180 About the Financial Industry Regulation Authority. Financial Industry Regulation Authority. Web. 

1 Feb. 2011. 

181 SEC figure represents Total Gross Program Cost from the SEC 2009 Annual Report (United 

States. U.S. Securities and Exchange Commission. Annual Report for Fiscal Year 2009. Washington: 

GPO, 2010. Print.); FINRA figure represents Total Expenses from the FINRA 2009 Annual 

Financial Report (Financial Industry Regulatory Authority. 2009 FINRA Annual Financial Report.

Web. 1 Feb. 2011.). 
© 2011 The Boston Consulting Group, Inc. 239

writing rules governing broker-dealer conduct. FINRA conducts surveillance for 

80 percent of equity trading volume in the US and brings investigations and 

enforcement actions against broker-dealers who are suspected of violating its 

rules and the US securities laws.182 Moreover, FINRA has expressed an interest in 

expanding its regulatory scope to encompass all equity trade surveillance, options 

trade surveillance and examination authority over investment advisers.183 In 

many of the regulatory areas where FINRA is active, it is increasingly becoming 

the sole active self-regulator. 

 The SEC currently oversees FINRA much the same way it oversees the 

other SROs licensed under the Exchange Act. Given the importance of FINRA, 

the SEC should consider whether a more tailored approach to oversight is 

warranted. 

There is an opportunity to develop improved metrics and standards to measure 

SRO regulatory effectiveness 

 

 The SEC’s oversight program does not contain a standard set of metrics for 

assessing the regulatory effectiveness of the SROs—either over time or relative to 

one another. Furthermore, the SEC has not yet established minimum standards 

for SROs in terms of how their regulatory operations should be structured and 

resourced. Current SRO evaluations primarily consist of ad-hoc inspections of 

individual programs or processes and one-time reviews of SRO rule filings. For 

example, TM will evaluate each SRO rule filing individually when it is submitted, 

and OCIE will evaluate individual and discrete components of an SRO’s 

operations. In both cases, the SEC may suggest incremental ways to improve a 

specific rule or process, but has limited ability to measure the effectiveness of any 

changes implemented. 

 This observation becomes more relevant as markets continue to fragment 

and evolve. Many of the exchange SROs already appear to be diverging in their 

regulatory operations. Take, for example, the governance models and staffing at 

the national securities exchanges, which can vary markedly. Some blend the 

regulatory function and for-profit operations into one set of departments and 

managers, with one person wearing multiple hats as the General Counsel and the 

Chief Regulatory Officer. At the other end of the spectrum is a model that carves 

out an entirely separate subsidiary to handle regulatory activities. In light of the 

demutualization of exchanges, it is increasingly important that the SEC have 

 

182 Testimony to the Senate Subcommittee on Securities, Insurance, and Investment Committee on 

Banking, Housing, and Urban Affairs, 111th Cong. (2010) (testimony of Stephen Luparello, Vice 

Chairman of FINRA). 

183 FINRA leaders have been widely cited in the media speaking in favor of consolidating equity 

market surveillance under one roof and expanding examinations for IA/ICs to SROs. (Comments 

to the Commission, U.S. Securities and Exchange Commission (2010) (testimony of Rick Ketchum, 

Chairman and CEO of FINRA). (Testimony Before the Senate Subcommittee on Securities, Insurance, 

and Investment Committee on Banking, Housing, and Urban Affairs, 111th Cong. (2010) (Rick 

Ketchum, Chairman and CEO of FINRA).
© 2011 The Boston Consulting Group, Inc. 240

robust oversight mechanisms in place and a standard method for comparing the 

SROs. 

 As noted earlier, OCIE is in the process of creating a baseline assessment 

of all the SROs, which will be used to conduct risk-based inspections. This is a 

good first step, but more can be done to cover this gap and establish a robust 

framework of metrics and standards to evaluate SRO regulatory effectiveness. 

The process for SRO rule review can be optimized 

 

 Together with the SEC, SROs are jointly responsible for writing rules to 

govern market structure and market participants. As mentioned above, SRO 

rules are often developed in collaboration with TM and are always reviewed by 

TM for consistency with the Exchange Act. 

 Historically, the SEC’s process for reviewing and approving SRO rule 

proposals has functioned relatively well to handle a steady flow of filings 

submitted by SROs. However, in recent years this process has become strained. 

This is partly due to a shortage of staff, an increase in the volume and complexity 

of SRO rule filings and additional rulemaking responsibilities placed on the 

division. At the same time, there is the desire to ensure that every rule is written 

in a consistent manner and no potentially negative market consequences are 

overlooked. Additionally, the SEC needs to ensure every filing is thoroughly 

described and analyzed in order to be capable of eliciting meaningful public 

comment. 

 Several observations highlight the complex set of factors influencing 

the current rule review and approval processes. First, given the intense scrutiny 

of the SEC in the past few years, the staff may have adopted a cautious, riskaverse approach to evaluating complex rule filings, which contributes to the long 

lead times required to approve new rules that need approval. Second, rules are 

difficult to review for relevance once approved—the agency lacks a robust 

process to “refresh” rules. Third, there are different types of rule filings--some 

are simpler and more routine and thus can be reviewed more quickly, while 

others are more complex and require input from staff supervisors or the 

Commission. Finally, when considering the substance of a rule, the SEC staff 

could seek to give more weight to empirical data and evolving market structures 

in addition to the context and precedents established by historical rules; 

achieving this may require additional investments in analytical tools and research 

capabilities. 

 

 A sub-optimal rule review process potentially exposes investors to 

conflicting rules and trading conventions across markets. It may be useful for TM 

to review rules to ensure regulatory consistency across markets, although such 

authority will require Congressional action. Under current statutory constraints, 

the Exchange Act limits the SEC’s rule review to assessing the proposed rule’s 

consistency with the Exchange Act; as such, two SRO rules may conflict, but still 

be consistent with the Exchange Act. 
© 2011 The Boston Consulting Group, Inc. 241

 

 Different ways to improve the rule creation and review process are under 

consideration, although options are limited to those within the framework 

established by Section 19 of the Exchange Act. For example, TM has already 

revised the rule review process flow to adhere to the Dodd-Frank statutory 

deadline for SEC action. The SEC could also seek to legislative changes to the 

rule review process in ways that go beyond the current statutory framework. For 

example, Congress could amend the Exchange Act to give the SEC authority to 

allow non-profit SROs (e.g., FINRA, MSRB) to self-certify rules that they write, or 

allow certain types of rules to be eligible for self-certification. TM already utilizes 

such an approach for swap execution facilities. Such changes would reduce the 

volume of filings submitted and allow staff to focus on the most complex and 

consequential rules. 

Staff in TM can benefit from more skill diversity and improved training in 

market structure and trading operations 

Staff members at the SEC are often lawyers by training, many of whom 

have limited direct experience in capital market structure and operations. In TM, 

over 50 percent of staff members are lawyers, while nearly all of the staff 

members who write rules and review SRO rule filings are attorneys. 184 While 

some of the staff attorneys who review SRO rules and set policies have industry 

experience, others could benefit from a deeper understanding of how the 

markets and market participants operate. Given the lack of direct market 

experience and expertise on the part of some staff, and in an effort to avoid suboptimal rulemaking decisions, many of the more complex SRO rule filings require 

senior management attention. This can then lead to longer lead times for rule 

reviews to be completed. There is also an opportunity to support all staff 

attorneys with enhanced training and access to an organized pool of experts who 

can provide advice on various topics. TM already occasionally leverages 

expertise from other divisions and offices, such as OCIE and RSFI; more can be 

done to create a larger and more formalized expert network. 

 TM has plans to hire non-lawyer staff, including ex-traders with Wall 

Street experience and staff with finance or economic training, which will help 

diversify the division’s skill set. Finally, while the SEC has taken some steps to 

improve general staff training, more specific training opportunities could be 

created for staff attorneys in TM to learn about the market. 

