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Blog Post | January 11, 2022

Climate Finance Capacity Project: Securities and Exchange Commission

Climate and EnvironmentFinancial RegulationGovernment CapacityIndependent Agencies
Climate Finance Capacity Project: Securities and Exchange Commission

How Climate Change Impacts The SEC’s Work 

Climate change poses a serious threat to everything the Securities and Exchange Commission (SEC) is meant to protect and oversee. The Commodity Futures Trading Commission (CTFC)’s “Managing Climate Risk in the U.S. The Financial System ”report makes this abundantly clear. The report concludes that climate change may “exacerbate existing, non-climate related vulnerabilities in the financial system, with potentially serious consequences for market stability”. Furthermore, the physical and transitional risks of climate change will likely lead to systemic and sub-systemic financial shocks. These shocks would cause “unprecedented disruption in the proper functioning of financial markets and institutions” and further marginalize communities underserved by the financial system. To fulfill its mandate, of maintaining fair, orderly, and efficient markets, protecting investors, and facilitating capital formation, the SEC must proactively ensure there is enough personnel to monitor and enforce regulations that will keep markets stable and adaptable. 

The SEC’s Role In Combating Climate Change

The SEC monitors and addresses the impact of climate change on market stability by reviewing climate related disclosures, and lately has been looking to launch other climate-focused initiatives. 

Number of Division of Corporation Finance Employees470471448455457463477461423404393

Three key divisions within the SEC will be responsible for most of this work. The Division of Corporation Finance is responsible for providing investors with the information necessary to inform investment decisions, providing interpretive assistance to companies concerning SEC rules and forms, and making recommendations to the Commission regarding new rules and revisions to existing rules. The Division also reviews filings to ensure compliance with the applicable disclosure and accounting requirements. The Division concentrates on disclosures that appear to be violating SEC rules or applicable accounting standards, or lack rationale and/or clarity. For the past decade, the Division of Corporation Finance has been reviewing companies’ disclosures, evaluating compliance with disclosure requirements, and engaging with them on Environmental, Social, and Governance (ESG)-related issues including climate change. However,  the 2010 Commission Guidance Regarding Disclosure Related to Climate Change, the framework under which it makes those assessments, has proven insufficient in that it “essentially allows firms to self-determine and report which climate risks are material.” As a result, they have tended to provide vague, inaccurate, and “boilerplate” disclosures. Now, the Division is being asked to update that guidance and enhance its focus on climate-related disclosure in public company filings and address gaps under existing guidance. 

Number of Division of Examinations Employees8548678208879029251,0231,0631,0241,0421,058
Number of Division of Enforcement Employees1,1731,2361,2191,2671,2661,3311,3801,3931,3851,2991,305

The Division of Examinations and the Division of Enforcement recently made announcements of their own in which they pledged to put greater emphasis on climate-related risks. The Division of Examinations is tasked with protecting investors, ensuring market integrity, and supporting responsible capital formation through risk-focused strategies. The Division oversees the SEC’s National Exam Program and conducts on-site exams to provide the most timely, accurate and reliable information to assist the program. The findings from the Division’s examinations are used to inform SEC rule-making initiatives, identify and monitor risks, improve industry practices and pursue misconduct. The Division of Enforcement’s mission is to protect investors, conduct investigations into possible violations of the federal securities laws, and litigate the SEC’s civil enforcement proceedings in federal courts and administrative proceedings. In March, the Enforcement Division created a Climate and ESG Task Force to develop initiatives to proactively identify ESG-related misconduct. 

Furthermore, the Commission selected Satyam Khanna as its first-ever senior policy advisor for climate and ESG. Khanna will advise the SEC on ESG matters and promote new initiatives across its offices and divisions. 

The SEC plans to update their 2010 climate disclosure guidance “to take into account developments in the last decade”. ESG-related disclosures have become an investment and geopolitical priority. The UN Global Compact, the world’s largest voluntary corporate sustainability initiative, has 7,000 signatories from over 135 countries. Investment advisors, asset managers and asset owners, US and foreign Issuers, third party data providers, NGO’s, and proponents of third-party disclosure frameworks all consider ESG information when making investment or voting decisions regardless of whether their investments mandate include an “ESG-specific” strategy. Yet, there is a lack of consistent, material, and comparable information upon which market actors can base their decisions. 

To change this, the SEC should adopt standards by which corporate issuers disclose material ESG risks to supply investors with the transparency and reliability necessary to make informed decisions. The Revolving Door Project (RDP), alongside nearly 60 advocacy groups, also urged the SEC to consider disclosure of political spending to avoid untenable growth of climate and ESG risk within our markets. We also suggested the SEC consider promoting racial, economic, environmental, and climate justice, and more as the agency updates its climate guidance. 

