The Gensler SEC's Rulemaking Reach Exceeds Its Grasp

November 7, 2022

Among Henry David Thoreau's more memorable quotes is this one: "Any fool can make a rule, and any fool will mind it." Which brings me to the issue of Securities and Exchange Commission ("SEC") Chair Gary Gensler's ambitious rule-proposal agenda. Many Wall Street stakeholders fear that the large number of proposals has become excessive. There is reach. There is grasp. Our reach exceeds our grasp. I wonder whether SEC Chair Gensler has stretched out his fingers and then retracted them in order to confirm that truth. 

Where I Stood. Where I Now Stand.

My years of online content reflect my ardent advocacy for investor protection and industry reform. I am no apologist for Wall Street fraudsters or the anti-consumer policies pursued by too many financial conglomerates. As the published record will prove, I was, in fact, a supporter of Gary Gensler's nomination to the Chair of the SEC:

Statement of Acting Chair Allison Herren Lee on Contingent Settlement Offers (SEC Release)
(Securities Industry Commentator / February 12, 2021)

As and Securities Industry Commentator readers know, I detest the SEC's unprincipled history of sanctioning corporate fraudsters in one breath, and then, in the next breath, granting them exemptions from "Bad Boy" provisions. In recent months, when asked about who I would like to see installed as the next SEC Chair, my list of candidates tended to include Preet Bharara, Gary Gensler, and Kara Stein. As such, I welcomed Gensler's selection. That being said, former SEC Commissioner Kara Stein would have been a wonderful choice because of her staunch opposition to the SEC's policy of granting knee-jerk-like exemptions to a slew of corporate miscreants . . .

Two years after voicing support for Gary Gensler, I regret my position. In all candor, I was wrong. Unquestionably, I still think that Gensler is a good man and sincere in his reform beliefs. That's not the point. The problem is that his rulemaking agenda has produced a troubling rate of Staff attrition and waning morale. Further, the diversion of resources has produced alarming numbers of "extensions" for cases on the SEC's docket that impedes efforts to timely settle and/or aggressively adjudicate pending Enforcement actions. On top of that, the SEC continues to fail to timely process claims for Whistleblower Awards -- some matters apparently taking four or more years to reach either a final Denial or Award.

Six Full Years (and a partial year) of SEC Proposed Rules

As of November 2, 2022, if we just count the number of reported Proposed Rules on the annual "SEC Proposed Rules" webpages, we come up with the following;  

MONTHS 2016 2017 2018 2019 2020 2021 2022
January  2 0 0 0 2 0 4
February 2 2 0 2 1 0 7
March 0 0 2 1 1 0 5
April 0 1 3 0 1 1 1
May 1 0 2 3 0 0 4
June 3 1 3 0 0 0 1
July 2 0 1 1 1 0 2
August 2 0 0 1 3 0 2
September 3 1 3 3 1 1 1
October 1 0 2 3 0 1 2
November 0 1 0 4 2 5 1
December 0 0 3 3 1 3 0
TOTAL 16 6 19 21 13 11 30

The "SEC Proposed Rules" chart above covers the years from 2016 through November 2, 2022, three Presidential administrations (two Democrats and one Republican), and pre-dates and covers the Covid pandemic. I have offered an extensive set of data so as to avoid allegations of favoritism or biased sampling. 

If we simply add up the Total Proposed Rules for the completed years of 2016 to 2021, we come up with 86; and if we divide that by six years, we have an average of 14.33 Rule Proposals for each year in that six-year span. If we array the totals from smallest to largest: 6+11+13+16+19+21, the "median" (versus the "mean" of 14.33) would fall between 13 and 16, or around 14.5ish. As such, be it the mean or median, the SEC proposed about 14 rules per year for each year from 2016 through 2021.

2022: 30 Rules and Counting!

About 11 months into 2022, the SEC has already proposed 30 rules -- more than double the average number for a completed year going back to 2016. Double! And we still have nearly two full months left in 2022!! 