Summary 

 To improve its oversight of SROs, the SEC should focus on developing a 

consistent set of metrics and standards to ensure a high degree of regulatory 

effectiveness at all SROs. It should also enhance its oversight of FINRA, the 

largest and most important SRO in terms of number of registrants and regulatory 

 

184 Data as of October 26, 2010, from the Office of Human Resources at the U.S. Securities and 

Exchange Commission. 
© 2011 The Boston Consulting Group, Inc. 242

activities performed. Finally, enhancing skill diversity and optimizing the current 

process for reviewing SRO rules will result to more consistency across SRO rules. 

7.5 Additional analyses requested in Statement of Work 

7.5.1 Exam program comparison 

7.5.1.1 Key questions explored

 How is the SEC’s exam program structured and administered? 

 How are examiners hired, trained and equipped? 

 How frequently are exams conducted for various registrants? 

 How does the SEC’s exam program compare to exam programs at SROs and 

other federal financial regulators in terms of staff levels, expertise, resources 

available, and examiner workload? 

7.5.1.2 Methodology

 This section evaluates many components of the SEC’s examination 

program, including, but not limited to, staffing levels, expertise, resources, and 

workload. 

 As part of this study, the SEC’s examination program was compared to the 

following examination programs at SROs and other federal financial regulators 

(comparable benchmark programs): 

 The FINRA examination program for broker-dealers 

 The PCAOB examination program for registered public accounting firms 

 The CFTC audit program for registered intermediaries185

 The Federal Reserve (Fed) bank supervision program 

 The Federal Deposit Insurance Corporation (FDIC) bank supervision 

program 

 The Office of the Comptroller of the Currency (OCC) bank examination 

process 

 The National Credit Union Administration (NCUA) credit union 

examination program 

 The Hong Kong Securities & Futures Commission (SFC) intermediary 

supervision program 

 We selected these benchmark programs in three ways. First, we selected 

SROs overseen by the SEC with extensive examination responsibilities. This 

 

185 The CFTC’s audit program is primarily administered by two SROs overseen by the CFTC - the 

National Futures Association (NFA) and the CME Group. The CFTC regularly reviews the SROs’ 

audit program results and operations. This study primarily focused on audits of Futures 

Commission Merchants (FCMs) done by these SROs under the oversight of the CFTC. 
© 2011 The Boston Consulting Group, Inc. 243

comprised FINRA, which examines the majority of broker-dealers in the US, and 

the PCAOB, which has authority to examine public accounting firms186 in the US. 

 Second, we selected examination programs administered by applicable 

regulatory agencies with a voting member on the Financial Stability Oversight 

Council (FSOC). Currently, the FSOC has nine voting members, representing 

nine different regulatory agencies.187 Of these nine, we excluded the Treasury 

Department, the FHFA, and the CFPB. The Treasury Department does not 

conduct any bank examinations itself; rather, that work is completed through the 

OCC, which is included in our evaluation. The FHFA’s examination program is 

narrowly focused on inspecting Fannie Mae, Freddie Mac, and 12 regional FHL 

Banks, whose member financial institutions provide mortgage loans. Finally, the 

CFPB was excluded as it is a very new agency and is still in the process of 

recruiting and organizing its examination, supervision and enforcement staff.188

 Third, we sought an international benchmark for the examination 

program and selected the Hong Kong SFC. 

 BCG collected information on the SEC’s and other regulator’s exam 

programs through interviews and publicly available data sources. Over a dozen 

interviews were conducted with senior staff in charge of examination programs at 

various regulators.189 Additionally, details on exam program procedures and 

statistics were gathered through the public websites of several regulators.190

 With information gathered through interviews and public documents, BCG 

evaluated the examination programs relative to each other along the following 

dimensions: 

 Exam program mission and statutory mandate 

 Exam selection, scoping, and staffing 

 Standard exam process and objectives 

 Exam program frequency and workload 

 

186 PCAOB inspects registered public accounting firms to assess compliance with the SarbanesOxley Act, PCAOB rules, the rules of the SEC, and professional standards, in connection with the 

firm’s performance of audits, issuance of audit reports, and related matters involving U.S. 

companies, broker-dealers and other issuers. 

187 The nine regulatory agencies include: Treasury Department, Federal Reserve (Fed), the Office 

of the Comptroller of the Currency (OCC), the Bureau of Consumer Financial Protection (CFPB), 

the Commission, the Federal Deposit Insurance Corporation (FDIC), the CFTC, the Federal 

Housing Finance Agency (FHFA), and the National Credit Union Administration (NCUA). 188 The CFPB was created by the Dodd-Frank legislation and is scheduled to officially launch on 

July 21, 2011. 

189 Regulators interviewed regarding their examination program include: the SEC’s OCIE, FINRA, 

the PCAOB, the CFTC, the FDIC, the Federal Reserve, the OCC, the Hong Kong Securities & 

Futures Commission (SFC). 

190 Example documents collected via public websites include: FDIC annual reports, the OCC’s 

Bank Supervision Process / Comptroller’s Handbook, “The Federal Reserve System: Purposes & 

Functions” (Board of Governors of the Federal Reserve System. The Federal Reserve System: 

Purposes & Functions. July 2005. Web. 1 Feb. 2011). 
© 2011 The Boston Consulting Group, Inc. 244

 Examiner background 

 Examiner training opportunities 

 Examiner access to data and tools 

 Examiner focus191

 Availability of experts to assist examiners 

 An assessment of these dimensions enabled us to determine whether the 

SEC’s examination program is appropriately structured and resourced and how 

effectively the program is accomplishing its goals of preventing fraud, mitigating 

risk, improving compliance and shaping regulatory policy. 

7.5.1.3 Findings

The SEC’s examination program covers broker-dealers, investment 

advisers, investment companies, transfer agents, NRSROs, clearing agencies, and 

the SROs. The exams are primarily administered by OCIE, with support from 

other divisions as needed. The goal of the examination program is to detect and 

prevent fraud, monitor and mitigate emerging areas of compliance risk, improve 

compliance, and inform regulatory policy setting.192

 Four key findings emerged from an analysis and comparison of the SEC’s 

and other regulators’ examination programs: 

 Exam programs differ in terms of mandate and mission, driving 

differences in how exams are selected, scoped, and staffed 

 The SEC’s examination programs are similar to those of other agencies 

with respect to process and examiner profile 

 The SEC’s examination program has comparatively lower examiner to 

registrant ratios 

 There are opportunities for the SEC to optimize its exam program 

 

Exam programs differ in terms of statutory mandate and mission, driving 

differences in how exams are selected, scoped, and staffed: The SEC’s exam 

program has a different statutory mandate and mission than that of the other 

federal financial regulators. This drives differences in how the exam programs 

select, scope and staff examinations. 

 

191 Examiner focus refers to what, if any, non-exam related tasks and responsibilities are assigned 

to examiner staff. 

192 United States. U.S. Securities and Exchange Commission. Examinations by the Securities and 

Exchange Commission – Office of Compliance Inspections and Examinations. Feb. 2010. Web. 1 Feb. 

2011. 
© 2011 The Boston Consulting Group, Inc. 245

Mandate

 The SEC’s statutory authority to administer an examination program is 

drawn from the Securities Exchange Act of 1934, the Investment Company Act of 

1940, and the Investment Advisers Act of 1940. The exam program’s objective is 

to support the overall SEC mission to protect investors, maintain fair, orderly, 

and efficient markets, and facilitate capital formation. Moreover, the SEC exam 

program emphasizes four key activities: detecting fraud, improving compliance, 

identifying risk, and informing policy decisions. 

