WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission is spending millions of dollars on consultants to streamline the agency, but SEC insiders and at least one lawmaker are questioning whether the SEC is getting its money’s worth.
At a time when the SEC is fighting Congress for more funds, some agency employees are concerned that the SEC has spent over $8.5 million in just under a year on dozens of consultants from Booz Allen Hamilton to advise on reforming workflows and back-office operations, according to documents and people familiar with the matter.
Booz Allen consultants are costing the SEC anywhere between around $100 an hour to over $300 an hour depending on the person’s position, according to internal documents reviewed by Reuters. The number of consultants on site fluctuates each month, but it has ranged from four to 77.
At times, the burn rate has been as high as $1.4 million per month, although now it is down to about $700,000, according to documents and people familiar with the matter.
A spokesman for Booz Allen Hamilton acknowledged the company is under contract with the SEC, but declined to discuss the details about the work being performed.
The SEC has acknowledged the need for an internal facelift.
Government watchdogs found in a 2010 report that the SEC had “material weaknesses” because of information security problems, errors in accounting for penalties, and bad reporting of its obligations, among other problems.
The SEC is trying to clean up its act.
While it is known for watching over the health of financial markets and the honesty of publicly traded companies, it is like a massive corporation of its own.
It has roughly 3,500 staff scattered across the United States and must maintain information technology systems, leasing operations and other back-office functions.
In May 2010, SEC Chairman Mary Schapiro hired the agency’s first-ever chief operating officer, Jeff Heslop, who previously was in charge of information risk management for Capital One Financial.
Also, as part of a review required by the 2010 Dodd-Frank financial oversight law, the SEC brought in the Boston Consulting Group to examine SEC operations and structure and issue a report suggesting reforms.
The Boston Consulting Group report, which cost the SEC roughly $4.8 million, urged the agency to re-prioritize its activities, reshape the organization, invest in the proper infrastructure and bolster its relationship with self-regulatory organizations. A spokesman for the Boston Consulting Group declined to comment.
Now Heslop is overseeing the contract awarded in May 2011 to Booz Allen to oversee the follow-up work to the BCG report, known internally as the “Mission Advancement Program,” or MAP.
Although Dodd-Frank did not require the SEC to hire consultants to conduct the follow-up work, it does put the agency under pressure to show progress to Congress every six months.
In an interview, Heslop said hiring Booz Allen was essential because the SEC simply did not have the manpower or experts on hand to conduct the follow-up work.
“It wasn’t like we had a bench of people we could turn to,” Heslop said. “The only way we could have done it is to pull people off existing roles of conducting enforcement investigations and examinations where they were already choking on the work.”
The SEC said the consultants’ unique skills and employment arrangements justify the pay premium - the consultants are being paid on average $140 per hour compared to $93 for SEC staff.
The Boston Consulting Group’s report had also warned that the recommended reforms would come with a fairly hefty price tag.
It estimated it could cost somewhere in the neighborhood of $50 million to implement many of the reforms, with a good portion of that money going toward technology improvement projects.
“We’ve not spent anywhere near that,” Heslop said of the Boston Consulting Group’s total estimate. “And we’ve not had to pull any enforcement or examinations staff off their jobs and they’ve helped us identify millions of dollars of savings.”
It is routine for government agencies to seek the expertise of large consulting firms, such as Booz Allen.
But some critics have doubts about the project, and they fear the Booz Allen work has ballooned with little oversight or much to show for what has been accomplished so far.
“If they’re not careful, agencies can spend billions of taxpayer dollars on outside studies and contractors and have nothing to show for it,” Republican Senator Charles Grassley said in an emailed statement to Reuters.
“The SEC appears to be headed down this path in hiring a consultant to implement another consultant’s work. The onus is on the SEC to make sure outside consultants deliver useful products and pull the plug when necessary,” Grassley added.
Booz Allen is not only working on the MAP project, but has a handful of other contracts with the SEC. One contract, for instance, involves a review of financial statements by public companies in over-the-counter markets. Another is to help the SEC with business processes associated with the handling of disgorgement and penalties.
The Booz Allen work has caught the attention of some investigators in the SEC’s inspector general’s office.