On November 2, 2022, the SEC decided to see whether it could add just one more rule-proposal-straw and break the camel's back. Apparently, not satisfied that the first straw had, in fact, broken the poor beast's back, the SEC opted for a second rule proposal in the same day:

When the SEC posts a Rule Proposal, that inevitably prompts a published statement from each of the sitting Commissioners and Chair. We are asked to read through unending  musings, opinions, and thoughts about nothing more than mere proposed rules. Of course, attendant to publishing a statement about all that musing, opining, and thinking is the use of staff and resources to compose the drafts, research the footnotes, edit the final product, and, then, hey, y'know, let's all pretend that the purported author actually did all the work, right? For example, consider Chair Gensler's personal Statements in connection with the two above-cited November 2, 2022 Rule Proposals:

Statement on Final Amendments to Form N-PX by SEC Chair Gary Gensler, states in part:

I am pleased to support today's final amendments. I'd like to thank the members of the SEC staff who worked on this rule, including:
  • Christian Corkery, David Driscoll, Nathan Schuur, Tim Dulaney, Trevor Tatum, Bradley Gude, Angela Mokodean, Brian Johnson, Sarah ten Siethoff, and William Birdthistle in the Division of Investment Management; 

  • Hanna Lee, Andrew Glickman, PJ Hamidi, Gregory Scopino, Alex Schiller, Julie Marlowe, Michael Willis, and Jessica Wachter in the Division of Economic Risk and Analysis;

  • Bob Bagnall, Amy Scully, Natalie Shioji, Malou Huth, and Meridith Mitchell in the Office of the General Counsel;

  • Mavis Kelly and Song Brandon in the Division of Examinations;

  • Corey Schuster and Andrew Dean in the Division of Enforcement; and

  • Dan Chang in the EDGAR Business Office.

Statement on Open-End Funds by SEC Chair Gary Gensler

I would like to thank the SEC staff involved in this proposal, particularly:
  • William Birdthistle, Sarah ten Siethoff, Brian Johnson, Angela Mokodean, Mykaila DeLesDernier, Rachel Kuo, Nathan Schuur, James Maclean, Michelle Beck, Holly Miller, Michael Republicano, Tim Dulaney, Trevor Tatum, Daniel Stemp, Juan Carlos Forero, Isaac Kuznits, and Guang Yang in the Division of Investment Management; 

  • Jessica Wachter, Alex Schiller, James McLoughlin, Dasha Safonova, Lauren Moore, and Charles Woodworth in the Division of Economic and Risk Analysis; 

  • Meridith Mitchell, Malou Huth, Natalie Shioji, Bob Bagnall, and Monica Lilly in the Office of the General Counsel; 

  • Song Brandon in the Division of Examinations; and

  • Corey Schuster in the Division of Enforcement.

The Human Tally

Lets start taking names and adding up the numbers. In Chair Gensler's:
  • Form NPX Statement, he thanked 28 Staff members.
  • Open-Ends Funds Statement, he thanked 30 Staff members.
Add up the numbers of Staff involved in the two rule proposals: 58 Staff members. Yes, I know that I'm double-counting some folks but since they were assigned to separate proposals, I think that's fair and appropriate. As I see it, those 58 Staff members were not preparing for trial. Not at trial. Not clearing up the back-log of whistleblower tips or processing whistleblowers' claims for awards. No, those 58 Staff were engaged in what likely was little more than the make-work and make-waste

As a former regulatory lawyer, I know how the unavailability of 58 Staffers actually plays out. You're preparing a Motion or you're getting ready for a hearing, and, what the hell, that "okay" I need from some higher-up is still stuck somewhere on some idiot's desk in Washington. Where is the approval to hire the expert? Where is the signature on the document that needs to be filed by today? What happened to the questions that I sent to that other Division. 

And then the answers -- the excuses -- start to flood in. 

Sorry, Mr. Smith was tied up on the third Draft of the Rule Proposal; or Ms. Smith was assigned to vet the citations; or the Director couldn't get to your case because he was tasked (yeah, don't you love that word "tasked") with checking the accuracy of several footnotes. 

You win the case, of course all those folks who didn't get back to you will take credit for your hard work; and if you lose, those same folks will second-guess you and blame you. 

Adding insult to injury, at the end of the year, when they give out those awards and commendations, the folks who never found the time to get back to you are featured in the press releases and you're told that "maybe next year" your nomination for the faux wood plaque will get approved. 

