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United States Government Accountability Office:
GAO:
Report to the Chairman, United States Securities and Exchange
Commission:
November 2011:
Financial Audit:
Securities and Exchange Commission's Financial Statements for Fiscal
Years 2011 and 2010:
GAO-12-219:
GAO Highlights:
Highlights of GAO-12-219, a report to the Chairman, United States
Securities and Exchange Commission.
Why GAO Did This Study:
Pursuant to the Accountability of Tax Dollars Act of 2002, the United
States Securities and Exchange Commission (SEC) is required to prepare
and submit to Congress and the Office of Management and Budget audited
financial statements. Pursuant to the Securities Exchange Act of 1934,
amended in 2010 by the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act), SEC is also required to submit
audited financial statements for the Investor Protection Fund (IPF) to
Congress. GAO, under its audit authority, audited SEC’s and IPF’s
financial statements to determine whether (1) the financial statements
are fairly presented, and (2) SEC maintained effective internal
control over financial reporting. GAO also tested SEC’s compliance
with selected provisions of laws and regulations. In accordance with
the 1934 act, as amended by the Dodd-Frank Act, GAO also reported on
SEC’s assessment of its internal control over financial reporting.
What GAO Found:
In GAO’s opinion, SEC’s fiscal years 2011 and 2010 financial
statements are fairly presented in all material respects. Also in GAO’
s opinion, IPF’s fiscal years 2011 and 2010 financial statements are
fairly presented in all material respects. In addition, GAO concluded
that although internal controls could be improved, SEC maintained, in
all material respects, effective internal control over financial
reporting for both the agency as a whole and IPF as of September 30,
2011. GAO’s conclusion on the effectiveness of SEC’s internal control
over financial reporting is consistent with SEC’s assessment of its
internal control over financial reporting as of September 30, 2011.
GAO found no reportable noncompliance for either SEC or IPF in fiscal
year 2011 with the provisions of laws and regulations it tested.
During fiscal year 2011, SEC made important progress in addressing
previously reported material weaknesses in internal control over its
information systems and over its financial reporting and accounting
processes. Because of these improvements, GAO concluded that the
deficiencies that comprised these weaknesses no longer constitute
material weaknesses. However, GAO also concluded that, because of the
remaining control deficiencies along with newly identified
deficiencies in fiscal year 2011, SEC had significant deficiencies in
its internal control in four areas: (1) information security, (2)
financial reporting and accounting processes, (3) budgetary resources,
and (4) registrant deposits and filing fees. These significant
deficiencies pertain to SEC’s financial reporting, but not that of IPF
because of the nature of IPF’s financial transactions during fiscal
year 2011. While these significant deficiencies are not material
weaknesses, they nonetheless warrant the attention of those charged
with SEC’s governance. SEC’s ability to establish and maintain
effective internal control over financial reporting remains at risk
until it can reduce its reliance on compensating manual financial
reporting and accounting processes.
GAO will be separately reporting at a later date to SEC on additional
details regarding these significant deficiencies along with
recommendations for corrective action. GAO noted other matters
involving SEC’s internal control that were less significant than a
material weakness or significant deficiency and will also be reporting
separately to SEC management on these matters.
What GAO Recommends:
GAO is not making recommendations in this report, but will be
reporting separately on the control issues identified during its
audit, along with recommendations for corrective actions.
In commenting on a draft of this report, SEC stated that, as part of
its strategy for addressing financial reporting control issues, SEC
will complete migration of its core financial system to a federal
government shared service provider in fiscal year 2012. SEC also plans
to continue to remediate deficiencies in other areas.
View [hyperlink, http://www.gao.gov/products/GAO-12-219]. For more
information, contact James R. Dalkin, (202) 512-9406, or
dalkinj@gao.gov.
[End of section]
Contents:
Letter:
Auditor's Report:
Opinion on SEC's Financial Statements:
Opinion on IPF's Financial Statements:
Opinion on Internal Control:
Compliance with Laws and Regulations:
Consistency of Other Information:
Objectives, Scope, and Methodology:
Significant Deficiency over Information Security:
Significant Deficiency over Financial Reporting and Accounting
Processes:
Significant Deficiency over Budgetary Resources:
Significant Deficiency over Registrant Deposits and Filing Fees:
Agency Comments:
Management's Discussion and Analysis:
SEC's Financial Statements:
Required Supplementary Information:
IPF's Financial Statements:
Appendixes:
Appendix I: Comments from the United States Securities and Exchange
Commission:
Appendix II: GAO Contact and Staff Acknowledgments:
Abbreviations:
FMFIA: Federal Managers' Financial Integrity Act:
IPF: Investor Protection Fund:
SEC: United States Securities and Exchange Commission:
SRO: Self-Regulatory Organization:
[End of section]
United States Government Accountability Office:
Washington, D.C. 20548:
November 15, 2011:
The Honorable Mary Schapiro:
Chairman:
United States Securities and Exchange Commission:
Dear Ms. Schapiro:
The accompanying report presents the results of our audits of the
financial statements of the United States Securities and Exchange
Commission (SEC) and its Investor Protection Fund (IPF)[Footnote 1] as
of and for the fiscal years ended September 30, 2011, and 2010. The
Accountability of Tax Dollars Act of 2002 requires that SEC prepare
and submit audited financial statements to Congress and the Office of
Management and Budget. The Securities Exchange Act of 1934, as amended
in 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection
Act (Dodd-Frank Act), requires SEC to prepare and submit a complete
set of audited financial statements for IPF to Congress.[Footnote 2]
We agreed, under our audit authority, to audit SEC's and IPF's
financial statements. Section 963 of the Dodd-Frank Act further
requires that (1) SEC submit a report to Congress describing
management's responsibility for internal control over financial
reporting and assessing the effectiveness of such internal control
during the fiscal year; (2) the SEC Chairman and Chief Financial
Officer attest to SEC's report; and (3) GAO submit a report to
Congress evaluating the effectiveness of SEC's internal control over
financial reporting and assessing, attesting to, and reporting on SEC
management's internal control assessment.[Footnote 3] Accordingly,
this report also responds to our requirement under the Dodd-Frank Act.
This report contains our (1) unqualified opinions on SEC's and IPF's
fiscal years 2011 and 2010 financial statements; (2) opinion that,
although internal controls could be improved, SEC maintained, in all
material respects, effective internal control over financial reporting
for both the agency as a whole and IPF as of September 30,
2011;[Footnote 4] and (3) conclusion that our tests of SEC's
compliance with selected provisions of laws and regulations disclosed
no instances of noncompliance for either the agency as a whole or IPF
for fiscal year 2011.
We are sending copies of this report to the Chairmen and Ranking
Members of the Senate Committee on Banking, Housing, and Urban
Affairs; the Senate Committee on Homeland Security and Governmental
Affairs; the House Committee on Financial Services; and the House
Committee on Oversight and Government Reform. We are also sending
copies to the Secretary of the Treasury, the Director of the Office of
Management and Budget, and other interested parties. In addition, this
report will be available at no charge on the GAO website at
[hyperlink, http://www.gao.gov].
If you have questions about this report, or if I can be of further
assistance, please contact me at (202) 512-9406 or d [Hyperlink,
dalkinj@gao.gov] alkinj@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff who made key contributions to this
report are listed in appendix II.
Sincerely yours,
Signed by:
James R. Dalkin:
Director:
Financial Management and Assurance:
[End of section]
United States Government Accountability Office:
Washington, D.C. 20548:
Auditor's Report To the Chairman of the United States Securities and
Exchange Commission:
We agreed, under our audit authority, to audit the financial
statements of the United States Securities and Exchange Commission
(SEC) and the financial statements of SEC's Investor Protection Fund
(IPF). The Securities Exchange Act of 1934, as amended in 2010 by the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act), requires that SEC provide separate audited financial statements
for IPF to Congress.[Footnote 5] Since IPF is a fund within SEC, its
financial transactions are also included in SEC's overall financial
statements. In accordance with the Dodd-Frank Act,[Footnote 6] we are
required to assess the effectiveness of SEC's internal control over
financial reporting, evaluate SEC's assessment of such effectiveness,
and attest to SEC's assessment of its internal control over financial
reporting.
In our audits of SEC's financial statements and IPF's financial
statements for fiscal years 2011 and 2010, we found:
* the financial statements are presented fairly, in all material
respects, in conformity with U.S. generally accepted accounting
principles;
* although internal controls could be improved, SEC maintained, in all
material respects, effective internal control over financial reporting
for both the agency as a whole and IPF as of September 30, 2011; and:
* no reportable noncompliance in fiscal year 2011 with provisions of
laws and regulations we tested.
The following sections discuss in more detail (1) these conclusions;
(2) our conclusions on Management's Discussion and Analysis and
required supplementary and other accompanying information; (3) our
audit objectives, scope, and methodology; and (4) SEC's comments on a
draft of this report.
Opinion on SEC's Financial Statements:
The financial statements, including the accompanying notes, present
fairly, in all material respects, in conformity with U.S. generally
accepted accounting principles, SEC's assets, liabilities, and net
position as of September 30, 2011 and 2010, and its net costs, changes
in net position, budgetary resources, and custodial activity for the
fiscal years then ended.
Opinion on IPF's Financial Statements:
The financial statements, including the accompanying notes, present
fairly, in all material respects, in conformity with U.S. generally
accepted accounting principles, IPF's assets, liabilities, and net
position as of September 30, 2011 and 2010, and its net costs, changes
in net position, and budgetary resources for the fiscal years then
ended.
Opinion on Internal Control:
Although certain internal controls could be improved, SEC maintained,
in all material respects, effective internal control over financial
reporting as of September 30, 2011, that provided reasonable assurance
that misstatements, losses, or noncompliance material in relation to
the agency's and IPF's financial statements would be prevented or
detected and corrected on a timely basis. Our opinion is based on
criteria established under 31 U.S.C. § 3512 (c), (d), commonly known
as the Federal Managers' Financial Integrity Act of 1982 (FMFIA). As
discussed below, our fiscal year 2011 audit identified significant
deficiencies in SEC's internal control over financial reporting.
[Footnote 7] These significant deficiencies pertain to SEC's financial
reporting, but not that of IPF because of the nature of IPF's
financial transactions during fiscal year 2011. Our opinion on SEC's
internal control is consistent with SEC's assertion that its internal
controls over financial reporting, both for the agency as a whole and
for IPF, were operating effectively as of September 30, 2011, and that
no material weaknesses were found in the design or operation of the
controls.[Footnote 8] SEC management's assertion is included in its
Management's Discussion and Analysis included in this report.
In our 2010 audit report,[Footnote 9] we concluded that SEC did not
maintain effective internal control over financial reporting as of
September 30, 2010, because of material weaknesses[Footnote 10] in
SEC's internal control over (1) information systems and (2) financial
reporting and accounting processes. Based on SEC's efforts to address
the deficiencies we previously found in its controls over information
systems, and the improvements we found in this area during our fiscal
year 2011 audit, we concluded that the remaining deficiencies in
information systems no longer constitute a material weakness. However,
these remaining deficiencies in controls over information systems
could adversely affect SEC's information security and its financial
reporting relevant to these information systems. Therefore, we
considered SEC's controls over information security to be a
significant deficiency in fiscal year 2011. This significant
deficiency is discussed in more detail later in this report.
During fiscal year 2011, SEC also made progress in addressing the five
areas of internal control deficiencies that collectively comprised the
material weakness over financial reporting and accounting processes in
fiscal year 2010. Specifically, SEC sufficiently addressed the
deficiencies regarding SEC's internal controls related to accounting
for disgorgement and penalties[Footnote 11] and reporting required
supplementary information such that we no longer consider these two
areas to be control deficiencies as of September 30, 2011. SEC also
addressed some of the issues comprising deficiencies in its financial
reporting and accounting processes, budgetary resources, and
registrant deposit and filing fee transactions that were also part of
the material weakness in internal control over financial reporting in
fiscal year 2010. However, our work in fiscal year 2011 showed
continuing deficiencies in the design and/or implementation of
effective internal control for each of these three areas that were
significant to SEC's financial reporting as of September 30, 2011.
Therefore, while they no longer collectively represent a material
weakness, we considered each of these remaining continuing
deficiencies to represent a significant deficiency in internal control
in fiscal year 2011. These three significant deficiencies are
discussed later in this report.
For all significant errors and issues that were identified, SEC made
necessary adjustments to the financial statements, the notes
accompanying the financial statements, and other required
supplementary information, as appropriate, and was therefore able to
prepare financial statements that were fairly presented in all
material respects for fiscal years 2011 and 2010. Although the
significant deficiencies in internal control did not materially affect
SEC's fiscal year 2011 financial statements, misstatements may occur
in other financial information reported by SEC and not be prevented or
detected because of these significant deficiencies.
The four significant deficiencies as of September 30, 2011, although
not considered to be material weaknesses, are important enough to
merit the attention of those charged with governance of SEC. We will
be reporting additional details concerning these four significant
deficiencies separately to SEC management, along with recommendations
for corrective actions. We also identified other deficiencies in SEC's
system of internal control that we do not consider to be material
weaknesses or significant deficiencies. We have communicated these
matters to SEC management informally and, as appropriate, will be
reporting them separately to SEC at a later date.
Compliance with Laws and Regulations:
Our tests of SEC's compliance with selected provisions of laws and
regulations for the agency as a whole and IPF for fiscal year 2011
disclosed no instances of noncompliance that would be reportable under
U.S. generally accepted government auditing standards. The objective
of our audit was not to provide an opinion on overall compliance with
laws and regulations. Accordingly, we do not express such an opinion.
As disclosed in note 14C to SEC's financial statements, a GAO legal
decision,[Footnote 12] issued on October 3, 2011, concluded that SEC
did not properly record its obligation when it entered into a 10-year
lease by failing to record its total liability under the lease at the
date when the lease was signed. Specifically, GAO concluded that SEC
did not have the authority to record an obligation for an amount less
than the government's full liability under the lease and was therefore
in violation of the recording statute.[Footnote 13] SEC made
adjustments to its budget accounts in order to properly record any
lease agreements it entered into during fiscal year 2011. SEC also
made an adjustment to its budget accounts in fiscal year 2011 to
obligate $778 million for the full amount of its lease obligations it
entered into during fiscal years 1990 through 2010. However, since SEC
lacked sufficient budgetary authority to cover the $778 million in
lease obligations, it incurred violations of the Antideficiency Act
for fiscal years 1990 through 2010, the years in which these
obligations were incurred.
Consistency of Other Information:
SEC's Management's Discussion and Analysis, required supplementary
information, and other accompanying information contain a wide range
of information, some of which is not directly related to the financial
statements. We did not audit and we do not express an opinion on this
information. However, we compared this information for consistency
with the financial statements and discussed the methods of measurement
and presentation with SEC officials. On the basis of this limited
work, we found no material inconsistencies with the financial
statements, U.S. generally accepted accounting principles, or Office
of Management and Budget Circular No. A-136, Financial Reporting
Requirements.
Objectives, Scope, and Methodology:
SEC management is responsible for (1) preparing the financial
statements of the agency and IPF in conformity with U.S. generally
accepted accounting principles; (2) establishing and maintaining
effective internal control over financial reporting for both the
agency as a whole and IPF, and evaluating its effectiveness; and (3)
complying with laws and regulations applicable to both the agency and
IPF. SEC management evaluated the effectiveness of internal control
over financial reporting as of September 30, 2011, based on the
criteria established under FMFIA. Under the Dodd-Frank Act, SEC is
also responsible for attesting to the effectiveness of its internal
control during the fiscal year.[Footnote 14]
We are responsible for planning and performing the audits of SEC and
IPF to obtain reasonable assurance and provide our opinion about
whether (1) the financial statements are presented fairly, in all
material respects, in conformity with U.S. generally accepted
accounting principles and (2) SEC management maintained, in all
material respects, effective internal control over financial reporting
for the agency as a whole and IPF as of September 30, 2011. We are
also responsible for (1) testing compliance with selected provisions
of laws and regulations that have a direct and material effect on the
financial statements of SEC and IPF and (2) performing limited
procedures with respect to certain other information accompanying the
financial statements. Further, under the Dodd-Frank Act, we are
responsible for evaluating SEC's assessment of its internal control
over financial reporting.[Footnote 15]
In order to fulfill these responsibilities, we:
* examined, on a test basis, evidence supporting the amounts and
disclosures in the financial statements;
* assessed the accounting principles used and significant estimates
made by SEC management;
* evaluated the overall presentation of the financial statements;
* obtained an understanding of SEC's and IPF's operations, including
SEC's internal control over financial reporting for both the agency as
a whole and IPF;
* considered SEC's process for evaluating and reporting on internal
control over financial reporting based on criteria established under
FMFIA;
* assessed the risk that a material misstatement exists in the
financial statements and the risk that a material weakness exists in
internal control over financial reporting;
* evaluated the design and operating effectiveness of internal control
over financial reporting based on the assessed risk;
* tested relevant internal control over financial reporting;
* evaluated SEC's assessment of its internal control over financial
reporting;
* tested compliance with selected provisions of the following laws and
regulations: the Securities Exchange Act of 1934, as amended; the
Securities Act of 1933, as amended; the Antideficiency Act; laws
governing the pay and allowance system for SEC employees; the Debt
Collection Improvement Act; the Prompt Payment Act; the Federal
Employees' Retirement System Act of 1986; Full-Year Continuing
Appropriations Act, 2011, which incorporates, by reference, certain
provisions of the Financial Services and General Government
Appropriations Act, 2010; and the Dodd-Frank Wall Street Reform and
Consumer Protection Act; and:
* performed such other procedures as we considered necessary in the
circumstances.
An entity's internal control over financial reporting is a process
effected by those charged with governance, management, and other
personnel, the objectives of which are to provide reasonable assurance
that (1) transactions are properly recorded, processed, and summarized
to permit the preparation of financial statements in accordance with
U.S. generally accepted accounting principles, and assets are
safeguarded against loss from unauthorized acquisition, use, or
disposition and (2) transactions are executed in accordance with the
laws governing the use of budget authority and other laws and
regulations that could have a direct and material effect on the
financial statements.
We did not evaluate all internal control relevant to operating
objectives as broadly established under FMFIA, such as controls
relevant to preparing statistical reports and ensuring efficient
operations. We limited our internal control testing to testing
controls over financial reporting that are significant to SEC's and
IPF's financial statements. Our internal control testing was for the
purpose of expressing an opinion on the effectiveness of internal
control over financial reporting and may not be sufficient for other
purposes. Consequently, our audit may not identify all deficiencies in
internal control over financial reporting that are less severe than a
material weakness. Because of inherent limitations, internal control
may not prevent or detect and correct misstatements caused by error or
fraud, losses, or noncompliance. We also caution that projecting any
evaluation of effectiveness to future periods is subject to the risk
that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
We did not test compliance with all laws and regulations applicable to
SEC or IPF. We limited our tests of compliance to selected provisions
of laws and regulations that have a direct and material effect on
SEC's and IPF's financial statements for the fiscal year ended
September 30, 2011. We caution that other deficiencies in internal
control may exist and not be detected by our tests and that our
testing may not be sufficient for other purposes.
We performed our audit in accordance with U.S. generally accepted
government auditing standards. We believe our audit provides a
reasonable basis for our opinions and other conclusions.
Significant Deficiency over Information Security:
In our previous year's audit of SEC, we reported a material weakness
in internal control over information systems because of pervasive
deficiencies in the design and operation of SEC's information security
and other system controls that spanned across its general support
system and all key applications that supported financial reporting.
[Footnote 16] During fiscal year 2011, SEC made progress in addressing
several of the control deficiencies that comprised this material
weakness and thereby strengthened its overall security program.
Notable among these efforts were the security access control
improvements and updates SEC made to its core general ledger system,
reducing the system's vulnerability to unauthorized access, viruses,
attacks, and other threats. SEC also implemented a security monitoring
program over its core general ledger system to better identify and
address segregation of incompatible duties and an entitywide system
security program for its general support system to identify and
address security risks. Further, SEC improved its capacity to
effectively carry out information security controls through its
increased investments in hiring information security staff. However,
because SEC's remediation efforts focused primarily on its general
ledger system and general support system, we continued to find
information security design and implementation deficiencies similar to
those found in our previous audit as well as new deficiencies
concerning other key financial systems and databases that support
financial reporting. These deficiencies decrease assurance regarding
the reliability of the data processed by these key financial systems
and increase the risk that unauthorized individuals could gain access
to critical hardware or software and intentionally or inadvertently
access, alter, or delete sensitive data or computer programs.
Consequently, the combination of the continuing and new information
security deficiencies existing as of September 30, 2011, considered
collectively, represent a significant deficiency in SEC's internal
control over information security.
Specifically, our fiscal year 2011 testing found that SEC did not
perform necessary or adequate information security system updates on
its financial system that processes significant amounts of filing fee
revenue or its database that houses disgorgement and penalty financial
data, thus exposing SEC to information security vulnerabilities in
these areas. We also found that for some of its key financial
applications, SEC did not always set sufficiently restrictive security-
related parameters and users' rights and privileges, effectively
secure remote connections, or effectively manage guest user accounts
and open ports to prevent unauthorized access to its internal network.
SEC also did not always ensure proper security oversight and
monitoring of system connections for its information systems that were
connected to external systems to ensure the existence of proper
security requirements pertaining to these external systems. In
addition, SEC did not always adequately protect or secure the
confidentiality and integrity of sensitive data transmitted across its
internal networks. Further, SEC did not appropriately manage its
password accounts or set system password protections for some of its
key financial applications in accordance with its policy, resulting in
weak passwords and excessive log-in attempts being allowed before a
user's account is suspended.
Additionally, we found that while SEC implemented sufficient security
monitoring and auditing tools over its core general ledger system in
fiscal year 2011, it did not do so systemically for all of its key
system applications that support financial reporting and consequently,
it does not yet have comprehensive oversight of, and information
concerning, the security risks to financial reporting. Information
security risks are further amplified because SEC did not always
implement vulnerability and compliance scans on network devices
required under its information security program. Until SEC
consistently implements all key elements of its information security
program systemically across all its financial systems and applications
that support financial reporting, there is increased risk that the
information that is processed, stored, and transmitted on its systems
remain vulnerable, and management will not have sufficient assurance
that financial information and financial assets are adequately
safeguarded from inadvertent or deliberate misuse, fraudulent use,
improper disclosure, or destruction.
Significant Deficiency over Financial Reporting and Accounting
Processes:
As we have reported in prior audits, SEC's general ledger system and
certain software applications and configurations are not designed to
provide the accurate, complete, and timely transaction-level data
needed to accumulate and readily report reliable financial
information. Instead, the initiation and recording of significant
transactions is accomplished through the use of spreadsheets,
databases, manual workarounds, and data handling that rely on
significant analysis, reconciliation, and review to calculate amounts
for the general ledger posting of transactions. These compensating
manual processes are resource intensive and prone to error, and
coupled with the significant amount of data involved, increase the
risk of materially misstated account balances in the general ledger.
To address some of the risks in its financial reporting and accounting
processes, in fiscal year 2011 SEC implemented a reconciliation
control procedure to provide some assurance that the data in its
financial reporting tool database that is used to produce its monthly
trial balances and financial statements are consistent with the source
data in the general ledger. SEC also made enhancements this year to
its financial reporting tool that assisted SEC in researching and
reviewing financial activity, such as the development of record counts
to facilitate comparison of data and systematic timestamps to ensure
the appropriate file is being used. In addition, SEC drafted a policy
to strengthen and formalize application and security controls over its
spreadsheets and databases (referred to by SEC as user developed
applications); however, this policy did not become effective until
September 30, 2011. Consequently, SEC operated throughout the fiscal
year without adequate controls over some of its user developed
applications. Despite SEC's actions to improve controls in this area,
errors and deficiencies we found during this year's audit demonstrate
that SEC remains at risk of not properly controlling user developed
applications and manual financial reporting and accounting processes.
Therefore, collectively, these continuing deficiencies represent a
significant deficiency in internal control over SEC's financial
reporting and accounting processes for fiscal year 2011.
For example, during this year's audit, we found errors in SEC's year-
end calculation of its allowance for loss on the disgorgement and
penalties receivable because of a spreadsheet formula error that was
not discovered by SEC's review process. We also found that SEC made
errors in its lease calculations because it used incorrect lease term
and rate assumptions and because of spreadsheet formula errors that
were also not detected. In addition, we noted that a spreadsheet error
resulted in incorrect amounts for SEC's legal liability and lease
liability disclosed in the notes to SEC's interim financial
statements. SEC made the necessary adjustments to address these errors
so that related balances were properly stated at year-end. However,
these and other errors we found point to a lack of effective review
procedures, which are even more critical given SEC's heavy dependence
on spreadsheets and error-prone manual data entry for its financial
reporting and accounting processes.
Significant Deficiency over Budgetary Resources:
For fiscal year 2011, SEC incurred approximately $2 billion in new
obligations,[Footnote 17] which represent legal liabilities against
funds available to SEC to pay for goods and services ordered, and
deobligated approximately $39 million for prior year obligations that
were either canceled or for which the dollar amount of the obligation
was decreased. During this fiscal year, SEC addressed some of the
control deficiencies that we have reported on in the past in this
area. A noteworthy action that SEC implemented this year to compensate
for a control issue concerning the timeliness of recording
deobligations was the implementation of an accounting procedure for
estimating an accrual for downward adjustments to obligations in
situations where an obligation is no longer valid but has not yet been
closed out. This accrual adjustment accounted for $14.5 million of the
total $39 million in deobligations for fiscal year 2011. SEC also
improved procedures this year for deobligating travel obligations and
for recording miscellaneous obligations. However, consistent with our
findings from our audits of SEC over the past 5 years, this year's
audit continued to find general ledger system configuration
deficiencies and continuing deficiencies in recording of obligations,
monitoring open obligations, and deobligating obligations that were no
longer valid. Collectively, these continuing deficiencies represent a
significant deficiency in internal control over budgetary resources
for fiscal year 2011.
Specifically, because of general ledger system configuration
deficiencies that limit SEC from properly posting undelivered order
and offsetting collection transactions,[Footnote 18] SEC recorded $38
million in manual correcting entries to accurately reflect related
account balances on the Statement of Budgetary Resources for fiscal
year 2011. Our testing of new obligations during the year also
continued to find obligations that were either not supported by
sufficient documentation or documentation showing that they were
approved by an authorized individual, or were no longer required and
therefore should have been deobligated. The errors we found indicated
a likely $12.7 million misstatement in SEC's obligation balance at
June 30, 2011. In addition, our fiscal year 2011 testing showed a
continuing deficiency in SEC's control over monitoring and reviewing
its open obligations to ensure that they remain valid and that
adjustments are made properly and timely. Of the 45 recorded
deobligations we tested, we found that 28 were not deobligated timely.
For example, our work found that SEC's contract close-out process took
from 3 months to more than 3 years to complete from the end of the
period of performance or completion of the contract. This is largely
because SEC does not have a control in place to monitor its contracts
in a timely manner, and therefore, needs to carry out time-consuming
reconciliation procedures with its vendors before it can properly
adjust an obligation or deobligate an obligation for contracts that
were completed or whose period of performance had ended. Deobligating
resources timely can be important to an agency to free up resources
that may be made available for incurring new obligations or used to
provide resources to fund increases to existing obligations.
SEC's new accrual procedure for downward adjustments to open
obligations has resulted in more accurate financial reporting of
budgetary activity on the Statement of Budgetary Resources for fiscal
year 2011. However, the continuing ineffective processes and related
documentation deficiencies that caused the errors in budgetary
transactions increase SEC's risk of future misstatements being
recorded in its general ledger and reported on its Statement of
Budgetary Resources.
Significant Deficiency over Registrant Deposits and Filing Fees:
SEC is partially funded through the collection of securities
registration, tender offer, merger, and other fees (filing fees) from
registrants. SEC records the filing fees it collects as revenue. If
registrants submit amounts to SEC in excess of the actual fee payment
due for a specific filing, SEC records the excess amounts collected in
a registrant deposit liability account until earned by SEC from a
future filing. Pursuant to a revised SEC policy, SEC is to return to
the account holder any funds held in any filing fee account in which
there has not been any deposit, withdrawal or other adjustment
activity for more than 3 years.[Footnote 19] We have reported
deficiencies in controls over SEC's registrant deposits since fiscal
year 2009 and have made recommendations to improve controls over
filing fee transactions. This year we noted that SEC made improvements
in verifying current filing fee transactions more timely. However, our
audit this year found continuing deficiencies in SEC's controls over
registrant deposits and filing fees that collectively represent a
significant deficiency for fiscal year 2011.
Specifically, SEC has not effectively addressed previously reported
deficiencies in its process to enable timely recognition of filing fee
revenue. For example, SEC still has not completed its review of
dormant registrant deposit accounts, which consisted of 2,042 accounts
totaling over $12 million as of September 30, 2011, to determine if
any of these amounts should be refunded or recognized as revenue.
Because of this continuing control deficiency, SEC is not always
recognizing filing fee revenue in the correct accounting period and
its registrant deposit liability of $46 million as of September 30,
2011, could be misstated and not be corrected in a timely manner. For
example, as of September 30, 2011, SEC identified $2.3 million in the
liability account that should have been recognized as revenue. The
change in SEC's policy this year for extending the time period from
180 days to 3 years before initiating a return of funds explains the
majority of the reduction in the balance of dormant accounts from
$25.7 million at September 30, 2010, to $12.5 million at September 30,
2011. However, SEC has made limited progress in researching and
determining the proper accounting treatment for the remaining backlog
of dormant accounts. SEC has taken some short-term actions to
compensate for its lack of timely review. For example, in the fourth
quarter of fiscal year 2011, SEC implemented a new procedure to
statistically analyze the inactive deposit accounts in order to
estimate the amount of unrecognized revenue. This procedure resulted
in an estimate of about $7 million in unrecognized revenue pertaining
to the dormant accounts. Contributing to SEC's deficiencies in this
area is that SEC has yet to finalize and implement a formal process
for ongoing monitoring of filing fee transactions.
Agency Comments:
In commenting on a draft of this report, SEC's Chairman expressed her
pleasure that GAO found that SEC has successfully remediated the two
material weaknesses identified in 2010, and attributes this success to
its new leadership team of the Chief Operating Officer, Chief
Financial Officer, Chief Information Officer, and Chief Accounting
Officer. She stated that SEC will continue working to ensure that its
controls infrastructure is strong and sustainable over the long term.
The Chairman also commented that SEC will realize improvements in
system functionality, automate some manual processes, and further
enhance financial management and reporting upon completion in fiscal
year 2012 of a migration of its core financial system to a federal
government shared service provider. The Chairman added that SEC plans
further progress on tightening information security, resolving the
backlog of inactive registrant deposit accounts, bolstering controls
over budgetary resources, and completing implementation of its new
program governing the use of spreadsheets and databases related to
financial reporting.
The complete text of SEC's comments is reprinted in its entirety in
appendix I.
Sincerely yours,
Signed by:
James R. Dalkin:
Director:
Financial Management and Assurance:
November 14, 2011:
[End of section]
Management's Discussion and Analysis:
Management's Discussion and Analysis:
The U.S. Securities and Exchange Commission's (SEC) Management's
Discussion and Analysis (MD&A) serves as a brief overview of this
entire report. It provides a concise description of the agency's
performance measures, financial statements, systems and controls,
compliance with laws and regulations, and actions taken or planned. It
also provides a balanced assessment of the SEC programs and financial
performance, and the efficiency and effectiveness of the SEC's
operations.
Vision, Mission, Values, and Goals:
Vision:
The SEC strives to promote a market environment that is worthy of the
public's trust and characterized by transparency and integrity.
Mission:
The mission of the SEC is to protect investors; maintain fair,
orderly, and efficient markets; and facilitate capital formation.
Values:
Integrity;
Accountability;
Effectiveness;
Teamwork;
Fairness;
Commitment to Excellence.
Strategic Goals and Outcomes:
Goal 1: Foster and enforce compliance with the federal securities laws:
Outcome 1.1: The SEC fosters compliance with the federal securities
laws.
Outcome 1.2: The SEC promptly detects violations of the federal
securities laws.
Outcome 1.3: The SEC prosecutes violations of federal securities laws
and holds violators accountable.
Goal 2: Establish an effective regulatory environment:
Outcome 2.1: The SEC establishes and maintains a regulatory
environment that promotes high-quality disclosure, financial
reporting, and governance, and that prevents abusive practices by
registrants, financial intermediaries, and other market participants.
Outcome 2.2: The U.S. capital markets operate in a fair, efficient,
transparent, and competitive manner, fostering capital formation and
useful innovation.
Outcome 2.3: The SEC adopts and administers rules and regulations that
enable market participants to understand clearly their obligations
under the securities laws.
In order to comply with the GPRA Modernization Act of 2010, the SEC is
developing an addendum to the fiscal year (FY) 2010 - FY 2015
Strategic Plan. The addendum will reflect the agency’s mission,
vision, values, and strategic goals through FY 2014, and highlight
specific initiatives the agency plans to undertake in the coming 24
months. Additionally, the addendum will include an updated performance
measurement framework, as well as updates to existing performance
measures that will be used to gauge the agency’s progress in
accomplishing the strategic goals and outcomes. The addendum will be
finalized and available on the SEC’s website at [hyperlink,
http://www.sec.gov] in February 2012.
Goal 3: Facilitate access to the information investors need to make
informed investment decisions:
Outcome 3.1: Investors have access to high-quality disclosure
materials that are useful to investment decision making.
Outcome 3.2: Agency rulemaking and investor education programs are
informed by an understanding of the wide range of investor needs.
Goal 4: Enhance the Commission's performance through effective
alignment and management of human, information, and financial capital.
Outcome 4.1: The SEC maintains a work environment that attracts,
engages, and retains a technically proficient and diverse workforce
that can excel and meet the dynamic challenges of market oversight.
Outcome 4.2: The SEC retains a diverse team of world-class leaders who
provide motivation and strategic direction to the SEC workforce.
Outcome 4.3: Information within and available to the SEC becomes a
Commission-wide shared resource, appropriately protected, that enables
a collaborative and knowledge-based working environment.
Outcome 4.4: Resource decisions and operations reflect sound financial
and risk management principles.
History and Purpose:
During the peak of the Depression, Congress passed the Securities Act
of 1933. This law, together with the Securities Exchange Act of 1934
(Exchange Act), which created the SEC, was designed to restore
investor confidence in our capital markets by providing investors and
the markets with more reliable information and clear rules of honest
dealing. The main purposes of these laws were to ensure that:
* Companies publicly offering securities for investment dollars must
tell the public the truth about their businesses, the securities they
are selling, and the risks involved in investing.