Additionally, RDP has called on the SEC to hire more personnel to effectively implement and enforce these changes. We encouraged a focus on hiring those with climate expertise  to regional offices, particularly regions most affected by climate change. RDP and allies also suggested the establishment of a climate-related disclosure review team within the Division of Corporate Finance and a team that examines investment advisers, registered investment companies, and private funds engaged in ESG investing in the Office of Inspections, Compliance and Examinations. 

These directives, initiatives, and recommendations could facilitate a more thorough understanding of corporations’ contributions to climate change, and in turn help keep markets stable and investors well-informed. However, building and maintaining capacity will be a key factor in the Commission’s success in updating and enforcing climate-related regulation. 


Consequences Of Being Understaffed

Year 201020112012201320142015201620172018201920202021
Number of Total Employees3,7483,8443,7704,0234,1504,3014,5544,6164,4834,3504,4114,484
blank bbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbbb bbbbbbbbbbbbbbb Source: Full Time Equivalents (FTE) numbers from the SEC Congressional Budget Justification Annual Performance Plans for the sub-divisions for the following years:  2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020. Source for 2021: Total SEC Employees number: OPM’s Fedscope. Numbers for June 2021.

On several occasions, the SEC has acknowledged the discrepancy between the size of its workforce and the markets it regulates. As recently as September 2021, SEC Chairman Gary Gensler noted that the agency was understaffed and faced with unprecedented financial challenges. In their FY 2022 Congressional Budget Justification Annual Performance Plan, the agency plainly states that while capital markets have grown, “the SEC has not grown to meet the needs of the 2020s”. Indeed, according to Fedscope data, SEC staffing levels barely grew (by 1.4 percent) from 2019 and 2020 and (by 1.65 percent) between 2020 and June 2021. This is not a recent phenomenon. Looking back at the last decade, the percentage increase in employees miserably fails to match the percentage change in companies the SEC monitors. Between 2010 and 2019, the total net assets of investment companies grew by 108 percent, yet the workforce only increased by 16 percent. 

Hiring freezes have only made matters worse. In October 2016, the SEC instituted a hiring freeze which led to “enormous attrition,” according to co-director of the Division of Enforcement Steven Peikin. He also claimed the Enforcement Division alone lost 200 workers. Then in January 2017, Trump implemented a hiring freeze across the executive branch. Trump’s hiring freeze ended 79 days later in April, yet the SEC voluntarily continued to halt hiring until April 2019

The agency operated with limited capacity for three years, and it shows. According to the Bloomberg Law review, the SEC Enforcement Division, responsible for policing Wall Street, has lost more employees than any other agency group since January 2017 and annual enforcement actions fell by 13 percent. In the U.S. Government Accountability Office (GAO)’s Survey on SEC Personnel and Human Capital Management, 94.2 percent of respondents said the 2017 hiring freeze negatively impacted their division’s workload. 82.7 percent of respondents claimed the hiring freeze negatively affected their division’s ability to meet its mission. A combined 71.2 percent1 of respondents said there was not enough staff to manage the volume of work that needs to be completed. As noted by former SEC Commissioner Robert Jackson “the SEC is a human capital agency,” and staff reductions “means fewer investigations, fewer actions, and, ultimately, fewer dollars returned to investors.”

Inadequate staffing poses a serious threat to the SEC’s regulatory power. Addressing it must be treated as a top priority.  Without action, the SEC staff will likely continue to be overwhelmed by their ever-growing workload, undermining their role in the fight against climate change. In light of these issues, the SEC should make new hiring a priority, including by targeting longstanding obstacles to efficient onboarding. The following recommendations could improve onboarding and ultimately the SEC’s ability to enact and enforce strong climate finance regulation.

Recommendations On How To Improve Onboarding 

This administration and Congress have acknowledged the obstacles posed by inadequate staffing and taken some steps to address it. In its FY 2022 budget proposal, the White House requested a 5 percent increase in funding for the agency. This is below the average budget increase over the past 25 years and falls short of what would be necessary to keep pace with the growth in its regulated markets. Especially considering the inflation rate in 2021 rose to 6.8 percent, the highest it’s been since 1982. Furthermore, Congress has until now failed to pass a new omnibus spending bill that codifies any budget increase. The continued reliance on continuing resolutions has left the SEC operating under Trump-era funding levels for the entirety of Biden’s first year in office. 

  1. Increase funding to avoid future hiring freeze and other harmful policies: The SEC voluntarily implemented disastrous hiring freezes due to budget constraints. To avoid implementing other harmful hiring freezes that increased the workload and undermined the morale of existing SEC employees, sufficient funding should be allocated to the agency. We urge Congress to quickly agree on a government spending plan that surpasses the SEC’s FY2022 funding requests in order for employees to tackle their mounting and ever-important workload. 

