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An Open Letter to the SEC Staff

Commissioner Daniel M. Gallagher

U.S. Securities and Exchange Commission

Washington, D.C.

Feb. 21, 2014

Thank you, Norm [Champ].

Over the years, I've heard many quips and remarks about the name "SEC Speaks," including suggestions that a better title for this conference would be “SEC Squeaks."  One thing I've never heard, however, is the simple question, "To whom?”  If the SEC is speaking, who is listening?  More importantly, who do we want to listen?  I won't try to answer these questions today - after all, one of the great joys of being a Commissioner is that I can raise all kinds of questions, and then simply look to the staff for answers.  On that note, I'd like to take the opportunity at this event, one of the premier venues for the Commission to communicante, to speak to the SEC staff.  Directly, Commissioner to staffers.  And so, I would like to read to an open letter, a sincere letter, which I have penned to the SEC staff.

To the SEC Staff:

I have been a Commissioner for over two years now and, as many of you are aware, I too served on the staff – including a stint as a summer intern - before becoming a Commissioner.  In both of those capacities, I've come to know a significant number of you.  I wish I could say that I’ve met everyone, but I still have some work to do on that front.  As a Commissioner, I've had the privilege of coming to know many of you who were friends and colleagues while I was on the staff even better, and to see you perform – and excel – in various settings.   

After living through the financial crisis as a member of the SEC staff, working through critical issues under difficult political and economic conditions, I didn't think my regard for the talent and dedication of the staff could get any higher.  But after seeing you in post-crisis mode, working through incredible challenges, balancing the work of existing programs and congressional mandates, I see now that I was wrong — my admiration for the staff has only grown    You are often told how excellent you are, and sometimes the sentiment is actually sincere.  The truth is that, generally speaking, you really are an amazing group of public servants.  Your passion for the mission of the agency and genuine concern for the well-being of investors is as exceptional as it is admirable. 

I’m very cognizant of the impact that the crisis and related policy and administrative responses have had on the esprit de corps that has for so long been a hallmark of the SEC.  Despite modest recent gains, the SEC still ranks far too low in federal employee job satisfaction surveys, which troubles me greatly.  These low marks represent a horrible turnaround from the very high rankings the agency garnered pre-crisis, when according to surveys it was considered one of the best places in the federal government to work. Low staff morale is, in a very real sense, an existential threat, because a mission-driven agency like the SEC depends on staff enthusiasm and engagement to do the work of the agency and fulfill its mandate effectively.  I believe it is incumbent upon the Commission to take this morale issue very, very seriously.  We cannot simply look at the year-after-year miserable workplace satisfaction rankings, shrug them off as the inevitable fallout from the financial crisis, and turn back to whatever morale-draining, congressionally mandated rulemaking we're focused on at the moment. 

I'd like to take a few minutes today to offer some observations that I hope will get a conversation started on how to return the SEC to the top of the best-places-to-work rankings - and, in doing so, enhance our ability to carry out our mandate.

One thing I know for sure, having been at the agency both at the pre-crisis market high and at the mid-crisis market low, now - with the Dow over 16,000 - is the best time to have this conversation.  After all, as those of you who also were at the SEC back in 2008 and 2009 know, our jobs get a lot harder — and we are faced with much more scrutiny and criticism — when the market drops.  To quote President Kennedy, speaking in early 1961 after the failed Bay of Pigs invasion, "Victory has 100 fathers, but defeat...well, that's the SEC's fault."  Or at least that's what he might have said had his Dad not been the Commission's first Chairman.  What he actually said was that defeat was an orphan.  Throughout the financial crisis, the SEC was uniquely singled out for blame while other agencies, whose failures were often masked by the opaqueness of their operations or mitigated by their use of fiscal and regulatory tools not wielded by capital markets regulators like the Commission, emerged from the crisis with enhanced power and even prestige.  So, before we get sucked into the next crisis, let’s reflect on how we got to this point and — more importantly — how we can improve.

To the entire staff

Most of you were with the agency during the financial crisis in 2008.  Like me, you heard policymakers - from both parties, I'll note - and various so-called experts screaming publicly and loudly for change at the SEC.  You felt the intense media scrutiny about the SEC’s role in the events leading up to the crisis – much of which was based on misinformation and spin from policymakers.  You watched congressional hearings in which the Commission’s reputation was dragged through the mud, including by those who should have been leading the agency’s defense.    All of this was in the quest to pin the blame on someone, some entity, for the cataclysmic events that unfolded in 2008. 