 In contrast, examination programs at the Fed, FDIC, OCC, and NCUA 

(collectively the “bank regulators”) primarily focus on supervising banking 

institutions to ensure the safety and soundness of the nation's banks and 

financial system, and to mitigate systemic risk.193

 FINRA and other SROs exercise their authority to examine broker-dealers 

as registered national securities associations and exchanges under the oversight 

of the SEC.194 FINRA’s mission is to protect investors and promote market 

integrity, consistent with the SEC’s mission. Similarly, as a regulatory 

organization overseen by the SEC, the PCAOB’s mission is to protect the interests 

of investors by ensuring the preparation of informative, accurate and 

independent audit reports.195

 The CFTC designates SROs to oversee their registered intermediaries.196 

Each SRO is responsible for conducting audits of, and ongoing financial 

surveillance over, their designated intermediary, under the oversight of the 

CFTC. Today, the two primary SROs conducting such audits are the National 

Futures Association and the CME Group. The SROs carry out their duties with a 

regulatory mission that is consistent with the CFTC’s mission, which is to protect 

market users and the public from fraud, manipulation, and abusive practices 

related to the sale of commodity and financial futures and options, and to foster 

open, competitive, and financially sound futures and option markets. 

 

193 The Federal Reserve’s exam program authority is drawn from the 1913 Federal Reserve Act. 

The FDIC and its bank examination scope and authority were created in the 1933 Glass-Steagall 

Act. The OCC was established by the National Currency Act of 1863 and serves to charter, 

regulate, and supervise all national banks and the federal branches and agencies of foreign banks 

in the US. The NCUA is an independent federal agency that supervises and charters federal 

credit unions per the Federal Credit Union Act of 1934. 

194 SROs examine broker-dealers for compliance with federal securities laws and their own rules 

by their members and associated persons of their members. 

195 The PCAOB was created by the Sarbanes-Oxley Act of 2002 and has authority to inspect all 

registered public account firms for compliance with the Sarbanes-Oxley Act and rules created by 

the PCAOB and the SEC. 

196 The CFTC was created in 1974 through the enactment of the Commodity Futures Trading 

Commission Act, which gave the CFTC the authority to audit its registrants for compliance with 

CFTC rules. The Commodity Futures Modernization Act of 2000 expanded the CFTC’s mandate 

and also gave them authority to outsource the audit function to the CFTC’s SROs.
© 2011 The Boston Consulting Group, Inc. 246

How exams are selected, scoped and staffed 

 The SEC’s National Exam Program includes different sub-programs 

customized to various regulated entities. The investment adviser/investment 

company (IA/IC) exam program utilizes a risk-based approach to select and scope 

registrants for examination. Risk is determined based on information contained 

in IA/IC disclosure filings, past examination reports, and other available 

information.197 Currently, registered IA/ICs are not regularly examined on a 

cyclical basis. Typically, all IA/IC exams are risk-based and originate from a 

variety of sources, including the tips, complaints and referrals, sweeps, or other 

risk-based factors.198

 The SEC’s broker-dealer examination program is markedly different from 

the IA/IC exam program. Currently, FINRA is the designated examining 

authority for all securities firms doing business with the public, and has primary 

responsibility for regulatory oversight of a broker-dealer’s activity. As such, the 

SEC’s broker-dealer exams complement and reinforce FINRA’s efforts. The 

majority of the SEC’s broker-dealer exams are cause exams (typically based on 

tips and referrals). The balance consists of other risk-based exams where the 

exam scope is determined by the areas of risk identified for the selected firm 

during exam preparation. 

On an annual basis, OCIE creates and validates an exam plan through a 

robust governance process. Following that, OCIE selects exam candidates based 

on a variety of data. For example, OCIE evaluates broker-dealer disclosures, past 

examination results and broader market trends to identify broker-dealers that 

pose a higher risk in the market. Once a firm is selected for examination, OCIE 

then carefully scopes and staffs the examination based on the key risk factors 

identified. This risk-based approach is similar to methodologies employed at 

other federal financial regulators.

 Typical SEC IA/IC and broker-dealer exam teams have two to four 

examiners but scale to the size and complexity of the exam scope and registrant. 

SEC examiners typically work on multiple cases at once, though the caseload is 

generally balanced so that an examiner is not starting two cases at the same time. 

Examiners may also specialize in specific areas as they rise in seniority. Exam 

staffing decisions are typically delegated to the regional offices. 

 In contrast to the SEC, the bank regulators are required by law to conduct 

safety and soundness exams for their member banks on a 12-18 month cycle. In 

practice, many of the regulators will examine higher risk banks on a much more 

frequent basis. For example, large banks undergo a continuous exam process 

where an on-site examination team from the Fed, FDIC, or OCC will stay at the 

bank year-round. Bank regulators staff each exam based on the size and 

 

197 Other information could include tips, referrals, and complaints, news/media coverage, etc. 198 Sweep exams are a collection of narrowly focused exams on multiple registrants with a goal of 

understanding a particular type of industry activity or violation. 
© 2011 The Boston Consulting Group, Inc. 247

complexity of the bank and the specific skills needed to perform the exam. The 

FDIC assigns an Examiner-in-Charge (EIC) for every exam and lets the regional 

offices determine how many additional staff to put on each case, while the OCC 

centrally coordinates exam staffing, prioritizing resources to the highest risk firms 

and activities. 

 FINRA conducts sales practice exams and financial operations exams for 

broker-dealers registered with them. 199 Both types of exams are typically 

conducted on a one to four year cycle depending on FINRA’s annual risk 

assessment of the member firm.200 This risk-based approach enables FINRA to 

concentrate its resources on firms and activities that may pose the greatest risk to 

investors. FINRA also conducts cause exams when FINRA receives tips and 

referrals. FINRA staffs the exams based on the size and complexity of the exam. 

Typical teams range from two to five examiners, with one lead examiner. 

Examiners usually work on multiple cases. 

 The CFTC, working through its SROs, requires exams (or audits) of its 

intermediaries every 12-15 months.201 The NFA and CME Group both use a riskbased method to select and scope examinations, based on information collected 

from previous exams and registrant disclosures. The size of the exam team varies 

based on the complexity of the exam, with a minimum of two examiners per 

case. 

The SEC’s examination programs are similar to those of other agencies 

with respect to process and examiner profile 

Process 

The SEC employs a thorough process for selecting firms for examination. 

Once an exam has been selected, scoped, and staffed, the process for 

administering the exam is fairly standard across all the various financial 

regulators reviewed in this study. The standard SEC exam process for a cycle or 

cause exam is as follows: 

 Exam selection: Select the registrant to be examined 

 Exam prep: Finalize the exam team, conduct background research on the 

firm (e.g., through historical exam results and publicly available 

information) 

 Determine scope: Summarize firm background information, key risks and 

areas for focus during the exam 

 Document request: Send the examinee a list of initial data requests and a 

deadline for providing the documents to the SEC 

 

199 All broker-dealers must register with the SEC and at least one SRO. Approximately 90 percent 

of all broker-dealers are registered with FINRA. 

200 This risk assessment is based on numerous factors, including types of products offered, 

financial condition, compliance profile, and other business activities conducted by the firm. 201 This is a CFTC rule. 
© 2011 The Boston Consulting Group, Inc. 248

 Onsite inspection: Interview staff, assess the physical offices and layout, 

request and review additional documentation. Adjust scope if needed. 

This stage is highly iterative and can last from a few days to several weeks 

or even months 

 Close-out process: Provide informal feedback at an exit interview. Issue a 

deficiency letter or no-action letter and review examinee’s response 

 Enforcement referral: If warranted, refer fraud or other violations to 

Enforcement for further action 

 FINRA, the NFA and CME Group all follow a similar exam process. Two 

observations should be noted, however. First, while the scope of NFA and CME 

Group exams are customized by the SRO audits teams, the CFTC mandates 

certain elements to be part of every exam and requires all intermediary audits to 

be opened and completed within five months. The CFTC inspects the SROs for 

compliance with these rules. Second, when FINRA begins an exam process that 

consists of a Sales Practice component and a Risk Oversight and Operational 

Regulation (ROOR), they will coordinate the two separate exam tracks and assign 

one lead examiner to oversee the consolidated exam process. 