* People who sell and trade securities – brokers, dealers and
exchanges – must treat investors fairly and honestly, putting investors’
interests first. The SEC consists of five presidentially appointed
Commissioners, with staggered five-year terms. One of them is designated
by the President as Chairman of the Commission (see Appendix A:
Chairman and Commissioners). President Franklin Delano Roosevelt
appointed Joseph P. Kennedy, to serve as the first Chairman of the SEC.
Organizational Structure and Resources:
SEC Office Locations:
The SEC’s headquarters are in Washington, D.C., and it has 11 regional
offices located throughout the country. The regional offices are
responsible for investigating and litigating potential violations of
the securities laws. The offices also have examination staff, who
impact regulated entities such as investment advisers, investment
companies and broker-dealers. The map below shows the locations of the
regional offices, and the states that are included in each region.
Chart 1.1: SEC Headquarters And Regional Office Locations:
[Refer to PDF for image: U.S. map]
SEC Headquarters: Washington, D.C.
New York Regional Office:
New York, New Jersey.
Boston Regional Office:
Connecticut, Maine, Massachusetts, New Hampshire, Vermont, Rhode
Island.
Philadelphia Regional Office:
Delaware, Maryland, Pennsylvania, Virginia, West Virginia, District of
Columbia.
Miami Regional Office:
Florida, Mississippi, Louisiana, U.S. Virgin Islands, Puerto Rico.
Atlanta Regional Office:
Georgia, North Carolina, South Carolina, Tennessee, Alabama.
Chicago Regional Office:
Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri,
Ohio, Wisconsin.
Denver Regional Office:
Colorado, Kansas, Nebraska, New Mexico, North Dakota, South Dakota,
Wyoming.
Fort Worth Regional Office:
Texas, Oklahoma, Arkansas, Kansas (except for the exam program which
is administered by the Denver Regional Office).
Salt Lake Regional Office:
Utah.
Los Angeles Regional Office:
Arizona, Hawaii, Guam, Nevada, Southern California (zip codes 93599
and below, except for 93200-93299).
San Francisco Regional Office:
Washington, Oregon, Alaska, Montana, Idaho, Northern California (zip
codes 93600 and up, plus 93200-93299).
[End of figure]
SEC Organizational Structure:
The SEC is an independent Federal agency established pursuant to the
Exchange Act. It is headed by a bipartisan five-member Commission,
comprised of the Chairman and four Commissioners, who are appointed by
the President and confirmed by the Senate (see Appendix A: Chairman
and Commissioners). The Chairman serves as the Chief Executive
Officer. The SEC is organized into five main divisions: Enforcement;
Corporation Finance; Investment Management; Trading and Markets; and
Risk, Strategy, and Financial Innovation. In FY 2011, the SEC’s
budgetary authority amounted to $1,673 million, consisting of an
appropriation for salaries and expenses in the amount of $1,185
million, carryover balances of $36 million for the expenses of the
agency, and $452 million in the Investor Protection Fund. In FY 2011,
the agency employed 3,844 full-time equivalents (FTE), including 3,806
permanent and 38 temporary FTEs. The below SEC organization chart is
as of September 30, 2011.
Chart 1.1: Sec Organization Chart:
Top level:
Chairman (Office of the Chairman);
Associated with the Office of the Chairman:
* Commissioners (4 - 1 vacant).
Second level, reporting to the Office of the Chairman:
* Enforcement:
* Corporation Finance:
* Investment Management:
* Trading and Markets:
* Risk, Strategy, and Financial Innovation:
* Executive Director:
* General Counsel:
* Secretary:
* Chief Operating Officer:
* Chief Accountant:
* Investor Education and Advocacy:
* Compliance Inspection and Examinations:
* Administrative Law Judges:
* Equal Employment Opportunity:
* Information Technology:
* Inspector General:
* International Affairs:
* Legislative and Intergovernmental Affairs:
* Public Affairs:
* Office of Minority and Women Inclusion.
Third level, reporting to the Chief Operating Officer:
* Financial Management:
* Human Resources:
* Administrative Services:
* Freedom of Information Act and Records Management Services;
* Information Technology.
Fourth level: regional offices:
* New York:
* Boston:
* Philadelphia:
* Atlanta:
* Miami:
* Chicago:
* Fort Worth:
* Denver:
* Salt Lake:
* Los Angeles:
* San Francisco:
[End of chart]
SEC Programs:
The SEC organizes its divisions and offices under the 10 major
programs outlined below in Table 1.1, SEC Programs and
Program Descriptions.
Table 1.1: SEC Programs and Program Descriptions:
Program: Enforcement;
Divisions and Offices: Division of Enforcement and enforcement staff
within the SEC's regional offices;
Program Descriptions: This program investigates and brings civil
charges in Federal district court or in administrative proceedings
based on violations of the Federal securities laws. An integral part
of the program’s function is to seek penalties and the disgorgement of
ill-gotten gains in order to return funds to harmed investors. Also
organized within the Enforcement program is the new Office of the
Whistleblower, created to administer the SEC’s Whistleblower Program
that rewards individuals who provide the agency with tips that lead to
successful enforcement actions under the Dodd-Frank Act.
Program: Compliance Inspections and Examinations;
Divisions and Offices: Office of Compliance Inspections and
Examinations staff within the SEC's regional offices;
Program Descriptions: This program conducts the SEC's examinations of
registrants such as investment advisers, investment companies, broker-
dealers, self-regulatory organizations, credit rating agencies,
transfer agents, and clearing agencies.
Program: Corporation Finance;
Divisions and Offices: Division of Corporation Finance;
Program Descriptions: This program performs functions to assure that
investors have access to materially complete and accurate information,
and to deter fraud and misrepresentation in the public offering,
trading, voting, and tendering of securities.
Program: Trading and Markets;
Divisions and Offices: Division of Trading and Markets;
Program Descriptions: This program conducts activities to establish
and maintain standards for fair, orderly and efficient markets, while
fostering investor protection and confidence in the markets.
Program: Investment Management;
Divisions and Offices: Division of Investment Management;
Program Descriptions: This program seeks to minimize the financial
risks to investors from fraud, mismanagement, self-dealing, and
misleading or incomplete disclosure in the investment company and
investment adviser segments of the financial services industry.
Program: Risk, Strategy, and Financial Innovation;
Divisions and Offices: Division of Risk, Strategy, and Financial
Innovation;
Program Descriptions: The division provides economic analyses as part
of Commission’s rulemaking process; supports its rule review,
examination and enforcement programs with data-driven, risk-based
analytical methods; and oversees its Tips, Complaints and Referrals
(TCR) and interactive data programs.
Program: General Counsel:
Divisions and Offices: Office of the General Counsel;
Program Descriptions: OGC serves as the chief legal officer of the
Commission and provides independent legal analysis and advice to the
Chairman, Commissioners, and operating divisions on all aspects of the
Commission's activities. The General Counsel also defends the
Commission in federal district courts, represents the Commission in
all appellate matters and amicus curiae flings, and oversees the SEC's
bankruptcy program.
Program: Other Program Offices;
Divisions and Offices:
* Office of Chief Accountant;
* Office of Investor Education and Advocacy;
* Office of International Affairs; and;
* Office of Administrative Law Judges.
Program Descriptions: These offices are responsible for:
* serving as the chief advisor on all accounting and auditing policy
and overseeing private sector standards setting;
* serving investors who contact the SEC, ensuring that retail
investors' perspectives inform the Commission's regulatory policies
and disclosure programs; and improving investors' financial literacy;
* advancing international regulatory and enforcement cooperation,
promoting converged high regulatory standards worldwide, and;
facilitating technical assistance programs in foreign countries; and
* adjudicating allegations of securities law violations.
Program: Agency Direction and Administrative Support;
Divisions and Offices:
* The Chairman and Commission;
* Office of Legislative and Intergovernmental Affairs;
* Office of Public Affairs;
* Office of the Secretary;
* Office of the Chief Operating Officer;
* Office of Information Technology;
* Office of Freedom of Information Act and Records Management Services;
* Office of Financial Management;
* Office of the Executive Director[A];
* Office of Human Resources;
* Office of Administrative Services; and;
* Office of Equal Employment Opportunity.
Program Descriptions: The Chairman is responsible for overseeing all
aspects of agency operations, and the Chairman and Commissioners are
responsible for the review and approval of enforcement cases and
formal orders of investigation and the development, consideration, and
execution of policies and rules. The other offices in Agency Direction
and Administrative Support are responsible for:
* working with Members of Congress on issues that affect the
Commission;
* coordinating the SEC's communications with the media, the general
public, and foreign visitors;
* reviewing all documents issued by the Commission, and preparing and
maintaining records of Commission actions;
* maximizing the use of SEC resources by overseeing the strategic
planning, information technology program, financial management,
records management, human resources, and administrative functions of
the agency; and;
* ensuring that the SEC is an equal opportunity employer in full
compliance with all federal EEO laws.
Program: Inspector General;
Divisions and Offices: Office of the Inspector General;
Program Descriptions: OIG is an independent office that conducts
audits of programs and operations of the SEC and investigations into
allegations of misconduct by staff or contractors. The mission of OIG
is to detect fraud, waste, and abuse and to promote integrity,
economy, efficiency, and effectiveness in the SEC's programs and
operations.
[A] The Office of the Executive Director was eliminated in FY 2011,
but the costs of the Office during the early months of the fiscal year
are included under Agency Direction and Administrative Support. The
Office of the Executive Director was responsible for management of the
agency’s human resources, budget management, and administrative
services functions. When the Office was eliminated, these functions
were transferred under the Office of the Chief Operating Officer.
[End of table]
As shown in the Statement of Net Cost, on page 123, the SEC presents
its net costs of operations by the programs outlined above,
and program contributions to accomplishing the mission of the SEC can
be found in the Performance Section.
[End of section]
FY 2011 Year in Review:
A More Modern and Effective SEC:
In fiscal year 2011, the U.S. Securities and Exchange Commission
continued to improve its effectiveness in pursuit of its investor
protection and market integrity missions. This progress was the result
of an ongoing, comprehensive effort to improve basic agency functions
and organization; align regulation, enforcement and oversight
strategies and priorities with evolving financial market conditions;
and equip the SEC’s 3,800 professionals with the tools and training
required to perform at the highest level.
Institutional enhancements begun two years ago continued to bear
fruit, as a changing culture increased the capacity and improved the
performance of the SEC. New hiring and training strategies lifted
staff performance while the creation of specialized teams in the
enforcement and examination programs helped the agency increase in-
house expertise in those areas. Reorganization of key divisions and
offices and an increased emphasis on collaboration and intra-agency
communication made the SEC more creative and responsive.
Core functions, including examination and enforcement, benefited from
new and upgraded information systems which allowed staff to focus
resources on high-risk registrants and to discover suspicious conduct
more rapidly. Other divisions and offices looked beyond traditional
priorities to identify emerging threats and opportunities within the
financial markets, adjusting strategies and priorities to better protect
investors and markets in a rapidly-changing environment.
Recognizing the historic significance of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the Dodd-Frank Act), the SEC
supported its many Dodd-Frank Act-related rulemakings with aggressive
efforts to solicit and consider ideas and criticisms from market
participants of all types, and to align action with domestic and
foreign regulators (with whom the SEC must coordinate policy in order
to limit exploitable regulatory inconsistencies).
And the SEC continued to upgrade human resources and back office
functions, improving resource allocation, increasing the value of the
SEC’s human capital, and allowing staff to focus on the SEC’s investor
protection and market stability mission – all while capturing savings
through further efficiencies in administrative tasks.
It should be noted, however, that savings and efficiencies alone will
not free up sufficient resources to allow the SEC to effectively carry
out a mission that is expanding significantly as
a result of the Dodd-Frank Act.
The SEC is better positioned today than it has been in many years to
respond quickly to events and developments in the financial world; to
keep regulatory pace with the continuing evolution of the financial
markets; and to deter, identify, and pursue wrongdoers. It is
important that the agency’s funding increases in step with these
increasing responsibilities, in order to ensure that investors and
markets continue to benefit from the SEC’s improving performance.
Enforcement: A Record Performance:
A reorganized Division of Enforcement is collaborating more closely
than ever with other SEC offices and increasingly utilizing technology
as a way to identify and halt unlawful activity before it occurs or
results in additional investor harm. The Division’s aggressive
strategy sends a clear message that securities law violations will be
discovered and punished.
Enforcement’s broad focus has meant successful actions against a wide
range of unlawful conduct, ranging from fraud committed by large
financial institutions whose actions contributed to the financial
crisis – including Countrywide Financial, J.P. Morgan, and Wachovia –
to smaller frauds that did not generate headlines but nonetheless
threatened the savings of vulnerable individuals.
Having completed the most significant restructuring since its
establishment almost 40 years ago, Enforcement continued to enhance
its effectiveness by focusing resources on the misconduct that most
harms investors and markets, by developing risk-based initiatives that
anticipate suspicious behavior before a fraud takes hold, and by using
the agency’s new IT resources to create analytical tools and to
process the increasing amounts of data that accompany its
investigations.
The Division of Enforcement has built closer ties with the Office of
Compliance Inspections and Examinations (OCIE), as well. And, the
Division is developing specialized skills and new approaches for
investigating possible violations in key areas such as valuation,
aberrational performance by hedge funds and investment advisers, and
microcap fraud.
These changes have allowed Enforcement to move faster and more
strategically to attack securities laws violations, and to achieve
record results in the process.
The SEC brought 735 enforcement actions in FY 2011, more than have
ever been filed by the Commission in a fiscal year. Eighty-five of
those actions were designated National Priority Cases – the Division’s
most important and complex. In addition to the improvement in the
quantity and quality of the filed enforcement actions, the Division
obtained orders for $2.8 billion in penalties and disgorgement;
utilized enhanced remedies available under the Dodd-Frank Act to bar
numerous wrongdoers from future work in the securities industry; and
obtained relief that sent a strong deterrent message, including
asset freezes, trading suspensions, and penny stock bars.
A fuller description of Division of Enforcement actions filed in FY
2011 can be found in Appendix B: Major Enforcement Cases, but this
brief survey conveys the breadth and effectiveness of those efforts:
Financial Crisis:
Since 2008, the SEC has filed 36 actions against 81 individual arising
from the financial crisis. Fifteen of these actions were filed in
2011, up from 12 filed in 2010.
* Among the most significant of these actions was that filed against
J.P. Morgan Securities, LLC, for misleading investors in a complex
mortgage securities transaction executed just as the housing market
was starting to plummet. The SEC charged J.P. Morgan for structuring
and marketing a synthetic collateralized debt obligation (CDO) without
informing investors that a hedge fund helped select the assets in the
CDO portfolio and that the fund had a short position in more than half
of those assets. J.P. Morgan settled the SEC’s charges by paying
$153.6 million, which represented a full return of losses to harmed
investors. J.P. Morgan also agreed to improve its processes for the
review and approval of mortgage securities transactions and to return
more than $56 million to investors who were harmed in a second CDO
transaction.
* Countrywide Financial Chief Executive Officer (CEO) Angelo Mozilo
agreed to pay a record $22.5 million penalty to settle SEC charges
that he and two other former Countrywide executives failed to disclose
to investors the significant credit risk that Countrywide was taking
on as it increased its share of the subprime mortgage market. Mozilo
was permanently barred from serving as an officer or director of a
publicly-traded company and agreed to disgorge $45 million in ill-
gotten gains. A total of $67.5 million is being returned to harmed
investors.
* The SEC settled charges filed previously against Morgan Keegan &
Company and Morgan Asset Management, which agreed to pay $200 million
to settle fraud charges. Two Morgan Keegan employees also agreed to pay
penalties for their alleged misconduct, including one who is now
barred from the securities industry. The Memphis-based firms, former
portfolio manager James C. Kelsoe accused by the SEC of causing the
false valuation of subprime mortgage-backed securities in five funds
managed by Morgan Asset Management, from January 2007 to July 2007.
The SEC’s order issued in settling the charges also found that Morgan
Keegan failed to employ reasonable pricing procedures and consequently
did not calculate accurate “net asset values” (NAV) for the funds.
Morgan Keegan nevertheless published the inaccurate daily NAVs and
sold shares to investors based on the inflated prices.
* In separate actions, the SEC charged RBC Capital with defrauding
five Wisconsin school districts by selling them unsuitably risky and
complex CDO investments. Stifel and former Stifel Senior Vice
President David W. Noack were charged with misrepresenting the risk of
the investments and failing to disclose material facts to the school
districts. The sales took place despite significant concerns within
RBC Capital about the suitability of the product for municipalities
like the school districts. RBC Capital agreed to settle the SEC’s
charges by paying a total of $30.4 million, which will be distributed in
varying amounts to the harmed school districts through a Fair Fund.
The SEC’s case against Stifel, Nicolaus & Co. is continuing.
* The SEC charged Wells Fargo Securities LLC – formerly known as
Wachovia Capital Markets LLC – with misconduct by Wachovia in the sale
of two CDOs tied to the performance of residential mortgage-backed
securities as the housing market was beginning to show signs of
distress. The SEC’s order found that Wachovia violated securities laws
by charging undisclosed excessive markups in the sale of certain
interests to investors in one CDO, and by misrepresenting to investors
in another CDO the value at which it had acquired assets from
affiliates. In settling the action, Wells Fargo agreed to pay more
than $11 million in disgorgement and penalties, most of which will be
returned to harmed investors.
Fraudulent Schemes:
Supporting investor confidence in the financial markets means
bringing cases not only against major financial firms and their
executives, but also against individuals and smaller firms whose
misdeeds can steal a lifetime’s savings or devastate an investor’s
future.
* The SEC charged three senior executives at the Akron, Ohio-based
Fair Finance Company with orchestrating a $230 million fraudulent
scheme involving at least 5,200 investors – many of them elderly. The
SEC alleges that after purchasing Fair Finance Company, Chief Executive
Officer Timothy S. Durham, Chairman James F. Cochran, and Chief
Financial Officer Rick D. Snow deceived investors, selling interest-
bearing certificates whose proceeds were supposed to be used to
purchase and service discounted consumer finance contracts. Instead,
Durham and Cochran schemed to divert investor proceeds to themselves
and others, as well as to struggling and unprofitable entities that
they controlled.
* The SEC charged internet-based investment company Imperia Invest IBC
with securities fraud and obtained an emergency court order freezing
Imperia’s assets. The SEC alleged that Imperia solicited several million
dollars from U.S. investors and promised them returns of 1.2 percent
per day – while in reality siphoning the funds into foreign bank
accounts and not paying a single penny back. Imperia allegedly raised
more than $7 million from approximately 14,000 investors worldwide.
More than half the funds were collected from U.S. investors who are
members of the Deaf community.
Insider Trading:
The Commission has aggressively pursued practices that damage the
integrity of financial markets and discourage investors who seek a
fair and level playing field. Most notably, the SEC discovered and
developed information that ultimately led to criminal convictions for
Galleon hedge fund founder Raj Rajaratnam and others, and to
Commission charges against 22 individuals – including high-ranking
corporate executives and hedge fund managers – and against seven
entities involved in the scheme (in November 2011, Rajaratnam was
ordered to pay a record $92.8 million to resolve SEC charges
in the case).
There have been other important cases, as well.
* The SEC charged a former Mariner Energy Inc. board member and his
son with insider trading on confidential information about an
impending takeover of the oil and gas company. Acting on a tip from
his father, H. Clayton Peterson, son Drew Clayton Peterson purchased
Mariner Energy stock for himself, his relatives, his clients and a
close friend in advance of an announcement that Apache Corporation
would be acquiring Mariner. Peterson also tipped several other close
friends, who traded on the nonpublic information ahead of the April
2010 acquisition announcement. The insider trading by the Petersons and
others generated more than $5.2 million in illicit profits.
* The SEC charged former Nasdaq managing director Donald L. Johnson
with insider trading on confidential information he stole while
working in two units at Nasdaq that communicated with companies in
advance of market-moving public announcements. The SEC alleged that
Johnson used the stolen information to trade in the stock of six
companies on at least nine occasions, realizing illicit profits of
more than $755,000.
* The SEC charged Cheng Yi Liang, a chemist at the U.S. Food and Drug
Administration (FDA), with insider trading on confidential information
concerning upcoming announcements of FDA drug approval decisions,
generating more than $3.6 million in illicit profits and avoided
losses. Liang illegally traded in advance of 28 public announcements
about FDA drug approval decisions, involving 20 publicly-traded
companies, for profits and losses avoided totaling over $3.7 million.
In each instance, Liang traded in the same direction as the
announcement. Liang went to great lengths to conceal his insider
trading, including trading in multiple accounts, none of which were in
his name.
Municipal Securities:
The SEC focused increased attention on the lightly-regulated municipal
securities market, in which well-connected individuals and firms use
influence and collusion to win lucrative fund management contracts or
otherwise shortchange the municipalities whose interests they are
supposed to be serving.
* In a series of cases, the SEC charged J.P. Morgan Securities LLC,
UBS Financial Services Inc., and Banc of America Securities, LLC with
rigging more than 200 municipal bond re-investment transactions,
generating tens of millions of dollars in ill-gotten gains. Together,
the settlements of these three cases resulted in the return of $134
million to harmed municipalities and conduit borrowers in more than 40
states. In addition, the companies paid a total of $391 million to
settle parallel cases brought by other Federal and state authorities.
Misleading Investors:
The SEC continued its vigilant enforcement of regulations regarding
entities such as mutual funds, investment advisers, and broker-dealers
who are entrusted with a significant portion of the investing
public’s assets.
* The Commission charged Charles Schwab Investment Management and
Charles Schwab & Co. Inc. with making misleading statements about the
Schwab YieldPlus Fund – at one time, the largest ultra-short bond
fund. The misleading statements included descriptions of the fund as a
cash alternative that offered only slightly higher risk than a money
market fund. The fund suffered a significant decline during the credit
crisis of 2007 and 2008. The Schwab entities agreed to pay more than
$118 million to settle the SEC’s charges. The SEC also charged the
responsible Schwab executives, who are currently litigating the SEC’s
claims.
OCIE Referrals:
Increased cooperation with OCIE, which collaborates with Enforcement
when its examinations reveal suspicious activity, resulted in several
important cases, including the Stifel, Nicolaus & Co case described
above.
* Three AXA Rosenberg entities, as well as the cofounder of the firm,
Barr Rosenberg, were charged with securities fraud for concealing a
significant error in the computer code of the quantitative investment
model that they developed and used to manage client assets. AXA
Rosenberg agreed to settle the SEC charges by paying $217 million to
cover investor losses, to pay an additional $25 million penalty and to
take other remedial steps. Separately, Barr Rosenberg agreed to settle
the SEC’s charges by paying a $2.5 million penalty and agreeing to be
barred from the securities industry.
* The SEC filed an emergency action and obtained emergency relief to
halt a multi-million dollar misappropriation of investor assets by
registered investment adviser MK Capital Management, LLC and its
principal, Francisco Illarramendi. The Commission subsequently amended
its complaint to allege that Illarramendi and MK Capital had
misappropriated investor assets and misused two hedge funds they
managed in a Ponzi scheme involving hundreds of millions of dollars.
The SEC obtained a court order freezing the assets of the hedge funds
and ordered that all assets of the hedge funds, including $230 million
held in offshore accounts, be repatriated to the United States.
Illarramendi was permanently barred by the SEC from serving in the
securities industry.
The Division of Enforcement’s 2011 performance reinforces what a
growing number of individuals and entities are discovering: recent
improvements in the Division’s structure, expertise, management,
technology, and staff capacity are allowing the Commission not only to
bring more – and more complex – cases, but to obtain better results on
investors’ behalf.
OCIE: Protecting Investors through More Effective Examinations:
In 2011, OCIE significantly expanded its ability to contribute to the
SEC’s mission – improving its ability to identify risk and target
examinations and resources accordingly, changing structure to more
effectively acquire and deploy expertise, and collaborating across the
agency to improve both the examination and the rulemaking processes.
OCIE’s National Exam Program (NEP) anchored this improving performance
by weaving a number of key initiatives into a single effective effort.
Collaboration with the Division of Risk, Strategy and Financial
Innovation (RSFI) allows the NEP to continuously improve its targeting
and risk indicators and to focus exams on registrants that are most
likely to merit them. A recently-established Office of Risk Analysis
and Surveillance within OCIE guides that targeting strategy across
different program areas and sharpens focus on registrants and
practices that pose the greatest risk to investors and market
integrity.
As part of its risk assessment efforts, OCIE began developing risk
profiles of systemically relevant institutions, including large broker-
dealers, clearing agencies and exchanges. OCIE has completed risk
profiles of each of the 21 national securities exchanges and self
regulatory organizations (SROs), enabling NEP to understand individual
risk, and risk among the exchanges as a group. OCIE has audited all
ten nationally recognized statistical rating organizations, and publicly
reported the findings. OCIE has begun risk-monitoring of clearing
agencies and it is moving to develop risk profiles of the largest and
most systemically significant broker-dealers.
Continuing improvements in risk-based targeting allow the NEP to
extend resources and staffing strained by the continued growth in the
number and complexity of the registrants OCIE is charged with
examining. Further, specialized groups now focus on complex and high-
risk areas of the financial marketplace.
OCIE also is working to extend its capacity by establishing an
infrastructure that reflects the SEC’s increasingly diverse registrant
population, including private fund advisers, credit
rating agencies, and quantitative/high-frequency trading advisers.
A major restructuring is underway within OCIE, including the
development of specialized working groups (SWGs) in six key areas and
over thirty other significant improvement initiatives. The SWGs will
serve as forums in which the NEP and other agency staff can
collaborate and discuss current issues, initiatives, and concerns
related to each specialized area. They will serve as an ongoing
resource for training and for disseminating this specialized
knowledge, as well.
OCIE is hiring exam staff with industry experience and specialized
expertise in targeted areas, and enhancing the resources and tools
available to examination staff. These efforts also include new
training: OCIE has worked with SEC University to develop targeted
training in areas like risk management and on specific topics related
to new responsibilities created by the Dodd-Frank Act, such as
examining private fund advisers. Development of a new certified
examiner program is underway, as well.
The examination process itself has been improved. Once examination
targets are identified, an open architecture staffing system allows
the NEP to assemble more effective teams by bringing together
different combinations of individuals, with varying areas of
expertise, to address the unique challenges each examination presents.
OCIE is increasingly collaborating with other organizations, inside
and outside the SEC, to improve the quality of examinations and of
disclosures made by registered entities. The Office is reaching out to
state regulators, local and national law enforcement agencies and –
where appropriate – foreign regulators, sharing information and
examinations strategies.
Within the SEC, OCIE is collaborating with the Division of Trading and
Markets (TM) on examinations of broker-dealers, SROs, and transfer
agents. This allows OCIE to identify important areas of focus and has
led to TM requests that firms change certain practices. OCIE also
teams with the Division of Investment Management (IM) for examinations
of various investment funds and their management, collaborating on
reviews of money market fund filings and using data provided by IM in
its risk assessment of registrants.
Key OCIE actions that led to Division of Enforcement action include:
* Identifying the sale of millions of dollars of micro-cap securities
through false and misleading statements, followed by swift action to
protect investors’ assets, including freezes, trading halts and/or
fines. The microcap review demonstrates the benefits of OCIE’s
recently created specialized groups, one of which focuses on these
securities.
* Discovering that a broker was churning two accounts owned by the
Sisters of Charity – one account for care of nuns in assisted living
facilities and a second supporting the sisters’ charitable endeavors –
in order to generate excess commissions for the broker.
* Identifying information that led to the charging of Raymond James
with misrepresenting and omitting material information in connection
with the sale to customers of over $2.4 billion in market value of
auction rate securities.
OCIE’s effort to promote voluntary compliance, good governance and
risk management within the industry serves both investors and
registrants: it diminishes the need for formal action while ensuring
that investors have access to accurate, timely information. As part of
this effort, OCIE has conducted Chief Compliance Officer Outreach
(CCOutreach) events designed to encourage open communications and
coordination on compliance issues between the SEC and the mutual fund,
investment adviser, and broker-dealer industries. OCIE published two
public reports as part of a new initiative to create more transparency
about issues identified in its examinations. Additionally, OCIE
created an expansive large-firm monitoring program and improved
communication efforts with senior management and fund boards at a
number of large organizations. A primary goal of these efforts is to
increase awareness, engagement and support on key risk and regulatory
issues.
Finally, OCIE is contributing to the SEC’s rulemaking process,
imparting practical knowledge and information gathered during
examinations while taking part in over 50 working groups implementing
various Dodd-Frank Act rulemaking provisions. Other rulemakings have
benefited from significant OCIE input, as well, including large trader
reporting rules, amendments to the Advisers Act and the consolidated
audit trail rule proposal.
Operating Divisions: Progress throughout the Agency:
Enforcement, examination and rulemaking are the SEC’s most settlement
visible functions. However, the importance of other efforts cannot be
overstated. The SEC ensures that investors have access to timely,
accurate and complete information, that markets function efficiently,
that regulations are anchored in sound economics and that the agency
as a whole is keeping up with changes in the financial marketplace.
The Division of Corporation Finance (CF), which oversees corporate
disclosure of information, established new offices concerned with
three vital facets of the financial world: an office focused on the
largest financial institutions; the Office of Structured Finance,
which deals with disclosure reviews and policy-making in asset-backed
securities and other structured products; and the Office of Capital
Market Trends. These offices are increasing the attention paid to
market sectors that have proved systemically significant in recent
years, aiding rulemaking and improving the SEC’s familiarity with and
expertise in these increasingly important areas.
CF’s Office of Disclosure Operations worked in 2011 to enhance
investor protection by targeting specific disclosure issues that had
previously received little attention: requesting disclosure of
overseas cash holdings which, if repatriated, would result in
material, negative consequences; questioning whether current
litigation contingency disclosure practices comply with existing
requirements; and working with Enforcement, the Office of the Chief
Accountant (OCA) and the Office of International Affairs (OIA) to
combat an uptick in problems with reverse mergers by stepping up
scrutiny of the Form 8-Ks filed in their wake.
In support of the SEC’s call to facilitate capital formation for small
enterprises, CF also began reviewing restrictions on communications in
public offerings, the impact of the ban on general solicitation in
private offerings, triggers for public reporting under Section 12(g)
of the Exchange Act and regulatory questions around subjects including
secondary trading platforms and new capital raising strategies. In
addition to very significant rulemaking responsibilities regarding
derivatives trading, the Division of Trading and Markets (TM)
addressed a broad spectrum of issues as it worked to help stabilize
the financial markets and protect the interests of large and retail
investors.
TM received and processed over 2,000 SRO filings from exchanges,
clearing agencies, the Financial Industry Regulatory Authority
(FINRA), and the Municipal Securities Rulemaking Board (MSRB),
including those regarding complex fee structures, new products, and
revamped governance structures. TM led Commission monitoring of – and,
as appropriate, response to – market activities in connection with
significant events, including Hurricane Irene and the August 2011 market
volatility, helping markets continue to function normally despite
significant stress.
TM also continued to solicit stakeholder views on the structure of
today’s financial markets and on potential changes that might improve
market integrity or help maintain a level playing field for investors
of all types. TM established a new Office of Derivatives Policy to
focus on implementing the derivatives provisions of the Dodd-Frank
Act. TM also continued to expand the clearance and settlement program,
an effort that culminated in the establishment of a new Office of
Clearance and Settlement. Traditionally focused on securities clearing
agencies and transfer agents, the Office of Clearance and Settlement
is now also responsible for implementing Dodd-Frank Act regulations
for clearing agencies that clear security-based swaps, and for
overseeing security-based swap data repositories.
The Dodd-Frank Act expanded the SEC’s regulatory authority over
previously-exempted advisers to hedge funds and other private funds,
an important expansion of agency responsibility. The Division of
Investment Management (IM) formed a new Private Funds group headed by
an experienced hedge fund attorney to spearhead this regulatory
program and to gear up for the task of collecting and conveying
information that will be reported to the SEC by these entities for use
by the Financial Stability Oversight Council (FSOC).
IM also worked with FSOC members to share information newly filed by
money market funds with the SEC and the related analyses. This has
facilitated critical consultations with other agencies responsible for
monitoring systemic risk related to the European debt crisis.
The Division of Risk, Strategy, and Financial Innovation (RSFI) was
created in 2009 as the SEC’s internal “think tank,” and provides the
agency with sophisticated analyses that integrate economic, financial,
and legal expertise. A linchpin of the SEC’s effort to break down
silos and bring together critical data from across the agency, RSFI is
the “business owner” of the SEC’s new TCR (tips, complaints and
referrals) System, generating data and statistics on the system’s
operations and helping to define further system development.
RSFI provided critical support in the successful federal insider
trading prosecutions of Raj Rajaratnam and Winifred Jiau, analyzing
expert testimony and other documents proffered by the defense and
allowing prosecutors to successfully challenge key portions of the
defense’s strategies.
The Division has contributed substantially to the Dodd-Frank Act
rulemaking process, particularly with regard to the over-the-counter
derivatives market. And RSFI is at the center of the SEC’s work to
provide detailed economic analysis of proposed agency actions.
RSFI also worked closely with OCIE, refining risk models that help
OCIE direct exam resources in light of current trends and suspected
abuses, and it participated in exams as part of RSFI’s work developing
tools, algorithms, and analytics that enhance the effectiveness of
field teams at these exams.
Consistent with its “think tank” role, RSFI economists conducted
research on financial and economic issues relevant to the SEC’s
mission, for publication in peer-reviewed academic journals, on
relevant subjects such as “Short Selling in Initial Public Offerings”
and “Venture Capital Reputation, Post-IPO Performance, and Corporate
Governance.”
The Office of the Chief Accountant (OCA) continued to coordinate and
monitor progress towards convergence of U.S. Generally Accepted
Accounting Principles and International Financial Reporting Standards
(IFRS). OCA published both a report on progress against the staff’s
IFRS work plan and a Staff Paper exploring a possible method for
incorporation of IFRS. OCA also worked with the SEC’s Office of
International Affairs (OIA) to develop recommendations and a final
report regarding the IFRS Monitoring Board Governance Review.
In connection with OCA’s role in overseeing the Public Company
Accounting Oversight Board (PCAOB), the SEC approved a PCAOB
rulemaking to update its Audit Risk Assessment Standards. These
standards are designed to benefit investors by enhancing the
effectiveness of the auditor’s assessment of and response to the risks
of material misstatement.
The SEC also approved temporary rules establishing the PCAOB’s Interim
Program of Inspection for Audits of Broker-Dealers. These rules are
part of the PCAOB’s initial steps to implement the expanded authority
over auditors of brokerdealers granted it in the Dodd-Frank Act.