Despite all of the clamor, despite a multi-thousand page legislative response to the crisis, and despite the scores of reports and books that have been written about the crisis, we have never had a true and honest debate about the SEC’s role in it.  And that is for two reasons: first, the discovery of the Madoff fraud in December 2008, right in the midst of the financial crisis, confirmed for many the convenient and then all-too-common narrative that the SEC was simply inept.  The Madoff fraud shook the agency perhaps like nothing before or since, as it truly called into question a matter of core competency.  No one should understate the magnitude of that failure, one that the agency must never forget.  But we cannot let it keep us down.  The Commission took ownership of this failure and has taken a large number of meaningful steps to address the Madoff fraud and our inability to unearth it. 

However, as the call for the SEC to be the proverbial cop on the beat swinging a baton on every corner grows louder every day, we also need to be realistic with our aspirations and honest with investors.  We cannot foster a nanny state ideal of securities law protection in which all investment decisions are insured and the government shields investors from all harm.  Capital markets are risk-taking markets, and unfortunately a risk as old and as certain as time is that where there is opportunity, there will be unscrupulous characters trying to take advantage. 

The second reason why there was no honest debate about the SEC’s role in the crisis is simply that it was politically inconvenient to aggressively investigate and understand the actual causes of the financial crisis.  The congressional response to the crisis, the Dodd-Frank Act, is a 2,319 page monstrosity that is in substantial part untethered to the causes of the crisis.  The congressional response to the 1929 stock market crash post-dated and built upon the extensive investigations and hearings into the causes of the crisis headed by former Manhattan district attorney and future SEC Commissioner Ferdinand Pecora.  The Dodd-Frank Act, in contrast, pre-dated the findings of both the Congressionally-mandated Financial Crisis Inquiry Commission and the Senate's Permanent Subcommittee on Investigations.  In short, Dodd-Frank was an almost purely political response to a real world crisis.  Not surprisingly, then, Dodd-Frank is premised primarily on the largely false but highly convenient narratives about regulatory failures, including those of the SEC, without any reference whatsoever to the policy failures behind the crisis.  I guess it should be no surprise that a law created by a congressional majority and signed by the President would not take the legislative and executive branches of our government to task for their massive housing policy failures. 

In the months preceding the passage of the Dodd-Frank Act, a team of SEC staffers conducted almost nightly real-time reviews of draft legislative language and provided congressional staff with suggested edits in an effort to ensure that the final bill provided meaningful, investor-focused reform.  These efforts, however, were impeded from the start and throughout the process by the lack of will on the part of those with the authority to defend the SEC against the false narratives and political agendas that were so obviously driving the Dodd-Frank process. 

It would be easy for today’s Commission to say, “Well, we lost that one,” and choose to avoid further introspection about the SEC’s role in the crisis.  In the same vein, we could pretend that the Dodd-Frank Act was an actual and meaningful response to the financial crisis and to assume, therefore, that its implementation will mean a safer financial system not prone to future crises.  In order to stay true to our mandate, however, we simply cannot do either, and it is long past time to push back on the false narratives that impact so dramatically the future of the agency, the economy, and our country.  The SEC must regain its seat as an equal partner at the all too large table of financial services regulators.   

To the policymaking staff in various Divisions and offices

You have borne the brunt of the Dodd-Frank mandates for the past three and a half years.  You have done so with vigor and dignity, even when working on mandates that we all know are political and - at best - irrelevant to the mission of the agency.  And you have done so while being forced to give short shrift to the vitally important programs for which you are responsible and were responsible for long before Dodd-Frank. 

As I find I often have to explain to people, despite its extreme breadth, Dodd-Frank did not eliminate the securities laws, it simply amended them. The SEC still has a day job, and that is the administration of the federal securities laws that have grown exponentially in size and scope since the agency was founded almost exactly 80 years ago.  The programs we have created as a Commission, and which the staff run on a daily basis, are our lifeblood.  They are immensely important to the markets and to the market participants we are charged with overseeing.  They are important to investors and the U.S. economy.  Crucially, they too, like our Dodd-Frank rulemakings, are direct responses to congressional mandates.  They cannot be ignored. 

When we neglect our obligation to update our rulebook and programs, we often find ourselves inviting further congressional mandates, such as was the case with the JOBS Act.  And, if we simply put our heads down and rotely implement each and every remaining Dodd-Frank mandate, it would take us over five years even at an unprecedentedly aggressive rulemaking pace.  At the end of that period, I promise you, the agency would be a shell of its former self ranking at the very bottom of best-places-to-work surveys, and its jurisdiction would be overrun by bank regulators who want nothing more than to de-risk our capital markets to the detriment of investors and the U.S. economy.

