The Securities and Exchange Commission’s Division of Enforcement has had a sharp drop in staff in the last couple of years, which raises concerns about the agency’s ability to effectively handle enforcement issues related to private equity if the trend continues.

The division’s annual report points to a 10 percent decline in headcount between fiscal years 2016 and 2018. Debevoise & Plimpton said in a report that the SEC continues to labor under the constraints imposed by an agency-wide hiring freeze that has been in place since late 2016.

Having knowledgeable employees is a key factor in holding SEC examinations on private equity firms, and departures from the agency can leave a void that isn’t easily filled. Three days after releasing the report, the SEC announced on November 5 that the co-chief of the Enforcement Division’s Asset Management Unit, Anthony Kelly, would be leaving the agency this month. The SEC notes that Kelly played a leading role in the unit’s pursuit of fee and expense issues in the private funds industry.

Employees like Kelly, who has been with the SEC for about 18 years, aren’t easy to replace. While it may not be an issue now, it could become problematic if the enforcement unit continues to lose staff.

“We’d like the SEC to be well staffed, and we think it’s particularly important to have that expertise that understands the asset class, which I think makes these exams more effective and more efficient for both GPs and LPs,” director of industry affairs at the Institutional Limited Partners Association, Chris Hayes, told pfm. “I would hope over time that the commission would lift this hiring freeze if they don’t have sufficient staff to regulate the industry effectively.”

Despite the hiring freeze and the decrease in employees, the SEC – which seeks to protect retail investors as part of its initiatives – has kept up its enforcement-related activity. The agency filed 821 enforcement actions this year, up from 754 in 2017.

The SEC has dealt with a number of enforcement cases in the private equity industry this year. In June, it fined 13 registered investment advisors $75,000 each after an investigation by the Enforcement Division’s Asset Management Unit – with assistance from the Private Funds Unit in the Office of Compliance Inspections and Examinations and the Analytics Office in the Division of Investment Management – found the advisors repeatedly failed to file annual reports over multiple years. Nine of the advisors engage mainly in private equity, while four operate hedge funds.

“We’ve been heartened by the fact that the SEC has continued to bring cases on private equity,” Hayes said. “Obviously we think the exam programs, and particularly the private funds exam unit, have done a good job in ensuring that the private equity market is doing well. It gives investors assurance that GPs are following the terms of the investment agreements that they signed with their investors.”

The SEC sees its ability to continue a steady flow of enforcement activity as an achievement, given the circumstances. But the agency also wants more resources to dedicate to protecting retail investors and defending against cyber-related crimes.

Still, the Enforcement Division acknowledged facing other significant challenges. It said that the Supreme Court’s decision in the Kokesh v. SEC case has limited its ability to obtain disgorgement in certain long-running frauds. It also noted that the “successful constitutional challenge to the appointment of the commission’s administrative law judges in the Lucia v. SEC Supreme Court case has required the division to divert substantial trial and other resources to older matters, many of which had been substantially resolved prior to the decision.”