Since the Commission’s appointment of three new PCAOB Board Members in
February, 2011, OCA has been working closely with the new Board and
PCAOB staff on several Board initiatives, including its consideration
of potential changes to the auditors’ reporting model.
OCA is also working with the PCAOB and the SEC’s OIA on continuing
negotiations with certain jurisdictions – most notably in the European
Union and China – aimed at obtaining for the PCAOB the ability to
adequately inspect audits by registrants’ accountants. These
negotiations occur at a time when the reliability of financial reports
and audit practices in some jurisdictions has been called into
question, leading to investor losses and the de-listing of a number of
entities.
In addition to its work with OCA, OIA is working closely with
Enforcement to ensure that the SEC’s reach is as global as the
financial markets have become – tracing and freezing $317 million of
fraud proceeds located overseas and repatriating $241 million to
harmed investors. It helped coordinate more than one thousand
assistance requests between Enforcement and its foreign counterparts,
while working to increase – from 71 nations to 80 – the number of
signatories to a memorandum of understanding regarding compliance with
and enforcement of securities laws. In addition, OIA brokered
information sharing agreements between the PCAOB and the United
Kingdom and the Swiss Audit Oversight Authorities, allowing the PCAOB
to inspect the auditors of foreign companies listed on U.S. exchanges
and registered with the SEC.
OIA also created and led a Task Force on International
Implementation – an intra-agency task force coordinating the
international aspects of the Dodd-Frank Act. The Task Force’s work is
diminishing the risk that Dodd-Frank Act regulation will conflict with
regulations in other countries, and create the potential for
regulatory arbitrage.
The Office of Investor Education and Advocacy (OIEA) redesigned and
expanded its investor.gov website, adding information on a variety of
topics, and materials aimed at the particular needs of specific
groups, such as service members, teachers and retirees. OIEA completed
a Dodd-Frank Act study on ways to improve investors’ access to
registration information about investment professionals. In addition, it
began a multi-part study on financial literacy among retail investors
underway.
A Critical Market Response: May 6th and Market Confidence:
In 2011, the SEC continued efforts to address the unusual market
volatility that occurred on May 6, 2010.
At 2:42 on the afternoon of May 6, 2010, stock prices on U.S.
exchanges began to fall with almost unprecedented speed – 573 points
in five minutes – leaving the nation’s most prominent stock index down
over 900 points from the previous day’s close. At the worst end of the
spectrum, more than 300 securities suffered declines of more than 60
percent. And then, just as suddenly, the markets reversed themselves,
recovering to pre-crash levels within minutes.
These unusual price swings caused significant harm to many investors,
including those who lost money when “stop loss” programs led to
automatic selling during the dramatic – but quickly reversed –
decline. In addition to financial losses, the sudden disruptions also
delivered a significant blow to the confidence of investors of all
types – individual retail investors, large institutions and all those
in between.
Recognizing the significance of the market’s unusual fluctuations, the
SEC acted immediately, working with the exchanges, FINRA and the
Commodity Futures Trading Commission (CFTC) to determine causes of the
volatility and to take action to reduce the possibility of other,
similar, events occurring in the future.
Beginning in May 2010, the SEC – spearheaded by the Division of
Trading and Markets – joined with FINRA and the exchanges to propose
the single-stock circuit breakers which would ultimately be applied to
most U.S. equity securities.
On October 1, 2010, staffs of the SEC and CFTC presented a
comprehensive analysis of the causes and consequence of the May 6
volatility, as the SEC’s efforts to enhance market integrity continued
into the new fiscal year.
* In 2011, the SEC adopted a rule effectively prohibiting brokers and
dealers from offering customers “unfiltered” or “naked” access to the
exchanges by requiring that risk controls – designed to prevent
inadvertent risk threats to market stability – be in place before
access is provided. The rule requires brokers to put in place risk
management controls and supervisory procedures to help prevent
erroneous orders, ensure compliance with regulatory requirements, and
enforce pre-set credit or capital thresholds.
* The SEC approved rules proposed by FINRA and the exchanges that
provide more certainty regarding the circumstances under which trades
will be considered “clearly erroneous” and canceled. After May 6, a
variety of market participants reported that the uncertainty over
which trades would be canceled contributed to participants’ decision
to withdraw from trading, further exacerbating the market’s volatility.
* The SEC also approved rules proposed by FINRA and the exchanges
requiring that market makers maintain a quote within a certain
percentage of the prevailing bid and offer, which reduces the
likelihood that stub quotes – offers to buy or sell a stock at a price
so far away from the prevailing market that they are not intended to
be executed – will be executed against. Executions against quotes as
low as a penny a share and as high as $100,000 represented a
significant proportion of the trades that were executed at extreme
prices on May 6 and were subsequently broken.
* The SEC considered a proposed national market system (NMS) plan
filed by national securities exchanges and FINRA that would establish
a new “limit up-limit down” mechanism to address extraordinary market
volatility in U.S. equity markets. Limit up-limit down would prevent
trades in listed equity securities from occurring outside a specified
price band, which would be set at a percentage level above and below
the average price of the security over the immediately preceding five-
minute period.
* The Commission published for comment changes proposed by SROs to
rules governing market-wide circuit breakers. Among other things, the
proposals would lower the thresholds that trigger the respective Level
1, 2 and 3 market-wide circuit breakers from 10 percent, 20 percent
and 30 percent, to 7 percent, 13 percent and 20 percent. They also
would replace the Dow Jones Industrial Average with the S&P 500 Index
as the pricing reference against which to measure market decline.
* The Commission adopted a rule establishing large trader reporting
requirements that will enhance the agency’s ability to identify large
market participants, as well as to collect and analyze information on
their trading activity. This will both speed analysis of unexpected
market behavior and aid the SEC’s Division of Enforcement in
investigations of suspicious activity.
Dodd-Frank Act Regulations: Implementing Financial Reform:
The Dodd-Frank Act is the most significant piece of securities
legislation since the 1930s, one that both imposes significant new
investor protection and market stability responsibilities on the SEC,
and provides new tools with which to meet those responsibilities. 2011
was the busiest portion of the multiyear implementation agenda written
by Congress into the law and the SEC – in collaboration with other
regulatory bodies and in close communication with stakeholders
representing every facet of the financial marketplace – made significant
progress against that agenda.
Of the more than 90 mandatory rulemaking provisions in the Dodd-Frank
Act, the SEC had proposed or adopted rules for three-quarters of them
by the close of 2011, as well as a number of the rules stemming from
the dozens of other provisions that give the SEC discretionary
rulemaking authority. Additionally, the SEC had issued 12 of the more
than 20 studies and reports that it is required to complete under the
Act.
Derivatives:
One of the most complex and important responsibilities assigned to the
SEC in the Dodd-Frank Act is the building – from the ground up,
together with the Commodity Futures Trading Commission (CFTC) – a
regulatory system for an over-the-counter derivatives market that has
grown in notional value to hundreds of trillions of dollars. A new,
transparent derivatives market, with a variety of trading platforms and
central clearing, will diminish risk and encourage competition, which
can increase liquidity and improve pricing.
By the close of 2011, the SEC had begun to lay the groundwork for
regulating security-based swaps – the agency’s part of this complex
new derivatives market – with a series of proposals regarding its
fundamental legal, structural and definitional issues.
* The SEC, jointly with the CFTC, proposed rules further defining a
number of key terms, including “swap,” “security-based swap,”
“security-based swap agreement,” “swap dealer,” “security-based swap
dealer,” “major swap participant,” and “major security-based swap
participant.” These rules seek to clarify whether and how derivatives
market participants will be subject to regulation, either as a result
of the products in which they transact or the activities they
undertake.
* The SEC proposed rules governing the registration and operation of
security-based swap data repositories (SDRs), new entities that will
collect transaction information on securities-related swap
transactions and publicly disseminate it in real time. These rules
also prescribe the manner in which transactions must be reported to
SDRs, and how SDRs should disseminate transaction information.
* The SEC proposed rules regarding clearance of security-based swaps
that are not covered by the end-user exemption. These rules would
establish a process through which clearing agencies provide
information to the SEC about the security-based swaps they plan to
accept for clearing. The rules would also set minimum operational and
governance standards for clearing agencies. Additionally, the SEC
proposed rules setting forth the requirements to which end-users must
adhere when they engage in security-based swap transactions that are
exempt any from mandatory clearing requirement that may apply.
* The SEC proposed rules establishing a framework for the registration
and regulation of swap execution facilities (SEFs) – platforms on
which security-based swaps required to be cleared may be traded. These
regulations would encourage transparent and fair trading of security-
based swaps.
* The SEC took steps to provide for the registration and regulation of
security-based swap dealers and major security-based swap participants
by, among other things, proposing rules establishing business conduct
standards applicable to those entities.
Asset-Backed Securities:
The collapse of the market for one type of asset-backed securities
(ABS), those backed by residential subprime mortgages, was a
precipitating event for the global financial crisis. Mortgage
originators, able to transfer the risk of foreclosure to securitizers,
allowed underwriting standards to collapse. Securitizers then
transferred their risk to investors, who lost billions when mortgage-
holders began defaulting on an unprecedented scale. The SEC is
pursuing regulations that would encourage high underwriting standards
by aligning the interests of originators and securitizers with those
of investors, and by ensuring that investors in these securities have
access to the information needed to invest rationally.
* Risk retention requirements would ensure that securitizers have
“skin in the game” and, thus, incentive to ensure quality
underwriting. The SEC joined the Federal Reserve Board, the Office of
the Comptroller of the Currency, the Federal Deposit Insurance
Corporation, the Federal Housing Finance Agency and the Department of
Housing and Urban Development in seeking public comment on a proposed
rule that would require sponsors of ABS to retain at least five
percent of the credit risk of the assets underlying the security.
* The SEC adopted rules requiring issuers of asset-backed securities
to disclose the history of repurchase requests received and
repurchases made, and requiring issuers of asset-backed securities to
conduct a review of the assets underlying those securities.
* The SEC also adopted rules implementing the Dodd-Frank Act provision
which requires ABS issuers in registered transactions to review the
assets underlying the ABS and disclose the nature of the review.
* The SEC proposed a rule prohibiting material conflicts of interest
between those who package and sell asset backed securities and those
who invest in them, helping ensure that entities which create and sell
asset-backed securities cannot benefit at the expense of their clients,
from the failure of those same securities.
* The SEC re-proposed for public comment rules requiring greater
accountability and enhanced quality around ABS when issuers seek to
use an expedited registration process known as “shelf registration.”
First proposed before that enactment of the Dodd-Frank Act, the revised
proposal would require that an executive officer of the issuer certify
the accuracy of the disclosure, that the securitization be designed to
ensure cash flows sufficient to service expected payments, that a risk
manager be appointed to review assets upon the occurrence of certain
trigger events, and that dispute resolution procedures be
in place in the event of a repurchase request.
Credit Rating Agencies:
The collapse of billions of dollars of triple-A rated mortgage-backed
securities was a key element of the financial crisis. Over-reliance on
opinions issued by nationally recognized statistical rating
organizations (NRSROs or, simply, rating agencies) left investors
exposed to risks that were, in fact, far greater than the securities’
initial ratings implied (many of these triple A securities were
eventually downgraded to “junk” status).
Independent of financial reform legislation, the SEC had previously
proposed rules that would lessen reliance on rating agencies by
requiring that investors have access to data on the assets, including
individual mortgage data, underlying ABS.
* In response to the Dodd-Frank Act, the SEC proposed rules and
amendments intended to increase transparency and improve the integrity
of credit ratings by requiring that NRSROs report on internal
controls, protect against conflicts of interest, establish
professional standards for credit analysts, publicly disclose the
methodology used to determine individual ratings and enhance their
public disclosures about the performance of their credit ratings.
* The SEC removed credit ratings as eligibility requirements for
companies seeking to use “short-form” registration when registering
securities for public sale. The SEC also proposed amendments to
existing rules that would remove references to credit ratings in
several rules under the Exchange Act, including rules concerning
broker-dealer financial responsibility, distributions of securities,
and confirmations of reserve requirements for broker-held excess
margin securities. In addition, the SEC proposed removing credit
rating references in certain rules and forms under the Investment
Company Act of 1940, including Rule 2a-7, governing the operations of
money market funds.
Executive Compensation:
* The SEC adopted rules concerning shareholder approval of executive
compensation and “golden parachute” compensation arrangements,
requiring that say-on-pay votes occur at least once every three years
and that a “frequency” vote be held at least once every six years.
Companies also are required to provide additional disclosure regarding
“golden parachute” compensation arrangements made with certain
executive officers in connection with merger transactions.
* The SEC, jointly with the Federal Reserve and five other financial
regulatory agencies, proposed a rule that would require certain
financial institutions – including brokerdealers and investment
advisers with $1 billion or more in assets – to disclose the structure
of their incentive-based compensation practices, and which would
prohibit such institutions from maintaining compensation arrangements
that encourage inappropriate risks.
* The SEC also proposed rules requiring the Commission to direct the
national securities exchanges and national securities associations to
prohibit the listing of any equity security of an issuer that does not
comply with new compensation committee and compensation adviser
requirements.
Private Funds:
* The SEC adopted rules requiring advisers to hedge funds and other
private funds to register with the SEC and reallocating regulatory
responsibility for smaller advisers to the states. In addition, the
Commission approved rules that implement exemptions from registration
for three types of private fund advisers: advisers solely to venture
capital funds; advisers solely to private funds with less than $150
million in assets under management in the U.S.; and certain private
advisers without a place of business in the U.S.
* In a joint release with the CFTC, the Commission proposed a new rule
that would require hedge fund advisers and other private fund advisers
to report systemic risk information on a new form, Form PF (this
proposal was adopted in October, 2011). • The SEC adopted a rule
defining “family offices” that will be excluded from the definition of
an investment adviser under the Investment Advisers Act, and therefore
not subject to regulation under the Act.
Other Significant Dodd-Frank Act Rulemakings:
* The SEC proposed a rule creating a new process by which municipal
advisers must register with the SEC, submitting detailed information
and certifying that they have met or will meet the qualifications and
regulatory obligations required of them. Required information would
include contact information, a list of municipal advisory activities
in which they engage, and disciplinary history. When adopted, this
rule will supersede a more limited temporary rule adopted shortly
after the passage of the Dodd-Frank Act.
* The SEC proposed rules that would require reporting issuers to
disclose annually whether they use “conflict minerals” that originate
from the Democratic Republic of the Congo or adjoining countries and
are “necessary to the functionality or production” of a product that
the issuer either manufactures or contracts to be manufactured.
* The SEC proposed rules that would require resource extraction
issuers to disclose payments made by themselves, a subsidiary or any
entity they control to the U.S. or foreign governments, including
taxes, royalties, fees (including license fees), production entitlements
and bonuses. Additionally, rules were proposed outlining the way in
which mining companies must disclose to investors certain information
about mine safety and health standards.
* The SEC created a Whistleblower Program that rewards insiders who
provide the agency with high-quality tips that lead to successful
enforcement actions. To be considered, a whistleblower must
voluntarily provide the SEC with original information that leads to the
successful enforcement by the SEC of a Federal court or administrative
action and monetary sanctions totaling more than $1 million. Under the
program, whistleblowers will enjoy new protections. The new rules
encourage company employees to report suspected wrongdoing internally,
providing companies a strong incentive to have a credible, effective
compliance program in place.
Dodd-Frank Act Studies:
In addition to rulemakings, the Dodd-Frank Act requires the SEC to
produce a number of reports. Among them:
* The SEC submitted to Congress a staff study on the standard of
conduct applicable to broker-dealers and investment advisers who
provide personalized investment advice to retail investors. The study
concluded that, although retail investors generally expect that
investment professionals (whether investment advisers or broker-
dealers) are acting in their best interests, those investors are
confused by the different standards of conduct that apply under the
two regimes. The study concluded that retail customers should not have
to parse legal distinctions to determine whether the advice they
receive is provided in accordance with their expectations, and that a
retail investor receiving personalized investment advice about
securities should receive the same regulatory protections, regardless
of whether the investor chooses to work with an investment adviser or
a broker-dealer.
* To address this conclusion, the study made two primary
recommendations; that the Commission exercise its discretionary
rulemaking authority to implement a uniform "no fiduciary standard of
conduct (which would be less stringent" than the standard that applies
to investment advisers today) for broker-dealers and investment
advisers when they provide personalized investment advice about
securities to retail investors; and that the Commission consider
harmonization of broker-dealer and investment adviser regulation when
those financial professionals provide the same or substantially
similar services to retail investors and when such harmonization adds
meaningfully to investor protection.
* The SEC submitted, with the CFTC, a joint staff study required by
the Dodd-Frank Act on "the feasibility of requiring the derivatives
industry to adopt standardized computer-readable algorithmic
descriptions which may be used to describe complex and standardized
financial derivatives." The joint study concluded that current
technology is capable of representing derivatives using a common set
of computer-readable descriptions and that these descriptions are
precise enough to use for the calculation of net exposures and to
serve as part or all of a binding legal contract.
* The Commission submitted to Congress a staff study on the need for
enhanced examination and enforcement resources for investment advisers
that are registered with the Commission.
Beyond the Dodd-Frank Act: An Investor-Focused Rulemaking Agenda:
The SEC's rulemaking efforts extend beyond the boundaries of the Dodd-
Frank Act, addressing priorities in areas not covered by that
legislation.
* The SEC proposed amendments to the broker-dealer financial reporting
rule that would strengthen the audits of broker-dealers and the SEC's
oversight of broker-dealers' handling of their customers' securities and
cash. Building on rules adopted in December, 2009 that strengthened
custody controls for investment advisers, the proposed rules would
reinforce the annual reporting and audits of broker-dealers by
improving the focus on compliance with financial responsibility rules
and related controls.
* The SEC made available to investors the detailed information that
money market funds file with the agency, including information about a
fund's investments and the market-based price of its portfolio known
as its "shadow NAV' or mark-to-market valuation. The information is
available on the SEC's website and is updated monthly.
* The SEC issued a concept release seeking public comment on the
treatment of real estate investment trusts (REITs) and other mortgage-
related pools under the Investment Company Act. At the same time, the
Commission issued an advance notice of proposed rulemaking, seeking
public input on possible amendments the agency might consider
proposing to Rule 3a-7, which provides a conditional exclusion from
the definition of "investment company" under the Investment Company
Act for certain issuers of asset-backed securities.
* The SEC also issued a concept release seeking public comment on the
use of derivatives by mutual funds and other investment companies
registered under the Investment Company Act. The agency acted, among
other causes, in light of recent significant growth in the holding of
derivatives by mutual funds, exchange-I funds and closed-end funds.
Increasing SEC Effectiveness through Structural Improvements:
In 2011, the SEC continued to make strategic structural improvements,
striving to build a more effective and managed agency, one in which
organizations are appropriately aligned, administrative and logistical
support is dynamic and efficient, operational controls are effective
in mitigating operational risk, and all functions are supported
appropriate, upgraded information technology.
One area of significant focus this year was the work Boston Consulting
Group (BCG), which was hired in response to a Dodd—Frank Act
requirement that the SEC engage in independent consultant to conduct a
broad assessment SEC's internal operations, structure, funding, and
relationship with self-regulatory organizations (SROs).
BCG reported their findings in March, 2011, including numerous
recommendations designed to increase SEC's efficiency and
effectiveness. In the months following the release of the BCG report,
the SEC has developed the necessary program management and oversight
infrastructure to respond to its key recommendations.
In 2011, the SEC continued to improve back office functions in its
largest divisions and offices, creating "managing executive" positions
to handle important support areas such as information technology,
workflow, data collection and analysis and human resources. The
management professionals who have filled these positions have both
improved deployment of limited resources and personnel and freed
legal, examination and other professionals to focus their skills on
mission-critical work.
On a broader level, several commission-wide infrastructure support
functions previously housed under the Office of the Executive Director
were consolidated with those residing in the Office of the Chief
Operating Officer (OCOO), achieving economies of scale and improving
management of the interdependencies between them. The physical
security operation, previously fragmented in three separate offices,
has been consolidated as well. Across infrastructure areas more
generally, the SEC is moving its leasing operation to an General
Services Administration (GSA) and reducing the size of the of
associated functions such as the construction branch.
The Office of Financial Management (OFM) made significant progress in
improving internal controls, eliminating a material weakness from
2010. Also, OFM has been preparing for the migration of the SEC's
financial system to a Federal Shared Service Provider (FSSP), with the
transition on track for the FY 2012 implementation.
In direct response to one of the BCG report's recommendations, the SEC
has implemented a continuous cost reduction program that has
identified a number of areas of potential savings, and has begun
pulling back on these expenditures and repurposing the funds towards
other mission-critical activities.
A number of significant technology infrastructure improvements were
led by the Office of Information Technology (Off"), including
implementation of a major component of the Enforcement Case Management
system (HUB). This multi-year project is currently in the initial
pilot of the software. Also in 2011, Electronic, Data Gathering,
Analysis, and Retrieval (EDGAR) filers were migrated from a client-
based fling application called EDGARLink onto a totally on-line fling
interface called EDGARLink On-line, thus making fling with the
Commission easier than ever. The SEC significantly reduced the
technology cost associated with new Dodd-Frank Act rules and realized
an estimated savings of approximately $35 million by utilizing the
EDGAR Filing Systems as the Dodd Frank Act filing data repository.
OIT also developed an enterprise architecture strategy and framework
based on recommendations from a 2011 Mitre assessment and the BCG
study's recommendations. This framework will be a strategic roadmap
for better alignment of IT investments with the SEC's business units.
In addition, the organizational design of the OIT was changed to
emphasize increased alignment with internal clients, improve
coordination and increase efficiencies by centralizing activities such
as application development and project management.
The Office of Human Resources (OHR) improved the recruiting and hiring
process and achieved a 10 percent reduction in the average length of
time required to fill external vacancies. Additionally, and in concert
with the recommendations of the BCG study, the SEC has taken a
strategic approach to restructuring the composition of the SEC's
workforce, and is actively prioritizing external hiring needs rather
than simply back-filling open positions created by attrition. OHR also
rolled out a new performance management system to the agency, and
provided in depth training in the system to over 700 managers.
In addition to hiring and performance strategies designed to improve
SEC institutional capacity, the SEC continues to expand its training
and professional development efforts.
SEC staff participated in 89 separate learning events at SEC
University's College of Securities and Investor Protection (CSIP),
together receiving more than 6,000 certifications for completing
programs in subjects such as forensic accounting, detection of
financial fraud, and quantitative high frequency trading; in
securities, financial, accounting, statistics, and business training;
and in industry- and position-specific expertise that supports the
agency's goals.
Staff who attended more than 170 College of Education Administration
trainings are bringing new and upgraded skills to the SEC's financial
management, IT and administrative functions, while the College of
Leadership Development has delivered a diverse array of leadership
programs to the men and women whose management abilities will help SEC
performance continue to improve in the years ahead.
A new Chief Data Office has been created to integrate strategic goals
for enterprise data across the lines of business and Office of
Information Technology (Oil). The ultimate goal is to create a
streamlined and sharable data architecture.
Additionally, the SEC has established an Operational Risk Management
organization to assist in identification and mitigation of the
operational risks the agency faces.
The agency has dramatically improved its ability to process Freedom of
Information Act (FOIA) requests, in spite of unprecedented volume.
2011 saw a 10 percent increase in the number of requests received, on
top of a 33 percent increase in 2010. The Commission has received more
than 10,000 requests each of the past two years, yet has processed
more requests than it received. The SEC closed 2011 with fewer
requests pending than in any year since 2001.
While most observers rightly focus on front-line SEC functions, such
as oversight and rulemaking, the SEC's leadership understands that
back office activities are key components of effective front-line
operations. Significant improvements in personnel, training and IT
functions will help the SEC make the financial marketplace safer and
more stable for all investors.
Conclusion:
The SEC is matching its expanding responsibilities with an equally
ambitious effort to enhance its performance at every level. The agency
is improving internal logistics and staff abilities, focusing more
effectively on emerging financial market developments, and infusing
its rulemakings with ideas and strategies that reflect not just the
growing expertise of SEC staff, but the intent of Congress and the
experience of the market participants who will be most affected by
agency actions.
The result is an agency increasing y responsive to the demands of the
world's most important financial markets and those who participate in
them — whether sophisticated professionals or the hundred million
retail investors with assets in the market today.
Looking Forward:
In FY 2012, the SEC expects to continue the trajectory has followed
through the last two years: pursuing a regulatory agenda consistent
with recent statutory change the accelerating evolution in the
financial markets; examining the structure of those markets with
respect to current regulation; increasing the quality of the
information investors receive and of their communications with
companies and boards; and improving the agency's own internal fun and
infrastructure.
As the agency moves towards completion of the rulemaking and reports
required by the Dodd-Frank Act, the agency will increasingly focus on
other priorities — many of them in informed by securities market
changes in the last decade.
Other areas of agency focus will include the quality of the
information received by investors from registered entities, including
U.S. disclosure mandates and the quality of the principles underlying
financial accounting in a global financial marketplace. The agency
will also continue to examine the proxy process seeking ways in which
communication between shareholders and boards might be made more
effective and less cumbersome.
And, the SEC will continue to study the strengths and weaknesses of
contemporary financial markets, soliciting the perspectives of a broad
variety of market participants and working to determine where action
may increase market stability and investor confidence.
In order to more effectively pursue these initiatives as it continues
to exercise oversight in areas of established responsibility, the SEC
expects to continue improving its internal operations, including human
resources, IT and financial controls. The SEC will also continue its
Mission Advancement Program, the agency-wide effort to implement the
recommendations contained in the Boston Consulting Group (BCG)
management study required by the Dodd-Frank Act.
Rulemakings — Dodd-Frank and Beyond:
* In 2012, the SEC plans to conclude the vast majority of the
rulemaking required by the Dodd-Frank Act and subject to deadlines set
by Congress.
* While the Dodd-Frank Act did not mandate a deadline for their
adoption, the Commission will also consider additional executive
compensation requirements. These will include rules mandating new
listing standards relating to specified "clawback" policies, and new
disclosure requirements for executive pay ratios, employee and
director hedging, and the relationship between executive compensation
and company performance.
* The Commission has already proposed a number of regulations required
by Title VII of the Dodd-Frank Act related to the regulation of over-
the-counter derivatives. While proposing and finalizing the remaining
rules, the SEC will also continue working with other regulators and
market participants to construct the new regulatory framework in a way
that takes into account the steps market participants will need to
take to comply with the new regulations, and the order in which those
steps might best be taken. To that end, the SEC will seek public
comment on a detailed implementation plan that will permit a roll-out
of the new requirements in a logical, progressive, and efficient
manner, while minimizing unnecessary disruption and costs.
* The SEC will continue to advance a number of studies required by the
Dodd-Frank Act. Among these is a study of the credit rating process
for structured finance the products and the conflicts associated with
the "issuer-pay" and the "subscriber-pay models. A key part of this
effort will be examining comments, proposals and data already received
regarding the feasibility of establishing a system in which a public
or private utility or a self-regulatory organization would assign
agencies to individual rating projects, rather than continuing to rely
on the current issuer-driven business model.
* The SEC will consider the recommendations of a staff study on the
obligations of investment advisers and broker-dealers that there be a
universal fiduciary standard of conduct which applies to both types of
registants when they are providing personalized investment advice to
retail investors, and that regulations regarding the two professions
be better harmonized.
* Other agency priorities arising from the Dodd-Frank Act will include
rules intended to better protect investors in the asset-backed
securities (ABS) market by improving the disclosure and offering
process for ABS and prohibiting many material conflicts of interest by
entities packaging and selling them; rules regarding the registration
of municipal advisers; and rules requiring that reporting companies
provide information about their use of certain "conflict minerals" in
their products.
* One key rulemaking not related to the Dodd-Frank Act that the SEC
expects to advance is the proposal to create a consolidated audit
trail, which would allow regulators to track information related to
trading orders received, routed and executed across multiple
securities markets. The consolidated audit trail should allow the
agency to rapidly reconstruct trading activity and quickly analyze
both suspicious trading behavior and unusual market events.
* The SEC, working with a team from the Financial Stability Oversight
Council, is considering further structural changes to money market
funds, building on reforms adopted shortly after the financial crisis,
during which the Reserve Primary Fund "broke the buck." These reforms
would seek to address funds' susceptibility to runs and provide for a
greater cushion in the case of an emergency.
* The SEC is also reviewing ways to reduce the regulatory burdens on
smaller companies, particularly burdens associated with capital
formation, in a manner consistent with the Commission's investor
protection mandate. This review will consider, among other things, the
rules related to the triggers for public reporting, communications in
public and private offerings, and new capital raising strategies.
Responding to Current Market Structure:
The SEC continues to examine a securities market structure where
changes – particularly the emergence of high-speed computer-driven
trading – have outpaced the governing regulatory structure.
* Working with an eye towards preserving the efficiency, liquidity and
competition benefits of current structure, the SEC will consider
further possible reforms growing out of the unusual volatility markets
displayed on May 6, 2010. These include the proposal by self-
regulatory organizations to establish a new "limit up-limit down"
mechanism and changes to the rules governing market-wide circuit
breakers.
* An important issue related to high-frequency trading and the
sophisticated electronic systems that drive today's markets is the
risk of volume-induced market disruptions or unauthorized access to
systems and networks. In 2012, the SEC expects to consider whether to
make compliance with existing, voluntary Automation Review Policies
mandatory Doing so would require market participants – most of whom
are already in compliance with these policies – to meet standards for
the capacity, resiliency, and security of their automated systems.
Information and Communication:
The quality of the communication between investors and the companies
in which they invest is of paramount importance. Investors with access
to accurate, timely information can make informed judgments about risk
and allocate their capital efficiently. Investors are also more likely
to take part in market characterized by disclosure and communication,
making additional capital available to growing enterprises.
* In 2012, the SEC will continue to encourage companies to enhance and
clarify key information disclosed to investors, especially information
that provides a better view into the risks companies face and the
impact of operational decisions companies' management make.
* In addition, agency staff will develop recommendations related to
the Commission's July 2010 "Proxy Plumbing" concept release, in which
the Commission asked a number of questions about how communication
between shareholders and company boards might be improved.
* The SEC will continue to consider incorporating International
Financial Reporting Standards into the financial reporting system for
U.S. domestic companies. The agency will take measured steps in
accordance with the existing Work Plan towards the goal of global
standards, while ensuring that the interests of U.S. investors in
timely, accurate and comparable financial data remain the primary
consideration.
Internal Reforms:
SEC management recognizes that increased operational efficiency is
critical to carrying out its mission at a time when the agency's
responsibilities are growing faster than available capital resources.
This requires continued focus on the technical, financial and
managerial functions that allow the agency to raking carry out day-to-
day operations more efficiently and to respond quickly, creatively and
effectively to unanticipated events.
* A key priority for the SEC will be building on the significant
progress made in strengthening its internal controls. The better
centerpiece of this effort will be completing the migration of the
agency's financial system and some of its financial operations to the
Federal Shared Service Provider (FSSP) at the Department of
Transportation. Once completed, this initiative will yield significant
benefits for the SEC in terms of enhanced system functionality and more
streamlined operations. The SEC also will continue its multi-year
efforts to remediate audit findings with respect to IT security
financial reporting, registrant deposits, and accounting for budgetary
resources.
* The Office of Information Technology will focus on EDGAR and SEC.gov
modernization — improving system performance, adding features and
enhancing the ability to manage Dodd-Frank Act data. Enhancements to the
Tips, Complaints and Referrals system, and the Division of
Enforcement's HUB system — its primary database — will extend their
functionality and improve their ability to support process workflow,
search and auditing. The SEC will also focus on improving data
management and the procurement of robust analytical tools with which
to better analyze data.
* The agency will continue its Mission Advancement Program, working to
implement recommendations resulting from the Dodd-Frank-mandated BCG
study of the SEC's management. Following the release of the study in
early 2011, the program office created 17 recommendation analysis
workstreams. These workstreams will yield in suggested approaches for
implementation and an estimate of the resources required.
SEC senior leadership is actively engaged in these efforts and serves
on an Executive Steering Committee (ESC) established to oversee the
implementation of the resulting initiatives.
* The agency expects to realize significant operational efficiencies
and enhanced service provision through organizational redesigns of the
Offices of Human Resources, Administrative Services and Financial
Management, coupled with a focus on business process improvement
initiatives in each of those activities.
In the year ahead, the SEC will enhance operations, infrastructure its
and management as part of ongoing effort to become a more effective
and dynamic agency. Making these changes, while implementing the Dodd-
Frank Act, addressing market structure concerns and ensuring that
information needed to make rational investment decisions is disclosed
in a clear and timely fashion, will allow the SEC to continue
improving investor safeguards and strengthening the U.S. capital
markets.
Financial Highlights:
This section provides an analysis of the financial position, results
of operations, and the underlying causes for significant changes in
the balances presented in the SEC's FY 2011 financial statements.
Overview of Financial Position:
Assets. The SEC's total assets were $8,517 million at September 30,
2011, an increase of $355 million or 4 percent over FY 2010.
Investments, Net increased by $278 million due to a $453 million
increase in Investor Protection Fund investment and a $175 million
decrease in Disgorgement and Penalty related investments. Investor
Protection Fund resources were invested in Treasury securities during
the first quarter of FY 2011. The decrease in Disgorgement and Penalty
investments is related to the SEC's continued efforts to accelerate
distributes to harmed investors during FY 2011.
The increase in Accounts Receivable, Net of $53 million is mainly
comprised of a $43 million increase in Section 31 fees receivable and
a $9 million increase in disgorgement and penalty accounts receivable
(net) designated as payable to the U.S. Treasury General Fund upon
collection.
Section 31 fees are payable to SEC twice a year: in March for the
period September through December and in September for the period
January through August. Thus, the year-end Section 31 accounts
receivable balance is for securities transactions occurring during the
month of September. The increase in Section 31 accounts receivable
during FY 2011 is attributable to the increase in the fee rate from
$16.90 to $19.20 and a 37 percent transaction volume increase when
comparing September 2010 to September 2011.
Chart 1.3 Assets By Type:
[Refer to PDF for image: pie-chart]
Fund Balance with Treasury: 82%;
Investments - Disgorgement and Penalties: 9%;
Investments - Investor Protection Fund: 5%;
Accounts Receivable, Net: 3%;
Property and Other Assets: 1%.
[End of figure]
Table 1.2: Assets As Of September 30, 2011 And 2010 (Dollars in
Millions):
Fund Balance with Treasury;
FY 2011: $6,996
FY 2010: $6,989
Investments — Disgorgement and Penalties;
FY 2011: $750;
FY 2010: $925.
