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 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. 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Receipt and review of this document shall be deemed agreement with and consideration for the foregoing. © 2011 The Boston Consulting Group, Inc. 2 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. 3 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. 4 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