 Bank regulators follow a similar exam process as well, although the focus 

is weighted towards financial stability versus customer or investor protection. 

Bank examiners seek to identify emerging risks and assess the bank 

management’s ability to control those risks. Exams focus on those business 

activities that pose the greatest risk to the banks. The Fed, FDIC, OCC and NCUA 

are also members of the Federal Financial Institutions Examination Council 

(FFIEC) 202 and utilize the FFIEC’s CAMELS bank rating system.203 The FFIEC also 

prescribes uniform principles, standards and reporting tools for bank exams. 

 

Examiner profile 

The SEC’s hiring profile and mix of employee tenure appears in-line with 

other financial regulators. In general at the SEC, broker-dealer examiners 

typically have finance and accounting degrees. Some are right out of college, 

while many have work experience at securities or accounting firms. Similarly, 

examiners in the IA/IC examination group typically come from accounting and 

finance backgrounds, and many have work experience in the investment advisory 

industry prior to joining the SEC. Recently, OCIE has also begun hiring and 

designating Senior Specialist Examiners with specialized backgrounds in areas 

such as trading, valuation, portfolio management, and forensic accounting. 

 

202 The FFIEC is composed of the Fed, FDIC, OTC, OCC, NCUA, and State Liaison Committee. Its 

goal is to promote coordination of bank supervision among federal agencies, encourage better 

coordination of federal and state regulatory activities, and create uniform financial reports for 

federally supervised banks to file with their federal regulator. 

203 The CAMELS rating system, also known as the Uniform Financial Institutions Rating System 

(UFIRS), is a bank rating system based on bank financial statements examinations used to 

determine the overall health and areas of risk at a bank. It was adopted by the FFIEC and its 

members in 1979. 
© 2011 The Boston Consulting Group, Inc. 249

The SEC examination program has comparatively lower examiner to registrant 

ratios 

The SEC’s examination program has relatively fewer examiners per 

registrant, resulting in a relatively heavier workload and less frequent 

examinations of regulated entities. 204

 The SEC is currently the only examining authority for investment advisers 

and investment companies (IA/ICs) (smaller IAs are registered with the states).205 

From 2006 to 2010,206 the total number of OCIE staff dedicated to IA/IC exams 

declined from 475 to 460. Over the same time period, the number of exams 

declined from 1,346 to 1,083, while the total number of registrants increased 

from 10,665 to 11,888.207 As a result, the number of IA/IC registrants per exam 

FTE rose from 22.5 to 25.8. Additionally, the proportion of registered IA/IC 

registrants examined every year from 2006-2010 dropped from 13 to 9 percent. 

At that rate, the average registrant would only be inspected once every 

approximately 11 years, compared to once every approximately 7.5 years in 2006. 

There is no statutory mandate for how frequently any given IA/IC registrant must 

be examined.208 Changes stemming from Dodd-Frank will lead to a substantial 

drop in the number of IA/IC registrants.209 However, new types of registrants 

(e.g., private fund advisers, municipal securities advisors) will come under the 

purview of the IA/IC exam program. 

 FINRA has primary responsibility for examining broker-dealers, while the 

SEC staff will examine broker-dealers if specific risks have been identified or 

potential fraud and rule violations have occurred.210 Indeed, the majority of 

broker-dealer exams conducted by the SEC are cause exams. In contrast, FINRA 

devotes the majority of its examination resources to completing cycle exams and 

ensuring all broker-dealers are reviewed regularly. 

 

204 This analysis is focused on workload and exam frequency for broker-dealer and IA/IC 

examinations. These two registrant groups comprise the vast majority of exams conducted by the 

SEC. Workload is measured in terms of number of registrants per examiner. Frequency is 

measured in terms of percent of registrants examined per year, or alternately stated the average 

number of years between exams at any given registrant. 

205 IA/IC exams are administered by OCIE through the Office of IA/IC Examinations. Staff 

examiners are located at Commission headquarters and throughout the 11 regional offices. 206 2010 figures are estimates 207 Study on Investment Advisers and Broker-Dealers; U.S. Securities and Exchange Commission. 

Study on Enhancing Investment Adviser Examinations. Washington: GPO, 2011. Print. 208 The Investment Adviser Act and Investment Company Act states that exams can be performed 

“at any time and from time to time.” 

209 Dodd-Frank Act raises the threshold for IA/IC entities required to register with the SEC from 

$25M assets under management (AUM) to $100M AUM. 

210 Broker-dealer exams are administered by OCIE through the Office of Broker-Dealer 

Examinations. Examiners are distributed throughout the SEC’s 11 regional offices and 

headquarters in Washington, DC. FINRA examines broker-dealers through their Member 

Regulation department, where examiners operate out of 15 district offices around the US. 
© 2011 The Boston Consulting Group, Inc. 250

 Using data received from OCIE,211 the number of exam staff dedicated to 

broker-dealer exams declined from 405 in 2006 to 380 in 2010. Over the same 

time period, the number of exams conducted also declined from 764 to 490, and 

the number of registered broker-dealers declined from 6,037 to 5,357.212 As a 

result, from 2006 to 2010, the percentage of broker-dealers examined each year 

by the SEC declined from 13 to 9 percent, while the number of registrants per 

exam staff member fell slightly from 14.9 to 14.1. It should be noted that the 

broker-dealer examiners are also responsible for conducting over 100 exams per 

year for other entities registered with the SEC, such as transfer agents and 

clearing agencies. The SEC currently does not have a dedicated exam staff for 

these other registrant groups. 

 From 2006 to 2010, the number of FINRA examiners dedicated to brokerdealer exams increased from 634 to 843.213 During this time, the number of 

member firms (broker-dealers) registered with FINRA and subject to exams fell 

from 5,029 to 4,578. Over this period, the number of cycle exams conducted rose 

from 2,310 to 2,666. In addition, FINRA conducted approximately 7,000 cause 

exams every year during this period. From this data, one can see that FINRA 

examined 46 percent of all registered firms in 2006 and 58 percent of all 

registered firms in 2010.214 This is equivalent to every registered firm being 

examined every approximately 2 years, which is much more frequent than 

OCIE’s IA/IC exam program. Additionally, FINRA’s examiners have a less 

burdensome workload, as the ratio of registered firms to examiners declined 

from 7.9 to 5.4 from 2006 to 2010. 

 Banking regulators also appear to have more resources dedicated to their 

exam programs and in turn are able to examine their registrants more frequently. 

Exhibit 7.5.1.3-1 displays the number of exam staff, number of exams, and 

number of registrants for the exam programs mentioned in this section, along 

with comparative statistics. Note: for some exam programs, some data were not 

available for all years. 

 

 

211 2010 figures are estimates. 212 Study on Investment Advisers and Broker-Dealers. 213 Only considering cycle exams in the calculation. FINRA data from 2007 forward reflects 

integrated NASD and NYSE Member Regulation programs. Data from 2006 and prior reflect 

NASD operations only. 