Investments — Investor Protection Fund;
FY 2011: $453;
FY 2010: [Empty].
Accounts Receivable, Net;
FY 2011: $214;
FY 2010: $161.
Property and Equipment, Net;
FY 2011: $94;
FY 2010: $80.
Other Assets;
FY 2011: $10;
FY 2010: $7.
Total Assets:
FY 2011: $8,517;
FY 2010: $8,182.
[End of table]
Liabilities. The SEC's total liabilities were $1,106 million at
September 30, 2011, a decrease of $176 million or 14 percent from FY
2010. This decrease was mostly related to SEC's continued efforts to
accelerate distributions to harmed investors. These distribution
activities resulted in a $158 million decrease in the Liability for
Disgorgement and Penalties.
SEC's accrued liabilities for employee compensation and benefits
decreased by $16 million, mainly due to a shorter payroll accrual
period at the end of FY 2011 when compared to FY 2010. On September
30, 2011, only five days remained in the pay period for which to
accrue employee compensation and benefits, whereas on September 30,
2010, 14 days remained. In addition, Other Liabilities decreased by
$24 million due in part to the resolution of approximately $10 million
dollars in legal liabilities stemming from a complaint filed by the
National Treasury Employees Union (NTEU) before the Federal Labor
Relations Authority (FURA) for retroactive wage adjustments.
Ending Net Position. The SEC's net position, comprised of both
unexpended appropriations and the cumulative results of operations,
increased by $531 million or 8 percent between September 30, 2010 and
September 30, 2011. The increase is primarily due to the increases in
Section 31 and filing fee revenues discussed in the Results of
Operations section below.
Chart 1.4 Liabilities By Type:
[Refer to PDF for figure: pie-chart]
Liability for Disgorgement and Penalties: 78%;
Custodial Liability: 5%;
Accrued Payroll, Benefits and Leave: 6%;
Accounts Payable and Other Liabilities: 7%;
Registrant Deposits: 4%.
[End of figure]
Table 1.3: Liabilities As Of September 30, 2011 And 2010
(Dollars In Millions):
Liability for Disgorgement and Penalties;
FY 2011: $863;
FY 2010: $1,021.
Custodial Liability;
FY 2011: $52;
FY 2010: $42.
Accrued Payroll, Benefits and Leave;
FY 2011: $67;
FY 2010: $83.
Accounts Payable;
FY 2011: $61;
FY 2010: $51.
Registrant Deposits;
FY 2011: $47;
FY 2010: $45.
Other Liabilities;
FY 2011: $16;
FY 2010: $40.
Total Liabilities;
FY 2011: $1,106;
FY 2010: $1,282.
[End of table]
Results of Operations:
Earned Revenues. Total earned revenues for the year ended September
30, 2011 increased by $261 million or 19 percent over the total for FY
2010. The growth in Section 31 revenues of $115 million was driven by
an increase in transactional volume and higher average fee rates in FY
2011 as compared to FY 2010. The $143 million increase in filing fee
revenue was primarily driven by higher average fee rates. The SEC
adjusts the rates periodically in order to meet the annual offsetting
collection targets specified in the Investor and Capital Markets Fee
Relief Act of 2002. Other revenue is mainly related to post judgment
interest on disgorgement and penalty receivables.
Section 31 fee rates are per million dollars of securities transacted
on exchanges and over-the-counter markets. In the first quarter of FY
2010, the Section 31 fee rate was $25.70. This rate was reduced to
$12.70 in the second quarter, and then increased to $16.90 for the
third and fourth quarters. The rate remained unchanged through the
first quarter of FY 2011, but was increased to $19.20 for the second,
third and fourth quarters of FY 2011. The overall securities
transaction volume subject to Section 31 fees increased 8 percent
between FY 2010 and FY 2011.
Filing fee rates are per million dollars of registered securities. In
the first quarter of FY 2010, the filing fee rate was $55.80. The rate
increased to $71.30 in the second quarter of FY2010. The rate remained
unchanged until the second quarter of FY 2011 when it increased to
$116.10 for the remainder of the fiscal year.
Program Costs. Total Program Costs were $1,148 million for the year
ended September 30, 2011, an increase of $90 million or 9 percent when
compared to the prior year. The SEC's salary and benefit costs
increased by $43 million when comparing FY 2011 to FY 2010. Other
costs increased $47 million.
The SEC's number of full-time equivalents (FTEs) increased by 96
employees when comparing FY 2010 to FY 2011. This increase in FTEs is
directly related to the agency's continued focus on hiring new staff
with the requisite skills and experience to further the SECS mission.
Table 1.4: Earned Revenues for the years ended September 30, 2011 and
2010 (Dollars In Millions):
Section 31 Securities Transaction Fees:
FY 2011: $1,279;
FY 2010: $1,164.
Section 6 (b) Securities Registration, Tender Offer, and Merger Fees:
FY 2011: $362;
FY 2010: $219.
Other:
FY 2011: $3;
FY 2010: [Empty].
Total:
FY 2011: $1,644;
FY 2010: $1,383.
[End of table]
Chart 1.5: Filing Fee And Section 31 Exchange Fee Rates:
[Refer to PDF for image: multiple line graph]
FY 2010 Q1:
Sec. 31 Exchange Fee Rate: $22.50;
Filing Fee Rate: $55.80.
FY 2010 Q2:
Sec. 31 Exchange Fee Rate: $12.70;
Filing Fee Rate: $71.30.
FY 2010 Q3:
Sec. 31 Exchange Fee Rate: $16.90;
Filing Fee Rate: $71.30.
FY 2010 Q4:
Sec. 31 Exchange Fee Rate: $16.90;
Filing Fee Rate: $71.30.
FY 2011 Q1:
Sec. 31 Exchange Fee Rate: $16.90;
Filing Fee Rate: $71.30.
FY 2011 Q5:
Sec. 31 Exchange Fee Rate: $19.20;
Filing Fee Rate: $116.10.
FY 2011 Q3:
Sec. 31 Exchange Fee Rate: $19.20;
Filing Fee Rate: $116.10.
FY 2011 Q4:
Sec. 31 Exchange Fee Rate: $19.20;
Filing Fee Rate: $116.10.
[End of table]
Chart 1.6: Program Costs: (Dollars in millions)
[Refer to PDF for image: vertical bar graph]
Salaries and Benefit Expenses:
FY 2011: $798;
FY 2010: $755.
Other Expenses:
FY 2011: $350;
FY 2010: $303.
[End of table]
Budgetary Resources:
In FY 2011, the SEC’s total budgetary resources equaled $1,713
million, an 8 percent increase over the FY 2010 amount of $1,593
million. SEC’s budgetary resources are mostly derived from the
following sources: (1) unobligated balances brought forward, (2)
recoveries of prior year unpaid obligations, and (3) offsetting
collections (net of amounts temporarily not available pursuant to
public law).
Chart 1.7: Sources Of Funds:
[Refer to PDF for figure: pie-chart]
Unobligated Balance, Brought Forward, October 1: 29%;
Recoveries of Prior Year Unpaid Obligations: 2%;
Spending Authority from Offsetting Collections (Net of Temporarily not
Available Pursuant to Public Law): 69%.
[End of figure]
Unobligated Balance Brought Forward. The SEC’s unobligated balance,
brought forward was $489 million for FY 2011, an increase of $462
million over the FY 2010 total. The increase is primarily related to
the carry forward of $452 million in unobligated balances in the SEC’s
Investor Protection Fund.
As detailed in Chart 1.8, Unobligated Balance Brought Forward, General
Funds – Salaries and Expenses, the SEC has significantly reduced the
amount of unobligated resources brought forward in its Salaries and
Expenses Fund (X0100) since FY 2007.
Recoveries of Prior Year Unpaid Obligations. The SEC allocated
significant resources to the review and de-obligation of unliquidated
obligations from prior years during FY 2011. These efforts resulted in
a $20 million increase in recoveries when comparing FY 2010 to FY 2011.
Table 1.5: Total Budgetary Resources for the years ended September 30,
2011 and 2010 (Dollars In Millions):
Unobligated Balance, Brought Forward, October 1:
FY 2011: $489;
FY 2010: $27.
Recoveries of Prior Year Unpaid Obligations:
FY 2011: $39;
FY 2010: $19.
Appropriation – Investor Protection Fund:
FY 2011: ($1);
FY 2010: $452.
Spending Authority from Offsetting Collections, Earned, Collected:
FY 2011: $1,598;
FY 2010: $1,443.
Amounts Temporarily not Available Pursuant to Public Law:
FY 2011: ($412);
FY 2010: ($348).
Total Budgetary Resources:
FY 2011: $1,713;
FY 2010: $1,593.
[End of table]
Chart 1.8: Unobligated Balance, Brought Forward, General Funds —
Salaries And Expenses (Dollars In Millions):
[Refer to PDF for image: vertical bar graph]
FY 2007: $187;
FY 2008: $90;
FY 2009: $58;
FY 2010: $27;
FY 2011: $37.
[End of figure]
Chart 1.9: Recoveries Of Prior Year Unpaid Obligations (Dollars In
Millions):
[Refer to PDF for image: vertical bar graph]
FY 2011: $39;
FY 2010: $19.
[End of figure]
Offsetting Collections. The SEC’s budgetary authority from offsetting
collections was $1,598 for FY 2011. Chart 1.10, Offsetting Collections
vs. New Budgetary Authority[Footnote 20] presents the SEC’s budgetary
authority and offsetting collections related to transaction fees and
filing fees from FY 2003 through 2011. Offsetting collections in
excess of budgetary authority provided by Congress is recorded as
Temporarily not Available Pursuant to Public Law on the Statement of
Budgetary Resources and is not available for obligation until approved
by Congress. The SEC’s budgetary authority from fee collections was
$1,185 million for FY 2011.
Status of Budgetary Resources. The SEC’s Obligations Incurred
increased by $890 million or 81 percent during FY 2011. This increase
was primarily related to the SEC’s recognition of lease obligations
totaling $778 million to remedy issues noted in Comptroller General
Decision B-322160, Securities and Exchange Commission—Recording of
Obligation for Multiple-Year Contract and to accurately reflect the
SEC’s contractual obligations for leasing agreements in effect as of
September 30, 2011. In addition, the SEC’s Unobligated Balance
decreased by $769 million during FY 2011. This decrease was also
attributable to the SEC’s recognition of leasing obligations during FY
2011.
Chart 1.10: Offsetting Collections Vs. New Budgetary Authority Section
31 Exchange And Filing Fees (Dollars in millions):
[Refer to PDF for image: vertical bar and line graph]
FY 2003:
Total Actual Offsetting Collections: $1,077;
New Budgetary Authority: $716.
FY 2004:
Total Actual Offsetting Collections: $1,392;
New Budgetary Authority: $812.
FY 2005:
Total Actual Offsetting Collections: $1,665;
New Budgetary Authority: $856.
FY 2006:
Total Actual Offsetting Collections: $1,903;
New Budgetary Authority: $863.
FY 2007:
Total Actual Offsetting Collections: $1,538;
New Budgetary Authority: $868.
FY 2008:
Total Actual Offsetting Collections: $984;
New Budgetary Authority: $643.
FY 2009:
Total Actual Offsetting Collections: $1,016;
New Budgetary Authority: $894.
FY 2010:
Total Actual Offsetting Collections: $1,443;
New Budgetary Authority: $1,109.
FY 2011:
Total Actual Offsetting Collections: $1,598;
New Budgetary Authority: $1,185.
[End of figure]
Table 1.6: Investor Protection Fund Activity For the years ended
September 30, 2011 and 2010 (Dollars In Thousands):
Balance of Fund at beginning of preceding fiscal year
FY 2011: $451,910;
FY 2010: [Empty].
Amount deposited into or credited to the Fund during the preceding
fiscal year
FY 2011: [Empty];
FY 2010: $451,910.
Amount of earnings on investments during the preceding fiscal year
FY 2011: $990;
FY 2010: [Empty].
Amount paid from the Fund during the preceding fiscal year to
whistleblowers
FY 2011: [Empty];
FY 2010: [Empty].
Amount paid from the Fund during the preceding fiscal year for expenses
incurred by Employee Suggestion Program
FY 2011: ($112);
FY 2010: [Empty].
Balance of the Fund at the end of the preceding fiscal year
FY 2011: $452,788;
FY 2010: $451,910.
[End of table]
Investor Protection Fund:
The SEC prepares stand alone financial statements for the Investor
Protection Fund as required by the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the Dodd-Frank Act). The financial statements
are presented starting on page 157.
The Investor Protection Fund was established in the fourth quarter of
FY 2010 to provide funding for a whistleblower award program and to
finance the operations of the SEC Office of the Inspector General’s
Employee Suggestion Program. In FY 2010, $452 million of non-exchange
revenue was transferred to the Investor Protection Fund from SEC’s
disgorgement and penalties deposit fund. The $452 million in fund
assets represented Fund Balance with Treasury as of September 30,
2010. The $452 million was invested in U.S. Treasury Securities during
the first quarter of FY 2011. The Investor Protection Fund recognized
non-exchange revenues totaling $990 thousand during FY 2011. The
nonexchange revenue represents interest earnings on amounts invested
in U.S. Treasury Securities. In addition, the Investor Protection Fund
incurred expenses of $112 thousand for salary and benefit cost in the
OIG’s Employee Suggestion Program.
Additional information regarding the Investor Protection Fund and the
Office of the Whistleblower is available in the 2011 Annual Report on
the Dodd-Frank Whistleblower Program. This report may be found at
[hyperlink, http://www.sec.gov/whistleblower].
Limitations of the Financial Statements:
The principal financial statements included in this report have been
prepared by SEC Management to report the financial position and
results of operations of the SEC, pursuant to the requirements of 31
U.S. Code Section 3515(b). While the statements have been prepared
from the books and records of the SEC in accordance with GAAP for
Federal entities and the formats prescribed by the Office of
Management and Budget (OMB), the statements are in addition to the
financial reports used to monitor and control budgetary resources,
which are prepared from the same books and records. The statements
should be read with the understanding that they are for a component of
the U.S. Government, a sovereign entity.
Performance Highlights:
This section provides key performance information for FY 2011. It
outlines the SEC’s strategic and performance planning framework,
provides a brief discussion about how the SEC integrates its
performance and budget data, and highlights the agency’s progress
toward reaching planned performance targets. Additionally, this
section includes a list of performance indicators that provide useful
information for understanding the agency’s activities.
Strategic and Performance Planning Framework:
The SEC’s FY 2011 strategic and performance planning framework, is
based on the FY 2010 – FY 2015 Strategic Plan, available at
[hyperlink, http://www.sec.gov/about/secstratplan1015f.pdf]. The
Strategic Plan addresses the agency’s mission, vision, values,
and strategic goals and outcomes. The SEC’s work is structured
around four strategic goals, and 12 strategic outcomes that gauge the
SEC’s performance within each goal.
The SEC’s goals and priorities in the Strategic Plan are influenced by
several external environmental factors, including the demands of
fulfilling the agency mission in complex and global financial markets
and changes in legislation affecting the agency. During the past few
years, this environment has changed dramatically. While the Strategic
Plan attempts to foresee various ways in which financial markets,
regulated industries, and the legislative environment may change over
time, no plan can anticipate all possible scenarios. Because the
accompanying performance measures were significantly revised during
the development of the FY 2010 – FY 2015 Strategic Plan, there is
limited prior year performance information provided in this report.
Table 1.7:
Strategic Goals with Resources Invested: Foster and enforce compliance
with the Federal securities laws;
Cost: $622.9 million;
Outcomes:
The SEC fosters compliance with the Federal securities laws.
The SEC promptly detects violations of the Federal securities laws.
The SEC prosecutes violations of Federal securities laws and holds
violators accountable.
Strategic Goals with Resources Invested: Establish an effective
regulatory environment;
Cost: $126.4 million;
Outcomes:
The SEC establishes and maintains a regulatory environment that
promotes high-quality disclosure, financial reporting, and governance,
and prevents abusive practices by registrants, financial
intermediaries, and other market participants.
The U.S. capital markets operate in a fair, efficient, transparent,
and competitive manner, fostering capital formation and useful
innovation.
The SEC adopts and administers rules and regulations that enable
market participants to understand clearly their obligations under the
securities laws.
Strategic Goals with Resources Invested: Facilitate access to the
information investors need to make informed investment decisions;
Cost: $185.9 million;
Outcomes:
Investors have access to high-quality disclosure materials that are
useful to investment decision making.
Agency rulemaking and investor education programs are informed by an
understanding of the wide range of investor needs.
Strategic Goals with Resources Invested: Enhance the Commission’s
performance through effective alignment and management of human,
information, and financial capital;
Cost: $212.9 million;
Outcomes:
The SEC maintains a work environment that attracts, engages, and
retains a technically proficient and diverse workforce that can excel
and meet the dynamic challenges of market oversight.
The SEC retains a diverse team of world-class leaders who provide
motivation and strategic direction to the SEC workforce.
Information within and available to the SEC becomes a Commission-wide
shared resource, appropriately protected, that enables a collaborative
and knowledge-based working environment.
Resource decisions and operations reflect sound financial and risk
management principles.
[End of table]
Performance Measures Overview:
To assess the SEC’s performance results against preestablished
performance targets, a results rating methodology is used to assign
one of the following three performance ratings for a given result:
Below Target: Not Met;
On Target: Met;
Above Target: Exceeded.
The SEC’s FY 2010 – FY 2015 Strategic Plan outlines 70 total
performance targets. Several of these performance measures track
multiple performance targets, and Chart 1.11, Summary of FY 2011
Performance Results shows the performance results for each of the 70
performance targets. Twenty-two of these targets are categorized as
N/A if the performance target was not established or if FY 2011 data
is not available. Several of these performance measures are under
review as part of the FY 2011 Strategic Plan Addendum process in order
to allow for more complete and accurate reporting.
The performance indicators, outlined in Table 1.9, Performance
Indicators Results Summary, do not include planned targets because it
would be inappropriate for the agency to conduct certain activities
with an eye towards meeting predetermined targets. Therefore, results
for performance indicators are not included in Chart 1.11, Summary of
FY 2011 Performance Results.
Chart 1.11: Summary Of FY 2011 Performance Results:
[Refer to PDF for image: pie-chart]
Exceeded: 23;
Met: 11;
Not Met: 14;
N/A: 22.
[End of figure]
Performance Results Summary:
The SEC has established a series of performance measures for assessing
program performance against strategic goals and planned outcomes. For
each performance measure, one or more performance targets have been
established. Table 1.8, Performance Measures Results Summary provides
a summary of actual performance results during FY 2010 and FY 2011 for
each performance measure, and Table 1.9, Performance Indicators
Results Summary provides a summary of indicators by outcome within
each strategic goal. A detailed discussion of the agency’s program
achievements and performance results is located in the Performance
Section beginning on page 51.
Table 1.8: Performance measures Results Summary:
Goal 1: Foster and Enforce Compliance with the Federal Securities Laws:
Outcome 1.1: The SEC fosters compliance with the Federal securities
laws.
Measure 1: Number of new investor education materials designed
specifically to help investors protect themselves from fraud;
FY 2010 Actual: 16;
FY 2011 Target: 24;
FY 2011 Actual: 24;
FY 2011 Results: Met.
Measure 2: Number of industry outreach and education programs targeted
to areas identified as raising particular compliance risks;
FY 2010 Actual: 6;
FY 2011 Target: 10;
FY 2011 Actual: 5;
FY 2011 Results: Not Met.
Measure 3: Percentage of firms receiving deficiency letters that take
corrective action in response to all exam findings;
FY 2010 Actual: 90%;
FY 2011 Target: 90%;
FY 2011 Actual: 93%;
FY 2011 Results: Exceeded.
Measure 4: Percentage of attendees at CCOutreach that rated the
program as “Useful” or “Extremely Useful” in their compliance efforts;
FY 2010 Actual: 77%;
FY 2011 Target: 80%;
FY 2011 Actual: 86%;
FY 2011 Results: Exceeded.
Outcome 1.2: The SEC promptly detects violations of the Federal
securities laws.
Measure 5: Percentage of cause and special exams (sweeps) conducted as a
result of risk assessment process that includes multi-divisional input;
FY 2010 Actual: N/A;
FY 2011 Target: N/A;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
Measure 6: Percentage of advisers deemed “high risk” examined during
the year;
FY 2010 Actual: N/A;
FY 2011 Target: N/A;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
Measure 7: Percentage of registrant population examined during the year:
Investment advisers;
FY 2010 Actual: 9%;
FY 2011 Target: 11%;
FY 2011 Actual: 8%;
FY 2011 Results: Not Met.
Investment companies;
FY 2010 Actual: 10%;
FY 2011 Target: 11%;
FY 2011 Actual: 13%;
FY 2011 Results: Exceeded.
Broker-dealers (exams by SEC and SROs)
FY 2010 Actual: 44%;
FY 2011 Target: 45%;
FY 2011 Actual: 42%;
FY 2011 Results: Not Met.
Measure 8: Percentage of non-sweep and non-cause exams that are
concluded within 120 days;
FY 2010 Actual: 48%;
FY 2011 Target: 50%;
FY 2011 Actual: 53%;
FY 2011 Results: Exceeded.
Outcome 1.3: The SEC prosecutes violation of Federal securities laws
and holds violators accountable.
Measure 9: Percentage of enforcement actions successfully resolved;
FY 2010 Actual: 92%;
FY 2011 Target: 92%;
FY 2011 Actual: 93%;
FY 2011 Results: Exceeded.
Measure 10: Percentage of first enforcement actions filed within two
years;
FY 2010 Actual: 67%;
FY 2011 Target: 70%;
FY 2011 Actual: 61%;
FY 2011 Results: Not Met.
Measure 11: Percentage of debts where either a payment has been made
or a collection activity has been initiated within six months of the
due date of the debt;
FY 2010 Actual: 86%;
FY 2011 Target: 90%;
FY 2011 Actual: 91%;
FY 2011 Results: Exceeded.
Measure 12: Percentage of Fair Fund and disgorgement fund plans that
distributed the final tranche of funds to injured investors within 24
months of the order appointing the fund administrator;
FY 2010 Actual: N/A;
FY 2011 Target: N/A;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
Measure 13: Percentage of Fair Fund and disgorgement fund plans approved
by final order within the prior fiscal year which had a first tranche
of funds distributed under those plans within 12 months of such
approval date;
FY 2010 Actual: N/A;
FY 2011 Target: N/A;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
Goal 2: Establish an Effective Regulatory Environment:
Outcome 2.1: The SEC establishes and maintains a regulatory
environment that promotes high-quality disclosure, financial
reporting, and governance, and that prevents abusive practices by
registrants, financial Intermediaries, and other market
participants.
Measure 1: Survey on quality of disclosure;
FY 2010 Actual: N/A;
FY 2011 Target: N/A;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
Measure 2: Number of consultations; joint events, reports, or
initiatives; and joint examinations and other mutual supervisory
efforts with SROs and other federal, state, and non-U.S. regulators;
FY 2010 Actual: N/A;
FY 2011 Target: N/A;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
Measure 3: Number of non-U.S. regulators trained
FY 2010 Actual: 1,997;
FY 2011 Target: 2,020;
FY 2011 Actual: 1,765;
FY 2011 Results: Not met.
Outcome 2.2: The US. capital markets operate in a fair, efficient,
transparent, and competitive manner, fostering capital formation and
useful innovation.
Measure 4: Percentage of transaction dollars settled on time each year;
FY 2010 Actual: 99%;
FY 2011 Target: 99%;
FY 2011 Actual: 99%;
FY 2011 Results: Met.
Measure 5: Average institutional transaction costs for exchange listed
stocks on a monthly basis;
FY 2010 Actual: N/A;
FY 2011 Target: N/A;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
Measure 6: Percentage of market outages at SROs and electronic
communications networks (ECNs) that are corrected within targeted
timeframes:
Within 2 hours:
FY 2010 Actual: 74%;
FY 2011 Target: 60%;
FY 2011 Actual: 88%;
FY 2011 Results: Exceeded.
Within 4 hours:
FY 2010 Actual: 87%;
FY 2011 Target: 75%;
FY 2011 Actual: 94%;
FY 2011 Results: Exceeded.
Within 24 hours:
FY 2010 Actual: 100%;
FY 2011 Target: 96%;
FY 2011 Actual: 100%;
FY 2011 Results: Exceeded.
Outcome 2.3: The SEC adopts and administers rules and regulations that
enable market participants to understand clearly their obligations
under the securities laws.
Measure 7: Length of time to respond to written requests for no-action
letters, exemptive applications, and written interpretive requests:
Trading and Markets - No-action letters, exemptive applications, and
written interpretive requests (combined figure):
FY 2010 Actual: 91%;
FY 2011 Target: 85%;
FY 2011 Actual: 98.5%;
FY 2011 Results: Exceeded.
Investment Management - No-action letters and interpretive requests:
FY 2010 Actual: 100%;
FY 2011 Target: 75%;
FY 2011 Actual: 100%;
FY 2011 Results: Exceeded.
Investment Management - Exemptive applications:
FY 2010 Actual: 100%;
FY 2011 Target: 80%;
FY 2011 Actual: 100%;
FY 2011 Results: Exceeded.
Corporation Finance - No-action letters and interpretive requests:
FY 2010 Actual: 97%;
FY 2011 Target: 90%;
FY 2011 Actual: 97%;
FY 2011 Results: Exceeded.
Corporation Finance - Shareholder proposals:
FY 2010 Actual: 100%;
FY 2011 Target: 100%;
FY 2011 Actual: 100%;
FY 2011 Results: Met.
Measure 8: Survey on whether SEC rules and regulations are dearly
understandable;
FY 2010 Actual: N/A;
FY 2011 Target: N/A;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
Measure 9: Time to complete SEC review of SRO rules that are subject
to SEC approval:
Within 35 days:
FY 2010 Actual: 73;
FY 2011 Target: 40%;
FY 2011 Actual: 0%;
FY 2011 Results: Not met.
Within 45 days:
FY 2010 Actual: 99%;
FY 2011 Target: 80%;
FY 2011 Actual: 82%;
FY 2011 Results: Exceeded.
Goal 3: Facilitate Access to the Information Investors Need to Make
Informed Investment Decisions:
Outcome 3.1: Investors have access to high-quality disclosure
materials that are useful to investment decision making.
Measure 1: Percentage of public companies and investment companies
with disclosures reviewed each year:
Corporations:
FY 2010 Actual: 44%;
FY 2011 Target: 33%;
FY 2011 Actual: 48%;
FY 2011 Results: Exceeded.
Investment company portfolios:
FY 2010 Actual: 35%;
FY 2011 Target: 33%;
FY 2011 Actual: 33%;
FY 2011 Results: Met.
Measure 2: Time to issue initial comments on Securities At filings;
FY 2010 Actual: 24.1 days;
FY 2011 Target: less than 30 days;
FY 2011 Actual: 24.4 days;
FY 2011 Results: Met.
Measure 3: Percentage of investment company disclosure reviews for
which initial comments are completed within timeliness goals:
Initial registration statements:
FY 2010 Actual: 90%;
FY 2011 Target: 85%;
FY 2011 Actual: 92%;
FY 2011 Results: Exceeded.
Post-effective amendments:
FY 2010 Actual: 94%;
FY 2011 Target: 90%;
FY 2011 Actual: 94%;
FY 2011 Results: Exceeded.
Preliminary proxy statements:
FY 2010 Actual: 99%;
FY 2011 Target: 99%;
FY 2011 Actual: 98%;
FY 2011 Results: Not Met.
Measure 4: Point of sale "click-through rate;"
FY 2010 Actual: N/A;
FY 2011 Target: N/A;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
Measure 5: Access to broker-dealer and investment adviser background
checks:
BrokerCheck System:
FY 2010 Actual: N/A;
FY 2011 Target: N/A;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
IAPD System:
FY 2010 Actual: N/A;
FY 2011 Target: N/A;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
Measure 6: Investor demand for disclosures on municipal securities;
FY 2010 Actual: N/A;
FY 2011 Target: N/A;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
Measure 7: Satisfaction index for disclosure process;
FY 2010 Actual: N/A;
FY 2011 Target: N/A;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
Outcome 3.2: Agency rulemaking and investor education programs are
informed by an understanding of the wide range of investor needs.
Measure 8: Number of investors reached, and number of in-person events
with specifically targeted communities and organizations:
Number of investors reached (in millions):
FY 2010 Actual: 17.8;
FY 2011 Target: 16;
FY 2011 Actual: 14.8;
FY 2011 Results: Not met.
Number of in-person events:
FY 2010 Actual: 42;
FY 2011 Target: 30;
FY 2011 Actual: 48;
FY 2011 Results: Exceeded.
Measure 9: Number of investor educational initiatives organized and
produced;
FY 2010 Actual: 9;
FY 2011 Target: 10;
FY 2011 Actual: 11;
FY 2011 Results: Exceeded.
Measure 10: Timeliness of responses to investor contacts:
Closed within 7 days:
FY 2010 Actual: 72%;
FY 2011 Target: 80%;
FY 2011 Actual: 67%;
FY 2011 Results: Not Met.
Closed within 30 days:
FY 2010 Actual: 93%;
FY 2011 Target: 90%;
FY 2011 Actual: 92%;
FY 2011 Results: Exceeded.
Measure 11: Percentage of rules impacting investors that are presented
in alternate user-friendly formats;
FY 2010 Actual: 100%;
FY 2011 Target: 100%;
FY 2011 Actual: 100%;
FY 2011 Results: Met.
Measure 12: Customer satisfaction with usefulness of investor
educational programs and materials;
FY 2010 Actual: N/A;
FY 2011 Target: N/A;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
Goal 4: Enhance the Commission's Performance Through Effective
Alignment and Management of Human, Information, and Financial Capital.
Outcome 4.1: The SEC maintains a work environment that attracts,
engages, and retains a technically proficient and diverse workforce
that can excel and meet the dynamic challenges of market oversight.
Measure 1: Survey of employee engagement;
FY 2010 Actual: 58%;
FY 2011 Target: 65%;
FY 2011 Actual: 61%;
FY 2011 Results: Not Met.
Measure 2: Best Places to Work ranking;
FY 2010 Actual: Ranked #24;
FY 2011 Target: Ranked #5;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
Measure 3: Turnover;
FY 2010 Actual: 5%;
FY 2011 Target: less than 8%;
FY 2011 Actual: 6.4%;
FY 2011 Results: Met.
Measure 4: Expanding staff expertise;
FY 2010 Actual: N/A;
FY 2011 Target: N/A;
FY 2011 Actual: 9%;
FY 2011 Results: N/A.
Measure 5: Size of competency gaps;
FY 2010 Actual: N/A;
FY 2011 Target: N/A;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
Measure 6: Number of diversity-related partnerships/alliances;
FY 2010 Actual: 2;
FY 2011 Target: 5;
FY 2011 Actual: 10;
FY 2011 Results: Exceeded.
Measure 7: Survey feedback on the quality of the SEC's performance
management program;
FY 2010 Actual: N/A;
FY 2011 Target: 65%;
FY 2011 Actual: 53%;
FY 2011 Results: Not met.
Outcome 4.2: The SEC retains a diverse team of world-class leaders who
provide motivation and strategic direction to the SEC workforce.
Measure 8: Quality of hire;
FY 2010 Actual: N/A;
FY 2011 Target: 75%;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
Measure 9: Leadership competency gaps;
FY 2010 Actual: N/A;
FY 2011 Target: 10%;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
Measure 10: Satisfaction with Leadership Development Program (5-point
scale);
FY 2010 Actual: 4.46;
FY 2011 Target: 4;
FY 2011 Actual: 4.49;
FY 2011 Results: Not met.
Outcome 4.3: information within and available to the SEC becomes a
Commission-wide shared resource, appropriately protected, that enables
a collaborative and knowledge-based working environment.
Measure 11: Percentage of SEC data sources accessible through a virtual
data warehouse, and milestones achieved towards the creation of a robust
information management program;
FY 2010 Actual: N/A;
FY 2011 Target: N/A;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
Measure 12: Deployment of document management and workflow tools;
FY 2010 Actual: Enforcement and Examinations;
FY 2011 Target: Tips, Complaints, and Referrals Commissionwide;
FY 2011 Actual: Tips, Complaints, and Referrals Commissionwide;
FY 2011 Results: Met.
Measure 13: Time to process evidentiary material for enforcement
investigations;
FY 2010 Actual: N/A;
FY 2011 Target: N/A;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
Measure 14: System availability:
Systems availability:
FY 2010 Actual: 99.97%;
FY 2011 Target: 99.3%;
FY 2011 Actual: 99.94%;
FY 2011 Results: Exceeded.
Percentage fail over within 4 hours:
FY 2010 Actual: N/A;
FY 2011 Target: 100%;
FY 2011 Actual: 0%;
FY 2011 Results: Not met.
Systems virtualized:
FY 2010 Actual: 22%;
FY 2011 Target: 25%;
FY 2011 Actual: 38%;
FY 2011 Results: Exceeded.
Outcome 4.4: Resource decisions and operations reflect sound financial
and risk management principles.
Measure 15: Milestones achieved towards establishment of a robust data
management program;
FY 2010 Actual: N/A;
FY 2011 Target: Administrative data and reporting requirements
identified;
FY 2011 Actual: Administrative data and reporting requirements
identified;
FY 2011 Results: Met.
Measure 16: Financial Systems Integration;
FY 2010 Actual: N/A;
FY 2011 Target: 17%;
FY 2011 Actual: N/A;
FY 2011 Results: N/A.
Measure 17: Financial Audit Results:
Unqualified opinion:
FY 2010 Actual: Yes;
FY 2011 Target: Yes;
FY 2011 Actual: Yes;
FY 2011 Results: Met.
Material weaknesses:
FY 2010 Actual: 2;
FY 2011 Target: 0;
FY 2011 Actual: 0;
FY 2011 Results: Met.
Significant deficiency:
FY 2010 Actual: 0;
FY 2011 Target: 0;
FY 2011 Actual: 4;
FY 2011 Results: Not Met.
N/A - Signifies data does not currently exist or targets were not
established.
[End of table]
Table 1.9: Performance Indicators Results Summary:
Goal 1: Foster and Enforce Compliance with the Federal Securities Laws.
Outcome 1.1: The SEC fosters compliance with the federal securities
laws.
Indicator 1: Percentage of actions identified as "high impact" which
have resulted in significant corrective industry reaction;
FY 2010 Actual: N/A;
FY 2011 Actual: N/A.