SEC OIG Letter

The SEC's Office of Inspector General ("OIG") transmitted on September 29, 2022, a letter to Chair Gensler: " SUBJECT: Final Management Letter: Changes to the Internal Review Process for Proposed Rules May Impact the Office of the Advocate for Small Business Capital Formation and the Office of the Investor Advocate 
OIG raised its concerns about the SEC's rulemaking process and, in pertinent part, asserted that [Ed: Office of the Advocate for Small Business Capital Formation ("OASB"); the SEC's Office of the Investor Advocate ("OIAD"); and footnotes omitted]:

OASB and OIAD acknowledged that the Office of the Chair has the authority to direct the agency's rulemaking process; however, the opportunity to comment on 30-day and subsequent draft rules provides these offices with meaningful opportunities to carry out their office functions early in the process. Although OASB personnel raised concerns about the temporary change in the rulemaking process, they told us that they were nonetheless able to review, as warranted, all rule proposals likely to have a significant impact on small businesses and their investors. OIAD personnel informed us that, during the time the process change was in effect, they received two fatal flaw drafts (but not the corresponding 30-day drafts); they provided comments to the Commission on one of the proposed rules and determined that no comments were needed for the other. However, personnel reported to us that, had the change in the rulemaking process remained in effect, it would have significantly shortened the review and comment period and rendered OIAD's involvement in rulemaking largely ineffective because fatal flaw drafts are typically provided as a courtesy and only comments on perceived fatal errors are accepted at that stage. Generally, we concluded that changes to the SEC's rulemaking process, particularly without notice to the offices likely to be impacted, may unintentionally limit the ability of those offices to carry out their functions, and could hinder effective collaboration and information sharing across the agency.

Notably, the SEC's strategic plan identifies the teamwork of the SEC's staff and its leaders, along with other elements, as the "foundation" of the agency, and acknowledges that "effective and efficient partnership of staff across the agency" is critical to the SEC's ability to carry out its mission. As reported in our October 2021 statement on the SEC's management and performance challenges, opportunities exist to strengthen communication and coordination across divisions and offices. Specifically, we stated, "management's early attention, as needed in response to this emerging theme can be instrumental to (1) prevent the development of systematic and significant challenges, such as potential siloing or duplicative functioning, in the future, (2) continue positive trends in employees views on collaboration, and (3) achieve the goals established in the SEC's most recent strategic plan." Furthermore, federal internal control standards state that effective information and communication are vital for an entity to achieve its objectives, and management should internally communicate the necessary quality information to enable personnel to perform key roles in achieving objectives.

at Page 4 of the September 29, 2022 OIG Letter
The SEC OIG Cites Difficulties Managing Resources Because of Increased Rulemaking

Shortly after the transmittal of its September 29th letter to Chair Gensler, OIG published "The Inspector General's Statement on the SEC's Management and Performance Challenges, October 2022."  The October OIG Report asserts this disconcerting fact:

We met with managers from the SEC's divisions of Trading and Markets, Investment Management, Corporation Finance, and Economic and Risk Analysis, some of whom raised concerns about increased risks and difficulties managing resources and other mission-related work because of the increase in the SEC's rulemaking activities. For example, some reported an overall increase in attrition (discussed further on page 21 of this document) and difficulties hiring individuals with rulemaking experience. In the interim, managers reported relying on detailees, in some cases with little or no experience in rulemaking. Others told us that they may have not received as much feedback during the rulemaking process, either as a result of shortened timelines during the drafting process or because of shortened public comment periods. Although no one we met with identified errors that had been made, some believed that the more aggressive agenda-particularly as it relates to high-profile rules that significantly impact external stakeholders-potentially (1) limits the time available for staff research and analysis, and (2) increases litigation risk. Finally, some managers noted that fewer resources have been available to complete other mission-related work, as rulemaking teams have borrowed staff from other organizational areas to assist with rulemaking activities. 

at Page 3 of the 2022 SEC OIG Report

Despite management's commitment to cross-functional collaboration and communication, personnel we met with (including those from the Division of Economic and Risk Analysis, the Division of Enforcement [Enforcement], and the Office of the General Counsel, among others) identified coordination and communication as a persistent challenge in the rulemaking process, particularly given potential overlaps in jurisdiction and differences in opinions. We reported on such challenges in a management letter issued in September 2022. .  .

at Page 4 of the 2022 SEC OIG Report

Highest Attrition Rate in 10 Years

The SEC's overly-aggressive rule proposal effort has not merely fomented unrest and dissent in the ranks:

[T]he SEC seems to be facing challenges in its retention efforts. As the figures below demonstrate, the SEC has seen a significant increase in attrition over the last few years, from 3.8 percent in FY 2020 to an estimated 6.4 percent in FY 2022 (as of September 20, 2022) -- the highest attrition rate in 10 years. Most concerning is the increased attrition in Senior Officer and attorney positions, expected to be about 20.8 percent and about 8.4 percent for FY 2022, respectively.