214 This assumes that no firms receive more than 1 cycle exam in any given year. 
© 2011 The Boston Consulting Group, Inc. 251

Exhibit 7.5.1.3-1: Comparative statistics across exam programs 

SEC: 

Exam program Metric 2006 2007 2008 2009 2010 Unit Notes / Assumptions

# examiners          475          425          425          447          460 # Includes all exam staff in IA/IC Office

# registrants   10,665   10,820   11,294   11,452   11,888 # Registrants are IA/ICs

# exams conducted       1,346       1,379       1,521       1,244       1,083 # All exams are risk‐based

# registrants per examiner 22.5              25.5       26.6       25.6        25.8 #

# exams per examiner         2.8          3.2          3.6          2.8          2.4 #

Pct. of registrants examined 13% 13% 13% 11% 9% %

Frequency of exam (every x

years)           7.9           7.8           7.4           9.2         11.0 years

Assumes no registrant is examined twice

in one year

# examiners          405          392          365          376          380 #

# registrants     6,037     5,095     5,748     5,559     5,357 # Registrants are broker‐dealers

# exams conducted        764        675        772         662        490 # All exams are risk‐based

# registrants per examiner       14.9       13.0       15.7       14.8        14.1 #

# exams per examiner         1.9         1.7          2.1          1.8          1.3 #

Pct. of registrants examined 13% 13% 13% 12% 9% %

Frequency of exam (every x

years)           7.9           7.5           7.4           8.4         10.9 years

Assumes no registrant is examined twice

in one year

OCIE:  

Investment

adviser exam

program

OCIE: Broker‐

dealer exam

program

SEC note: all raw data provided by the SEC staff and/or sourced from publicly available reports and studies 

published by the SEC staff 

SROs: 

Exam program Metric 2006 2007 2008 2009 2010 Unit Notes / Assumptions

# examiners        634        837         829         803        843 #

# registrants     5,029     5,005     4,895     4,720     4,578 # Registrants are broker‐dealers

# exams conducted (cycle)     2,310     2,653     2,459     2,483     2,666 #

# exams conducted (cause)     6,527     7,148     7,039     7,758     7,321 #

# exams conducted (total)     8,837     9,801     9,498   10,241     9,987 # Equal to cycle exams + cause exams

# registrants per examiner          7.9          6.0          5.9          5.9          5.4 #

# exams per examiner (cycle‐

only)           3.6           3.2           3.0           3.1           3.2 #

# exams per examiner (all

exams)         13.9         11.7         11.5         12.8         11.8 #

Pct. of registrants examined 46% 53% 50% 53% 58% % Calculated as # cycle exams / # registrants

in every year

Frequency of exam (every x

years)           2.2           1.9           2.0           1.9           1.7 years

Assumes no registrant is examined twice

in one year

# examiners        117         115         128        108 #

Total number of auditors on staff at year

end

# registrants       3,768       3,806       3,816       3,722 #

In each year, NFA is the designated SRO

for all registrants except for ~50

# exams conducted        737         704         733        586 #

# registrants per examiner       32.2       33.1       29.8       34.5 #

# exams per examiner          6.3          6.1          5.7          5.4 #

Pct. of registrants examined 20% 18% 19% 16% %

Frequency of exam (every x

years)           5.1           5.4           5.2           6.4 years

Assumes no registrant is examined twice

in one year

FINRA: Broker‐

dealer exam

program1

National Futures

Association

(NFA)2

1. All raw data provided by FINRA staff. Data from 2006 reflect NASD operations, while data from 2007-2010 reflect 

consolidated operations of NASD and NYSE Regulation 

2. While the CFTC does not examine its intermediaries directly, it does perform annual assessments of the designated SROs 

who perform those examinations. Internal CFTC memos received from the Division of Clearing and Intermediary 

Oversight (DCIO) indicate that both the NFA and CME Group have adequate number of staff with the right level of 

experience and knowledge to execute the examination program in adherence to the guidelines established by the CFTC. 
© 2011 The Boston Consulting Group, Inc. 252

Banking regulators: 

Exam program Metric 2006 2007 2008 2009 2010 Unit Notes / Assumptions

# examiners       1,674       1,681       1,797       2,082 #

Estimated as a pct. of total employees in

the Division of Supervision & Consumer

Protection using 2009 data as a

benchmark

# registrants       5,237       5,257       5,116       4,943 #

Registrants are state‐chartered

institutions not members of the Federal

Reserve System

# exams conducted (safety &

soundness)       2,388       2,258       2,416       2,604 # Only includes safety & soundness exams

# exams conducted (total)     7,399     6,972     7,270     7,858

# registrants per examiner          3.1          3.1          2.8          2.4 #

# exams per examiner (safety &

soundness only)           1.4           1.3           1.3           1.3 #

# exams per examiner (all

exams)           4.4           4.1           4.0           3.8 #

Pct. of registrants examined 46% 43% 47% 53% % Only includes safety & soundness exams

Frequency of exam (every x

years)           2.2           2.3           2.1           1.9 years

Assumes no registrant is examined twice

in one year

# examiners          624          678          737          804 # Examiner FTEs estimated as a percentage

of all field examiner resources

# registrants            878            861            845            826 # State member banks only

# exams conducted            530            507            613            650 # Only includes safety & soundness exams

# registrants per examiner          1.4          1.3          1.1          1.0 #

# exams per examiner          0.8          0.7          0.8          0.8 #

Pct. of registrants examined 60% 59% 73% 79% % Only includes safety & soundness exams

Frequency of exam (every x

years)           1.7           1.7           1.4           1.3 years

Assumes no registrant is examined twice

in one year

# examiners            485            527            573            626 #

Examiner FTEs estimated as a percentage

of all field examiner resources.  Majority

of examiner resources dedicated to

examining ~24 banks with over $100Bn in

assets

# registrants         5,070         5,030         4,976         4,891 #

# exams conducted         3,803         3,885         4,151         4,248 # Only includes safety & soundness exams

# registrants per examiner       10.4          9.5          8.7          7.8 #

# exams per examiner          7.8          7.4          7.2          6.8 #

Pct. of registrants examined 75% 77% 83% 87% % Only includes safety & soundness exams

Frequency of exam (every x

years)           1.3           1.3           1.2           1.2 years

Assumes no registrant is examined twice

in one year

FDIC

Federal Reserve:

State member

banks

Federal Reserve:

Bank holding

companies

Blue text indicates a number obtained from data sources; black text indicates a calculated number. 

Banking regulator notes: Banking regulators are required to perform safety and soundness exams on a 12 or 18 month 

cycle for banks where they are primary supervisory authority. This is the primary focus for the bank examiners. For large 

banks and bank holding companies, bank regulators will perform a continuous, onsite, risk-focused supervision process, 

including multiple targeted reviews. Banking regulators also perform specialty and Community Reinvestment Act (CRA) 

compliance exams. While the number of these exams can be substantial, they generally require significantly less time and 

effort relative to the safety and soundness exams. 

Raw data obtained in two ways: 1) provided by staff from relevant agency; and 2) obtained from agencies’ publicly 

available annual reports. 

Federal Reserve data note: exam counts reflect safety & soundness exams only. Exam counts reflect full, target, and 

limited scope exams that were led by the Federal Reserve. The Federal reserve may have participated substantially in 

exams led by other agencies, such as state banking authorities; however, such exams are not reflected in the counts . 

Federal Reserve data note: the level of examiner resources (# of examiners) allocated to each registrant type (state 

member banks and bank holding companies) is approximate and based on a historical three year average at the Fed from 

2007 to 2009. The allocations reflect examiner time and some support time allocated to examinations. 
© 2011 The Boston Consulting Group, Inc. 253

Banking regulators (continued): 

Exam program Metric 2006 2007 2008 2009 2010 Unit Notes / Assumptions

# examiners       2,061       2,079       2,080       2,078 #

2009 and 2010 figures estimated as pct.

of total employees using known ratios

from 2007/8

# registrants     1,677     1,678     1,565     1,487 # Registrants are national banks

# exams conducted       1,287       1,266       1,265       1,272 # Only includes safety & soundness exams

# registrants per examiner          0.8          0.8          0.8          0.7 #

# exams per examiner          0.6          0.6          0.6          0.6 #

Pct. of registrants examined 77% 75% 81% 86% % Assumes no registrant is examined twice

in one year

Frequency of exam (every x

years)           1.3           1.3           1.2           1.2 years

Office of the

Comptroller of

the Currency

Compared to other exam programs, all else being equal, the SEC faces a 

higher number of registrants per examiner and registrants are examined less 

frequently (in terms of the percentage of registrants examined each year and 

average number of years between exams for any given registrant). These trends 

have persisted for at least the last five years. 