Indicator 2: Annual increases or decreases in the number of CCOs
attending CCOutreach programs;
FY 2010 Actual: N/A;
FY 2011 Actual: N/A.
Outcome 1.2: The SEC promptly detects violations of the federal
securities laws.
Indicator 3: Percentage of exams that identify deficiencies, and the
percentage that result in a "significant finding:"
Percentage identify deficiencies:
FY 2010 Actual: 72%;
FY 2011 Actual: 82%.
Percentage that result in a "significant finding:"
FY 2010 Actual: 42%;
FY 2011 Actual: 42%.
Indicator 4: Number of investigations or cause exams from tips:
Number of investigations:
FY 2010 Actual: 303;
FY 2011 Actual: 349.
Number of cause exams:
FY 2010 Actual: N/A;
FY 2011 Actual: N/A.
Outcome 1.3: The SEC prosecutes violations of federal securities laws
and holds violators accountable.
Indicator 5: SEC investigations referred to SROs or other state,
federal, and foreign authorities for enforcement;
FY 2010 Actual: 492;
FY 2011 Actual: 586.
Indicator 6: Percent of all enforcement investigations deemed "high
impact;"
FY 2010 Actual: 3.26%;
FY 2011 Actual: 5.11%.
Indicator 7: Percent of investigations that come from internally-
generated referrals or prospects;
FY 2010 Actual: 21.9%;
FY 2011 Actual: 18.5%;
Indicator 8: Criminal investigations relating to SEC investigations;
FY 2010 Actual: 139;
FY 2011 Actual: 134.
Indicator 9: Disgorgement and penalties ordered and the amounts
collected by the SEC:
Ordered amounts (in millions):
FY 2010 Actual: $2,846;
FY 2011 Actual: $2,806.
Collected amounts (in millions):
FY 2010 Actual: $1,724;
FY 2011 Actual: $1,281.
Indicator 10: Requests from foreign authorities for SEC assistance and
SEC requests for assistance from foreign authorities:
Number of requests from foreign authorities:
FY 2010 Actual: 457;
FY 2011 Actual: 492.
Number of SEC requests:
FY 2010 Actual: 605;
FY 2011 Actual: 772.
Goal 2: Establish an Effective Regulatory Environment.
Outcome 2.1: The SEC establishes and maintains a regulatory
environment that promotes high-quality disclosure, financial reporting
and governance, and that prevents abusive practices by registrants,
financial intermediaries, and other market participants.
Indicator 1: Average cost of capital in U.S. relative to the rest of
the world;
FY 2010 Actual: 10.99%;
FY 2011 Actual: 10.67%.
Outcome 2.2: The U.S capital markets operate in a fair, efficient,
transparent and competitive manner, fostering capital formation and
useful innovation.
Indicator 2: Average quoted spread for exchange listed stocks on a
monthly basis (in cents);
FY 2010 Actual: 2.52;
FY 2011 Actual: 1.76.
Indicator 3: Average effective spread for exchange listed stocks on a
monthly basis (in cents);
FY 2010 Actual: 2.65;
FY 2011 Actual:
Indicator 4: Speed of execution (in seconds);
FY 2010 Actual: 1.77;
FY 2011 Actual: 1.72.
Indicator 5: Average quoted size of exchange listed stocks on a
monthly basis;
FY 2010 Actual: 687;
FY 2011 Actual: 606.
Indicator 6: Average daily volatility of exchange listed stocks on a
monthly basis;
FY 2010 Actual: 1.18%;
FY 2011 Actual: 1.02.
Outcome 2.3: The SEC adopts and administers rules and regulations that
enable market participants to understand clearly their obligations
under the securities laws.
Indicator 7: Percentage of SRO rule flings that are submitted for
immediate effectiveness;
FY 2010 Actual: 69%;
FY 2011 Actual: 77&.
N/A - Signifies data does not currently exist for existing or newly
added measures.
[End of table]
Management’s Responsibility for Internal Control:
FMFIA requires the head of the agency, based on the agency’s internal
evaluation, to provide an annual Statement of Assurance on the
effectiveness of their management, administrative, and financial
reporting controls. OMB Circular A-123, Management’s Responsibility
for Internal Control, implements the FMFIA and defines management’s
responsibility for internal control in Federal agencies.
FMFIA § 2 requires agencies to establish internal controls and
financial systems that provide reasonable assurance that the
following objectives are achieved:
* Effective and efficient operations,
* Compliance with applicable laws and regulations, and,
* Reliability of financial reporting.
FMFIA § 4 requires that agencies annually evaluate and report on
whether financial management systems conform to Government-wide
requirements. The SEC evaluated its financial management systems for
the fiscal year ending September 30, 2011, in accordance with the
Federal Financial Management Improvement Act of 1996 (FFMIA) and OMB
Circular A-127, Financial Management Systems, as applicable.
Appendix A of OMB Circular A-123 requires the agency head to provide a
separate statement of assurance on the effectiveness of internal
control over financial reporting (ICFR), in addition to the overall
FMFIA assurance statement. The 2011 annual assurance statements for
FMFIA and ICFR are provided on the preceding page. This report also
provides a Summary of Financial Statement Audits and Management
Assurances under the section entitled Other Accompanying
Information, as required by OMB Circular A-136, Financial
Reporting Requirements.
As part of the overall FMFIA assurance process, SEC management
assessed internal control at the entity-level, as well as at the
process, transaction, and application level. To assess the
effectiveness of entity-level controls, SEC management used the
Government Accountability Office’s (GAO) document, titled Internal
Control Management and Evaluation Tool (GAO-01-1008G) to define entity-
level control objectives. SEC management then identified changes to
control activities from the prior year that addressed each control
objective. Information on these entity-level control activities was
gathered through meetings with relevant points of contact and feedback
in the form of survey responses from SEC supervisors. Entity-level
control activities were also evaluated based on risk and control
documentation, as well as the assessments conducted by the divisions
and offices for providing management assurances over the effectiveness
of programmatic and operational controls and compliance with
laws and regulations.
The effectiveness of process-level controls was assessed through
detailed test procedures related to the agency’s financial reporting
objectives. As part of this effort, the agency performed a
comprehensive risk assessment in which SEC management identified:
* Significant financial reports and materiality;
* Significant line items, accounts, disclosures, and laws and
regulations;
* Major classes of transactions;
* Relevant assertions, risks of material misstatement and control
objectives;
* Reporting and regulatory requirements; and;
* Existing deficiencies and corrective action plans.
From the results of the risk assessment, SEC management updated
documentation of the business processes and control activities
designed to mitigate significant financial reporting and compliance
risks. These control activities were tested for design and operating
effectiveness. The agency also tested for operating effectiveness
those control activities that were found deficient in prior years and
remediated in FY 2011. The test results served as a basis for
management’s assessment of the effectiveness of internal control over
financial reporting.
SEC management analyzed the internal control deficiencies, both
individually and in the aggregate, to determine if a significant
deficiency1 or a material weakness2 exists in the financial reporting
processes. Significant factors considered for assessing each
deficiency included the following:
* Nature of the control deficiency (e.g., design, operation);
* Internal control objectives and activities impacted;
* Potential impact on financial statement line items, accounts, and
disclosures;
* The interaction of control deficiencies with other deficiencies; and;
* The materiality of account balances impacted by the deficiency.
In addition, each division director and office head provided a
statement of assurance identifying any internal control weaknesses or
management challenges related to the effectiveness of the controls
over programs and operations, and compliance with laws and
regulations. These statements were based on information gathered from
various sources including, among other things:
* Internal management reviews, self-assessments, and tests of internal
controls;
* Management’s personal knowledge gained from daily operations;
* Reports from the GAO and the SEC’s Office of Inspector General (OIG);
* Reviews of financial management systems under OMB Circular A-127,
Financial Management Systems;
* Annual performance plans and reports pursuant to the Federal
Information Security Management Act (FISMA) and OMB Circular A-130,
Management of Federal Information Resources;
* Annual reviews and reports pursuant to the Improper Payments
Elimination and Recovery Act;
* Reports and other information from Congress or agencies such as OMB,
the Office of Personnel Management (OPM), or the General Services
Administration (GSA) reflecting the adequacy of internal controls; and;
* Additional reviews relating to a division or office’s operations,
including those discussed in the Other Reviews section below.
Each year, the agency’s Financial Management Oversight Committee
advises the Chairman as to whether the SEC had any deficiencies in
internal control or financial system design significant enough to be
reported as a material weakness or non-conformance. This advice is
based on the assurance statements from directors and office heads and
other supplemental sources of information. Among other factors, the
SEC considered the implications of Antideficiency Act violations in FY
2010 and previous years related to a GAO opinion on the SEC’s leasing
program, which is discussed in Note 14.C. Other Budgetary Disclosures.
Other Reviews:
GAO audited the SEC’s financial statements. The objective of GAO’s
audit was to express an opinion on the financial statements and on
internal control over financial reporting and to report on tests of
compliance with selected laws and regulations.
The OIG conducted 14 audits and reviews during the fiscal year. The
reviews covered 17 of the 35 assessable units (49 percent). Some
components had multiple reviews.
Status of Prior Year Internal Control over Financial Reporting Issues:
The SEC’s FY 2010 financial audit and ICFR assessment identified two
material weaknesses in internal control over financial reporting, one
in information systems and a second in financial reporting and
accounting processes. The second material weakness resulted from the
combination of five significant deficiencies.
Based on the agency’s continued efforts to address prior year audit
findings and ICFR weaknesses, the agency successfully remediated both
material weaknesses. The issues disclosed in the FY 2010 PAR related
to disgorgement and penalty transactions and required supplementary
information were either fully remediated or reduced to control
deficiencies as a result of the remedial actions that were focused on
strengthening controls and improving management’s monitoring and
oversight. Although the agency has four significant deficiencies,
in the areas of financial reporting, budgetary resources, filing fees,
and IT security, the agency made significant improvement in addressing
these four deficiency areas. In addition, the agency continued in FY
2011 to perform a robust internal control assessment and improved its
process to effectively manage, track, monitor and test key risks and
controls. Below is a summary of the agency’s efforts to remediate the
six areas that constituted the two material weaknesses in FY 2010.
Information Systems. In FY 2011, the SEC successfully remediated its
material weakness in the area of information systems and reduced it to
the level of a significant deficiency. The SEC undertook corrective
actions in FY 2011 to address information technology and security
control weaknesses which spanned across its general support system and
key applications.
During FY 2011, the Office of Information Technology (OIT) updated
patches across the agency’s financial systems and improved backup
processes to ensure the recovery of critical financial data. OIT also
continued to aggressively work to resolve outstanding information
security control deficiencies identified by management through its
certifications and accreditations and by prior-year audits. The SEC
improved its monitoring capability over system configuration changes,
so that all changes to system requirements, design, and scripts are
evaluated by a Configuration Control Board on the basis of cost,
benefits, and risk to the agency. Future system upgrades are
documented to show both the impact on security and evidence of
approval by the Board. The agency also made notable progress with
respect to user access controls and segregation of duties.
New and residual deficiencies were identified during the SEC’s FY 2011
assessment including dated security risk management procedures,
inconsistent continuous monitoring processes to support FISMA
requirements, user account control gaps, and further improvements
needed in the patch management process. These areas will be a priority
for remediation in FY 2012.
Disgorgement and Penalties. The SEC successfully remediated this
significant deficiency, through efforts to improve the controls and
procedures that ensure that accounts receivables and payments related
to disgorgements and penalties were recorded accurately and in the
proper accounting period. Some of the improved control activities
implemented by the SEC were as follows:
* Instituting a more comprehensive monthly review of Court Link/Lexis
Nexus for valid judgments/court orders against new and existing SEC
civil cases for new receivables or subsequent transfer orders;
* Implementing procedures to age receivables and to record post-
judgment interest;
* Establishing a new process for recording deposits in transit to
ensure all checks received are recognized in the proper accounting
period; and;
* Implementing an automated interface between the SEC’s current core
financial system and the Bureau of Public Debt’s FedInvest system to
record purchases and redemptions for tracking investments at the
detailed level held in the Disgorgement Deposit Fund account.
New and residual deficiencies were identified during the SEC’s FY 2011
assessment, but these deficiencies, even when considered in aggregate,
do not rise to the level of a significant deficiency.
Required Supplementary Information. In FY 2011, the SEC successfully
resolved its previous significant deficiency regarding the required
supplemental information, particularly with respect to the new
Investor Protection Fund. The SEC prepared the required supplementary
information during FY 2011, and formalized the process of performing a
detailed review of OMB Circular A-136 Financial Reporting Requirements
and other relevant guidance to ensure that such requirements are
properly reflected in the agency’s financial statements.
Financial Reporting. This process area continues to have a significant
deficiency in FY 2011. Many of the agency’s financial reporting
processes are still manual in nature and reliant on spreadsheets and
databases to both initiate transactions and perform key control
functions.
During FY 2011, the SEC was able to reduce the number of manual
processes by tracking investments at the detail level within the
financial system and building an automated interface with the Bureau
of Public Debt for handling investments. In addition, SEC reduced the
number of manual journal vouchers by implementing the use of standard
vouchers for recurring types of journal vouchers. The agency
implemented a remediation plan to control its user developed
applications (UDAs), such as Microsoft Access databases and
spreadsheets, based on risk.
While the SEC made significant improvement in this area, the agency
still continues to have deficiencies related to financial reporting.
Most notably, the agency’s remediation related to UDAs went into
effect late in the fiscal year, and thus for most of FY 2011, the UDAs
were not subject to the newly required controls as appropriate to
ensure that manual compensating controls are operating effectively.
OFM plans to continue to assess its UDAs and to strengthen the
controls associated with those UDAs.
Budgetary Resources. This process area continues to have a significant
deficiency in FY 2011. The SEC continued its efforts to ensure the
correct use of posting models and developed new policies and
procedures related to posting obligations, funds reservations, and
monitoring open obligations. During FY 2011, the agency found
continuing issues, specifically in the design and operation of
controls to:
* Record obligations and adjustments to obligations accurately and on
a timely basis, upon contract execution.
* Ensure completeness of recorded obligations between the core
financial reporting and sub-ledger systems.
* Ensure that open obligations identified by the divisions and offices
as no longer needed are timely de-obligated by the contracting officer
per the closeout procedures contained in the Federal Acquisition
Regulation.
The SEC will continue to refine its business processes in this area in
FY 2012. Most notably, the agency’s controls over budgetary resources
will be significantly enhanced through integration of procurement and
financial systems, which the agency aims to achieve as part of the
migration to a Federal Shared Service Provider (FSSP).
Filing Fees. This process area continues to have a significant
deficiency in FY 2011 related to timeliness of recording revenues and
the backlog of inactive registrant accounts with balances. The agency
moved on multiple fronts to remediate these deficiencies, such as
eliminating a backlog of offering and verification reviews of fees,
resolving thousands of registrant deposit accounts, and implementing a
quarterly statistical analysis to enhance the accuracy of financial
reporting related to filing fees.
As of September 30, 2011, the control activities still need to be
improved to routinely review, research, and monitor registrant deposit
account activity to determine if amounts should be refunded or
recognized as revenue. The processes for continuous monitoring and
sustaining these efforts will be finalized and formalized in FY 2012.
The SEC will continue its efforts to resolve the backlog of inactive
deposit accounts and maintain the timeliness of the review and
verification of filing fees. In addition, the SEC will continue to
develop and implement long term enhancements, such as business process
redesign and enhancements to the systems supporting these processes.
With these remediation efforts, the SEC intends to ensure that
registrant filings and deposits are matched on a timely basis,
revenues are recorded in the period earned, and there is no backlog of
dormant registrant deposit accounts.
Financial Management System Conformance:
The FFMIA requires that each agency shall implement and maintain
financial management systems that comply substantially with Federal
financial management systems requirements, applicable Federal
accounting standards, and the U.S. Standard General Ledger at the
transaction level. The purpose of the FFMIA is to advance Federal
financial management by ensuring that financial management systems
provide accurate, reliable, and timely financial management
information. Although the SEC is exempt from the requirement to
determine substantial compliance with FFMIA, the agency assesses its
financial management systems annually for conformance with the
requirements of OMB Circular A-127 and other Federal financial system
requirements.
The SEC’s process for assessing its financial management systems is in
compliance with the January 9, 2009 revision of OMB Circular A-127 and
included the use of an FFMIA risk model that ranks risks from nominal
to significant. Based on the results of the review, the SEC concluded
that its risk rating is nominal. After reviewing the criteria in OMB
Circular A-127 for agencies with nominal risk, the SEC determined its
financial core and mixed systems are in substantial compliance with
Section 803(a) of the FFMIA requirements. This decision was based on
notable progress made in implementing corrective actions in response
to the material weakness in information systems noted in FY 2010.
Summary of Current Financial System and Future Strategies:
The SEC’s current financial management system environment is
characterized by a core financial system that has some gaps in
functionality; silo applications providing key financial management
functionality; external data marts with embedded business logic used
for reporting; and processes that rely extensively on human capital
for data entry, cleansing, and reconciliation. The SEC’s core
financial system, Momentum Version 6.1.5, is used to record all
accounting transactions, maintain an agency-wide general ledger,
produce financial reports, and generate external reports submitted
periodically to Treasury and other Federal entities. The core financial
system has automated interfaces with mixed systems such as the Budget
Planning and Performance Management System for budget formulation and
execution; the Central Contractor Registry for SEC vendor information;
FedTraveler for travel orders and vouchers; Fee Momentum for the
agency’s filing fees; and the Department of the Interior’s payroll
systems. The agency’s financial reporting and processes are dependent
upon a number of Microsoft Access databases, such as those related to
disgorgements and penalties receivables, financial reporting and
analysis, payments to harmed investors, and accounts payable accruals.
During FY 2011, the agency began its migration to an OMB-designated
FSSP to replace its core financial system. Through this initiative,
the SEC seeks to automate some manual, non-integrated financial sub-
processes and adopt standard business and technology practices.
Accordingly, during FY 2011, the SEC signed two Inter-Agency
Agreements (IAA) with the Enterprise Service Center of the U.S.
Department of Transportation (DOT) for the Planning and Requirements
Gathering and the Implementation Phases of this migration. The SEC has
worked throughout FY 2011 with the DOT FSSP team to develop detailed
requirements in order to cut over to the new system in FY 2012.
Federal Information Security Management Act (FISMA):
FISMA requires Federal agencies to conduct annual assessments of their
information security and privacy programs, to develop and implement
remediation efforts for identified weaknesses and vulnerabilities, and
to report compliance to OMB. The SEC’s Office of the Inspector General
(OIG), Chief Information Security Officer, and Privacy Officer are
performing a joint review of the agency’s compliance with FISMA
requirements during 2011, and will submit the report to OMB on
November 15, 2011, as required.
In FY 2011, OIT, in conjunction with system owners, completed
assessment and authorization activities for 22 reportable systems,
including annual assessments of systems such as the Momentum core
financial system. As a result, the SEC has now assessed and authorized
a total of 59 reportable systems in accordance with OMB policy and
guidance from the National Institute of Standards and Technology (NIST).
OIT also completed contingency testing on the majority of the SEC’s
authorized systems as part of several disaster recovery exercises.
OIT, in conjunction with system owners, completed 58 privacy reviews
during FY 2011. The privacy reviews included Privacy Impact
Assessments (PIA) on 14 required systems.
[End of section]
SEC's Financial Statements:
Financial Section:
This section of the Performance and Accountability Report contains the
U.S. Securities and Exchange Commission’s (SEC) financial statements,
required supplementary information, financial statements for the
Investor Protection Fund, and the related Independent Auditor’s
Report. Information presented here satisfies the financial reporting
requirements of the Office of Management and Budget (OMB) Circular
A-136, Financial Reporting Requirements, Accountability of Tax Dollars
Act of 2002, and Dodd-Frank Wall Street Reform and Consumer Protection
Act (the Dodd-Frank Act).
The SEC prepares these statements in conformity with U.S. Generally
Accepted Accounting Principles (GAAP) for the Federal Government and
OMB Circular A-136, Financial Reporting Requirements.
The first portion of this section contains the Government
Accountability Office’s (GAO) audit opinion, followed by the SEC’s
response. Then, the section shows the principal financial statements
for the SEC as a whole. The statements provide a comparison of Fiscal
Year (FY) 2011 and FY 2010 information. The SEC prepares the following
required financial statements
* Balance Sheet – presents, as of a specific time, amounts of future
economic benefits owned or managed by the reporting entity exclusive
of items subject to stewardship reporting (assets), amounts owed by
the entity (liabilities), and amounts which comprise the difference
(net position).
* Statement of Net Cost – presents the gross cost incurred by the
reporting entity less any exchange revenue earned from its activities.
The SEC also prepares a Statement of Net Cost by program to provide cost
information at the program level.
* Statement of Changes in Net Position – reports the change in net
position during the reporting period. Net position is affected by
changes to Cumulative Results of Operations.
* Statement of Budgetary Resources – provides information about how
budgetary resources were made available as well as their status at the
end of the year.
* Statement of Custodial Activity – reports collection of non-exchange
revenue for the Treasury General Fund.
The SEC, as the collecting entity, does not recognize these
collections as revenue. Rather, the agency accounts for sources and
disposition of the collections as custodial activities on this
statement.
The SEC does not have stewardship over resources or responsibilities
for which supplementary stewardship reporting would be required.
Budgetary information aggregated for purposes of the Statement of
Budgetary Resources is disaggregated for each of the SEC’s major
budget accounts and is presented as Required Supplementary Information.
The accompanying Notes to the Financial Statements provide a
description of significant accounting policies as well as detailed
information on select statement lines.
The second portion of this section contains stand alone, comparative
financial statements and accompanying notes for the Investor
Protection Fund as required by the Dodd-Frank Act. These statements
include the Balance Sheet, Statement of Net Cost, Statement of Changes
in Net Position, and Statement of Budgetary Resources.
Message from the Chief Financial Officer:
I am delighted to join Chairman Schapiro in presenting the SEC’s
Performance and Accountability Report (PAR) for fiscal year (FY) 2011.
We hope you find the PAR a useful summary of the SEC’s use of
resources, operating performance, financial stewardship, and internal
control.
I am extremely pleased to report that the SEC has successfully
remediated the two material weaknesses identified in 2010 related to
information systems and financial reporting and accounting processes.
This was a top priority of the SEC, and I am gratified that the agency
staff’s hard work and dedication to building a strong internal control
environment have yielded such significant results.
In FY 2011, the SEC significantly enhanced its technology security,
thereby reducing the first material weakness in information systems
down to a significant deficiency. The agency achieved this important
milestone through efforts such as remediating self-identified security
deficiencies, updating security patches on SEC systems, and
strengthening user access controls. The SEC eliminated the second
material weakness by resolving two of the five underlying significant
deficiencies, in disgorgements and penalties and in required
supplementary information, and making significant progress on the
other three areas, related to financial reporting, budgetary
resources, and filing fees. The agency did so through efforts
such as:
* Tightening controls over the recording of subsequent orders, post-
judgment interest, and deposits in transit related to disgorgements
and penalties;
* Eliminating a backlog of offering and verification reviews of fees
paid on registrant filings, and significantly reducing the backlog of
inactive registrant accounts;
* Redesigning and implementing controls over the spreadsheets and
databases used by the agency for material financial reporting-related
transactions and key operational management decisions, based on risk;
* Bolstering the processes related to the use of miscellaneous
obligating documents; and;
* Strengthening our process for de-obligating funds from completed
contracts, and ensuring that appropriate accounting adjustments are
recognized.
At the same time, the agency has been engaged in a multi-year effort
to migrate its core financial system to a Federal Shared Service
Provider (FSSP) model, engaging with the Department of Transportation’
s Enterprise Services Center (ESC). The ESC has successfully served
multiple Federal agencies, including various components of the
Department of Transportation, the Government Accountability Office,
and the Commodity Futures Trading Commission. Through this initiative,
the SEC will realize improvements in system functionality, automate some
manual processes, and further enhance financial management and
reporting.
In FY 2012, the SEC will continue working to ensure a successful
transition to the FSSP, and the agency is on track to cut over to the
new system and associated new processes in that year. In addition, the
SEC plans further progress on tightening information security,
resolving the backlog of inactive registrant deposit accounts,
bolstering the processes related to deobligations of previously
executed contracts, and implementing controls over spreadsheets and
databases related to financial reporting.
I am proud of the tremendous strides the SEC has made over the past
year. Yet our work is certainly not complete. We will continue
investing the time and resources necessary to remediate our remaining
deficiencies and build even stronger, more sustainable controls. That
is what the public has every right to expect from their government.
Sincerely,
Signed by:
Kenneth A. Johnson:
Chief Financial Officer:
November 15, 2011:
[End of letter]
U.S. Securities And Exchange Commission:
Balance Sheet:
As of September 30, 2011 and 2010 (Dollars In Thousands):
Assets (Notes 2 and 11):
Intragovernmental:
Fund Balance with Treasury (Note 3):
FY 2011: $6,995,610
FY 2010: $6,989,367.
Investments, Net (Note 5):
FY 2011: $1,202,525;
FY 2010: $924,823.
Accounts Receivable (Note 5):
FY 2011: $20;
FY 2010: [Empty].
Advances and Prepayments:
FY 2011: $7,172;
FY 2010: $2,198.
Total Intragovernmental:
FY 2011: $8,205,327;
FY 2010: $7,916,388.
Cash and other Monetary Assets (Note 4):
FY 2011: [Empty];
FY 2010: $2,815.
Accounts Receivable, Net (Note 6):
FY 2011: $214,026;
FY 2010: $161,143.
Advances and Prepayments:
FY 2011: $3,656;
FY 2010: $2,381.
Property and Equipment, Net (Note 7):
FY 2011: $93,939;
FY 2010: $79,712.
Total Assets:
FY 2011: $8,516,948;
FY 2010: $8,162,439.
Liabilities (Notes 8 and 11):
Intragovernmental:
Accounts Payable:
FY 2011: $8,049;
FY 2010: $5,185.
Employee Benefits:
FY 2011: $2,877;
FY 2010: $6,088.
Unfunded FECA and Unemployment Liability:
FY 2011: $1,770;
FY 2010: $1,719.
Custodial Liability:
FY 2011: $51,745;
FY 2010: $42,380.
Liability for Non-Entity Assets:
FY 2011: $134;
FY 2010: $4.
Total Intragovernmental:
FY 2011: $64,575;
FY 2010: $55,376.
Accounts Payable:
FY 2011: $52,768;
FY 2010: $46,260.
Accrued Payroll and Benefits:
FY 2011: $18,395;
FY 2010: $31,649.
Accrued Leave:
FY 2011: $45,472;
FY 2010: $45,629.
Registrant Deposits:
FY 2011: $46,622;
FY 2010: $44,729.
Actuarial FECA Liability:
FY 2011: $7,805;
FY 2010: $7,576.
Liability for Disgorgement and Penalties (Note 16):
FY 2011: $862,976;
FY 2010: $1,021,466.
Other Accrued Liabilities (Note 8):
FY 2011: $7,22;
FY 2010: $29,270.
Total Liabilities:
FY 2011: $1,105,825;
FY 2010: $1,281,955.
Commitments and Contingencies (Note 10):
Net Position (Note 11):
Unexpended Appropriations—Other Funds:
FY 2011: $735;
FY 2010: $1,749.
Cumulative Results of Operations—Earmarked Funds:
FY 2011: $7,409,186;
FY 2010: $6,878,132.
Cumulative Results of Operations—Other Funds:
FY 2011: $1,202;
FY 2010: $603.
Total Net Position:
FY 2011: $7,411,123;
FY 2010: $6,880,484.
Total Liabilities and Net Position:
FY 2011: $8,516,948;
FY 2010: $8,162,439.
[End of table]
U.S. Securities And Exchange Commission:
Statement of Net Cost:
For the years ended September 30, 2011 and 2010:
(Dollars In Thousands):
Program Costs (Note 12):
Enforcement:
FY 2011: $391,183;
FY 2010: $355,451.
Compliance Inspections and Examinations:
FY 2011: $239,435;
FY 2010: $229,389.
Corporation Finance:
FY 2011: $131,660;
FY 2010: $131,166.
Trading and Markets:
FY 2011: $62,176;
FY 2010: $54,107.
Investment Management:
FY 2011: $47,240;
FY 2010: $47,873.
Risk, Strategy and Financial Innovation:
FY 2011: $20,080;
FY 2010: $18,143.
General Counsel:
FY 2011: $41,357;
FY 2010: $39,780.
Other Program Offices:
FY 2011: $45,122;
FY 2010: $48,603.
Agency Direction and Administrative Support:
FY 2011: $163,357;
FY 2010: $128,531.
Inspector General:
FY 2011: $6,528;
FY 2010: $5,380.
Total Program Cost:
FY 2011: $1,148,138;
FY 2010: $1,058,423.
Less: Earned Revenue Not Attributed to Programs (Note 12):
FY 2011: $1,643,730;
FY 2010: $1,382,856.
Net (Income) Cost from Operations (Note 15):
FY 2011: ($495,592);
FY 2010: ($324,433).
The accompanying notes are an integral part of these financial
statements.
U.S. Securities And Exchange Commission:
Statement of Changes in Net Position:
For the years ended September 30, 2011 and 2010:
(Dollars In Thousands):
Cumulative Results Of Operations:
Beginning Balances:
FY 2011 Earmarked Funds: $6,878,132;
FY 2011 All Other Funds: $603;
FY 2011 Consolidated Total: $6,878,735.
Budgetary Financing Sources:
Appropriations Used:
FY 2011 Earmarked Funds: [Empty];
FY 2011 All Other Funds: $1,014;
FY 2011 Consolidated Total: $1,014.
Non-Exchange Revenue:
FY 2010 Earmarked Funds: $909;
FY 2010 All Other Funds: [Empty];
FY 2010 Consolidated Total: $909.
Other Financing Sources:
Imputed Financing (Note 13):
FY 2011 Earmarked Funds: $34,380;
FY 2011 All Other Funds: [Empty];
FY 2011 Consolidated Total: $34,380.
Other:
FY 2011 Earmarked Funds: [Empty];
FY 2011 All Other Funds: ($323);
FY 2011 Consolidated Total: ($323).
Total Financing Sources:
FY 2011 Earmarked Funds: $35,370;
FY 2011 All Other Funds: $691;
FY 2011 Consolidated Total: $36,061.
Net Income (Cost) from Operations:
FY 2011 Earmarked Funds: $495,684;
FY 2011 All Other Funds: ($92);
FY 2011 Consolidated Total: $495,592.
Net Change:
FY 2011 Earmarked Funds: $531,054;
FY 2011 All Other Funds: ($599);
FY 2011 Consolidated Total: $531,653.
Cumulative Results of Operations (Note 11):
FY 2011 Earmarked Funds: $7,409,186;
FY 2011 All Other Funds: $1,937;
FY 2011 Consolidated Total: $7,411,123.
Unexpended Appropriations:
Beginning Balance:
FY 2010 Earmarked Funds: [Empty];
FY 2010 All Other Funds: $1,749;
FY 2010 Consolidated Total: $1,749.
Budgetary Financing Sources:
Appropriations Used:
FY 2011 Earmarked Funds: [Empty];
FY 2011 All Other Funds: ($1,045);
FY 2011 Consolidated Total: ($1,045).
Total Unexpended Appropriations:
FY 2011 Earmarked Funds: [Empty];
FY 2011 All Other Funds: $735;
FY 2011 Consolidated Total: $735.
Net Position, End of Period:
FY 2011 Earmarked Funds: $7,409,186;
FY 2011 All Other Funds: $1,937;
FY 2011 Consolidated Total: $7,411,123.
Cumulative Results Of Operations:
Beginning Balances:
FY 2010 Earmarked Funds: $6,058,225;
FY 2010 All Other Funds: [Empty];
FY 2010 Consolidated Total: $6,058,225.
Budgetary Financing Sources:
Appropriations Used;
FY 2010 Earmarked Funds: [Empty];
FY 2010 All Other Funds: $8,111;
FY 2010 Consolidated Total: $8,111.
Non-Exchange Revenue:
FY 2010 Earmarked Funds: $451,910;
FY 2010 All Other Funds: [Empty];
FY 2010 Consolidated Total: $451,910.
Other Financing Sources:
Imputed Financing (Note 11):
FY 2010 Earmarked Funds: $36,216;
FY 2010 All Other Funds: [Empty];
FY 2010 Consolidated Total: $36,216.
Other:
FY 2010 Earmarked Funds: [Empty];
FY 2010 All Other Funds: ($160);
FY 2010 Consolidated Total: ($160).
Total Financing Sources:
FY 2010 Earmarked Funds: $488,126;
FY 2010 All Other Funds: $7,951;
FY 2010 Consolidated Total: $496,077.
Net Income (Cost) from Operations:
FY 2010 Earmarked Funds: $331,781;
FY 2010 All Other Funds: ($7,348);
FY 2010 Consolidated Total: $324,433.
Net Change:
FY 2010 Earmarked Funds: $819,907;
FY 2010 All Other Funds: $603;
FY 2010 Consolidated Total: $820,510.
Cumulative Results of Operations (Note 13):
FY 2010 Earmarked Funds: $6,878,132;
FY 2010 All Other Funds: $603;
FY 2010 Consolidated Total: $6,878,735.
Unexpended Appropriations:
Beginning Balance:
FY 2010 Earmarked Funds: [Empty];
FY 2010 All Other Funds: $9,860;
FY 2010 Consolidated Total: $9,860.
Budgetary Financing Sources:
Appropriations Received:
FY 2010 Earmarked Funds: [Empty];
FY 2010 All Other Funds: [Empty];
FY 2010 Consolidated Total: [Empty].
Appropriations Used:
FY 2010 Earmarked Funds: [Empty];
FY 2010 All Other Funds: ($8,111);
FY 2010 Consolidated Total: ($8,111).
Total Unexpended Appropriations:
FY 2010 Earmarked Funds: [Empty];
FY 2010 All Other Funds: $1,749;
FY 2010 Consolidated Total: $1,749.
Net Position, End of Period:
FY 2010 Earmarked Funds: $6,878,132;
FY 2010 All Other Funds: $2,352;
FY 2010 Consolidated Total: $6,880,484.
[End of table]
U.S. Securities And Exchange Commission:
Statement of Budgetary Resources:
For the years ended September 30, 2010 and 2009:
(Dollars In Thousands):
Budgetary Resources:
Unobligated Balance, Brought Forward, October 1:
FY 2011: $489,349;
FY 2010: $26,765.
Recoveries of Prior Year Unpaid Obligations:
FY 2011: $38,945;
FY 2010: $18,753.