I hope and expect that the Commission will weave a healthy dose of our “day job” into this year’s agenda.  We saw some limited bright spots in 2013 with the finalization of the so-called “Onnig Amendments” to the broker-dealer capital and customer protection rules.  These amendments had languished in the proposal stage for seven long years, and that is a travesty.  In 2013, we also saw the publication of FAQs on our rules addressing failure to supervise liability as well as on Rule 15a-6 and foreign broker-dealers, and the agency hosted critically important roundtables on fixed income markets and proxy advisory services.  In 2014, we should build upon these accomplishments by taking on such critical projects as reviewing our corporate disclosure regime, undertaking a holistic review of U.S. equity market structure, and effecting reform in the fixed income markets and proxy advisory space.  We should also identify and address other aged rule sets uch as the transfer agent rules, and we should finally begin the process of formal retrospective reviews of all of our rules.  I hope and expect that Reg NMS will become the poster child for that process.

As was the case for me, I believe that these are the types of meaningful, investor-focused projects that led many of you to join the agency in the first place.  Put simply, the basic blocking and tackling work of the SEC is also the most rewarding work we do.  It offers you, the staff, a keen sense of job satisfaction.  Political endeavors such as the extractive resource disclosure rules have the opposite effect - unless, perhaps, you are an appellate lawyer looking to hone your skills in court.

To the Enforcement and OCIE staff

The staffs of our Enforcement Division and Office of Compliance Inspections and Examinations are among the most committed public servants I have worked with.  You suffered more than most with respect to the Madoff fraud, and that is unfortunate.  The failure of the few should not besmirch the excellent work of the many, but that is exactly what happened.

Those of you in Enforcement deal with adversity every day.  You are constantly going up against high-powered and often deep-pocketed defense lawyers, dealing with dishonorable miscreants, and carefully navigating the often treacherous internal processes – and difficult personalities – that stand between you and Commission approval for the projects on which you toil.  There have been many changes to the Enforcement Division over the last 5 years.  Most of them, I believe, make good sense.  Some changes, however, were inappropriate, and many were made to address false narratives about the Division created and propagated by those who should have known better - or did know better, but chose to allow political considerations to stand in the way of doing what's right.   And we cannot forget the impact on the Division of the recommendations made years ago in several Inspector General reports, including the headline-seeking charge that the Division was “handcuffed” by the Commission, a politically convenient “finding” which was quickly and conveniently adopted as a political sound bite and with which I wholeheartedly disagree.  I saw no handcuffs when you consistently, year after year, successfully gained Commission approval for solid recommendations that properly acquitted our mission and gave force to our rulebook.  Such  commitment to the work of the Commission and the Division to me is best exemplified by long time public servants like Scott Friestad, who for 19 years has been consistently producing high quality and programmatically important cases for the Commission. 

Regardless of the rationale for past changes, the Commission must be vigilant to ensure that each reform continues to make sense as time goes by, and we should not resist refinements or additional reforms if they become necessary. 

Those of you in OCIE are faced with the task of overseeing nearly eleven thousand investment advisers with no SRO and minimal increases in staff resources.  What could possibly go wrong with that?  Nevertheless, you have adapted the best you could and have come up with clever ideas to maximize the resources you do have.  OCIE’s staff-led efforts to maximize the use of technology have been nothing short of incredible.  Hopefully, someday soon politics will be put to the side and this unfunded mandate to oversee thousands of new registrants, most of whom cater exclusively to sophisticated investors, will be addressed by Congress. 


As the newest Division, DERA has not had to endure restructurings or other reforms in recent years.  A much needed renaming, yes, but otherwise DERA has effectively operated as a startup within an 80-year-old government bureaucracy.  But we all know that the role of economists has been a common concern at the SEC for decades, and – to be blunt — the role was not what it should have been until a couple of years ago. 

Economists are now a vital part of our policymaking, enforcement, and examination processes.  And the work product proves that out — we are, quite simply, conducting more sophisticated analyses of issues before we act on them, through rulemakings or otherwise.  And, we are finally fulfilling the need to, as my friend and former colleague Troy Paredes used to call for all the time, “prove our work.”  I am thoroughly impressed by all of you – the economists, the lawyers, and the rest of the DERA staff – and  the work you do for the Commission, and I look forward to continuing to work closely with you on all matters critical to the Commission, the markets, and investors.  I would be remiss if I did not take this opportunity to personally thank Craig Lewis for the much-needed work he has done to remake and professionalize the Division.  Craig will be missed, but he has built up a substantial bench of talented staff who are ready and able to continue his great work — a hallmark of the type of effective leadership Craig has provided throughout his tenure.


Before I conclude, I must emphasize that while time — not to mention audience attention spans — don't allow me to single out every division, office, and function for praise, I fully appreciate the work that all of you do each day that helps us fulfill our mission.  You have all felt the impact of the issues I've discussed today, and I hope for your sake that we can make real, and rapid, improvements on your experience and better equip you to perform your jobs to the best of your abilities.

I appreciate the opportunity to speak to the SEC staff today, and I wish all of you an informative and enjoyable conference.  Thank you.

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