There are opportunities for the SEC to optimize its exam program 

 We identified seven potential opportunities to improve the SEC’s exam 

process. 

First, exams have historically frequently exceeded the SEC stipulated 

timeline. Per the SEC’s guidelines, exams should be closed within 120 days of the 

completion of field work.215 However, in practice, many exams have extended 

beyond this time frame; some exams take over a year to close. Such protracted 

exams deliver stale results and recommendations, making the process less 

effective and efficient for the examiners and the examined registrant. OCIE 

acknowledges this issue and has already taken steps to remedy it, for example by 

having supervisors monitor the age of open examinations and assist with exams 

that are taking longer than expected to complete. 

 Second, the SEC’s examiners tend to focus on areas where there is a clear 

rule violation or instance of fraud. Relatively less attention is paid to the 

soundness of the overall business model and non-enforceable risks at the firm. 

Most examiners in the field work closely with their Enforcement counterparts 

and report to a regional director who has responsibility for examination and 

enforcement, thus tying the two functions together. While detecting fraud and 

rule violations is important and protects investors, encouraging examiners to pay 

more attention to business model risk will enhance the balance and wellroundedness of the exam program. OCIE recognizes this issue and is in the 

process of adjusting how examiners are trained and what guidelines they follow 

to give more attention to the broader strategic risks at examined entities. 

 

215 An exam is considered closed when a deficiency letter or no action letter is sent to the 

examined entity. 
© 2011 The Boston Consulting Group, Inc. 254

 Third, while examiners should spend most of their time in examinations, 

many examiners in the field currently spend a material portion of their time 

focused on non-exam activities—either by design or out of necessity. For 

instance, in one of the larger SEC field offices,216 a team of over 30 examiners 

shared a single administrative support FTE. This naturally meant that many of 

those examiners were using their time to perform administrative tasks such as 

filling out expense reports and filing paperwork. 

 Fourth, broker-dealer examiners have historically also conducted oversight 

exams.217 In a typical broker-dealer exam, the examiner’s responsibility is to 

detect fraud and rule violations and address emerging areas of risk at the firm. 

However, during an oversight exam, examiners assess the efficiency and 

effectiveness of FINRA’s examination processes. While the difference is subtle, 

there may be variations in the skills required for someone trained to inspect 

broker-dealers to also be responsible for assessing FINRA’s operations. Note here 

that OCIE is in the process of creating a separate group of examiners at 

headquarters dedicated to oversight exams, which would resolve this issue. 

 Fifth, as markets and regulated entities become more complex, the 

examiners will increasingly need to rely on subject matter experts for advice on 

specific topics. Currently, the SEC does not have an established network of 

experts to assist with exams, nor does it have a protocol by which examiners can 

identify and contact the experts. While there are staff members within the SEC 

who have various functional or industry expertise, they are not officially 

designated as an expert, and are not expected to assist with exams as part of their 

job. Examiners generally rely on their personal networks to find these specialists 

and informally ask for advice. In contrast, FINRA maintains an internal database 

of designated subject matter experts. The experts are expected to assist with 

exams, if called upon. The expert database is available to all examiners, and 

there is a standard procedure for contacting the experts. FINRA is also seeking 

ways to expand their expert network program so that the experts can be 

integrated into an exam for a longer period of time. The Hong Kong SFC 

maintains a similar network of experts whereby examiners in the field can 

request expert advice on a certain topic, and a central supervisory group within 

the exam function will quickly identify and alert an appropriate subject matter 

expert. At the banking regulators, the majority of senior bank examiners are 

specialists. As such, there is a high degree of collaboration on any given bank 

exam. The lead examiner can quickly identify and reach out to colleagues to 

provide expert advice on various aspects of an exam, if needed. 

 Sixth, there is potentially room for improvement in terms of the quality 

and quantity of training. The SEC conducts formal training for all newly hired 

examiners and supervisors at the home office and in regional offices. The initial 

 

216 Larger in terms of staff headcount in the office. 217 Examinations of broker-dealers with the primary purpose of auditing FINRA’s examination 

program. 
© 2011 The Boston Consulting Group, Inc. 255

training program focuses on examination procedures, financial products, and 

fraud detection. Trainers include professionals from the SEC staff, industry, 

other regulatory agencies, and academia. Examiners also have access to online 

training videos accessible on demand. Ongoing training opportunities sponsored 

by the SEC and through external sources are also available for examiners to stay 

abreast of industry trends and new exam procedures. 

 While such training initiatives are valuable, there are opportunities for 

enhancement. For example, OCIE holds four new-hire training sessions a year at 

headquarters, but examiners are hired throughout the year in the regional offices, 

and sometimes do not receive training for several weeks after they start. Some 

training materials may be too generic and not reflect the nuances of specific 

exam procedures and regional variations. Several regional offices interviewed 

indicated that they spend time and resources training their own examiners 

because they felt that the basic training sessions were insufficient. OCIE has 

plans underway to revamp the examiner training curriculum, including creating a 

certification program similar to those employed at FDIC and Federal Reserve. 

 

 In comparison, FINRA places all newly hired junior examiners into a oneyear full-time training program combining classroom lessons and field work. This 

program is synchronized with FINRA’s hiring waves and new examiners can 

begin the program immediately. At the NFA, new hires also immediately receive 

three weeks of initial classroom training followed by on-the-job training. After 

four to five months on the job, staff members then receive an additional week of 

advanced classroom training. All staff members have access to regular ongoing 

training sessions. The NFA’s training program was reviewed by the CFTC and 

determined to be adequate for newly hired and existing compliance audit staff. 

 Examiners at the FDIC and Fed receive extensive initial and ongoing 

training sessions over a period of multiple years with the goal of passing a 

commissioning test administered by their respective agency. The training 

includes both structured classroom sessions and on-demand, mandatory online 

sessions. The FDIC also offers an official mentoring program pairing junior 

examiners with senior staff. 

 Seventh, it is vital that examiners have easy access to relevant data and 

information technology systems and tools to support their work. For example, 

once a document request is made, the examiner will need the right tools to 

process any raw data received. Examiners can also benefit from workflow tools. 

This may include process tools that help an examiner follow a set process and 

track progress, milestones, and key findings during an exam. Workflow tools can 

also consist of metrics or guidelines to evaluate an examined entity in a 

standardized way. Such tools can include hardware at the home office and in the 

field, along with customized or commercially available software applications. 