Budget Authority:
Appropriation:
FY 2011: ($847);
FY 2010: $451,910.
Spending Authority from Offsetting Collections: Earned:
Collected:
FY 2011: $1,598,067;
FY 2010: $1,443,347.
Change in Receivables from Federal Sources:
FY 2011: $20;
FY 2010: ($188).
Change in Unfilled Customer: Advance Received:
FY 2011: [Empty];
FY 2010: ($157).
Change in Unfilled Customer: Without Advance from Federal Sources:
FY 2011: $2;
FY 2010: ($98).
Subtotal:
FY 2011: $1,597,242;
FY 2010: $1,894,814.
Temporarily not Available Pursuant to Public Law:
FY 2011: ($412,005);
FY 2010: ($347,694).
Total Budgetary Resources:
FY 2011: $1,713,531;
FY 2010: $1,592,638.
Status Of Budgetary Resources:
Obligations Incurred:
Direct (Note 14):
FY 2011: $1,215,144;
FY 2010: $1,103,007.
Direct, Change in Legal INterpretation for Lease Obligations (Note 14):
FY 2011: $779,928;
FY 2010: [Empty].
Reimbursable (Note 14):
FY 2011: $388;
FY 2010: $282.
Subtotal:
FY 2011: $1,993,460;
FY 2010: $1,103,289.
Unobligated Balance Available:
Realized and Apportioned for Current Period:
FY 2011: $459,248;
FY 2010: $17,213.
Unobligated Balance Not Available:
FY 2011: ($739,177);
FY 2010: $472,136.
Total Status of Budgetary Resources:
FY 2011: $1,713,531;
FY 2010: $1,592,638.
Change In Obligated Balance:
Obligated Balance, Net:
Unpaid Obligations, Brought Forward, October 1:
FY 2011: $317,772;
FY 2010: $236,399.
Uncollected Customer Payments from Federal Sources, Brought Forward,
October 1:
FY 2011: ($25);
FY 2010: ($311).
Total Unpaid Obligated Balance, Net:
FY 2011: $317,747;
FY 2010: $236,088.
Obligations Incurred Net:
FY 2011: $1,993,460;
FY 2010: $1,103,289.
Gross Outlays:
FY 2011: ($1,161,653);
FY 2010: ($1,003,163).
Recoveries of Prior Year Unpaid, Obligations Actual:
FY 2011: ($38,945);
FY 2010: ($18,753).
Change in Uncollected Customer Payments from Federal Sources:
FY 2011: ($22);
FY 2010: $286.
Obligated Balance, Net, End of Period:
Unpaid Obligations:
FY 2011: $1,110,634;
FY 2010: $317,772.
Uncollected Customer Payments from Federal Sources:
FY 2011: ($47);
FY 2010: ($25).
Total, Unpaid Obligated Balance, Net, End of Period (Note 10):
FY 2011: $1,110,587;
FY 2010: $317,747.
Net Outlays:
Gross Outlays:
FY 2011: $1,161,53;
FY 2010: $1,003,163.
Offsetting Collections:
FY 2011: ($1,598,067);
FY 2010: ($1,443,190).
Distributed Offsetting Receipts:
FY 2011: $660;
FY 2010: $194.
Net Outlays/(Collections):
FY 2011: ($435,754);
FY 2010: ($439,833).
[End of table]
U.S. Securities And Exchange Commission:
Statement of Custodial Activity:
For the years ended September 30, 2011 and 2010:
(Dollars In Thousands):
Revenue Activity:
Sources of Cash Collections:
Disgorgement and Penalties:
FY 2011: $413,413;
FY 2010: $1,116,632.
Other:
FY 2011: $8,109;
FY 2010: $1.
Total Cash Collections:
FY 2011: $421,522;
FY 2010: $1,116,633.
Accrual Adjustments:
FY 2011: $9,365;
FY 2010: $42,380.
Total Custodial Revenue (Note 17):
FY 2011: $430,887;
FY 2010: $1,159,013.
Disposition Of Collections:
Amounts Transferred to Department of the Treasury:
FY 2011: $421,522;
FY 2010: $664,723.
Investor Protection Fund:
FY 2011: [Empty];
FY 2010: $451,910.
Accounts yet to be Transferred:
FY 2011: $9,365;
FY 2010: $42,380.
Total Disposition of Collections:
FY 2011: $430,887;
FY 2010: $1,159,013.
Net Custodial Activity:
FY 2011: [Empty]
FY 2010: [Empty].
[End of table]
The accompanying notes are an integral part of these financial
statements.
Notes to the Financial Statements:
U.S. Securities And Exchange Commission:
As of September 30, 2011 and 2010:
A. Reporting Entity:
The Securities and Exchange Commission (SEC) is an independent agency
of the U.S. Government established pursuant to the Securities Exchange
Act of 1934 (Exchange Act), charged with regulating this country’s
capital markets. The SEC’s mission is to protect investors; maintain
fair, orderly, and efficient securities markets; and facilitate
capital formation. The SEC works with Congress, other executive branch
agencies, Self Regulatory Organizations (SROs) (e.g., securities
exchanges and the Financial Industry Regulatory Authority (FINRA)),
accounting and auditing standards setters, state securities
regulators, law enforcement officials, and many other organizations in
support of the agency’s mission.
The agency’s programs protect investors and promote the public
interest by fostering and enforcing compliance with the Federal
securities laws; establishing an effective regulatory environment;
facilitating access to the information investors need to make informed
investment decisions; and enhancing the SEC’s performance through
effective alignment and management of human, information, and
financial capital.
The SEC consists of five presidentially-appointed Commissioners, with
staggered five-year terms. The SEC is organized into five Divisions
and multiple offices. The five divisions are the Division of
Corporation Finance; the Division of Trading and Markets; the Division
of Investment Management; the Division of Enforcement; and the
Division of Risk, Strategy, and Financial Innovation. The offices
include the Office of Administrative Law Judges, the Office of
Compliance Inspections and Examinations, the Office of the Chief
Accountant, Office of Investor Education and Advocacy and
various supporting services.
The SEC reporting entity includes the Investor Protection Fund (See
Note 1.T. Investor Protection Fund). As discussed in Note 10.A.
Commitments: Securities Investor Protection Act, the SEC reporting
entity does not include the Securities Investor Protection Corporation
(SIPC).
As discussed at Note 1.S. Disgorgement and Penalties, disgorgement
funds collected and held by the SEC on behalf of harmed investors are
part of the SEC reporting entity. However, disgorgement funds held by
the U.S. Courts and by non-Federal receivers on behalf of harmed
investors are not part of the SEC reporting entity.
B. Basis of Presentation and Accounting:
The accompanying financial statements present the financial position,
net cost of operations, changes in net position, budgetary resources,
and custodial activities of the SEC’s core business activities as
required by the Accountability of Tax Dollars Act of 2002. The
statements may differ from other financial reports submitted pursuant
to Office of Management and Budget (OMB) directives for the purpose of
monitoring and controlling the use of the SEC budgetary resources, due
to differences in applicable accounting and reporting principles
discussed in the following paragraphs. The SEC’s books and records
serve as the source of the information presented in the accompanying
financial statements.
The agency classifies assets, liabilities, revenues, and costs in
these financial statements according to the type of entity associated
with the transactions. Intragovernmental assets and liabilities are
those due from or to other Federal entities. Intragovernmental
revenues are earned from other Federal entities. Intragovernmental
costs are payments or accruals due to other Federal entities.
The SEC’s financial statements are prepared in conformity with
generally accepted accounting principles (GAAP) for the Federal
Government and presented in conformity with OMB Circular A-136,
Financial Reporting Requirements. The Balance Sheet, Statement of Net
Cost and Statement of Changes in Net Position are prepared using the
accrual basis of accounting. Accordingly, revenues are recognized when
earned and expenses are recognized when incurred without regard to the
receipt or payment of cash. These principles differ from budgetary
accounting and reporting principles on which the Statement of
Budgetary Resources is prepared. The differences relate primarily to
the capitalization and depreciation of property and equipment, as well
as the recognition of other long-term assets and liabilities. The
Statement of Custodial Activity is presented on the modified cash basis
of accounting. Cash collections and amounts transferred to Treasury or
the Investor Protection Fund are reported on a cash basis. The change
in receivables and related payables are reported on an accrual basis.
The SEC presents net cost of operations by program. OMB Circular A-136
defines the term “major program” as describing an agency’s mission,
strategic goals, functions, activities, services, projects, processes,
or any other meaningful grouping. The presentation by program is
consistent with the presentation used by the agency in submitting its
budget requests.
Certain FY 2010 balances in the footnotes to the financial statements
have been reclassified to conform to FY 2011 presentations.
C. Use of Estimates:
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities. These estimates and
assumptions include, but are not limited to, the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Estimates are also used in the allocation of
costs to the SEC programs presented in the Statement of Net Cost.
Actual results may differ from those estimates.
D. Intra- and Inter-Agency Relationships:
The SEC is comprised of a single Federal agency with limited intra-
entity transactions. The Investor Protection Fund, which was created
in FY 2010, finances the operations of the SEC Office of the Inspector
General’s employee suggestion program on a reimbursable basis. This
has given rise to a small amount of intra-entity eliminations of the
related revenue and expense transactions between the Investor
Protection Fund and the SEC’s General Salaries and Expenses Fund.
E. Fund Accounting Structure:
The SEC, in common with other Federal agencies, utilizes various
Treasury Appropriation Fund Symbols (Funds), to recognize and track
appropriation authority provided by Congress, collections from the
public and other financial activity. These funds are described below:
(1) General Funds – Salaries and Expenses: Earned revenues from
securities transaction fees from SROs and securities registration,
tender offer, merger, and other fees from registrants are deposited
into Fund X0100, Salaries and Expenses, Securities and Exchange
Commission. These collections are earmarked for carrying out the SEC’s
mission, functions, and day to day operations and may be used in
accordance with spending limits established by Congress. Collections
in excess of Congressional spending limits are unavailable by law and
reported as Non-Budgetary Fund Balance with Treasury (See Note 3. Fund
Balance with Treasury). In this context, “earmarked” indicates that
these collections are set aside by Congress for the purpose stated. In
addition, the SEC received a supplemental appropriation of $10 million
for use in FY 2009 and FY 2010.
(2) Deposit Funds: The Deposit Funds hold disgorgement, penalties, and
interest collected and held on behalf of harmed investors, registrant
monies held temporarily until earned by the SEC, and collections
awaiting disposition or reclassification. This activity is recognized
in Fund X6561, Unearned Fees, Securities and Exchange Commission and
Fund X6563, Disgorgement and Penalty Amounts Held for Investors,
Securities and Exchange Commission.
(3) Miscellaneous Receipt Accounts: The Miscellaneous Receipt Accounts
hold non-entity receipts and accounts receivable from custodial
activities that the SEC cannot deposit into funds under its control.
These accounts include receipts pursuant to certain SEC enforcement
actions and other small collections that will be sent to the U.S.
Treasury General Fund upon collection. This activity is recognized in
Fund 1060, Forfeitures of Unclaimed Money and Property, Fund 1099,
Fines, Penalties, and Forfeitures, Not Otherwise Classified, Fund
1435, General Fund Proprietary Interest, Not Otherwise Classified, and
Fund 3220, General Fund Proprietary Receipts, Not Otherwise Classified.
(4) Investor Protection Fund: The Investor Protection Fund is an
earmarked fund that provides dedicated funding for the whistleblower
awards as required by the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act). Persons may receive award payments
from the Fund if they provide original information to the SEC that
results in a successful enforcement action and other conditions are
met. In addition, the Fund is used to finance the operations of the
SEC Office of the Inspector General’s employee suggestion program for
the receipt of suggestions for improvements in work efficiency and
effectiveness, and allegations of misconduct or mismanagement within
the SEC. This activity is recognized in Fund X5567, Monetary Sanctions
and Interest, Investor Protection Fund, Securities and Exchange
Commission (Investor Protection Fund).
(5) Reserve Fund: Effective October 1, 2011, a portion of SEC
registration fee collections up to $50 million in any one fiscal year
may be deposited in the Reserve Fund, the balance of which cannot
exceed $100 million. The Reserve Fund may be used by the SEC to
obligate amounts up to a total of $100 million in one fiscal year as
the SEC determines necessary to carry out its functions. The SEC must
notify Congress after obligating amounts from the Reserve Fund. The
SEC established the Fund in FY 2011 in anticipation of beginning
Reserve Fund operations in FY 2012.
The SEC’s lending and borrowing authority is limited to authority to
borrow funds from Treasury and loan funds to SIPC, as discussed in
Note 10. Commitments and Contingencies. The SEC has custodial
responsibilities, as disclosed in Note 1.M. Liabilities.
F. Earmarked Funds:
Earmarked funds are financed by specifically identified revenues,
often supplemented by other financing sources, which remain available
over time. The SEC collects earmarked funds and is required to use
these funds for designated activities, benefits or purposes and to
account for them separately from the Government’s general revenues.
The SEC’s earmarked funds include securities transaction fees from
SROs and securities registration, tender offer, merger, and other fees
from registrants. These are reported as offsetting collections as
defined by OMB and are deposited into Fund X0100, Salaries and
Expenses. Also, all funds held in the Fund X5567, Investor Protection
Fund, are considered earmarked as described in Note 11. Earmarked,
Other Entity, Disgorgement and Penalties, and Other Non-Entity Funds.
G. Entity and Non-Entity Assets:
Entity assets are assets that the SEC may use in its operations. This
includes amounts where SEC management has the authority to decide how
funds will be used as well as other amounts that the SEC is legally
obligated to use to meet program obligations.
Assets that an agency holds on behalf of another Federal agency or a
third party and are not available for the agency’s use are non-entity
assets. The SEC’s non-entity assets include the following: (i)
disgorgement, penalties, and interest collected and held or invested
by the SEC; (ii) disgorgement, penalties, and interest receivable;
(iii) accounts receivable with respect to Freedom of Information Act
(FOIA) fees; and (iv) excess filing fees remitted by registrants
(registrant deposits).
H. Fund Balance with Treasury:
Fund Balance with Treasury (FBWT) reflects amounts the SEC holds in
the U.S. Treasury that have not been invested in Federal securities.
The SEC’s FBWT consist of several components.
(1) The aggregate amount of funds in the SEC’s general fund accounts
with Treasury that the SEC is authorized to use to make expenditures
and pay liabilities;
(2) Filing and securities transaction fees in excess of appropriated
amounts;
(3) Funds held in the Investor Protection Fund;
(4) Registrant deposits held pending submission of a filing or return
to the registrant; and;
(5) Disgorgement funds held on behalf of harmed investors.
The SEC conducts all of its banking activity in accordance with
directives issued by Treasury’s Financial Management Service.
I. Investments:
The SEC has the authority to invest disgorgement funds in Treasury
securities including civil penalties collected under the “Fair Fund”
provision of the Sarbanes-Oxley Act of 2002. As the funds are
collected, the SEC holds them in a deposit fund account and may invest
them in overnight and short-term market-based Treasury bills through
the Bureau of the Public Debt. The SEC adds interest earned to the
funds, and these funds are subject to taxation under Treasury Regulation
Section 1.468B-2.
The SEC also has authority to invest amounts in the Investor
Protection Fund in overnight and short-term market-based Treasury
bills through the Bureau of the Public Debt. The interest earned on
the investments is a component of the balance of the Fund and
available to be used for expenses of the Investor Protection Fund.
Additional details regarding SEC investments are provided in Note 5.
Investments, Net.
Intragovernmental Investments in Treasury Securities:
Market-based Treasury securities are debt securities that the U.S.
Treasury issues to Federal entities without statutorily determined
interest rates. Although the securities are not marketable, the terms
(prices and interest rates) mirror the terms of marketable Treasury
securities.
The Federal Government does not set aside assets to pay future
benefits or other expenditures associated with the investment by
Federal agencies in non-marketable Federal securities. The balances
underlying these investments are deposited in the U.S. Treasury, which
uses the cash for general Government purposes. Treasury securities are
issued to the SEC as evidence of these balances. Treasury securities
are an asset of the SEC and a liability of the U.S. Treasury. Because
the SEC and the U.S. Treasury are both components of the Government,
these assets and liabilities offset each other from the standpoint of
the Government as a whole.
For this reason, the investments presented by the SEC do not represent
an asset or a liability in the U.S. Government-wide financial
statements.
Treasury securities provide the SEC with authority to draw upon the
U.S. Treasury to make future payments from these accounts. When the
SEC requires redemption of these securities to make expenditures, the
Government finances those expenditures out of accumulated cash
balances, by raising taxes or other receipts, by borrowing from the
public or repaying less debt, or by curtailing other expenditures.
This is the same manner in which the Government finances all
expenditures.
J. Accounts Receivable and Allowance for Uncollectible Accounts:
SEC’s entity and non-entity accounts receivable consist primarily of
amounts due from the public. Entity accounts receivable are amounts
that the SEC may retain upon collection. Non-entity accounts
receivable are amounts that the SEC will forward to another Federal
agency or to the public upon collection.
Entity Accounts Receivable:
The bulk of SEC entity accounts receivable arise from securities
transaction fees and from filing fees paid by registrants. In
addition, the SEC has small amounts of activity arising from the sale
of goods or services provided by the SEC to other Federal agencies;
reimbursement of employee travel by outside organizations; and
employee-related debt. Entity accounts receivable balances are
normally small at year end due to the timing and payment requirements
relative to the largest categories of accounts receivable activity.
Specifically, Federal law generally requires payment of filing fees at
the time of filing, and securities transaction fees are payable to the
SEC twice a year: in March for the period September through December,
and in September for the period January through August. Accordingly,
the year-end accounts receivable accrual generally represents fees
payable to the SEC for one month of securities transaction fee
activity (September). At the end of the first, second and third
quarters, the receivable reflects four months, three months, and six
months of securities transaction fee activity, respectively.
Non-entity Accounts Receivable:
Non-entity accounts receivable arise mainly from amounts assessed
against violators of securities laws, including disgorgement of
illegal gains, civil penalties, and related assessed interest. The SEC
is responsible for collection, and recognizes a receivable, when an
order of the Commission or a Federal court directs payment to the SEC
or the U.S. Treasury.
Interest recognized by the SEC on non-entity accounts receivable
includes prejudgment interest specified by the court or administrative
order as well as post-judgment interest on collectible accounts. The
SEC does not recognize interest revenue on accounts considered to be
uncollectible.
The SEC is also party to court orders directing violators of Federal
securities laws to pay amounts assessed to a Federal court or to a non-
Federal receiver acting on behalf of harmed investors. These orders
are not recognized as accounts receivable by the SEC because the debts
are payable to, and collected by, another party.
Allowance for Uncollectible Amounts:
The SEC calculates the allowance for uncollectible amounts and the
related provision for estimated losses for filing fees and other
accounts receivable using an analysis of historical collection data.
No allowance for uncollectible amounts or related provision for
estimated losses has been established for securities transaction fees
payable by SROs, as these amounts are fully receivable based on
historical experience.
The SEC uses a three-tiered methodology to calculate the allowance for
loss on its non-entity disgorgement and penalty accounts receivable
balances. The first tier involves making an individual collection
assessment of the cases constituting the top 90 percent of the value
of the disgorgement and penalty accounts receivable portfolio. The
second and third tiers are composed of cases in the bottom 10 percent
of the value. Separate calculations are performed on accounts that are
equal to or less than 30 days old and accounts that are over 30 days
old using an allowance rate based on historical collection data.
The SEC writes off receivables aged two or more years by removing the
debt amounts from the gross accounts receivable and any related
allowance for uncollectible accounts.
K. Other Assets:
Advances and Prepayments:
Payments made in advance of the receipt of goods and services are
recorded as advances or prepayments, and recognized as expenses when
the related goods and services are received.
L. Property and Equipment, Net:
The SEC’s property and equipment consists of software, general-purpose
equipment used by the agency, capital improvements made to buildings
leased by the SEC for office space, and, when applicable, internal-use
software development costs for projects in development. The SEC reports
property and equipment purchases and additions at historical cost. The
agency expenses property and equipment acquisitions that do not meet
the capitalization criteria as well as normal repairs and maintenance.
The SEC depreciates property and equipment over the estimated useful
lives using the straight-line method of depreciation. The agency
removes property and equipment from its asset accounts in the period
of disposal, retirement, or removal from service. The SEC recognizes
the difference between the book value and the proceeds as a gain or
loss in the period that the asset is removed.
M. Liabilities:
The SEC recognizes liabilities for probable future outflows or other
sacrifices of resources as a result of events that have occurred as of
the Balance Sheet date. The SEC’s liabilities consist of routine
operating accounts payable, accrued payroll and benefits, registrant
deposit accounts that have not been returned to registrants,
liabilities for disgorgement and penalties, legal liabilities, and
custodial liabilities for amounts collected or receivable on behalf of
Treasury.
Enforcement Related Liabilities:
A liability for disgorgement and penalties arises when an order is
issued for the SEC to collect disgorgement, penalties, and interest
from securities law violators. When the Commission or court issues
such an order, the SEC establishes an accounts receivable due to the
SEC offset by a liability. The presentation of this liability on the
Balance Sheet is dependent upon several factors. If the court or
Commission order indicates that collections are to be retained by the
Federal Government, either by transfer to the U.S. Treasury General
Fund or to the Investor Protection Fund, the liabilities are
classified as custodial (that is, collected on behalf of the
Government) and intragovernmental. If the order indicates that the
funds are eligible for distribution to harmed investors, the SEC will
recognize a Governmental liability (that is, a liability of the
Government to make a payment to the public). This liability is not
presented as a custodial liability. The SEC does not record liabilities
on its financial statements for disgorgement and penalty amounts that
another government entity such as a court, or a non-governmental
entity, such as a receiver, has collected or will collect.
Prior to the enactment of the Dodd-Frank Act on July 21, 2010, all
collections not distributed to harmed investors were transferred to
the U.S. Treasury General Fund. After the enactment of the Dodd-Frank
Act, collections not distributed to harmed investors may be
transferred to either the Investor Protection Fund or the U.S.
Treasury General Fund. Collections not distributed to harmed investors
are transferred to the Investor Protection Fund if the Fund’s balance
does not exceed $300 million at the time of collection.
Liability Classification:
The SEC recognizes liabilities covered by three types of resources:
realized budgetary resources, unrealized budgetary resources that
become available without further congressional action, and amounts
that do not require the use of current budgetary resources. Realized
budgetary resources include obligated balances that fund existing
liabilities and unobligated balances as of the relevant Balance Sheet
dates. Unrealized budgetary resources represent fee collections in
excess of amounts appropriated for current fiscal year spending. The
SEC uses these resources to cover liabilities when appropriation
language makes these unrealized budgetary resources available in the
fiscal year without further congressional action. Amounts that do not
require the use of current budgetary resources are liabilities that
will be funded in future years, such as annual leave.
N. Employee Retirement Systems and Benefits:
The SEC’s employees may participate in either the Civil Service
Retirement System (CSRS) or the Federal Employees Retirement System
(FERS), depending on when they started working for the Federal
Government. Pursuant to Public Law 99-335, FERS and Social Security
automatically cover most employees hired after December 31, 1983.
Employees who are rehired after a break in service of more than one
year and who had five years of Federal civilian service prior to 1987
are eligible to participate in the CSRS offset retirement system or
may elect to join FERS.
All employees are eligible to contribute to a Thrift Savings Plan
(TSP). For those employees participating in FERS, the TSP is
automatically established, and the SEC makes a mandatory one percent
contribution to this plan. In addition, the SEC matches contributions
ranging from one to four percent for FERS-eligible employees who
contribute to their TSP. The SEC contributes a matching amount to the
Social Security Administration under the Federal Insurance
Contributions Act, which fully covers FERS participating employees.
Employees participating in CSRS do not receive matching contributions
to their TSP.
The SEC does not report CSRS, FERS, Federal Employees Health Benefits
Program (FEHBP), Federal Employees Group Life Insurance Program
(FEGLIP) assets, accumulated plan benefits, or unfunded liabilities
applicable to its employees; the U.S. Office of Personnel Management
(OPM) reports this information.
O. Injury and Post-employment Compensation:
The Federal Employees’ Compensation Act (FECA), administered by the
U.S. Department of Labor (DOL), provides income and medical cost
protection to covered Federal civilian employees harmed on the job or
who have contracted an occupational disease, and dependents of employees
whose death is attributable to a job-related injury or occupational
disease. The DOL bills the SEC annually as claims are paid, and the
SEC in turn accrues a liability to recognize the future payments.
Payment on these bills is deferred for two years to allow for funding
through the budget process. Similarly, employees that the SEC
terminates without cause may receive unemployment compensation
benefits under the unemployment insurance program also administered by
the DOL, which bills each agency quarterly for paid claims.
In addition, the SEC records an estimate for the FECA actuarial
liability using the DOL’s FECA model. The model considers the average
amount of benefit payments incurred by the SEC for the past three
fiscal years, multiplied by the medical and compensation liability to
benefits paid (LBP) ratio for the whole FECA program.
P. Annual, Sick, and Other Leave:
The SEC accrues annual leave and compensatory time as earned and
reduces the accrual when leave is taken. The balances in the accrued
leave accounts reflect current leave balances and pay rates. No
portion of this liability has been obligated. Future financing sources
provide funding to the extent that current or prior year funding is
not available to pay for leave earned but not taken. The SEC expenses
sick leave and other types of non-vested leave as used.
Q. Revenue and Other Financing Sources:
The SEC’s revenue and financing sources include exchange revenues,
which are generated from arm’s-length transactions in which both
parties give and receive value, and nonexchange revenues, which arise
from the Government’s ability to demand payment.
Exchange Revenue:
The SEC’s exchange revenue consists primarily of collections of
securities transaction fees from SROs and of securities registration,
tender offer, merger, and other fees from registrants. The fee rates
are calculated by the SEC’s Division of Risk, Strategy, and Financial
Innovation and established by the SEC in accordance with Federal law
and are applied to volumes of activity reported by SROs or to filings
submitted by registrants. Fees are recognized as exchange revenue on
the effective date of transaction or filing. These fee collections are
the primary source of SEC funding and may be used up to limits
established by Congress. See Note 1.E. Fund Accounting Structure.
The SEC recognizes amounts remitted by registrants in advance of the
transaction or filing date as a liability until earned by the SEC or
returned to the registrant. Federal regulation requires the return of
registrant deposits when an account is dormant for three years.
Filing Fee Offsets:
The Securities Act of 1933 and the Exchange Act do not permit refunds
to registrants for securities that remain unsold after the completion,
termination, or withdrawal of an offering. However, Code of Federal
Regulations (CFR) Title 17 Chapter II, Part 230, Section 457(p)
permits filers to offset a fee paid (filing fee offset) for a
subsequent registration statement (offering) filed within five years
of the initial filing date of the earlier registration statement. The
total aggregate dollar amount of the filing fee associated with the
unsold securities may be offset against the total filing fee due on
the subsequent offering. Unused filing fee offsets are not a liability
to the SEC because registrants cannot obtain refunds of fees or
additional services in relation to securities that remain unsold.
However, filing fee offsets may reduce revenue earned in future
accounting periods.
Non-exchange Revenue:
The SEC’s non-exchange revenue mainly consists of amounts collected
from violators of securities laws as a result of enforcement
proceedings. These amounts may take the form of disgorgement of
illegal gains, civil penalties, and related interest. Amounts
collected may be paid to injured investors, transferred to the
Investor Protection Fund, or transferred to the U.S. Treasury General
Fund, based on established policy and regulation.
All non-exchange revenue expected to be forwarded to either the U.S.
Treasury General Fund or Investor Protection Fund is recognized on the
Statement of Custodial Activity. The Investor Protection Fund
recognizes non-exchange revenue on the Statement of Changes in Net
Position when funds are transferred into the Investor Protection Fund.
The result is that, in accordance with Federal accounting standards,
the entire amount of custodial activity is presented on the Statement of
Custodial Activity to document the movement of funds and the portion
retained by the SEC is also recognized as SEC activity.
The SEC does not recognize amounts collected and held by another
government entity, such as a court registry, or a nongovernment
entity, such as a receiver.
R. Budgets and Budgetary Accounting:
The SEC is subject to certain restrictions on its use of statutory
fees. The SEC deposits all fee revenues in a designated account at
Treasury. However, the SEC may use funds from this account only as
authorized by Congress and made available by OMB apportionment, upon
issuance of a Treasury warrant. Revenue collected in excess of
appropriated amounts is restricted from use by the SEC.
The SEC can use fees other than the restricted excess fees from its
operations, subject to annual congressional limitations, which were
$1,185 million and $1,095 million for the budgets for FY 2011 and FY
2010, respectively. In addition, the SEC had available approximately
$36.1 million and $16.1 million from prior year balances for FY 2011
and FY 2010, respectively. Funds appropriated that the SEC does not use
in a given fiscal year are maintained in a designated account for use
in future periods in accordance with the appropriation requirements.
As previously mentioned in Note 1.E. Fund Accounting Structure, the
SEC received a supplemental appropriation for $10 million from the
U.S. Treasury General Fund for use in FY 2009 and FY 2010. Unlike the
annual appropriation, the supplemental funds are not offset by fees
collected by the SEC.
General Funds – Salaries and Expenses:
Each fiscal year, the SEC receives Category A apportionments, which
are quarterly distributions of budgetary resources made by OMB. The
SEC also receives a small amount of Category B funds for reimbursable
activity, which are exempt from quarterly apportionment.
Investor Protection Fund:
The Investor Protection Fund is a special fund that has the authority
to retain revenues and other financing sources not used in the current
period for future use. The Dodd-Frank Act provides that the Fund is
available to the SEC without further appropriation or fiscal year
limitation for the purpose of paying awards to whistleblowers and
funding the activities of the Office of the Inspector General’s
employee suggestion program. However, the SEC is required to request
and obtain an annual apportionment from OMB to use these funds. All of
the funds are Category B, exempt from quarterly apportionment.
S. Disgorgement and Penalties:
The SEC maintains non-entity assets related to disgorgements and
penalties ordered pursuant to civil injunctive and administrative
proceedings. The SEC also recognizes an equal and offsetting liability
for these assets as discussed in Note 1.M. Liabilities. These non-
entity assets consist of disgorgement, penalties, and interest
assessed against securities law violators where the Commission,
administrative law judge, or in some cases, a court, has determined
that the SEC should return such funds to harmed investors or may be
transferred to the Investor Protection Fund or the U.S. Treasury
General Fund. The SEC does not record on its financial statements any
asset amounts that another government entity such as a court, or a non-
governmental entity, such as a receiver, has collected or will
collect. Additional details regarding disgorgement and penalties are
presented in Note 11. Earmarked, Other Entity, Disgorgement and
Penalties, and Other Non-Entity Funds and Note 16. Disgorgement and
Penalties.
T. Investor Protection Fund:
The Investor Protection Fund was established through a permanent
indefinite appropriation to provide financing for payments to
whistleblowers and for the SEC Office of the Inspector General’s
employee suggestion program. The Investor Protection Fund is financed
by transferring a portion of monetary sanctions collected by the SEC
in judicial or administrative actions brought by the SEC under the
securities laws that are not added to disgorgement fund or other funds
intended for harmed investors under Section 308 of the Sarbanes-Oxley
Act of 2002 (15 U.S.C. 7246). Sanctions collected by the Commission
payable either to the SEC or the U.S. Treasury General Fund will be
transferred to the Investor Protection Fund if the balance in that
fund is less than $300 million on the day of collection.
The SEC may request the Secretary of the Treasury to invest Investor
Protection Fund amounts in Treasury obligations. Refer to Note 1.I.
Investments for additional details.
Note 2. Assets:
At September 30, 2011 SEC assets consisted of the following: (Dollars
In Thousands):
Intragovernmental:
Fund Balance with Treasury:
SEC Funds:
Entity: $6,875,059;
Non-Entity: [Empty];
Total: $6,875,059.
Registrant Deposits:
Entity: [Empty];
Non-Entity: $46,662;
Total: $46,662.
Disgorgement and Penalties (Note 16):
Entity: [Empty];
Non-Entity: $73,929;
Total: $73,929.
Investments, Net:
Disgorgement and Penalties (Note 16):
Entity: [Empty];
Non-Entity: $749,810;
Total: $749,810.
Investor Protection Fund:
Entity: $452,715;
Non-Entity: [Empty];
Total: $452,715.
Accounts Receivable:
Entity: $20;
Non-Entity: [Empty];
Total: $20.
Advances and Prepayments:
Entity: $7,172;
Non-Entity: [Empty];
Total: $7,172.
Total Intragovernmental Assets:
Entity: $7,334,966;
Non-Entity: $870,361;
Total: $8,205,327.
Cash and Other Monetary Assets:
Disgorgement and Penalties (Note 16):
Entity: [Empty];
Non-Entity: [Empty];
Total: [Empty].
Accounts Receivable, Net:
SEC Funds:
Entity: $122,910;
Non-Entity: [Empty];
Total: $122,910.
Disgorgement and Penalties (Note 16):
Entity: [Empty];
Non-Entity: $90,982;
Total: $90,982.
Other Non-Entity Assets:
Entity: [Empty];
Non-Entity: $134;
Total: $134.
Advances and Prepayments:
Entity: $3,656;
Non-Entity: [Empty];
Total: $3,656.
Property and Equipment, Net (Note 7):
Entity: $93,939;
Non-Entity: [Empty];
Total: $93,939.
Total Assets (Note 11):
Entity: $7,555,471;
Non-Entity: $961,477;
Total: $8,516,948.
At September 30, 2010 SEC assets consisted of the following: (Dollars
In Thousands):
Intragovernmental:
Fund Balance with Treasury:
SEC Funds:
Entity: $6,890,369;
Non-Entity: [Empty];
Total: $6,890,369.
Registrant Deposits:
Entity: [Empty];
Non-Entity: $44,729;
Total: $44,729.
Disgorgement and Penalties (Note 16):
Entity: [Empty];
Non-Entity: $54,269;
Total: $54,269.
Investments, Net:
Disgorgement and Penalties (Note 19):
Entity: [Empty];
Non-Entity: $924,823;
Total: $924,823.
Protection Fund:
Entity: [Empty];
Non-Entity: $924,823;
Total: $924,823.
Accounts Receivable:
Entity: [Empty];
Non-Entity: [Empty];
Total: [Empty].
Advances and Prepayments:
Entity: [Empty];
Non-Entity: [Empty];
Total: [Empty].
Total Intragovernmental Assets:
Entity: $6,892,567;
Non-Entity: $1,023,821;
Total: $7,916,388.
Cash and Other Monetary Assets:
Disgorgement and Penalties (Note 16):
Entity: [Empty];
Non-Entity: $2,815;
Total: $2,815.