at Page 21 of the 2022 SEC OIG Report
See, for example: "SEC Announces Departure of Chief of Staff Prashant Yerramalli and Appointment of Amanda Fischer to the Role" (SEC Release / Nov. 7, 2022) 

Recently, six Senate Republicans on the Senate Banking Committee [Thom Tillis from North Carolina, Mike Crapo from Idaho, Tim Scott from South Carolina, Michael Rounds from South Dakota, Bill Hagerty from Tennessee and Steve Daines from Montana} sent a private letter to SEC Chair Gensler questioning the numbers of rule proposals and reports of SEC Staff discontent; see, "Senate Republicans want the SEC to explain why staff are quitting" (Reuters by Neil Mackenzie / updated October 31, 2022) In part, the Reuters story notes that the letter:

references a public Oct. 13 report posted on the SEC's website from the Office of the Inspector General, the SEC's own internal watchdog, detailing staff attrition and reports of discontent.

Republicans want Gensler to explain how he will address the concerns in the report and also to allow more time for industry feedback on the new rules.

Failing to Manage

Indeed, there are many fine, talented men and women in the managerial ranks of the SEC. Some reached those lofty heights through hard work; others, not so much -- they knew someone who knew someone; or they knew someone who was owed a favor; or their father/mother donated some big bucks to someone who pushed aside someone else's candidacy. You have been at the SEC for some 15 years and know what you're doing and even have some ideas for improving things but you know that you were never given a fair consideration for that senior position. Fact is, everyone knew the fix was in. We in the ranks just don't get those posts. They go to someone from the outside. In some cases, that outsider doesn't have a clue. 

A lack of managers with effective managerial skills is not just an SEC thing. It is a failure that impacts governments at all levels. It is corrosive and impervious to remediation. It is a cancer. Which explains why the biggest problem at places like the SEC is not getting talent but, in contradistinction, getting skilled managers. Great litigators are not necessarily great managers. Gifted statisticians don't always know how to write compelling reports. Folks who deserve promotion are often kept in their place by superiors with little knowledge of the field that they were put in charge of.

Putt-ing Along

I commend to your consideration these two bedrock principles of organizations:

Putt's Law: Technology is dominated by two types of people: those who understand what they do not manage and those who manage what they do not understand. 

Putt's Corollary: Every technical hierarchy, in time, develops a competence inversion.

I'm comfortable substituting "Wall Street Regulation" for "Technology" and retrofitting Putt's Law and Corollary. The SEC has competent, skilled Staff in the trenches and assigned to handle litigation and market oversight; however, those who are managing the skilled Staff don't appear to understand what they're managing or how to manage effectively. In the end, if you know what you're doing at the SEC, you will never rise into the upper echelons of management; however, in an inversion of competence, if you don't know what you're doing at the SEC, then you will be promoted so that you manage what you don't understand and manage those who do. 

SEC Among Best Places to Work

When I first entered the securities industry in 1982, the SEC was always considered among the best places to work. Frankly, the federal regulator boasts as much on its webpage titled "SEC Again Ranks Among Best Places to Work" (September 21, 2021)

According to the 2020 Best Places to Work in the Federal Government rankings, which are compiled by the nonpartisan, nonprofit Partnership for Public Service, the SEC ranked fourth out of 25 mid-size agencies, just 1.5 points out of the third spot and less than four points away from the top of the rankings.

The SEC's "engagement score" was 85.7, well above the government-wide average of 69.0.

"This honor is a testament to the SEC staff's teamwork, dedication, and service to American investors," said SEC Chair Gary Gensler. "They are the reason the SEC is one of the best places to work. I congratulate them on this achievement and thank them for their work on behalf of the public."

The SEC finished first among all mid-size agencies in the category of "Work-Life Balance" that measures the extent to which employees consider their workloads reasonable and feasible, and managers support a balance between work and life.

The SEC also had three divisions/offices rank among the top 10 in government for the "agency subcomponents" category, the most by any agency in government. The SEC's Office of Support Operations ranked fourth with a score of 91.3, and the Division of Investment Management and the Office of General Counsel ranked sixth and seventh, respectively.

But that was then and this is the now of 2022, almost 2023. It will be interesting to see if the SEC remains the shining star of employee satisfaction during the balance of the Gensler Administration. 

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