 Compared to other financial regulators, the SEC has less sophisticated 

technology and fewer metrics to support its exam program. Section 7.3 provides 

a more detailed assessment of the SEC’s technology systems. Examiners typically 
© 2011 The Boston Consulting Group, Inc. 256

use publicly available information on the internet and historical exam results to 

research broker-dealers and IA/ICs. They have rudimentary workflow tools, 

which are often developed informally by regional exam teams and not centrally 

planned and funded. For example, examiners in one field office developed a 

spreadsheet tool to help them track exam progress. This tool was adopted by 

examiners working in other field offices. However, the tool has several 

limitations – it is not yet web-based and therefore difficult to share. It makes it 

difficult to search information, and it is not easily tailored to different exam 

scopes. Examiners also do not have a clear set of guidelines for how they should 

evaluate an examined entity. While it is important to give examiners flexibility to 

use their experience and expertise, having a consistent framework to use across 

all exams would also be beneficial. OCIE, in its effort to revamp the national 

examination program, has identified technology as one of five key areas for 

improvement.218 

 There are many examples of robust tools and metrics being used in other 

regulators’ exam programs. For example, FINRA maintains a profile on every 

registered broker-dealer, which is continuously updated as data are gathered 

through examinations and broker-dealer disclosures. FINRA also has a software 

workflow tool, which examiners use to adjust the exam scope and track progress 

during the exam. The tool is used by examiners in all district offices, and data 

can be easily integrated into FINRA’s central databases. Similar workflow and 

data analysis tools are also utilized by examiners at the NFA and the CME Group 

when they conduct audits on behalf of the CFTC. At the banking regulators, all 

banks are assessed using the CAMELS system, an international bank-rating 

system where the examiners rate the banking institution according to six 

factors.219 This system helps regulators monitor the highest risk banks. Banks 

also regularly file Call Reports containing material information regarding their 

financial stability, which examiners use to select and scope examinations. The 

OCC has invested in tools that allow examiners from a remote location to search 

OCC databases and analyze bank records more readily and securely. The OCC is 

also upgrading its computer hardware and broadband access in order “to support 

[its] highly mobile work force any time, anywhere, using any computer securely 

and efficiently.”220

 

Summary 

The SEC’s examination program operates under a strong statutory 

mandate and with a clear mission. The program uses a risk-based approach for 

exam selection and scoping in line with industry best practices. The program 

 

218 The five key components are: strategy, structure, people, process, and technology. 219 The six factors examined are as follows: C - Capital adequacy, A - Asset quality, M - 

Management quality, E – Earnings, L – Liquidity, S - Sensitivity to Market Risk. Bank supervisory 

authorities assign each bank a score on a scale of one (best) to five (worst) for each factor. If a 

bank has an average score less than two it is considered to be a high-quality institution, while 

banks with scores greater than three are considered to be less-than-satisfactory establishments. 220 United States. U.S. Department of the Treasury. Office of the Comptroller of the Currency. 

Annual Report Fiscal Year 2009. Washington: GPO, 2010. Print. 
© 2011 The Boston Consulting Group, Inc. 257

appears to have comparatively lower examiner to registrant ratios. There are 

several ways for the SEC to improve its exam program, including optimizing how 

examiners spend their time, building a network of experts to support them, and 

enhancing the quality and quantity of training. 

7.5.2 High-frequency trading assessment 

7.5.2.1 Key questions explored

 What is high-frequency trading? 

 What is the effect of high-frequency trading on the capital markets? 

 What does the SEC require to effectively monitor the effects of high-frequency 

trading? 

7.5.2.2 Findings

Overview of high-frequency trading: High-frequency trading (HFT) is a 

strategy that relies on the frequent turnover of many small positions based on the 

detection of minute inefficiencies or market patterns. Technology and speed are 

key characteristics: the strategy requires automated systems capable of 

identifying trading opportunities and placing a large volume of trades at speeds 

measured in milliseconds. 

 The traders that employ high-frequency trading strategies are typically 

proprietary trading firms; some also fulfill a formal market making function. 

Regardless, like traditional market makers, most high-frequency traders aim to 

capture the spread between the price at which a security can be bought and sold. 

These spreads are razor-thin, typically fractions of pennies. Given this, highfrequency traders make a huge number of trades, typically holding positions for 

very short periods of time. Most employ a “delta-neutral” strategy, i.e. they close 

out positions by the end of each day. 

 As a result of the scale the strategy requires, high-frequency trading has 

emerged as one of the most significant drivers of volume in the capital markets 

over the last decade. It is estimated that high-frequency trading now accounts for 

~56 percent of US equity trade volume, up from 35 percent in 2005.221 Highfrequency trading is a growing phenomenon in other markets as well. 

 Two sets of developments have been key enablers and catalysts for the 

rise of high-frequency trading. The first is a series of changes that have 

modernized the structure of the capital markets. These include the shift to 

electronic trading, decimalization, competition between trading venues, and 

 

221 TABB Group. 
© 2011 The Boston Consulting Group, Inc. 258

direct market access. Advancement in technology—the lifeblood of highfrequency trading—is the second key enabler. Examples include increased 

computing power, the broad availability of low latency bandwidth, and advances 

in the fields of complex event processing and business intelligence, which drive 

trading algorithms. 

Exhibit 7.5.2.2-1: High-frequency trading growth 

High frequency trading estimated

to be 56% of US equity volume

Key enablers: technology and

changes to market structure

Effect of high-frequency trading on the capital markets: The rise of highfrequency trading is credited with having a significant impact on the capital 

markets. It is seen as a major driver of the massive rise in trading volume over 

the last decade: from 2005 to 2009, the volume in NYSE-listed stocks rose by 3x; 

during the same period, the number of trades executed each day rose by ~8x.222 

This rise in volume, coupled with the market making function of high-frequency 

trading, has had the effect of deepening the capital markets and tightening 

spreads. In this manner, the rise of high-frequency trading has added liquidity to 

the market.

 

222 US Securities and Exchange Commission, Concept Release on Equity Market Structure. Release 

No. 34-61358. Print. 

0

20

40

60

80

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

% of total equity trading volume from HFT

Asia

Europe

US

Technological innovation

• Faster, cheaper computing power

• Advancements in the field of complex event 

processing

• Increase in availability of low-latency 

bandwidth

Shift to electronic trading

Rise of alternative trading systems

Decimalization

Regulatory changes, e.g., Reg NMS

Today, 56% 

of volume

Projected

Source: TABB Group; BCG analysis
© 2011 The Boston Consulting Group, Inc. 259

Exhibit 7.5.2.2-2: Trends in trading activity, partly driven by high-frequency 

trading 

 Critics contend this liquidity, while beneficial in normal circumstances, is 

far less consistent than that provided by traditional market makers. The pullback 

of high-frequency traders during the events of May 6, 2010 is cited as a 

contributing factor in the wild market swings that took place. The SEC and 

CFTC’s report concluded that while many high-frequency traders continued to 

actively trade during the market dip, others scaled-back their activity or withdrew 

from the market entirely.223 This temporary loss of liquidity exacerbated the 

market swing and price dislocation that occurred. A similar criticism holds in 

normal market circumstances as well; high-frequency trading is often cited as a 

potential source of increased market volatility. 

 High-frequency trading creates new potential for market manipulation, 

through schemes that leverage the speed and throughput of high-frequency 

trading infrastructure. Such practices include improper order cancellation tactics 

known as quote stuffing, passive market making activities, layering, and abusive 

data latency arbitrage strategies such as “front running.” Meanwhile, legitimate 

practices common to high-frequency trading are seen as reducing market 

fairness. For example, by co-locating their servers with exchange and ATS 

matching engines, a small number of high-frequency traders have gained a 

material speed advantage over other investors, potentially creating an uneven 

playing field. 

SEC monitoring of high-frequency trading: To identify and investigate 

securities violations (e.g., layering), proactively assess and mitigate risks (e.g., 

 

223 United States. U.S. Securities and Exchange Commission and U.S. Commodity Futures Trading 

Commission. Preliminary Findings Regarding the Market Events of May 6, 2010, Washington: GPO, 

2010. Print. 

2.1

5.9

0

2

4

6

8

+181%

Shares (billions)

2005 2009

2.9

22.1

0

7

14

21

28

+662%

Trades (millions)

2005 2009

724.0

268.0

0

300

600

900

Shares per trade

-63%

2005 2009

Note: All data is consolidated NYSE-listed

Source: US Securities and Exchange Commission, "Concept Release on Equity Market Structure," 1/14/2010 [Release 34-61358; File S7-02-10], BCG analysis.