Accounts Receivable, Net:
SEC Funds:
Entity: $79,200;
Non-Entity: [Empty];
Total: $79,200.
Disgorgement and Penalties (Note 16):
Entity: [Empty];
Non-Entity: $81,939;
Total: $81,939.
Other Non-Entity Assets:
Entity: [Empty];
Non-Entity: $4;
Total: $4.
Advances and Prepayments:
Entity: $2,381;
Non-Entity: [Empty];
Total: $2,381.
Property and Equipment, Net (Note 7):
Entity: $79,712;
Non-Entity: [Empty];
Total: $79,712.
Total Assets (Note 11):
Entity: $7,053,860;
Non-Entity: $1,108,579;
Total: $$8,162,439.
[End of table]
Note 3. Fund Balance with Treasury:
The Fund Balance with Treasury by type of fund as of September 30, are
as follows: (Dollars In Thousands):
Fund Balances:
General Funds:
FY 2011: $6,874,986
FY 2010: $6,438,459.
Special Fund:
FY 2011: $73;
FY 2010: $451,910.
Other Funds:
FY 2011: $120,551;
FY 2010: $98,998.
Total Fund Balance with Treasury:
FY 2011: $6,995,610;
FY 2010: $6,989,367.
Status of Fund Balance with Treasury:
Unobligated Balance:
Available:
FY 2011: $8,323;
FY 2010: $17,213.
Unavailable:
FY 2011: $38,751;
FY 2010: $472,136.
Obligated Balance not yet Disbursed:
FY 2011: $332,707;
FY 2010: $317,747.
Non-Budgetary Fund Balance with Treasury:
FY 2011: $6,615,829
FY 2010: $6,182,271.
Total Fund Balance with Treasury:
FY 2011: $6,995,610;
FY 2010: $6,989,367.
[End of table]
The Special Fund consists of the Investor Protection Fund established
in FY 2010. This Special Fund provides the financial resources for the
whistleblower award program and the SEC Office of Inspector General’s
employee suggestion program, both of which were mandated in the Dodd-
Frank Act.
Other Funds consist of Fund Balance with Treasury held in deposit
funds.
Obligated and unobligated balances reported for the status of Fund
Balance with Treasury differ from the amounts reported in the
Statement of Budgetary Resources due to the fact that budgetary
balances are supported by amounts other than Fund Balance with
Treasury. These amounts include Investor Protection Fund investments,
uncollected payments from Federal sources, and the impact of the
change in legal interpretation for leases.
Non-Budgetary Fund Balance with Treasury is comprised of amounts in
deposit funds and offsetting collections temporarily precluded from
obligation in SEC’s General Salaries and Expenses Fund (X0100).
Amounts temporarily precluded from obligation represent offsetting
collections for filing and securities transaction fees in excess of
appropriated amounts.
There were no significant differences between the Fund Balance
reflected in SEC financial statements and the balance in the Treasury
accounts.
NOTE 4. Cash and Other Monetary Assets:
The SEC did not have a Cash balance as of September 30, 2011. The SEC
receives disgorgement and penalties collections throughout the year.
Any collections received after the Treasury Department cut-off for
deposit of checks are treated as deposits in transit and recognized as
Cash on the Balance Sheet. The SEC had a Cash balance of $2.8 million
as of September 30, 2010.
NOTE 5. Investments, Net:
The SEC invests funds in overnight and short-term non-marketable
market-based Treasury bills. The SEC records the value of its
investments in Treasury bills at cost and amortizes any premium or
discount on a straight-line basis (S/L) through the maturity date of
these securities. Non-marketable market-based Treasury securities are
issued by the Bureau of Public Debt to Federal agencies. They are not
traded on any securities exchange but mirror the prices of similar
Treasury securities trading in the Government securities market.
At September 30, 2011, investments consisted of the following:
Non-Marketable Market-Based Securities, Disgorgement and Penalties:
Cost: $749,705;
Amortization Method: S/L;
Amortized (Premium) Discount: $105;
Interest Receivable: [Empty];
Investment, Net: $749,810;
Market Value Disclosure: $749,848.
At September 30, 2010, investments consisted of the following:
Non-Marketable Market-Based Securities, Disgorgement and Penalties:
Cost: $924,651;
Amortization Method: S/L;
Amortized (Premium) Discount: $171;
Interest Receivable: $1;
Investment, Net: $924,823;
Market Value Disclosure: $924,837.
[End of table]
Note 6. Accounts Receivable, Net:
At September 30, 2011, accounts receivable consisted of the following:
Intragovernmental Entity Accounts Receivable: Reimbursable Activity:
Gross Receivables: $20;
Allowance: [Empty];
Net Receivables: $20.
Subtotal Intragovernmental Accounts Receivable:
Gross Receivables: $20;
Allowance: [Empty];
Net Receivables: $20.
Entity Accounts Receivable:
Securities Transaction Fees:
Gross Receivables: $121,798;
Allowance: [Empty];
Net Receivables: $1211,798.
Filing Fees:
Gross Receivables: $893;
Allowance: $109;
Net Receivables: $784.
Other:
Gross Receivables: $375;
Allowance: $47;
Net Receivables: $328.
Non-Entity Accounts Receivable:
Disgorgement and Penalties (Note 16):
Gross Receivables: $952,711;
Allowance: $861,729;
Net Receivables: $90,982.
Other:
Gross Receivables: $1,329;
Allowance: $1,195;
Net Receivables: $134.
Subtotal Non-Intragovernmental Accounts Receivable:
Gross Receivables: $1,077,106;
Allowance: $863,080;
Net Receivables: $214,026.
Total Accounts Receivable:
Gross Receivables: $1,077,106;
Allowance: $863,080;
Net Receivables: $214,026.
At September 30, 2010, accounts receivable consisted of the following:
Intragovernmental Entity Accounts Receivable: Reimbursable Activity:
Gross Receivables: [Empty];
Allowance: [Empty];
Net Receivables: [Empty].
Subtotal Intragovernmental Accounts Receivable:
Gross Receivables: [Empty];
Allowance: [Empty];
Net Receivables: [Empty].
Entity Accounts Receivable:
Transaction Fees:
Gross Receivables: $78,461;
Allowance: [Empty];
Net Receivables: $78,461.
Filing Fees:
Gross Receivables: $690;
Allowance: $107;
Net Receivables: $583.
Other:
Gross Receivables: $180;
Allowance: $24;
Net Receivables: $156.
Non-Entity Accounts Receivable:
Disgorgement and Penalties (Note 16):
Gross Receivables: $656,495;
Allowance: $574,556;
Net Receivables: $81,939.
Other:
Gross Receivables: $9;
Allowance: $5;
Net Receivables: $4.
Subtotal Non-Intragovernmental Accounts Receivable:
Gross Receivables: $735,845;
Allowance: $574,692;
Net Receivables: $161,143.
Total Accounts Receivable:
Gross Receivables: $735,845;
Allowance: $574,692;
Net Receivables: $161,143.
[End of table]
Refer to Note 1.J. Accounts Receivable and Allowance for Uncollectible
Accounts for methods used to estimate allowances. The SEC estimates
that accrued interest (compounded and simple) on uncollectible
disgorgement and penalty related accounts receivable to be $138
million as of September 30, 2011. This estimate does not include
interest accruable on debts referred to Treasury for collection.
As of September 30, 2011 and 2010, the balances include disgorgement
and penalty accounts receivables, net of allowance, of $51.7 million
and $42.4 million, respectively designated as payable to the U.S.
Treasury General Fund per court order. As discussed in Note 1.M.
Liabilities, these receivables, their offsetting liabilities, and the
associated revenues, are classified as custodial.
Note 7. Property and Equipment, Net:
At September 30, 2011, property and equipment consisted of the
following:
Class of Property: Furniture and Equipment;
Depreciation/Amortization Method: S/L;
Capitalization Threshold for Individual Purchases: $15;
Capitalization Threshold for Bulk Purchases: $30;
Service Life (years): 3-5;
Acquisition Cost: $81,626;
Accumulated Depreciation/Amortization: $47,455;
Book Value: $34,171.
Class of Property: Software;
Depreciation/Amortization Method: S/L;
Capitalization Threshold for Individual Purchases: $300;
Capitalization Threshold for Bulk Purchases: $300;
Service Life (years): 3-5;
Acquisition Cost: $97,139;
Accumulated Depreciation/Amortization: $80,392;
Book Value: $16,747.
Class of Property: Leasehold Improvements;
Depreciation/Amortization Method: S/L;
Capitalization Threshold for Individual Purchases: $300;
Capitalization Threshold for Bulk Purchases: N/A;
Service Life (years): 10;
Acquisition Cost: $90,993;
Accumulated Depreciation/Amortization: $47,972;
Book Value: $43,021.
Class of Property: Total;
Acquisition Cost: $269,758;
Accumulated Depreciation/Amortization: $175,819;
Book Value: $93,939.
At September 30, 2010, property and equipment consisted of the
following: (Dollars in Thousands):
Class of Property: Furniture and Equipment;
Depreciation/Amortization Method: S/L;
Capitalization Threshold for Individual Purchases: $15;
Capitalization Threshold for Bulk Purchases: $50;
Service Life (years): 3-5;
Acquisition Cost: $61,133;
Accumulated Depreciation/Amortization: $42,754;
Book Value: $18,379.
Class of Property: Software;
Depreciation/Amortization Method: S/L;
Capitalization Threshold for Individual Purchases: $300;
Capitalization Threshold for Bulk Purchases: $300;
Service Life (years): 3-5;
Acquisition Cost: $89,827;
Accumulated Depreciation/Amortization: $73,305;
Book Value: $16,522.
Class of Property: Leasehold Improvements;
Depreciation/Amortization Method: S/L;
Capitalization Threshold for Individual Purchases: $300;
Capitalization Threshold for Bulk Purchases: N/A;
Service Life (years): 10;
Acquisition Cost: $84,204;
Accumulated Depreciation/Amortization: $39,393;
Book Value: $44,811.
Class of Property: Total;
Acquisition Cost: $235,164;
Accumulated Depreciation/Amortization: $155,452;
Book Value: $79,712.
[End of table]
Note 8. Liabilities:
The SEC’s liabilities include amounts that will not require the use of
budgetary resources. These liabilities include registrant deposit
accounts that have not been returned to registrants and the offsetting
liability that corresponds to assets the SEC holds relating to
collections from disgorgements and penalties and receivables as
discussed in Note 1.M. Liabilities.
At September 30, 2011, liabilities consisted of the following:
Intragovernmental:
Accounts Payable:
Liabilities Covered by Budgetary Resources: $8,049;
Liabilities Not Covered by Budgetary Resources: [Empty];
Liabilities Not Requiring Budgetary Resources: [Empty];
Total: $8,049.
Other Intragovernmental Liabilities:
Accrued Employee Benefits:
Liabilities Covered by Budgetary Resources: $2,877;
Liabilities Not Covered by Budgetary Resources: [Empty];
Liabilities Not Requiring Budgetary Resources: [Empty];
Total: $2,877.
Unfunded FECA and Unemployment Liability:
Liabilities Covered by Budgetary Resources: [Empty];
Liabilities Not Covered by Budgetary Resources: $1,770;
Liabilities Not Requiring Budgetary Resources: [Empty];
Total: $1,770.
Custodial Liability:
Liabilities Covered by Budgetary Resources: [Empty];
Liabilities Not Covered by Budgetary Resources: [Empty];
Liabilities Not Requiring Budgetary Resources: $51,745;
Total: $51,745.
Liability for Non-Entity Assets:
Liabilities Covered by Budgetary Resources: [Empty];
Liabilities Not Covered by Budgetary Resources: [Empty];
Liabilities Not Requiring Budgetary Resources: $134;
Total: $134.
Subtotal - Other Intragovernmental Liabilities:
Liabilities Covered by Budgetary Resources: $2,877;
Liabilities Not Covered by Budgetary Resources: $1,770;
Liabilities Not Requiring Budgetary Resources: $51,879;
Total: $56,526.
Total Intragovernmental:
Liabilities Covered by Budgetary Resources: $10,926;
Liabilities Not Covered by Budgetary Resources: $1,770;
Liabilities Not Requiring Budgetary Resources: $51,879;
Total: $64,575.
Accounts Payable:
Liabilities Covered by Budgetary Resources: $52,768;
Liabilities Not Covered by Budgetary Resources: [Empty];
Liabilities Not Requiring Budgetary Resources: [Empty];
Total: $52,768.
Actuarial FECA Liability:
Liabilities Covered by Budgetary Resources: [Empty];
Liabilities Not Covered by Budgetary Resources: $7,805;
Liabilities Not Requiring Budgetary Resources: [Empty];
Total: $7,805.
Other Liabilities:
Accrued Payroll and Benefits:
Liabilities Covered by Budgetary Resources: $18,395;
Liabilities Not Covered by Budgetary Resources: [Empty];
Liabilities Not Requiring Budgetary Resources: [Empty];
Total: $18,395.
Accrued Leave:
Liabilities Covered by Budgetary Resources: [Empty];
Liabilities Not Covered by Budgetary Resources: $45,472;
Liabilities Not Requiring Budgetary Resources: [Empty];
Total: $45,472.
Registrant Deposits:
Liabilities Covered by Budgetary Resources: [Empty];
Liabilities Not Covered by Budgetary Resources: [Empty];
Liabilities Not Requiring Budgetary Resources: $46,622;
Total: $46,622.
Liability for Disgorgement and Penalties (Note 16):
Liabilities Covered by Budgetary Resources: [Empty];
Liabilities Not Covered by Budgetary Resources: [Empty];
Liabilities Not Requiring Budgetary Resources: $862,976;
Total: $862,976.
Other Accrued Liabilities:
Legal Liability:
Liabilities Covered by Budgetary Resources: [Empty];
Liabilities Not Covered by Budgetary Resources: $956;
Liabilities Not Requiring Budgetary Resources: [Empty];
Total: $956.
Recognition of Lease Liability (Note 9);
Liabilities Covered by Budgetary Resources: [Empty];
Liabilities Not Covered by Budgetary Resources: $6,256;
Liabilities Not Requiring Budgetary Resources: [Empty];
Total: $6,256.
Other:
Liabilities Covered by Budgetary Resources: [Empty];
Liabilities Not Covered by Budgetary Resources: [Empty];
Liabilities Not Requiring Budgetary Resources: [Empty];
Total: [Empty].
Subtotal - Other Liabilities:
Liabilities Covered by Budgetary Resources: $18,395;
Liabilities Not Covered by Budgetary Resources: $52,684;
Liabilities Not Requiring Budgetary Resources: $909,477;
Total: $980,677.
Total Liabilities (Note 11):
Liabilities Covered by Budgetary Resources: $82,089;
Liabilities Not Covered by Budgetary Resources: $62,259;
Liabilities Not Requiring Budgetary Resources: $961,477;
Total: $1,105,825.
Other Liabilities totaled $1,037 million as of September 30, 2011 and
is comprised of current and non-current liabilities totaling $986
million and $51 million, respectively. The non-current portion of
Other Liabilities includes the appropriate portions of the Unfunded
FECA and Unemployment Liability, Accrued Leave, and Lease Liability.
Current liabilities not covered by budgetary resources totaled $3.6
million as of September 30, 2011.
At September 30, 2010, accounts receivable consisted of the following:
Intragovernmental:
Accounts Payable:
Liabilities Covered by Budgetary Resources: $5,185;
Liabilities Not Covered by Budgetary Resources: [Empty];
Liabilities Not Requiring Budgetary Resources: [Empty];
Total: $5,185.
Other Intragovernmental Liabilities:
Accrued Employee Benefits:
Liabilities Covered by Budgetary Resources: $6,088;
Liabilities Not Covered by Budgetary Resources: [Empty];
Liabilities Not Requiring Budgetary Resources: [Empty];
Total: $6,088.
Unfunded FECA and Unemployment Liability:
Liabilities Covered by Budgetary Resources: [Empty];
Liabilities Not Covered by Budgetary Resources: $1,719;
Liabilities Not Requiring Budgetary Resources: [Empty];
Total: $1,719.
Custodial Liability:
Liabilities Covered by Budgetary Resources: [Empty];
Liabilities Not Covered by Budgetary Resources: [Empty];
Liabilities Not Requiring Budgetary Resources: $42,380;
Total: $42,380.
Liability for Non-Entity Assets:
Liabilities Covered by Budgetary Resources: [Empty];
Liabilities Not Covered by Budgetary Resources: [Empty];
Liabilities Not Requiring Budgetary Resources: $4;
Total: $4.
Subtotal - Other Intragovernmental Liabilities:
Liabilities Covered by Budgetary Resources: $6,088;
Liabilities Not Covered by Budgetary Resources: $1,719;
Liabilities Not Requiring Budgetary Resources: $42,384;
Total: $50,191.
Total Intragovernmental:
Liabilities Covered by Budgetary Resources: $11,273;
Liabilities Not Covered by Budgetary Resources: $1,719;
Liabilities Not Requiring Budgetary Resources: $42,384;
Total: $55,376.
Accounts Payable:
Liabilities Covered by Budgetary Resources: $46,260;
Liabilities Not Covered by Budgetary Resources: [Empty];
Liabilities Not Requiring Budgetary Resources: [Empty];
Total: $46,260.
Actuarial FECA Liability:
Liabilities Covered by Budgetary Resources: [Empty];
Liabilities Not Covered by Budgetary Resources: $7,576;
Liabilities Not Requiring Budgetary Resources: [Empty];
Total: $7,576.
Other Liabilities:
Accrued Payroll and Benefits:
Liabilities Covered by Budgetary Resources: $31,649;
Liabilities Not Covered by Budgetary Resources: [Empty];
Liabilities Not Requiring Budgetary Resources: [Empty];
Total: $31,649.
Accrued Leave:
Liabilities Covered by Budgetary Resources: [Empty];
Liabilities Not Covered by Budgetary Resources: $45,629;
Liabilities Not Requiring Budgetary Resources: [Empty];
Total: $45,629.
Registrant Deposits:
Liabilities Covered by Budgetary Resources: [Empty];
Liabilities Not Covered by Budgetary Resources: [Empty];
Liabilities Not Requiring Budgetary Resources: $44,729;
Total: $44,729.
Liability for Disgorgement and Penalties (Note 16):
Liabilities Covered by Budgetary Resources: [Empty];
Liabilities Not Covered by Budgetary Resources: [Empty];
Liabilities Not Requiring Budgetary Resources: $1,021,466;
Total: $1,021,466.
Other Accrued Liabilities:
Legal Liability:
Liabilities Covered by Budgetary Resources: [Empty];
Liabilities Not Covered by Budgetary Resources: $10,823;
Liabilities Not Requiring Budgetary Resources: [Empty];
Total: $10,823.
Recognition of Lease Liability (Note 9);
Liabilities Covered by Budgetary Resources: [Empty];
Liabilities Not Covered by Budgetary Resources: $9,202;
Liabilities Not Requiring Budgetary Resources: [Empty];
Total: $9,202.
Other:
Liabilities Covered by Budgetary Resources: $9,245;
Liabilities Not Covered by Budgetary Resources: [Empty];
Liabilities Not Requiring Budgetary Resources: [Empty];
Total: $9,245.
Subtotal - Other Liabilities:
Liabilities Covered by Budgetary Resources: $40,894;
Liabilities Not Covered by Budgetary Resources: $65,654;
Liabilities Not Requiring Budgetary Resources: $1,066,195;
Total: $1,172,743.
Total Liabilities (Note 11):
Liabilities Covered by Budgetary Resources: $98,427;
Liabilities Not Covered by Budgetary Resources: $74,949;
Liabilities Not Requiring Budgetary Resources: $1,108,579;
Total: $1,281,955.
Other Liabilities totaled $1,223 million as of September 30, 2010 and
is comprised of current and non-current liabilities totaling $1,170
million and $53 million, respectively. The non-current portion of
Other Liabilities includes the appropriate portions of the Unfunded
FECA and Unemployment Liability, Accrued Leave, and Lease Liability.
Current liabilities not covered by budgetary resources totaled $14.4
million as of September 30, 2010.
The legal liability arose from an award ordered pursuant to case SEC
v. FLRA, No. 08-1256, 08-1294 (D.C.Cir.). This matter involved a
complaint filed by the National Treasury Employees Union (NTEU) before
Federal Labor Relations Authority (FLRA). In FY 2010, the SEC
developed a methodology for processing the ordered retroactive wage
adjustments and began making payments in the fourth quarter of FY
2010. As of September 30, 2011, the remaining legal liability is
estimated to be $1 million.
[End of table]
NOTE 9. Leases:
Operating Leases:
At September 30, 2011, the SEC leased office space at 20 locations
under operating lease agreements that expire between FY 2012 and FY
2027. The SEC paid $99.6 million and $93.3 million for rent for the
fiscal years ending September 30, 2011 and 2010, respectively.
Under existing commitments, minimum lease payments through FY 2017 and
thereafter are as follows:
Dollars In Thousands:
Fiscal Year: 2012
Minimum Lease Payments: $92,203.
Fiscal Year: 2013
Minimum Lease Payments: $95,907.
Fiscal Year: 2014
Minimum Lease Payments: $98,169.
Fiscal Year: 2015
Minimum Lease Payments: $94,462.
Fiscal Year: 2016
Minimum Lease Payments: $91,152.
Fiscal Year: 2017 and thereafter
Minimum Lease Payments: $369,849.
Total Future Minimum Lease Payments:
Minimum Lease Payments: $841,742.
[End of table]
The total future minimum lease payments presented above include rented
space through all optional lease periods.
Continuing Liability:
The total future minimum lease payments summarized above includes a
continuing liability, until March 31, 2012, for space leased in New
York. In FY 2005, to facilitate surrender of the SEC lease obligations
for this space, the SEC and U.S. General Services Administration (GSA)
entered into separate agreements with the lessor. Under these agreements
(including renewals), GSA has agreed to rent the office space for a
period of time extending past the end of the SEC’s lease term (March
2012). The SEC was responsible for a difference of approximately $18
million between its lease liability and the lease amount negotiated by
GSA. As of September 30, 2011, the SEC is responsible for
approximately $1 million in payments for the space leased in New York.
The amount will be paid in FY 2012 and is included in the total future
minimum lease payments disclosed in the Operating Leases section above.
Constitution Center Property:
The total future minimum lease payments summarized above includes
$137.7 million for the Constitution Center property, for which a lease
became effective on July 28, 2010. The lease was originally for
900,000 square feet of space. Subsequently, the landlord submitted a
notification that 600,000 square feet had been assumed by two
different third parties. Therefore, the minimum lease payments above
reflect the SEC’s obligation for the remaining 300,000 square feet.
The SEC is also discussing with the General Services Administration
(GSA) the possibility of transferring the remaining 300,000 square feet
to GSA.
Expense Recognition of “Rent Holiday:”
In addition to the lease liability above, in FY 2005 the SEC moved
into temporary office space in New York due to renovations in the new
leased office space. This temporary space was provided to the SEC for
only the lessor’s operating costs. As a result, the SEC did not make
rent payments for the New York office for five months of the fiscal
year. The SEC allocated the $8 million of rent expense foregone on a
straightline basis over the life of the new lease. Since 2006, the SEC
has recorded a reduction in the unfunded lease liability in the amount
of $2.9 million and currently has a remaining balance of $5.1 million.
The yearly future amortization amounts are shown in the table below.
Refer to Recognition of Lease Liability line in Note 8. Liabilities.
Dollars In Thousands:
Fiscal Year: 2012;
Future Amortization Amounts: $533.
Fiscal Year: 2013;
Future Amortization Amounts: $533.
Fiscal Year: 2014;
Future Amortization Amounts: $533.
Fiscal Year: 2015;
Future Amortization Amounts: $533.
Fiscal Year: 2016;
Future Amortization Amounts: $533.
Fiscal Year: 2017 and thereafter;
Future Amortization Amounts: $2,399.
Total Future Amortization Amounts:
Future Amortization Amounts: $5,064.
[End of table]
NOTE 10. Commitments and Contingencies:
A. Commitments: Securities Investor Protection Act:
The Securities Investor Protection Act of 1970 (SIPA), as amended,
created the Securities Investor Protection Corporation (SIPC) to
restore funds and securities to investors and to protect the
securities markets from disruption following the failure of broker-
dealers. Generally, if a brokerage firm is not able to meet its
obligations to customers, then customers’ cash and securities held by
the brokerage firm are returned to customers on a pro rata basis. If
sufficient funds are not available at the firm to satisfy customer
claims, the reserve funds of SIPC are used to supplement the
distribution, up to a ceiling of $500,000 per customer, including a
maximum of $250,000 for cash claims.
SIPA authorizes SIPC to create a fund to maintain all monies received
and disbursed by SIPC. SIPA gives SIPC the authority to borrow up to
$2.5 billion from the SEC in the event that the SIPC Fund is or may
appear insufficient for purposes of SIPA. To borrow the funds, SIPC
must file with the SEC a statement of the uses of such a loan and a
repayment plan, and then the SEC must certify to the Secretary of the
Treasury that the loan is necessary to protect broker-dealer customers
and maintain confidence in the securities markets and that the repayment
plan provides as reasonable assurance of prompt repayment as may be
feasible under the circumstances. The Treasury would make these funds
available to the SEC through the purchase of notes or other obligating
instruments issued by the SEC. Such notes or other obligating
instruments would bear interest at a rate determined by the Secretary
of the Treasury. As of September 30, 2011, the SEC had not loaned any
funds to the SIPC, and there are no outstanding notes or other
obligating instruments issued by the SEC.
Based on the estimated costs to complete ongoing customer protection
proceedings, the current size of the SIPC Fund supplemented by SIPC’s
ongoing assessments on brokers is expected to provide sufficient funds
to cover acknowledged customer claims. There are several broker-
dealers that are being liquidated under SIPA or that have been referred
to SIPC for liquidation that may result in additional customer claims.
In the event that the SIPC Fund is or may reasonably appear to be
insufficient for the purposes of SIPA, SIPC may seek a loan from the
SEC.
B. Commitments: Investor Protection Fund:
As mentioned in Note 1.E. Fund Accounting Structure, the Investor
Protection Fund will be used to pay awards to whistleblowers if they
voluntarily provide original information to the SEC and meet other
conditions. The legislation allows whistleblowers to receive between
10 and 30 percent of the monetary sanctions collected in the covered
action or in a related action, with the actual percentage being
determined at the discretion of the SEC using criteria provided in the
legislation and the related rules to implement the legislation adopted
by the SEC.
A contingent liability is recognized in instances where a positive
Preliminary Determination has been made by the Claims Review Staff in
the Office of the Whistleblower and the amount can be estimated. A
Preliminary Determination is a first assessment, made by the Claims
Review Staff, as to whether the claim should be allowed or denied and,
if allowed, what the proposed award percentage amount should be.
Liabilities are recognized in instances where a collection has been
received and a positive Proposed Final Determination has been reached
by the Claims Review Staff. However, the actual payment of the
whistleblower award would not occur until after the Determination
became final.
C. Other Commitments:
In addition to future lease commitments discussed in Note 9. Leases,
the SEC is obligated for the purchase of goods and services that have
been ordered, but not received. As of September 30, 2011, net
obligations for all of the SEC’s activities were $1,110.6 million, of
which $82.1 million was delivered and unpaid. As of September 30,
2010, net obligations for all of SEC’s activities were $317.7 million,
of which $98.4 million was delivered and unpaid.
D. Contingencies:
The SEC recognizes contingent liabilities when a past event or
exchange transaction has occurred, a future outflow or other sacrifice
of resources is probable, and the future outflow or sacrifice of
resources is measurable. The SEC is party to various routine
administrative proceedings, legal actions, and claims brought against
it, including threatened or pending litigation involving labor
relations claims, some of which may ultimately result in settlements
or decisions against the Federal Government. No such matters were
probable and measurable at September 30, 2011.
Note 11. Earmarked, Other Entity, Disgorgement and Penalties, and
Other Non-Entity Funds:
SEC’s Earmarked funds consist of transactions and balances recorded in
its Salaries and Expenses (X0100) and the Investor Protection (X5567)
funds, see Note 1.F. Earmarked Funds. SEC’s Other Entity Funds consist
of amounts recorded in its supplemental appropriation which was
available for use in FY 2009 and FY 2010; see Note 1.E. Fund
Accounting Structure.
Amounts disclosed as Disgorgement and Penalties consist of non-entity
custodial and Governmental liabilities and related assets stemming
from SEC’s actions to collect disgorgement, penalties, and investment
interest; refer to Note 1.M. Liabilities - Enforcement Related
Liabilities.
Other Non-Entity Funds mainly consist of liabilities and related
assets stemming from excess filing fees (registrant deposits),
FOIA fees, and post judgment interest; refer to Note 1.G. Entity and
Non-Entity Assets.
For FY 2011, the assets, liabilities, net position, and net income
from operations relating to earmarked, other entity, disgorgement
and penalties, and other non-entity funds consisted of the following:
(Dollars In Thousands):
Balance Sheet as of September 30, 2011:
Assets:
Fund Balance with Treasury:
Earmarked--Salaries and Expenses: $6,874,213;
Earmarked--Investor Protection Fund: $73;
Eliminations: [Empty];
Total Earmarked Funds: $6,874,291;
Other Entity Funds: $768;
Disgorgement and Penalties: $73,929;
Other Non-Entity Funds: $46,622;
Total: $6,995,610.
Cash and Other Monetary Assets:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: [Empty].
Investments, Net:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: $452,715;
Eliminations: [Empty];
Total Earmarked Funds: $452,715;
Other Entity Funds: [Empty];
Disgorgement and Penalties: $749,810;
Other Non-Entity Funds: [Empty];
Total: $1,202,525.
Accounts Receivable, Net:
Earmarked--Salaries and Expenses: $122,930;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $122,930;
Other Entity Funds: [Empty];
Disgorgement and Penalties: $90,982;
Other Non-Entity Funds: $134;
Total: $214,046.
Advances and Prepayments:
Earmarked--Salaries and Expenses: $10,828
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $10,828;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $10,828.
Property and Equipment, Net:
Earmarked--Salaries and Expenses: $92,736;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $92,736;
Other Entity Funds: $1,203;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $93,939.
Total Assets (Note 2):
Earmarked--Salaries and Expenses: $7,100,712;
Earmarked--Investor Protection Fund: $452,788;
Eliminations: [Empty];
Total Earmarked Funds: $7,553,500;
Other Entity Funds: $1,917;
Disgorgement and Penalties: $914,721;
Other Non-Entity Funds: $46,756;
Total: $8,516.948.
Liabilities:
Accounts Payable:
Earmarked--Salaries and Expenses: $60,783;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $60,783;
Other Entity Funds: $34;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $60,817.
Accrued Payroll and Benefits:
Earmarked--Salaries and Expenses: $21,272;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $21,272;
Other Entity Funds: $115;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $21,272.
FECA and Unemployment Liability:
Earmarked--Salaries and Expenses: $9,575;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $9,575;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $9,575.
Accrued Leave:
Earmarked--Salaries and Expenses: $45,472;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $45,472;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $45,472.
Custodial Liability:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: $51,745;
Other Non-Entity Funds: [Empty];
Total: $51,7450.
Liability for Non-Entity Assets:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: $134;
Total: $134.
Registrant Deposits:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: $46,622;
Total: $46,622.
Liability for Disgorgement and Penalties:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: $862,976;
Other Non-Entity Funds: [Empty];
Total: $862,976.
Other Accrued Liabilities:
Earmarked--Salaries and Expenses: $7,212;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $7,212;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $7,212.
Total Liabilities (Note 8):
Earmarked--Salaries and Expenses: $144,314;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $144,314;
Other Entity Funds: $34;
Disgorgement and Penalties: $914,721;
Other Non-Entity Funds: $46,756;
Total: $1,105,825.
Net Position:
Unexpended Appropriations:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: $735;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $735.
Cumulative Results of Operations:
Earmarked--Salaries and Expenses: $6,956,398;
Earmarked--Investor Protection Fund: $452,788;
Eliminations: [Empty];
Total Earmarked Funds: $7,409,186;
Other Entity Funds: $1,202;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $7,410,388.
Total Net Position:
Earmarked--Salaries and Expenses: $6,956,398
Earmarked--Investor Protection Fund: $452,788;
Eliminations: [Empty];
Total Earmarked Funds: $7,409,186;
Other Entity Funds: $1,937;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $7,411,123.
Total Liabilities and Net Position:
Earmarked--Salaries and Expenses: $7,100,712;
Earmarked--Investor Protection Fund: $452,788;
Eliminations: [Empty];
Total Earmarked Funds: $7,553,500;
Other Entity Funds: $1,971;
Disgorgement and Penalties: $914,721;
Other Non-Entity Funds: $46,756.
Total: $8,516,948.
Statement of Net Cost:
For the Year Ended September 30, 2011:
Gross Program Costs:
Earmarked--Salaries and Expenses: $1,145,097;
Earmarked--Investor Protection Fund: $112;
Eliminations: $112;
Total Earmarked Funds: $1,145,097;
Other Entity Funds: $415;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: $2,626;
Total: $1,148,138;
Less Earned Revenues Not Attributable to Program Costs:
Earmarked--Salaries and Expenses: $1,640,893;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: $112;
Total Earmarked Funds: $1,640,781;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: $2,949;
Total: $1,643,730;
Net (Income) Cost from Operations:
Earmarked--Salaries and Expenses: ($495,796);
Earmarked--Investor Protection Fund: $112;
Eliminations: [Empty];
Total Earmarked Funds: ($495,684);
Other Entity Funds: $45;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: ($323);
Total: ($495,592).
Statement of Changes In Net Position:
For the Year Ended September 30, 2011:
Net Position, Beginning of Period:
Earmarked--Salaries and Expenses: $6,426,222;
Earmarked--Investor Protection Fund: $451,910;
Eliminations: [Empty];
Total Earmarked Funds: $6,878,132;
Other Entity Funds: $603;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $6,878,735.
Appropriations Used:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: $1,014;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $1,014.
Non-Exchange Revenue:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: $990;
Eliminations: [Empty];
Total Earmarked Funds: $990;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $990.
Imputed Financing:
Earmarked--Salaries and Expenses: $34,380;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $34,380
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $34,380.
Other:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: ($323);
Total: ($323).
Net Income (Cost) from Operations:
Earmarked--Salaries and Expenses: $495,796;
Earmarked--Investor Protection Fund: ($112);
Eliminations: [Empty];
Total Earmarked Funds: $495,684;
Other Entity Funds: ($415);
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: $323;
Total: $495,592.