According to one person familiar with the matter, investigators there have been asking questions about what kind of work the company is doing and whether it is necessary.
Where those inquiries may lead is unclear.
The Booz Allen spokesman declined to comment on the inspector general’s inquiries.
The SEC’s inspector general’s office also declined to comment.
A U.S. House appropriations panel is tentatively scheduled to review the SEC’s budget request on March 6. Congress controls the SEC’s budget, although the agency’s expenses are covered by fees it charges companies.
The Obama administration has asked Congress to boost the SEC’s $1.321 billion budget by 18.5 percent for the year ending September 30, 2013. The SEC has said the increase is necessary to help the agency strengthen its enforcement and examination programs.
Also in March, the SEC is expected to deliver a report to Congress updating lawmakers on the progress of the internal reforms.
In the roughly 10 months since Booz Allen was hired on the MAP project, it has established a program management office to help oversee 18 different working groups. Each group is headed by one or more senior SEC officials and aims to improve the agency’s structure and business processes.
One group, for instance, was assigned to study ways the agency can bolster its staffing during a crisis period, such as during another “flash crash” like the one seen on May 6, 2010. Another group looked into cost-saving measures.
The groups report to a steering committee headed by Heslop which votes on the recommendations and then refers them to Schapiro’s office for a final decision.
Booz Allen’s job has been to run the program management office, manage the different working groups, provide expertise when needed, and help keep SEC staffers in the loop about the project.
Since the project started, Heslop said the results have already given the SEC a “return on investment.”
It uncovered between 700 and 900 wireless cards costing the SEC $43 a month that are not being used. It also shut down an underutilized shuttle service that was costing $14,000 a month.
“We definitely have tangible, hard saves that can offset this $8 million” spent on the Booz Allen contract, Heslop said.
Not everyone is convinced, however, that so many consultants are warranted.
“(Heslop) has spent millions,” said one SEC employee who is familiar with the contract. “I think the concern is why in the world are we bringing all of these Booz Allen folks in here and paying them all of this money to do this work when Jeff Heslop should be able to figure out how to do this.”
Jonathan Katz, a former long-time SEC secretary who helped coordinate the work of the agency’s commissioners, has authored reports proposing SEC structural reforms on behalf of the U.S. Chamber of Commerce, and has closely followed the SEC’s progress in implementing reforms.
He said the money spent so far does not seem excessive, unless it turns out that the agency is not getting a lot in return.
“Spending less than one percent of the budget to rebuild an infrastructure that has serious flaws is not very much money, but the question is what are they getting for the money they are spending?” he said.
In addition to disagreements over the necessity of the work, SEC staffers are also raising questions about how the contracting process for Booz has been handled.
Booz Allen won the contract over SAIC and IBM, the two other companies that were eligible to compete for the work.
Last year, several people familiar with the matter say, Heslop tried to direct staff to expand the scope and size of the Booz Allen contract by millions of dollars without opening it up for new competition among the other two companies.
In one November 2011 e-mail, Heslop inquired about raising the amount of the contract to pay for ongoing work, saying, “It was my understanding we could exceed total contract value to some degree, as long as it was not excessive.”
That rubbed some SEC employees the wrong way, both because the value could not be exceeded and also because they felt the contract was structured to only cover planning - and not implementation - to avoid a conflict of interest.
“A contractor should not be allowed to be in a position where they are allowed to call the shots where they get to put their private interests ahead of the public interest,” said Neil Gordon, an investigator who specializes in contracting for the non-profit Project on Government Oversight. “Their own profit motive takes precedence over the public good.”
Heslop said he believed it was important for the sake of consistency to have one firm do the restructuring work. He said the contract was written broadly enough to cover the entire scope of the project and that he did not initially realize the contract had a financial cap.
“I had asked that it be set up so that we ride one horse from the beginning to the end, and I thought that is what we had, and shame on me because I didn’t get down into the nitty gritty details of the contract to figure out they had put a $12 million cap on this thing,” Heslop said.
The SEC has launched a new competition among bidders to complete the reform work.
Editing by Tim Dobbyn and Muralikumar Anantharaman