Despite these challenges, the SEC can be doing more to accelerate hiring now. Managers at the SEC are struggling to expedite onboarding. 70 percent of managers claimed the hiring process was too time-consuming, and nearly 54 percent of managers said the SEC needed to invest more in the development of new employees. Financial difficulties also reduced hiring rates. The SEC should promptly take the following steps to maximize its potential capacity with available resources and prepare for a successful surge of new hiring when the omnibus spending package is approved. 

  1. Make changes to certain hiring procedures to make the hiring process less time-consuming.
    1. Better utilize Direct-Hire Authority (DHA) for specialized and technical positions: The 2020 Cares Act temporarily granted Direct-Hire Authority (DHA) to the SEC and five other agencies responsible for responding to public health and economic crises caused by the pandemic. DHA refers to hiring authority OPM can grant federal agencies for filling vacancies when there is a critical hiring need or severe shortage of candidates. Federal hiring procedures are known to be slow and inefficient. DHA expedites hiring by eliminating competitive rating and ranking procedures and veterans’ preference for specific positions. Under the Cares Act, the SEC had DHA between March 2020 and December 2020, yet the agency made no hires under DHA during that period. In addition to DHA, under the Cares Act, the SEC has Excepted Service Hiring Authority (ESHA) for specialized positions. Excepted Service refers to federal or civil service positions that are not in the competitive service or the Senior Executive service. Specialized positions include positions that require specialized knowledge of financial and capital market formation or regulation, financial market structures or surveillance, or information technology. With excepted service authority, agencies can set their own qualification requirements While they are still subject to veterans’ preference, they do not have to abide by the appointment, pay, and classification rules in title 5, United States Code. Excepted Service allows agencies to streamline hiring and hire when it is not feasible or not practical to use traditional competitive hiring procedures. SEC staffing numbers suggest that the agency has not sufficiently prioritized hiring and has not taken full advantage of available hiring flexibilities. The SEC should consider requesting Direct-Hire Authority (DHA) for specialized positions, and this time, better utilize it to expedite hiring. DHA for specialized positions within the SEC can be used as a temporary measure to – at the very least – get hiring levels back up to 2017 levels and revitalize the agency’s role in the fight against climate change. 
  1. Make changes to veteran’s preference to make it less confusing and time-consuming: While veterans’ preference can help veterans better reintegrate civilian life, the process of hiring veterans has often been described as confusing and time-consuming. Additionally, veteran turnover rates are high, suggesting that veteran’s preference may be contributing to insufficient and unstable staffing levels within federal agencies. The Government Accountability Office (GAO) found that veterans resigned 1.6 times more than their non-veteran counterparts. GAO also found that 18.7 percent of veterans left within their first 5 years compared to 11.1 percent of non-veterans. Changes must be made to the veterans’ preference programs to remove barriers to quick and effective hiring. Former Department of Homeland Security Chief Human Capital Officer Jeff Neal suggested shifting the veterans’ preference from being embedded within the competitive hiring process and instead give, “every agency in the federal government direct hiring authority for any veteran, for any position for which they’re qualified for.” However, this would require statutory action and might take time to implement. To clarify, changes should not eliminate a veterans’ preference. Rather, enacted reforms should ensure it is done well and enable hired veterans to remain and thrive in the federal government. 
  1. Increase of the Pathways Program to attract more entry-level talent: The Pathways Program is a series of entry-level hiring authorities for early career professionals and interns. At the end of their program term, pathways program participants will be eligible for conversion into a permanent position in the career civil service. A 2016 study of the program found that pathways participants transitioned into career roles at a very high rate. Tapping the pathways program will boost hiring rates in the short- term and address the issue of an aging federal workforce. Given that the prgram targets young professionals, it could also help increase diversity within the federal workforce as post-millenials are more racially and ethnically diverse, and employees of color are more likely to face workplace discrimination
  1. For in-demand jobs, create a centralized database of promising candidates who were not selected for the job to which they originally applied: Many competent candidates will not ultimately be selected for their desired position. OPM should establish a system to retain these candidates in a centralized database that other agencies can access. Access to such a database will allow hiring committees across the federal government to save time and reduce their workload.

Invest in career development opportunities to better integrate and retain new employees: Close to 54 percent of managers wished the SEC invested more in the development of new employees. Given that human capital is the SEC’s most important asset, it is only natural to offer more ongoing professional development opportunities. For instance, the SEC could collaborate with the OPM to find Federal Government Leadership Development Programs (FedLDP) that will allow its employees to reach their full potential and incentivize them to remain at the SEC.

1Percentage of respondents who responded to prompt 1h. “My division/office has enough staff to manage the volume of work that needs to be completed.” with “somewhat disagree” and “strongly disagreed”.

Climate and EnvironmentFinancial RegulationGovernment CapacityIndependent Agencies

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