Testimony Concerning the Lease of Constitution Center

by Jeffery Heslop
Chief Operating Officer,
U.S. Securities and Exchange Commission

Before the U.S. House of Representatives
Committee on Transportation and Infrastructure
Subcommittee on Economic Development, Public Buildings, and Emergency Management

June 16, 2011

Chairman Denham, Ranking Member Norton, Members of the Subcommittee:

My name is Jeff Heslop, Chief Operating Officer (COO) and Acting Executive Director of the U.S. Securities and Exchange Commission. I appreciate the opportunity to testify on behalf of the Commission with respect to the agency’s lease of office space at the Constitution Center building in Washington, D.C., and to share with you information on the actions that the SEC is taking in response to the May 16, 2011 report of the Commission’s Office of Inspector General (OIG), Report No. OIG-553, concerning that lease.

The OIG report on the leasing of Constitution Center revealed a number of flaws in the SEC’s leasing process. Although the SEC has not paid any rent and is no longer obligated for a majority of the original space, it is clear that this leasing decision lacked the rigor and attention to detail demanded for decisions of this magnitude. As such, we are committed to implementing whatever changes are needed to improve that process, starting with the retention of outside experts to conduct a comprehensive assessment of our entire leasing organization.

I joined the SEC in May 2010 as its first-ever COO.¹ Upon joining the SEC, my responsibilities were focused on overseeing the operations of the Office of Information Technology (OIT), the finance and accounting functions of the Office of Financial Management (OFM), and the Office of FOIA, Privacy, and Records Management. In April of this year, Chairman Schapiro asked me to take over responsibilities of the departing Executive Director (ED), who was responsible for overseeing the Office of Administrative Services (OAS), which manages the agency’s real property leasing activities.²

My charge from the Chairman is to address the issues identified in the OIG report and improve the agency’s leasing processes. I can assure you that the SEC is committed to taking all necessary and appropriate actions to ensure that the SEC makes efficient and economical use of its office space, produces accurate and reliable data to support leasing decisions, and holds agency staff — from senior executives on down — accountable.

We have taken — and are continuing to take — steps to minimize the future impact of this leasing decision. The SEC has worked with the landlord to identify substitute tenants, and recently two other agencies took the majority of the space allotted to the SEC. The SEC’s releases that enabled the landlord to lease the space to the other federal tenants were conditioned upon the SEC being released from all obligations for that space. SEC staff currently is working with the General Services Administration to identify other federal government agencies to fill the remaining space.

Beyond this, as described in more detail below, the SEC is actively at work to strengthen the agency’s real property leasing program. In addition, we are endeavoring to ensure that any new controls and procedures we are putting in place regarding the agency’s leasing decisions address the issues raised in the OIG report.

My testimony will describe the SEC’s leasing program, the impact of recent statutory changes on the SEC’s workforce needs, and the changes we are making to improve future leasing decisions.

The SEC’s Real Property Leasing Program

The SEC currently employs approximately 3,900 permanent staff and more than 700 contractors. Approximately 60 percent of the SEC’s permanent staff work at the agency’s headquarters, principally the Station Place buildings located in northeast Washington, D.C. adjacent to Union Station. Additionally, certain back-office functions are staffed from the agency’s Operations Center in Alexandria, Virginia. The SEC’s remaining approximately 1,500 employees — principally enforcement and examinations staff — work in the agency’s 11 regional offices located in New York City, Chicago, Los Angeles, Boston, Philadelphia, San Francisco, Fort Worth, Miami, Denver, Atlanta, and Salt Lake City.

The SEC does not own any of its facilities, and instead enters into commercial leases for its office space. These leases provide office space for the agency’s permanent staff, temporary staff (e.g., interns and fellows), and contractors, as well as space for public meeting rooms, hearing and testimony rooms, files and records storage, and information technology, including the agency’s data center and alternate data center. The SEC currently maintains approximately 2.5 million square feet of leasehold interests, which includes office space in each of the cities previously mentioned. In the current fiscal year, the agency will make total lease payments of approximately $100 million, which represents about 8 percent of the agency’s annual budget.

The SEC’s real property leasing program is managed by OAS, specifically, its Real Property and Leasing Branch. Leasing authority is centralized within OAS, meaning that the SEC’s regional offices do not have separate authority to enter into their own real property leases. Several other OAS components have responsibilities that impact the SEC’s real estate leasing program, including the Security, Construction, Space Management, and Facilities Branches, as well as the Office of Acquisitions. Other SEC offices that have significant interaction with the real property leasing program include: OIT, which equips offices with telephones, computers, and other IT equipment; OFM, which is a source of information on agency-wide budgets and resource needs; and the Office of General Counsel, which provides legal advice in connection with various leasing and acquisition issues. The Director of OAS serves as the SEC’s Senior Procurement Executive and appoints a Realty Contracting Officer, who has delegated, express written authority for realty leasing on a contracting officer’s warrant.

