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U.S. Securities and Exchange Commission

Testimony Concerning H.R. 1836, the "Civil Service and National Security Personnel Improvement Act"

William H. Donaldson

Chairman, U.S. Securities and Exchange Commission

Before the House Committee on Government Reform

May 6, 2003

Introduction and Summary

Chairman Davis, Ranking Member Waxman and Members of the Committee:

Thank you for inviting me to testify before you today, on behalf of the Securities and Exchange Commission, in support of Title III, Subtitle A of H.R. 1836, the "Civil Service and National Security Personnel Improvement Act." Although I have been at the Commission only since February 18th, I look forward to continuing and building on the strong and cooperative relationship that our Agency has developed with this Committee in the past as we work together on the SEC's resource needs to implement the Sarbanes-Oxley Act and fulfill all of our statutory duties. This is a critical time for the agency and the way we address the challenges before us will determine not only where we go tomorrow, but for years to come. Prominent among those challenges facing the Commission today is the threshold issue of the adequacy of its own staffing level. I thank you, Mr. Chairman, for your leadership in this vital area, leadership that would allow the Commission to move forward at full strength.

Given our task of implementing the Sarbanes-Oxley Act, our mission in overseeing our financial markets, and our role in restoring investor confidence during these difficult times, putting additional "cops on the beat" more quickly to accomplish our goals is absolutely vital.

Dramatic changes have occurred in the Commission's personnel environment during the past year. Thanks in large part to the efforts of this committee, the Commission has been granted the authority to pay its staff higher salaries, and to provide additional benefits. We have also received increases in our appropriations sufficient to fill over 800 new positions. While the new pay authority and higher appropriations funding have greatly eased the Commission's crisis in hiring and retaining attorneys, substantial difficulties still remain in our efforts to hire accountants, economists and securities compliance examiners.

In our experience, the reason for this distinction between attorney hiring and hiring of other Commission professionals is clear: while the hiring of Commission attorneys is excepted from civil service posting and competitive requirements, the hiring of Commission accountants, economists and securities compliance examiners is not. When we are filling a vacancy under competitive service requirements, the process can take months to complete. Under excepted service authority, the hiring process can be completed in a few weeks' time because hiring officials get to the interview step much more rapidly. Allowing the Commission to hire accountants, economists and securities compliance examiners in the same way we hire attorneys will give us the critical tools we need to fill these positions far more quickly, allowing the Commission to meet the challenges of our mission with the full resources that Congress intended.

The provisions of H.R. 1836 pertaining to the Securities and Exchange Commission would provide much needed authority to the Commission in its effort to expedite and simplify the hiring of accountants, economists and securities compliance examiners. Those provisions are substantially similar to those introduced by Michael Oxley and Richard Baker in H.R. 658, the "Accountant, Compliance, and Enforcement Staffing Act of 2003," which passed out of the House Financial Services Committee on March 26, in compromise form, with bi-partisan support. The compromise was reached after cooperative work with our union, the National Treasury Employees Union (NTEU), and the authorizing committee. It accomplishes the Commission's hiring objectives without loss of any of the civil service protections of employees in the competitive service. (See attached joint SEC/NTEU letter of support.) The Commission appreciates that H.R. 1836 respects this compromise, and keeps in tact those provisions we all worked hard to craft in a way that all parties can support.


In January 2002, the Commission received its long sought "pay parity" authority as part of the Investor and Capital Markets Fee Relief Act.1 This authority allowed us to implement a new pay scale in May 2002 that compensates all Commission employees with salaries commensurate with those paid by other federal financial regulators. This authority is helping to attract the highly qualified personnel we need and to stem the long-term drain of our most talented and experienced staff members. Additionally, after passage of the landmark Sarbanes-Oxley, in August 2002, as part of the Fiscal Year 2002 Supplemental Appropriations Act,2 the Commission received a supplemental appropriation of $30.9 million, of which $25 million was earmarked for the purpose of filling 125 additional staff positions.

As expected, the combined effect of these two pieces of legislation has already had a profoundly positive influence on our ability to hire and retain attorneys. Nearly all of the attorney positions funded by last year's Supplemental Appropriations Act have been filled at this time. However, our experience in hiring accountants -- who comprise the bulk of the additional new slots from the supplemental funding -- has been far less successful. So far, despite our best efforts, only a few more than half of the new accountant positions funded with last year's Supplemental Appropriation have been filled. We are greatly concerned that without legislative assistance the struggle to fill positions will only intensify in the future. On February 20, 2003, the President signed into law the Consolidated Appropriations Resolution, providing the Commission with a Fiscal Year 2003 appropriation of $716.4 million, over $278 million more than our Fiscal Year 2002 appropriation. The Commission is expected to use these funds primarily to increase staff by another 700 positions this fiscal year, the majority of which will be accountants, economists and securities compliance examiners.

Specialized Experience Needed

The nature of the Commission's work requires that we seek highly skilled individuals who often are at a point in their careers where they have a number of employment options available to them. Our task is therefore hindered by the slow speed and inflexibility of the competitive service hiring process. We have, time and time again, seen the best applicants for accountant, economist and securities compliance examiner positions snapped up by competitors before the Commission has reached the point in the rigid competitive service hiring process where it can make them an offer. In marked contrast, this rarely happens with attorneys. Simply put, if we want an attorney, we can make them an offer almost as fast as any other employer can.

