SEC facing 'death by 1,000 cuts,' professors warn

The Securities and Exchange Commission has reduced employee headcount via voluntary buyout and retirement offers in the first two months of the Trump administration, a move experts say will likely slow down the regulatory process and potentially impact the SEC’s oversight capabilities.

“The agency has lots of choices about how it wants to serve the public interest,” said James D. Cox, a professor at the Duke University School of Law. “And one thing is that before we start whacking at the staff and resources of the agency, we ought to first be having this conversation about what we want to do.”

The SEC at the end of February sent an email offering eligible employees a $50,000 incentive to resign or retire by April 4. About 500 staffers representing about 10% of the SEC's roughly 5,000 employees accepted the offer, according to Bloomberg. The offer was a voluntary separation incentive or voluntary early retirement program is for employees on the agency’s payroll before Jan. 24., and the deadline to apply was March 21.

Cox, who once had SEC acting Chair Mark Uyeda as a student, is concerned the SEC is on a dangerous path.

Cox co-authored a piece earlier this month with four other law school professors — John Coates of Harvard University, John C. Coffee, Jr. of Columbia University, Merritt B. Fox of Columbia University and Joel Seligman of the University of Washington in St. Louis — stating, “We fear that we are watching the SEC face a death by 1,000 cuts.”

The professors said the SEC is on the verge of being shrunk by both budget cuts and mandated staff reductions, while losing its traditional independence. They pointed to an executive order President Donald Trump signed last month expanding White House control over federal agencies, including the SEC.

“The end result might be a shell of its former self, as the SEC becomes an agency with little power, capacity, or independent judgement,” the professors wrote.

With respect to Trump’s executive order, some business groups welcomed the change, including the American Securities Association whose President and CEO Chris Iacovella said in a statement that he applauded “the president for rightfully re-asserting the executive’s power over the SEC."

When it comes to staffing, the agency starting April 14 is requiring all employees to return to the office, a move that has led some remote workers to accept the buyout or early retirement offers, according to Christian D. H. Schultz, a partner at Arnold & Porter Kaye Scholer LLP and former assistant chief litigation counsel in the SEC's enforcement division.

Looking ahead, Schultz said he doesn’t expect many more departures. “The people who are there are really committed to the mission and believe in government service,” he said. “And it is a good job and these things are cyclical. Four years from now you may have a very different commission and administration and it’s not like the work of the commission is going to stop in the next four years.”

Lance Dial, a partner at K&L Gates LLP, said despite the departures, the SEC will still be able to function as needed. “I don’t think anyone at the SEC in enforcement or exams or any of the divisions is going to take their eye off the ball off their core mission of investor protection,” he said.

But given the Trump administration’s efforts to reduce the size of the federal workforce, “I think we can assume that the SEC rightly or wrongly will need to be a leaner organization,” Dial said. “They’re going to have to figure out how to do as much or more with less.”

Doing more with less will also likely slow down the SEC’s workflow, sources said.

“It is just a truism that a smaller staff can do fewer things and so there may be longer lines (for) exemptions, there may be a longer period to get no-action requests, but that will depend on how Atkins, frankly, wants to staff his agency,” Dial said. “Will they have as many people doing enforcement, will they drop certain enforcement priorities? They can pick and choose which of the functions of the agency they find most important and most relevant to the ongoing agenda.”

Trump has nominated Paul Atkins, a former SEC commissioner and CEO of Patomak Global Partners, to lead the SEC. Atkins has a Senate confirmation hearing slated for March 27 and is expected to be confirmed soon after.

Cox said he’s concerned that there will be fewer cops on the beat to enforce regulations and monitor market trends and compliance.

He noted that the SEC’s job is complex as it oversees approximately 40,000 entities, including more than 13,000 registered funds, more than 15,400 investment advisers, more than 3,400 broker-dealers and 24 national securities exchanges, according to the SEC’s most recent congressional budget justification plan.

“Our limited resources contrast against the tremendous growth and change in our markets,” former SEC Chair Gary Gensler told lawmakers during a June budget hearing.

Republican SEC Commissioner Hester Peirce said March 6 that the agency is committed to “keeping the SEC functioning well,” but some employees will leave. “And I will tell you that some of those departures are going to be very hard for me personally as well as for the agency because we’ll lose some of that wealth of knowledge that they have. But at the same time, there’s really deep talent there and so we will do the best to shepherd and protect the folks who are there as they develop even deeper knowledge and expertise.”

To date, Elon Musk’s Department of Government Efficiency hasn’t set its sights on the SEC.

Experts don’t expect DOGE to implement mass layoffs at the SEC like those that have been announced at other agencies, including the Consumer Financial Protection Bureau and Social Security Administration.

That’s because the SEC's funding is deficit-neutral as appropriations are offset by transaction fees.

Because of that fact, Cox and the other law professors said cutting the SEC’s staff and budget is counterproductive.

“If the SEC is shrunk and placed under the de facto supervision of the (White House’s Office of Management and Budget), the potential for an increase in the cost of capital becomes real and the losses cannot be reliably estimated,” the law professors wrote, asserting that less oversight and independence raises risk for investors.

“Moreover, such a change produces no real savings because the SEC actually makes a profit. Thus, the upside of the proposed cuts is negligible and the downside is catastrophic. To our minds, no rational decisionmaker would accept such a gamble where it can win little and lose much.”