Impact of the Dodd-Frank Act

In addition to carrying out our longstanding core responsibilities, last year’s enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act or the Act) added significantly to the SEC’s workload. The law assigns the SEC considerable new responsibilities, including establishing a new regulatory regime for the multi-trillion dollar over-the-counter derivatives market; registration of hedge fund and other private fund advisers, municipal advisors and security-based swap market participants; enhanced supervision of credit rating agencies and clearing agencies; heightened regulation of asset-backed securities; and creation of a new whistleblower program. The Act mandated an aggressive timetable for rulemaking and implementation of the statute and doubled the agency’s funding authorization over five years.

These new responsibilities, when coupled with those previously existing, required the hiring of additional staff. The Continuing Resolution in place for the first six months of this fiscal year significantly limited our ability to do that. As such, if resources sufficient to carry out our new market protection responsibilities are provided, the SEC will have a need to hire and house an expanded workforce in the future.

Constitution Center

On July 28, 2010, the SEC entered into an agreement to lease approximately 900,000 rentable square feet of office space at Constitution Center,³ an office building located at 400 Seventh Street in southwest Washington D.C, to house new staff necessitated by the Dodd-Frank Act and to address the facilities needs created by expiring leases in Alexandria for its back office operations. The SEC’s agreement contained a 10-year term, and envisioned space being delivered to the SEC in phases, with the first piece expected to be made available at the beginning of fiscal year (FY) 2012. To date, the SEC has not taken occupancy of the building, and has not paid any rent on the property.

In the fall of 2010, when it became apparent that the SEC would be limited by the Continuing Resolution and would not be receiving further funding for FY 2011 to hire additional staff — and in light of significant uncertainty regarding the agency’s budget for FY 2012 — the agency’s leasing branch worked with the Constitution Center landlord to identify two non-appropriated financial regulatory agencies — the Office of the Comptroller of the Currency and the Federal Housing Finance Agency — that were able to take the majority of the space allotted to the SEC, a total of approximately 558,000 square feet. The SEC’s releases that enabled the landlord to lease space to the other federal tenants were conditioned upon the SEC being released from all obligations for the space.⁴

With respect to the remaining space (approximately 342,000 square feet), the SEC earlier this year determined that the uncertainty of the agency’s budget for FY 2012 and beyond counsels against retaining any space at Constitution Center. To this end, SEC staff currently is working with the General Services Administration to help identify another federal government agency to fill the space.

Although the SEC is no longer pursuing any space in Constitution Center, the agency continues to believe that significant additional staff will be required to carry out the new responsibilities assigned to the agency under the Dodd-Frank Act. To this end, the SEC will continue to assess its space needs in the context of its current budget and the overall resources available to the agency.

The OIG’s Report and the SEC’s Responsive Actions

The SEC’s OIG recently reviewed the agency’s leasing process for Constitution Center, issuing a report on May 16, 2011. The report provides a thorough discussion of the OIG’s findings and recommendations, and clearly reveals significant flaws in the process by which SEC leasing decisions were made. As recommended by the OIG, the Chairman directed that I carefully review the report’s findings. Based on the findings of the report, we are moving to implement the report’s recommendations.

Shortly before receiving the report, the Chairman reassigned to me the authority to oversee the OAS. In addition, the Chairman submitted a reprogramming request to the House and Senate Appropriations Committees requesting approval to formally reorganize the SEC to reflect this transfer of authority for overseeing OAS operations. Additionally, the agency has taken, or is in the process of taking, a number of other steps to improve our leasing program and enhance the governance of leasing operations, including:

• Conducting a comprehensive assessment of OAS operations. The SEC is in the process of retaining the assistance of outside experts to conduct a comprehensive assessment of our entire OAS organization, with specific focus on the real property leasing and acquisitions programs. The assessment will examine:
   
  
  • OAS’s organizational structure, including decision-making processes, reporting relationships, quality controls, and staffing levels;
     
  • workforce knowledge, skills, and abilities;
     
  • business processes to identify improvement opportunities, including efficiency, cost reduction, and internal controls;
     
  • policies and procedures to ensure compliance with regulatory requirements and identify risks or impediments to optimal performance; and
     
  • real estate and leasing governance structures to ensure strict compliance and quality controls and ensure appropriate decision-making and approval authorities.
     
  In addition, a risk assessment will be performed to better identify key risks at the operational, process, and activity levels and recommend improvements and cost-beneficial controls. We anticipate that the assessment will be completed by the fall of 2011.
   