The Commission's efforts to hire accountants under our existing authority are particularly complicated by the special caliber of accountants that our mission demands. Most other federal agencies hire only a handful of accountants, for the limited purpose of keeping the agency's own books and records. However, in order to perform the complex task of ensuring the adequacy of disclosures by public companies, and to review the books and records of broker-dealers, investment advisers and mutual funds, the Commission must maintain a staff of hundreds of accountants, most of whom must have specialized experience in auditing or preparing the financial statements and reports of public companies. The Commission cannot maintain the high standard of professionalism that the investing public deserves by hiring accountants immediately out of school and expecting them to acquire their skills and experience "on-the-job" at the Commission. The learning curve is too steep, and our workload is too great.

Our difficulties in shepherding experienced, in-demand people in mid-career through the lengthy competitive service applications process are not limited to accountants. The complexity of the issues that Commission staff comes into contact with on a daily basis also mandates a similar level of skill and experience in our economists and securities compliance examiners. Often, the best candidates for securities compliance examiners are those with industry experience. Securities compliance examiners inspect broker-dealers, investment advisers, and mutual funds for compliance with the federal securities laws. There is no substitute for having been on the other side of the fence when it comes to performing effective compliance examinations. As for economists, they analyze the impact of regulations to assist rulemakers in adopting the most cost-effective regulations, as well as assist with enforcement and other administrative tasks of the agency. The work of economists is highly specialized, and there is only a relatively small pool from which to hire in the first instance. Moreover, we must compete not just with the corporate world, but also with think tanks and academia for economists who qualify to do our work.

We believe the solution to these problems is to allow us to hire accountants, economists, and securities compliance examiners as we have successfully hired attorneys for years. We therefore support legislation to allow the Commission to hire accountants, economists, and securities compliance examiners using the excepted service process.

Hiring Process is Cumbersome and Time-Consuming

The procedures required for hiring under the competitive service system have proven unduly time-consuming and inefficient. A position is usually posted for two weeks, and then several days are allowed to elapse in order to be certain that all applications have arrived in our Office of Administrative and Personnel Management (OAPM). After OAPM sifts out the obviously incomplete and unqualified applications, a rating panel in the division or office that is seeking to hire must first review and rate qualified applicants, based solely on their written applications. The rating panel in the division is made up of three or more professional staff who are at or above the grade level of the job posted. These professional staff, often managers, must set aside the regular duties of their jobs and spend up to two days at a time rating the applicants' resumes.

After the division's work in this phase, the file of applicants goes back to OAPM where, based on the ratings given by the division, staff members check the work of the division, and then send the top three to five candidates back to the division. Then, yet another panel of selecting officials in the division or office may begin the process of setting up interviews with these candidates to determine if one is suitable for hiring.

Beyond the cumbersomeness of the process, managers hiring for these positions have found that the rating process often favors not the best candidates, but those most familiar with how to fill out the relevant application with keywords and phrases used by the various panels in rating the candidates against specified criteria. Also, because the hiring panel only sees the three or five candidates identified by the rating panel, they may never see candidates who are otherwise highly qualified, and perhaps better suited for the job, but who were not rated among the top candidates under the ground rules of the rigid competitive service process. This process, even when it works well, can take several months to complete, but if none of the top ranked candidates proves satisfactory, the position is often reposted and the selection process starts all over again. In contrast, under the excepted service process, the hiring panel can simply review all the applications and interview all candidates whom they believed are highly qualified.

New Employees Would Retain Competitive Service Status

Although H.R. 1836 would allow the Commission to use the streamlined excepted service process to hire accountants, economists and securities compliance examiners, employees hired for these positions would be considered members of the competitive service for all other purposes, including full civil service rights and protections. These include veteran's preference, bargaining rights and union representation, health care options, EEO rights, and retirement and leave benefits. Their rights will also be the same as other competitive service employees with regard to appeals to the Merit System Protection Board, transfers between agencies, and the conduct of reductions in force. In short, the experience of employees hired under this new authority will be no different from their predecessors, except for a manifestly smoother hiring process.


The proposed legislation allowing the Commission to use the excepted service process in hiring for certain specialized positions is not unprecedented. Congress has already placed specialized employees of other agencies in the excepted service. For example, Congress has placed health care professionals (including doctors, dentists, and nurses) employed by the Department of Defense in the excepted service, along with Defense intelligence employees, employees in the Office of National Counterintelligence Executive, employees in the Department of Education's Performance-Based Organization for federal student financial assistance, and air traffic controllers hired through the FAA's College Training Initiative Program. Indeed, Congress placed all of the employees of the FBI in the excepted service.

In short, the Commission believes that its needs are significant and extraordinarily time-sensitive-we are trying to fill over 800 positions by the end of this fiscal year and to date have experienced serious difficulties in filling "mission-critical" positions for accountants, economists and securities compliance examiners. Thus, to be competitive in the hiring market, we believe we would greatly benefit from passage of H.R. 1836, granting excepted service hiring authority for those positions.

I appreciate the opportunity to share the agency's needs and concerns with you here today, and we look forward to working with you to solve this important problem.


1 Pub. L. No. 107-123, 115 Stat. 2390 (2002).

2 Pub. L. No. 107-206, 116 Stat. 820 (2002).



Modified: 05/07/2003