Average daily trades x = Average trade size Average daily volume
© 2011 The Boston Consulting Group, Inc. 260

potential for price dislocation), and inform policy (e.g., circuit breaker settings), 

the SEC must monitor the effects of high-frequency trading. More specifically, 

the SEC must be able to:

 Identify and investigate market participants that employ the increasingly 

sophisticated forms of market manipulation high-frequency trading 

enables 

 Perform detailed reviews of market events, such as the Events of May 6, 

2010 

 Identify and assess broad market trends relevant to high-frequency 

trading, such as increased market volatility 

 To effectively support these objectives, the SEC should seek to develop at 

least three of the capabilities outlined in Chapter 5 of this document: risk IQ, 

leveraging communities of interest, and technology sophistication. 

Risk IQ: The SEC must be able to gather information relevant to highfrequency trading from across the SEC, SROs, and the broader community of 

interests (e.g., investor tips), prioritize this information, connect the dots, 

develop actionable insights, and then communicate these insights, as 

appropriate, to the relevant entities for action 

 

Leveraging communities of interest: The SEC should seek seamless access to 

the market data that SROs collect in order to better support the agency’s 

oversight activities, examination programs, and enforcement actions. 

Implementation of the proposed Consolidated Audit Trail would be a 

significant step in this direction 

Technology sophistication: The SEC should have staff who understands how 

to leverage the technology and perform the analytics required to support 

investigations and assessments related to high-frequency trading. More 

important, the SEC requires people who know how high-frequency traders use 

technology 

 

Summary 

 The emerging scale and importance of high-frequency trading in the 

capital markets, coupled with its potential negative effects, argues for continued 

SEC attention. Monitoring these effects will require the SEC to develop three 

capabilities: risk IQ, leveraging communities of interest, and technology 

sophistication. 

 
© 2011 The Boston Consulting Group, Inc. 261

7.6 Glossary 

ACRONYM DEFINITION 

ALJ Administrative Law Judge 

AMEX American Stock Exchange 

ANC Alternative Net Capital 

APA Administrative Procedure Act of 1946 

ARP Automation Review Program 

ATS Alternative Trading System 

AUM Assets Under Management 

BCG The Boston Consulting Group 

BOX Boston Options Exchange 

BSE Boston Stock Exchange 

CAMELS 

Capital adequacy, Asset quality, Management, Earnings, Liquidity, Sensitivity to 

market risk 

CAT Consolidated Audit Trail 

CBOE Chicago Board Options Exchange 

CCP Central Counterparty 

CF Division of Corporation Finance 

CFO Chief Financial Officer 

CFPB Consumer Financial Protection Bureau 

CFR Code of Federal Regulations 

CFTC Commodity Futures Trading Commission 

CHX Chicago Stock Exchange 

CIO Chief Information Officer 

CLO Chief Learning Officer 

CME Chicago Mercantile Exchange 

CMQA Configuration Management and Quality Assurance 

COE Center of Excellence 

COO Chief Operating Officer 

CPA Certified Public Accountant 

CPC Capital Planning Committee 

CRA Community Reinvestment Act 

CRO Chief Regulatory Officer 

CS Competitive Service 

CTO Chief Technology Officer 

CY Calendar Year 

DCIO Division of Clearing and Intermediary Oversight 

DMA Direct Market Access 

DTC Depository Trust Company 

DTCC Depository Trust & Clearing Corporation 

EAB Enterprise Architecture Board 

EBPM Evidence-Based Performance Management 

ECN Electronic Crossing Network 

ED Executive Director 

EDGAR Electronic Data-Gathering, Analysis, and Retrieval 

EIC Examiner-in-Charge 

EO Executive Order 

ES Excepted Service 

ESHA Excepted Service Hiring Authority 

FASB Financial Accounting Standards Board 

FATF Financial Action Task Force 

FCM Futures Commission Merchant 
© 2011 The Boston Consulting Group, Inc. 262

FCPA Foreign Corrupt Practices Act 

FDIC Federal Deposit Insurance Corporation 

FFIEC Federal Financial Institutions Examination Council 

FHFA Federal Housing Finance Agency 

FHL Federal Housing Loan 

FIFO First In, First Out 

FINRA Financial Industry Regulatory Authority 

FIRREA Financial Institutions Reform, Recovery and Enforcement Act of 1989 

FOIA Freedom of Information Act of 1966 

FSA Financial Services Authority 

FSB Financial Stability Board 

FSOC Financial Stability Oversight Council 

FTE Full-time Equivalent 

FY Fiscal Year 

GAAP Generally Accepted Accounting Principles 

GAO Government Accountability Office (formerly General Accounting Office) 

GPO Government Printing Office 

HFT High Frequency Trading 

HR Human Resources 

HUB SEC case management system 

IA/IC Investment Adviser / Investment Company 

IARD Investment Adviser Registration Depository 

IC Individual Contributor 

IDP Individual Development Plan 

IG Inspector General 

IM Division of Investment Management 

IOC Information Officers' Council 

IOMA The Institute of Management & Administration 

IOSCO International Organization of Securities Commissions 

IPO Initial Public Offering 

IQ Intelligence Quotient 

ISE International Securities Exchange 

ISS Infrastructure Support Services 

IT Information Technology 

ITCPC Information Technology Capital Planning 

ITIL Information Technology Infrastructure Library 

LCCB Lifecycle Configuration Control Board 

MSRB Municipal Securities Rulemaking Board 

MUI Matter Under Investigation 

NASD National Association of Securities Dealers 

NCUA National Credit Union Administration 

NEP National Exam Program 

NFA National Futures Association 

NRSRO Nationally Recognized Statistical Rating Organization 

NSCC National Securities Clearing Corporation 

NSX National Stock Exchange 

NTEU National Treasury Employees Union 

NYSE New York Stock Exchange 

OALJ Office of Administrative Law Judges 

OAS Office of Administrative Services 

OCA Office of the Chief Accountant 

OCC Office of the Comptroller of the Currency 

OCIE Office of Compliance Inspections and Examinations 
© 2011 The Boston Consulting Group, Inc. 263

OCOO Office of the Chief Operating Officer 

OCRA Office of Credit Rating Agencies 

ODRP OTC Derivatives Regulators’ Forum 

OED Office of the Executive Director 

OEEO Office of Equal Employment Opportunity 

OFM Office of Financial Management 

OFOIA Office of Freedom of Information Act and Record Management Services 

OGC Office of the General Counsel 

OHR Office of Human Resources 

OIA Office of International Affairs 

OIAD Office of the Investor Advocate 

OIEA Office of Investor Education and Advocacy 

OIG Office of the Inspector General 

OIT Office of Information Technology 

OLIA Office of Legislative and Intergovernmental Affairs 

OMB Office of Management and Budget 

OMS Office of Municipal Securities 

OMWI Office of Minority and Women Inclusion 

OPA Office of Public Affairs 

OPM Office of Personnel Management 

OS Office of the Secretary 

OSP Office of Sales Practices 

OTC Over-The-Counter 

PCAOB Public Company Accounting Oversight Board 

PCX Pacific Coast Exchange 

PHLX Philadelphia Stock Exchange 

PIP Performance Improvement Plan 

PMO Program Management Office 

PRA Paperwork Reduction Act of 1980 

PRB Project Review Board 

PWP Performance Work Plan 

Reg NMS Regulation National Market System 

RIF Reduction in Force 

ROOR Risk Oversight and Operational Regulation 

RSFI Division of Risk, Strategy, and Financial Innovation 

SDLC Software Development Lifecycle 

SEC The U.S. Securities and Exchange Commission 

SFC Hong Kong Securities & Futures Commission 

SO Senior Officer 

SoC Span of Control 

SRO Self-regulatory organization 

STARS Super Tracking And Reporting System 

STP Straight Through Processing 

TCR Tips, Complaints, and Referrals 

TM Division of Trading and Markets 

TRB Technical Review Board 

UFIRS Uniform Financial Institutions Rating System 

USC Code of Laws of the United States of America 

XBRL eXtensible Business Reporting Language