• Requiring future leasing decisions to be approved by the COO. Determinations of where to house agency staff are among the most significant financial decisions the agency makes. To ensure these decisions are fully informed and carefully considered, I have directed that all future real property leasing decisions be submitted and approved by me as COO before any leases are signed.
   
• Creating a senior executive-level facilities management oversight committee for leasing decisions. Going forward, no leasing obligations will be incurred or recommended for approval without consultation with a senior executive-level facilities management committee we are in the process of creating. This cross-organizational committee will provide oversight and guidance to the SEC leasing process, and will serve as a forum for executive-level discussion of the agency’s leasing decisions. In addition, we separately have initiated a review, led by the directors of our national enforcement and examination programs, of the SEC’s regional office presence, which will include an assessment of the agency’s location strategy and associated office space needs.
   
• Reducing the square footage allotted to contractors who require office space. Allocation of office space to the SEC’s contractors contributes significantly to the agency’s overall use of space. Earlier this year, we undertook an effort to re-assess the design and allocation of office space to contractors at the SEC’s Washington, D.C. area facilities, and concluded that we could make more economical use of space. We since have taken aggressive action to reduce the square footage allotted to contractors and to consolidate contractor use of space. In some cases, we have assigned five or more contractors to an office that previously might have otherwise been occupied by only one person. These actions have reduced the agency’s overall need for space, and have helped free up space for higher priority uses.
   
• Acquiring a system that automates space planning to enable more strategic occupancy planning and more efficient use of space. With a workforce that includes more than 4,000 staff and contractors spread among 12 major metropolitan areas around the country, it is essential that we improve our ability to manage and support facilities management throughout its entire lifecycle, from planning to acquisition to operations. To this end, earlier this year the SEC initiated efforts to acquire an integrated workplace management system, i.e., information technology software that will permit us to automate and provide more efficient space planning, move management, and asset management. Such systems, available on an off-the-shelf basis and commonly used in private industry as a best practice, should provide managers with significantly more timely and accurate analysis and planning to deliver efficient space utilization at all office locations.
   
• Hiring a new Leasing Branch Chief. The Chief of OAS’s Real Property and Leasing Branch, the position most directly accountable for procurement and administration of the agency’s real property leasing, recently left the SEC. I have made it a top priority to fill this critical position with an experienced realty expert and manager who will work with me to reform and improve the agency’s lease-related decision-making process.
   
• Developing a more clearly defined leasing policy and associated process. We are in the process of developing a new leasing project approval process that will address, among other things:
   
  
  • estimation accuracy;
     
  • the approval process for non-competitive (i.e., sole-source) leasing acquisitions;
     
  • cost/benefit and business case analysis;
     
  • authorized funding availability;
     
  • clear identification of hiring needs with the requisite geographic match; and
     
  • external government agency requirements.

We also will develop and use a “rentable square foot” per-employee space standard that is benchmarked to government agencies and private organizations with comparable missions and needs. Additionally, efforts are underway to develop appropriate performance goals and performance metrics for the real property leasing program.

In addition, the OIG report recommends that the agency, upon a careful review of the report’s findings and a comprehensive assessment of our OAS operations, consider whether disciplinary action should be taken against certain current staff members. The SEC has begun this review in accordance with federal personnel law. At present, the Office of Human Resources and Office of General Counsel are analyzing the investigative report and record and, if warranted, the Director of the Office of Human Resources will recommend appropriate disciplinary action to me. I would then decide any appropriate disciplinary action that should be taken.

Conclusion

In conclusion, the SEC is actively at work on a number of fronts to strengthen the agency’s real property leasing program. Although the SEC has paid no rent on the space and has worked with the landlord to identify substitute tenants, the OIG report identified flaws in the leasing process in need of correction. We are endeavoring to take all necessary and appropriate steps, including implementing new controls and procedures, to ensure that we address the significant issues identified in the OIG’s report.

I would be happy to answer any questions you may have.

¹ Immediately prior to that, I worked for 12 years at Capital One Bank, including as Managing Vice President of Information Risk Management, Chief of Staff for the Chief Information Officer, and as Director of the company’s Information Technology University. Prior to joining Capital One, I was a Lieutenant Colonel in the United States Army, where I served for 22 years, including as Assistant Director of the Army Pentagon Staff and Battalion Commander at the University of Richmond ROTC Program.

² At the present time, the SEC is taking steps to consolidate the COO and ED positions.

³ Constitution Center was the former headquarters of the U.S. Department of Transportation.

⁴ As noted in the OIG report, the agency does not believe any damages are owed to the landlord.

http://www.sec.gov/news/testimony/2011/ts061611jh.htm