Net Change:
Earmarked--Salaries and Expenses: $530,176;
Earmarked--Investor Protection Fund: $878;
Eliminations: [Empty];
Total Earmarked Funds: $531,054;
Other Entity Funds: $599;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $531,653.
Cumulative Results of Operations:
Earmarked--Salaries and Expenses: $6,956,398;
Earmarked--Investor Protection Fund: $452,788;
Eliminations: [Empty];
Total Earmarked Funds: $7,409,186;
Other Entity Funds: $1,202;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $7,410,388.
Unexpended Appropriations:
Beginning Balances:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: $1,749;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $1,749.
Appropriations Used:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: ($1,014);
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: ($1,014).
Total Unexpended Appropriations:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: $735;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $735.
Net Position, End of Period:
Earmarked--Salaries and Expenses: $6,956,398;
Earmarked--Investor Protection Fund: $452,788;
Eliminations: [Empty];
Total Earmarked Funds: $7.409,186;
Other Entity Funds: $1,937;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $7,411,123.
For FY 2010, the assets, liabilities, net position, and net income
from operations relating to earmarked, other, disgorgement and
penalties, and non-entity funds consisted of the following:
Balance Sheet as of September 30, 2010:
Assets:
Fund Balance with Treasury:
Earmarked--Salaries and Expenses: $6,436,463;
Earmarked--Investor Protection Fund: $451,910;
Eliminations: [Empty];
Total Earmarked Funds: $6,888;
Other Entity Funds: $9,860;
Disgorgement and Penalties: $54,269;
Other Non-Entity Funds: $44,729;
Total: $6,989,367.
Cash and other monetary assets:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: $2,815;
Other Non-Entity Funds: [Empty];
Total: $2,815.
Investments, Net:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: $924,823;
Other Non-Entity Funds: [Empty];
Total: $924,823.
Accounts Receivable, Net:
Earmarked--Salaries and Expenses: $79,200;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $79,200;
Other Entity Funds: [Empty];
Disgorgement and Penalties: $81,939;
Other Non-Entity Funds: $4;
Total: $161,143.
Advances and Prepayments:
Earmarked--Salaries and Expenses: $4,579;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $4,579;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $4,579.
Property and Equipment, Net:
Earmarked--Salaries and Expenses: $79,109;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $79,109;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $79,712.
Total Assets (Note 2):
Earmarked--Salaries and Expenses: $6,599,351;
Earmarked--Investor Protection Fund: $451,910;
Eliminations: [Empty];
Total Earmarked Funds: $7,051,261;
Other Entity Funds: $2,599;
Disgorgement and Penalties: $1,063,846;
Other Non-Entity Funds: $44,733;
Total: $8,162,439.
Liabilities:
Accounts Payable:
Earmarked--Salaries and Expenses: $51,313;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $51,313;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $51,445.
Accrued Payroll and Benefits:
Earmarked--Salaries and Expenses: $37,622;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $37,622;
Other Entity Funds: $115;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $37,737.
FECA and Unemployment Liability:
Earmarked--Salaries and Expenses: $9,295;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $9,295;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $9,295.
Accrued Leave:
Earmarked--Salaries and Expenses: $45,629;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $45,629;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $45,629.
Custodial Liability:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: [$42,380;
Other Non-Entity Funds: [Empty];
Total: $42,380.
Liability for Non-Entity Assets:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: $4;
Total: $4.
Registrant Deposits:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: $44,729;
Total: $44,729.
Liability for Disgorgement and Penalties:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: $1,021,466;
Other Non-Entity Funds: [Empty];
Total: $1,021,466.
Other Accrued Liabilities:
Earmarked--Salaries and Expenses: $29,270;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $29,270;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $29,270.
Total Liabilities (Note 8):
Earmarked--Salaries and Expenses: $173,129;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $173,129;
Other Entity Funds: $247;
Disgorgement and Penalties: $1,063,846;
Other Non-Entity Funds: $44,733;
Total: $1,281,955.
Net Position:
Unexpended Appropriations:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: $1,749;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $1,749.
Cumulative Results of Operations:
Earmarked--Salaries and Expenses: $6,426,222;
Earmarked--Investor Protection Fund: $451,910;
Eliminations: [Empty];
Total Earmarked Funds: $6,878,132;
Other Entity Funds: $603;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $6,6,878,735.
Total Net Position:
Earmarked--Salaries and Expenses: $6,426,222;
Earmarked--Investor Protection Fund: $451,910;
Eliminations: [Empty];
Total Earmarked Funds: $6,878,132;
Other Entity Funds: $2,352;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $6,80,484.
Total Liabilities (Note 8):
Earmarked: $173,129;
Other Entity Funds: $247;
Disgorgement and Penalties: $1,063,846;
Total Liabilities and Net Position:
Earmarked--Salaries and Expenses: $6,599,351;
Earmarked--Investor Protection Fund: $451,910;
Eliminations: [Empty];
Total Earmarked Funds: $7,051,261;
Other Entity Funds: $2,599;
Disgorgement and Penalties: $1,063846;
Other Non-Entity Funds: $44,733;
Total: $8,162,439.
Statement of Net Cost For the Year Ended September 30, 2010:
Gross Program Costs:
Earmarked--Salaries and Expenses: $1,050,910;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $1,050,910;
Other Entity Funds: $7,508;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: $5;
Total: $1,058,423.
Less Earned Revenues Not Attributable to Program Costs:
Earmarked--Salaries and Expenses: $1,382,691;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $1,382,691;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: $165;
Total: $1,382,856.
Net (Income) Cost from Operations:
Earmarked--Salaries and Expenses: ($331,781);
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: ($331,781);
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: ($160);
Total: ($324,433).
Statement of Changes in Net Position For the Year Ended September 30,
2010:
Net Position Beginning of Period:
Earmarked--Salaries and Expenses: $6,058,225;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $6,058,225;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $6,058,225.
Appropriations Used:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: $8,111;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $8,111.
Non-Exchange Revenue:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: $451,910;
Eliminations: [Empty];
Total Earmarked Funds: $451,910;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $451,910.
Imputed Financing:
Earmarked--Salaries and Expenses: $36,216;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $36,216;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $36,216.
Other:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: ($160);
Total: ($160).
Net Income (Cost) from Operations:
Earmarked--Salaries and Expenses: $331,781;
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: $331,781;
Other Entity Funds: ($7,508);
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: $160;
Total: $324,433.
Net Change:
Earmarked--Salaries and Expenses: $367,997;
Earmarked--Investor Protection Fund: $451,910;
Eliminations: [Empty];
Total Earmarked Funds: $819,907;
Other Entity Funds: $603;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $820,510.
Cumulative Results of Operations:
Earmarked--Salaries and Expenses: $6,426,222;
Earmarked--Investor Protection Fund: $451,910;
Eliminations: [Empty];
Total Earmarked Funds: $6,878,132;
Other Entity Funds: $603;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $6,878,735.
Unexpended Appropriations:
Appropriations Received:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: $9,860;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $9,860.
Appropriations Used:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: ($8,111);
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: ($8,111).
Total Unexpended Appropriations:
Earmarked--Salaries and Expenses: [Empty];
Earmarked--Investor Protection Fund: [Empty];
Eliminations: [Empty];
Total Earmarked Funds: [Empty];
Other Entity Funds: $1,749;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $1,749.
Net Position End of Period:
Earmarked--Salaries and Expenses: $6,426,222;
Earmarked--Investor Protection Fund: $451,910;
Eliminations: [Empty];
Total Earmarked Funds: $6,878,132;
Other Entity Funds: $2,352;
Disgorgement and Penalties: [Empty];
Other Non-Entity Funds: [Empty];
Total: $6,880,484.
[End of table]
Note 12. Intragovernmental Costs and Exchange Revenue:
The Statement of Net Cost presents the SEC’s results of operations for
its major programs. The SEC assigns all costs incurred to ten
programs, consistent with its budget submissions. The full cost of SEC
programs is the sum of (1) the costs of resources directly or
indirectly consumed by those programs, and (2) the costs of
identifiable supporting services provided by other responsibility
segments within the agency. Typical examples of indirect costs include
costs of general administrative services, technical support, security,
rent, and operating and maintenance costs for buildings, equipment,
and utilities. The SEC allocates support costs to its programs using
activity-based cost accounting.
Intragovernmental costs arise from purchases of goods and services
from other components of the Federal Government. In contrast, public
costs are those which arise from the purchase of goods and services
from non-Federal entities.
Exchange revenue is not directly assignable to a specific program and
is presented in total. The Statement of Net Cost, for the fiscal years
ended September 30, 2011 and 2010, with a breakout of
intragovernmental and public costs is presented below.
(Dollars In Thousands):
FY 2011:
SEC Programs:
Enforcement:
Intragovernmental Gross Cost: $72,533;
Gross Cost with the Public: $318,650;
Total: $391,183.
Compliance Inspections and Examinations:
Intragovernmental Gross Cost: $44,396;
Gross Cost with the Public: $195,039;
Total: $239,435.
Corporation Finance:
Intragovernmental Gross Cost: $24,412;
Gross Cost with the Public: $107,248;
Total: $131,660.
Trading and Markets:
Intragovernmental Gross Cost: $11,528;
Gross Cost with the Public: $50,648;
Total: $62,176.
Investment Management:
Intragovernmental Gross Cost: $8,759;
Gross Cost with the Public: $38,481;
Total: $47,240.
Risk, Strategy, and Financial Innovation:
Intragovernmental Gross Cost: $3,148;
Gross Cost with the Public: $14,995;
Total: $18,143.
General Counsel:
Intragovernmental Gross Cost: $7,668;
Gross Cost with the Public: $33,689;
Total: $41,357.
Other Program Offices:
Intragovernmental Gross Cost: $8,367;
Gross Cost with the Public: $36,755;
Total: $45,122.
Agency Direction and Administrative Support:
Intragovernmental Gross Cost: $30,290;
Gross Cost with the Public: $133,067;
Total: $163,357.
Inspector General:
Intragovernmental Gross Cost: $1,210;
Gross Cost with the Public: $5,318;
Total: $6,528.
Total Entity:
Intragovernmental Gross Cost: $212,886;
Gross Cost with the Public: $935,252;
Total: $1,148,138.
Less: Exchange Revenues:
Securities Transaction Fees:
Total: $1,279,260
Securities Registration, Tender Offer, and Merger Fees:
Total: $361,284
Other:
Total: $3,186
Total Exchange Revenues:
$1,643,730.
Net (Income) Cost from Operations:
Total: ($495,592).
(Dollars In Thousands):
FY 2010:
SEC Programs:
Enforcement:
Intragovernmental Gross Cost: $61,669;
Gross Cost with the Public: $293,782;
Total: $355,451.
Compliance Inspections and Examinations:
Intragovernmental Gross Cost: $39,798;
Gross Cost with the Public: $189,591;
Total: $229,389.
Corporation Finance:
Intragovernmental Gross Cost: $22,757;
Gross Cost with the Public: $108,409;
Total: $131,166.
Trading and Markets:
Intragovernmental Gross Cost: $9,388;
Gross Cost with the Public: $44,719;
Total: $54,107.
Investment Management:
Intragovernmental Gross Cost: $8,306;
Gross Cost with the Public: $39,567;
Total: $47,873.
Risk, Strategy, and Financial Innovation:
Intragovernmental Gross Cost: $3,148;
Gross Cost with the Public: $14,995;
Total: $18,143.
General Counsel:
Intragovernmental Gross Cost: $6,901;
Gross Cost with the Public: $32,879;
Total: $39,780.
Other Program Offices:
Intragovernmental Gross Cost: $8,432;
Gross Cost with the Public: $40,171;
Total: $48,603.
Agency Direction and Administrative Support:
Intragovernmental Gross Cost: $22,300;
Gross Cost with the Public: $106,231;
Total: $128,531.
Inspector General:
Intragovernmental Gross Cost: $933;
Gross Cost with the Public: $4,447;
Total: $5,380.
Total Entity:
Intragovernmental Gross Cost: $183,632;
Gross Cost with the Public: $874,791;
Total: $1,058,423.
Less: Exchange Revenues:
Securities Transaction Fees;
Total: $1,163,633.
Securities Registration, Tender Offer, and Merger Fees;
Total: $218,755.
Other;
Total: $468.
Total Exchange Revenues $1,382,856.
Net (Income) Cost from Operations:
Total: ($324,433).
[End of table]
Note 13. Imputed Financing:
A portion of the retirement benefits provided to SEC employees is
funded by OPM. In accordance with Federal accounting standards, the
SEC recognizes identified costs paid by OPM on behalf of the SEC as an
expense. The funding for this expense is reflected as imputed
financing on the Statement of Changes in Net Position. Costs paid by
OPM on behalf of the SEC were $34.4 million and $36.2 million in FY
2011 and FY 2010, respectively.
Note 14. Status of Budgetary Resources:
A. Apportionment Categories of Obligations Incurred:
Category A funds are those amounts that are subject to quarterly
apportionment by OMB, meaning that a portion of the annual
appropriation is not available to the agency until apportioned each
quarter. Category B funds represent budgetary resources distributed by
a specified time period, activity, project, object, or a combination
of these categories. The SEC’s Category B funds represent amounts
apportioned at the beginning of the fiscal year for the SEC’s
reimbursable and Investor Protection Fund activities. For the fiscal
years ended September 30, 2011 and 2010, the SEC incurred obligations
against Category A and Category B funds as follows:
Obligations incurred (Dollars In Thousands):
Direct Obligations:
Category A;
FY 2011: $1,215,032;
FY 2010: $1,103,007.
Category A - Change in Legal Interpretation for Lease Obligations;
FY 2011: $777,928;
FY 2010: [Empty].
Reimbursable Obligations: Category B – Investor Protection Fund;
FY 2011: $112;
FY 2010: [Empty].
Total Direct Obligations:
FY 2011: $1,993,072;
FY 2010: $1,103,007.
Reimbursable Obligations:
Category B:
FY 2011: $388;
FY 2010: $282.
Total Obligations Incurred:
FY 2011: $1,993,460;
FY 2010: $1,103,289.
In addition, the amounts of budgetary resources obligated for
undelivered orders include $1,028.5 million and $219.3 million at
September 30, 2011 and 2010, respectively.
[End of table]
B. Explanation of Differences between the Statement of Budgetary
Resources and the Budget of the U.S. Government:
A comparison between the FY 2011 SBR and the actual FY 2011 data in
the President’s budget cannot be presented, as the FY 2013 President’s
budget which will contain FY 2011 actual data is not yet available;
the comparison will be presented in next year’s financial statements.
There are no differences between the FY 2010 SBR and the FY 2010 data
in the President’s budget except for rounding differences of $1
million in the Unobligated Balances and Obligated Balances, Net, End
of Period.
C. Other Budgetary Disclosures:
General Provisions of Appropriation:
The SEC’s annual appropriation bill contains general provisions which
limit the amount that can be obligated for international conferences,
International Organization of Securities Commission (IOSCO) dues, and
representation expenses.
Change in Legal Interpretation for Lease Obligations:
The SEC was granted independent leasing authority in 1990. Based on a
legal review of its statutory authority at the time, the SEC adopted a
policy of obligating only the annual portion of lease payments due
each year. On October 3, 2011, the Government Accountability Office
(GAO) issued a decision that this longstanding practice of recording
lease obligations only on an annual basis violated the recording
statute, 31 U.S.C. sect. 1501(a)(1). Specifically, GAO’s decision was
that the SEC lacks statutory authority to obligate an amount less than
the Government’s total obligation. If the SEC lacks sufficient budget
authority to cover this obligation, the SEC should report a violation
of the Antideficiency Act (ADA).
The SEC recorded obligations in the same manner for all its leasing
actions between the time the agency was granted independent leasing
authority in 1990 and 2010. Further, the agency does not have
sufficient remaining unobligated funds in the years in which the
various leases were entered to cover the full obligations associated
with those leases. As a result, the agency is reporting Antideficiency
Act violations between 1990 and 2010.
The SEC appropriately obligated the Government’s total financial
responsibility for the three lease actions initiated in FY 2011. For
the SEC’s other 17 current leases for which Antideficiency Act
violations occurred, obligations of $778 million have been recorded.
Further, in a step that will help prevent a recurrence of this type of
violation in the future, on August 1, 2011, the SEC and GSA entered
into a Memorandum of Understanding pursuant to which the SEC agreed
that all future lease acquisitions for the SEC’s office space needs
shall be performed by GSA, pursuant to GSA’s leasing authority. GSA’s
leasing authority includes the express statutory authority to obligate
funds for leases in the fiscal year for which payments are due.
Accordingly, in the future, the SEC will recognize annual lease
payments due to GSA in accordance with standard GSA lease procedures.
See Note 10.A. Commitments: Securities Investor Protection Act, for
information on SEC borrowing authority.
NOTE 15. Reconciliation of Net Cost of Operations (Proprietary) to
Budget (formerly the Statement of Financing):
For the fiscal years ended September 30, 2011 and 2010:
(Dollars In Thousands):
Resources Used To Finance Activities:
Budgetary Resources Obligated: Obligations Incurred (Note 16):
FY 2011: $1,993,460;
FY 2010: $1,103,289.
Budgetary Resources Obligated: Less Spending Authority from Offsetting
Collections and Recoveries;
FY 2011: ($1,637,034);
FY 2010: ($1,461,657).
Net Obligations:
FY 2011: $356,426;
FY 2010: ($358,368).
Other Resources:
Imputed Financing from Cost Absorbed by Others (Note 10):
FY 2011: $34,380;
FY 2010: $36,216.
Total Resources Used to Finance Activities:
FY 2011: $390,806;
FY 2010: ($322,152).
Resources Used To Finance Items Not Part Of The Net Cost Of Operations:
Change in Budgetary Resources Obligated for Goods, Services, and
Benefits Ordered But Not Yet Provided:
FY 2011: ($815,449)
FY 2010: ($67,775).
Resources That Finance the Acquisition of Assets Capitalized on the
Balance Sheet:
FY 2011: ($43,809)
FY 2010: ($27,319).
Total Resources Used to Finance Items Not Part of the Net Cost of
Operations:
FY 2011: ($859,258);
FY 2010: ($95,094).
Total Resources Used to Finance the Net Cost of Operations:
FY 2011: ($468,452);
FY 2010: ($417,246).
Components Of Net Cost Of Operations That Will Not Require Or
Generate Resources In The Current Period:
Components Requiring or Generating Resources in the Current Period:
Components Requiring or Generating Resources in Future Periods:
Change in Accrued Leave Liability:
FY 2011: ($157);
FY 2010: $2,933.
Net Increase in Revenue Receivables Not Generating Resources until
Collected:
FY 2011: ($43,710);
FY 2010: $60,320.
Change in Lease Liability:
FY 2011: ($2,946);
FY 2010: ($3,311).
Change in Legal Liability:
FY 2011: ($9,867);
FY 2010: $10,823.
Change in Unfunded Liability:
FY 2011: $280;
FY 2010: ($7,824).
Total Components of Net Cost of Operations That Will Require or
Generate Resources in Future Periods:
FY 2011: ($56,400);
FY 2010: $62,941.
Components Not Requiring or Generating Resources:
Depreciation and Amortization:
FY 2011: $27,951;
FY 2010: $25,408.
Revaluation of Assets or Liabilities:
FY 2011: $1,631;
FY 2010: $4,634.
Other Costs That Will Not Require Resources:
FY 2011: ($322);
FY 2010: ($170).
Total Components of Net Cost of Operations That Will Not Require or
Generate Resources in Future Periods:
FY 2011: $29,260;
FY 2010: $29,872.
Total Components of Net Cost of Operations That Will Not Require or
Generate Resources in the Current Period:
FY 2011: ($27,410);
FY 2010: $92,813.
Net (Income) from Operations:
FY 2011: ($495,592);
FY 2010: ($324,433).
[End of table]
Note 16. Disgorgement and Penalties:
The SEC’s non-entity assets consist of disgorgement, penalties, and
interest assessed against securities law violators by the Commission,
administrative law judge, or in some cases, a court. The SEC also
recognizes an equal and offsetting liability for these non-entity
assets as discussed in Note 1.M. Liabilities. When the Commission or
court issues an order for the SEC to collect disgorgement, penalties,
and interest from securities law violators, the SEC establishes an
account receivable due to the SEC. When collected, the SEC either (a)
holds receipts in FBWT or Treasury investments pending distribution to
harmed investors or (b) transfers to the Investor Protection Fund or
the U.S. Treasury General Fund. Disbursements related to disgorgements
and penalties include distributions to harmed investors, payments to
tax authorities, and fees paid to plan administrators and the Bureau
of Public Debt. When it is not practical to return funds to investors
or when court orders expressly state that funds are to be remitted to
the U.S. Treasury, the SEC transfers funds to the Investor Protection
Fund or to the U.S. Treasury General Fund. The SEC does not record on
its financial statements any amounts ordered to another Government
entity such as a court, or a non-governmental entity such as a
receiver. Additional details regarding disgorgement and penalties are
presented in Note 1.S. Disgorgement and Penalties, Note 2. Assets and
Note 11. Earmarked, Other Entity, Disgorgement and Penalties, and
Other Non-Entity Funds.
At September 30, the net inflows and outflows for FBWT, Investments,
and Accounts Receivable related to disgorgement and penalties
consisted of the following:
(Dollars In Thousands):
Fund Balance with Treasury:
Beginning Balance:
FY 2011: $54,269;
FY 2010: $43,622.
Collections:
FY 2011: $544,200;
FY 2010: $1,214,911.
Purchases and Redemptions of Treasury Securities:
FY 2011: $175,520;
FY 2010: $1,036,168.
Disbursements:
FY 2011: ($286,647);
FY 2010: ($1,123,799).
Transfers to Investor Protection Fund:
FY 2011: [Empty];
FY 2010: ($451,910).
Transfers to Treasury:
FY 2011: ($413,413);
FY 2010: ($664,723).
Total Fund Balance with Treasury (Note 2):
FY 2011: $73,929;
FY 2010: $54,269.
Cash and Other Monetary Assets: Beginning Balance:
FY 2011: $2,815;
FY 2010: [Empty].
Cash and Other Monetary Assets: Net Activity:
FY 2011: ($2,815);
FY 2010: $2,815.
Total Cash and Other Monetary Assets (Notes 2 and 4):
FY 2011: [Empty];
FY 2010: $2,815.
Investments, Net:
Beginning Balance:
FY 2011: $924,823;
FY 2010: $1,959,611.
Net Activity:
FY 2011: ($175,013);
FY 2010: ($1,034,788).
Total Investments, Net (Notes 2 and 5):
FY 2011: $749,810;
FY 2010: $924,823.
Accounts Receivable, Net:
Beginning Balance:
FY 2011: $81,939;
FY 2010: $294,508.
Net Activity:
FY 2011: $9,043;
FY 2010: ($212,569).
Total Accounts Receivable, Net (Notes 2 and 5):
FY 2011: $90,982;
FY 2010: $81,939.
Total Disgorgement and Penalties (Note 11):
FY 2011: $914,721;
FY 2010: $1,063,846.
[End of table]
[End of section]
Required Supplementary Information (Unaudited):
This section provides the Required Supplementary Information as
prescribed by OMB Circular No. A-136, Financial Reporting Requirements.
Statement of Budgetary Resources by Fund:
For the fiscal years ended September 30, 2011:
(Dollars In Thousands):
Budgetary Resources:
Unobligated Balance, Brought Forward, October 1:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $37,332;
Supplemental Fund: 09/10 0100: $107;
Investor Protection Fund: X513137: $451,910;
Total: $489,349.
Recoveries of Prior Year Unpaid Obligations:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $38,628;
Supplemental Fund: 09/10 0100: $317;
Investor Protection Fund: X513137: [Empty];
Total: $38,945.
Budget Authority:
Appropriation:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: [Empty];
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: ($847);
Total: ($847).
Spending Authority from Offsetting Collections: Earned: Collected:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,598,067;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: $1,598,067.
Spending Authority from Offsetting Collections: Earned: Change in
Receivables from Federal Sources:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $20;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: $20.
Spending Authority from Offsetting Collections: Change in Unfilled
Customer: Advance Received:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: [Empty];
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: [Empty].
Spending Authority from Offsetting Collections: Change in Unfilled
Customer: Without Advance from Federal Sources:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $2;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: $2.
Budget Authority: Subtotal:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,598,089;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: ($847);
Total: $1,597,242.
Temporarily not Available Pursuant to Public Law:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($412,005);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($412,005).
Total Budgetary Resources:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,262,044;
Supplemental Fund: 09/10 0100: $424;
Investor Protection Fund: X513137: $451,063;
Total: $1,713,531.
Status Of Budgetary Resources:
Obligations Incurred: Direct (Note 14):
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,215,032;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: $112;
Total: $1,215,144.
Obligations Incurred: Reimbursable (Note 14):
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $777,928;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: $777,928.
Obligations Incurred: Subtotal:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,993,348;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: $112;
Total: $1,993,460.
Unobligated Balance Available: Apportioned
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $8,297;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: $450,951;
Total: $459,248.
Unobligated Balance Not Available:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($739,61);
Supplemental Fund: 09/10 0100: $424;
Investor Protection Fund: X513137: [Empty];
Total: ($739,177).
Total Status of Budgetary Resources:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,262,044;
Supplemental Fund: 09/10 0100: $424;
Investor Protection Fund: X513137: $451,063;
Total: $1,713,531.
Change In Obligated Balance:
Obligated Balance, Net:
Unpaid Obligations, Brought Forward, October 1:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $315,883;
Supplemental Fund: 09/10 0100: $1,889;
Investor Protection Fund: X513137: [Empty];
Total: $317,772.
Uncollected Customer Payments from Federal Sources, Brought Forward,
October 1:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($25);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($25).
Total Unpaid Obligated Balance, Net, Beginning of Fiscal Year:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $315,858;
Supplemental Fund: 09/10 0100: $1,889;
Investor Protection Fund: X513137: [Empty];
Total: $317,474.
Obligations Incurred Net:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,993,348;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: $112;
Total: $1,993,460;
Gross Outlays:
Salaries and Expenses and Other Funds: X0100, 3220, F3875:
($1,160,313);
Supplemental Fund: 09/10 0100: ($1,228);
Investor Protection Fund: X513137: ($112);
Total: ($1,161,653).
Recoveries of Prior Year Unpaid, Obligations Actual:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($38,628);
Supplemental Fund: 09/10 0100: ($317);
Investor Protection Fund: X513137: [Empty];
Total: ($38,945).
Change in Uncollected Customer Payments from Federal Sources:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($22);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($22).
Obligated Balance, Net, End of Period:
Unpaid Obligations:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,110,290;
Supplemental Fund: 09/10 0100: $344;
Investor Protection Fund: X513137: [Empty];
Total: $1,110,587.
Uncollected Customer Payments from Federal Sources:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($47);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($47).
Total, Unpaid Obligated Balance, Net, End of Period (Note 10):
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,110,243;
Supplemental Fund: 09/10 0100: $344;
Investor Protection Fund: X513137: [Empty];
Total: $1.110,587;
Net Outlays:
Gross Outlays:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,160,313;
Supplemental Fund: 09/10 0100: $1,228;
Investor Protection Fund: X513137: $112;
Total: $1,161,653.
Offsetting Collections:
Salaries and Expenses and Other Funds: X0100, 3220, F3875:
($1,598,067);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($1,598,067).
Distributed Offsetting Receipts:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($187);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: $847;
Total: $660.
Net Outlays/(Collections):
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($437,941);
Supplemental Fund: 09/10 0100: $1,228;
Investor Protection Fund: X513137: $959;
Total: ($435,754).
For the fiscal years ended September 30, 2010:
(Dollars In Thousands):
Budgetary Resources:
Unobligated Balance, Brought Forward, October 1:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $19,011;
Supplemental Fund: 09/10 0100: $7,754;
Investor Protection Fund: X513137: [Empty];
Total: $26,765.
Recoveries of Prior Year Unpaid Obligations:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $18,753;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: $18,753.
Budget Authority:
Appropriation:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: [Empty];
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: $451,910;
Total: $451,910.
Spending Authority from Offsetting Collections: Earned: Collected:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,443,347;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: $1,443,347.
Spending Authority from Offsetting Collections: Earned: Change in
Receivables from Federal Sources:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($188);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($188).
Spending Authority from Offsetting Collections: Change in Unfilled
Customer: Advance Received:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($157);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($157).
Spending Authority from Offsetting Collections: Change in Unfilled
Customer: Without Advance from Federal Sources:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($98);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($98).
Budget Authority: Subtotal:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,442,904;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: $451,910;
Total: $1,894,814.
Temporarily not Available Pursuant to Public Law:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($347,694);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($347,694).
Total Budgetary Resources:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,132,974;
Supplemental Fund: 09/10 0100: $7,754;
Investor Protection Fund: X513137: $451,910;
Total: $1,592,638.
Status Of Budgetary Resources:
Obligations Incurred: Direct (Note 14):
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,095,360;
Supplemental Fund: 09/10 0100: $7,647;
Investor Protection Fund: X513137: [Empty];
Total: $1,103,007.
Obligations Incurred: Reimbursable (Note 14):
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $282;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: $282.
Obligations Incurred: Subtotal:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,095,642;
Supplemental Fund: 09/10 0100: $7,647;
Investor Protection Fund: X513137: [Empty];
Total: $1,103,289.
Unobligated Balance Available: Realized and Apportioned for Current
Period:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $17,106;
Supplemental Fund: 09/10 0100: $107;
Investor Protection Fund: X513137: [Empty];
Total: $17,213.
Unobligated Balance Not Available:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $20,226;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: $451,910;
Total: $472,136.
Total Status of Budgetary Resources:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,132,974;
Supplemental Fund: 09/10 0100: $7,754;
Investor Protection Fund: X513137: $451,910;
Total: $1,592,638.
Change In Obligated Balance:
Obligated Balance, Net:
Unpaid Obligations, Brought Forward, October 1:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $234,292;
Supplemental Fund: 09/10 0100: $2,107;
Investor Protection Fund: X513137: [Empty];
Total: $236,399.
Uncollected Customer Payments from Federal Sources, Brought Forward,
October 1:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($311);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($311).
Total Unpaid Obligated Balance, Net:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $233,981;
Supplemental Fund: 09/10 0100: $2,107;
Investor Protection Fund: X513137: [Empty];
Total: $236,088.
Obligations Incurred Net:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,095,642;
Supplemental Fund: 09/10 0100: $7,647;
Investor Protection Fund: X513137: [Empty];
Total: $1,103,289.
Gross Outlays:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($995,299);
Supplemental Fund: 09/10 0100: ($7,864);
Investor Protection Fund: X513137: [Empty];
Total: ($1,003,163).
Recoveries of Prior Year Unpaid, Obligations Actual:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($18,753);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($18,753).
Change in Uncollected Customer Payments from Federal Sources:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $286;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: $286.
Obligated Balance, Net, End of Period:
Unpaid Obligations:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $315,882;
Supplemental Fund: 09/10 0100: $1,890;
Investor Protection Fund: X513137: [Empty];
Total: $317,772.
Uncollected Customer Payments from Federal Sources:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($25);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($25);
FY 2009: ($311).
Total, Unpaid Obligated Balance, Net, End of Period (Note 10):
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $315,857;
Supplemental Fund: 09/10 0100: $1,890;
Investor Protection Fund: X513137: [Empty];
Total: $317,747.
Net Outlays:
Gross Outlays:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $995,299;
Supplemental Fund: 09/10 0100: $7,864;
Investor Protection Fund: X513137: [Empty];
Total: $$1,003,163.
Offsetting Collections:
Salaries and Expenses and Other Funds: X0100, 3220, F3875:
($1,443,190);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($1,443,190).
Distributed Offsetting Receipts:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $194;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: $194.
Net Outlays/(Collections):
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($447,697);
Supplemental Fund: 09/10 0100: $7,864;
Investor Protection Fund: X513137: [Empty];
Total: ($439,833).
[End of table]
[End of section]
PPF's Financial Statements:
Investor Protection Fund Financial Statements:
U.S. Securities And Exchange Commission:
Investor Protection Fund:
Balance Sheet:
As of September 30, 2011 and 2010:
(Dollars In Thousands):
Assets:
Intragovernmental:
Fund Balance with Treasury (Note 2)
FY 2011: $73;
FY 2010: $451,910.
Investments, Net (Note 3)
FY 2011: $452,715;
FY 2010: [Empty].
Total Assets
FY 2011: $452,788;
FY 2010: $451,910.
Liabilities:
Commitments and Contingencies (Note 4):
Net Position:
Cumulative Results of Operations – Earmarked Funds
FY 2011: $452,788;
FY 2010: $451,910.
Total Liabilities and Net Position
FY 2011: $452,788;
FY 2010: $451,910.
[End of table]
Statement of Net Cost:
For the years ended September 30, 2011 and 2010:
(Dollars In Thousands):
Program Costs (Note 5):
Employee Suggestion Program
FY 2011: $112;
FY 2010: [Empty].
Total Program Costs
FY 2011: $112;
FY 2010: [Empty].
Net (Income) Cost from Operations
FY 2011: $112;
FY 2010: [Empty].
[End of table]
Statement of Changes in Net Position:
For the years ended September 30, 2011 and 2010:
(Dollars In Thousands):
Cumulative Results Of Operations – Earmarked Funds:
Beginning Balances
FY 2011: $451,910;
FY 2010: [Empty].
Budgetary Financing Sources:
Non-Exchange Revenue
FY 2011: $990;
FY 2010: $451,910
Net Income (Cost) from Operations
FY 2011: $(112);
FY 2010: [Empty].
Net Change
FY 2011: $878;
FY 2010: $451,910
Cumulative Results of Operations
FY 2011: $452,788;
FY 2010: $451,910
Net Position, End of Period
FY 2011: $452,788;
FY 2010: $451,910.
[End of table]
Statement of Budgetary Resources:
For the years ended September 30, 2011 and 2010:
(Dollars In Thousands):
Budgetary Resources:
Unobligated Balance, Brought Forward, October 1:
FY 2011: $451,910
FY 2010: [Empty].
Budget Authority:
Appropriation:
FY 2011: ($847);
FY 2010: $451,910.
Total Budgetary Resources;
FY 2011: $451,063;
FY 2010: $451,910.
Status Of Budgetary Resources:
Obligations Incurred:
Direct – Category B (Note 6);
FY 2011: $112;
FY 2010: [Empty].
Unobligated Balance:
Apportioned;
FY 2011: $450,951;
FY 2010: [Empty].
Unobligated Balance Not Available;
FY 2011: [Empty];
FY 2010: $451,910.
Total Status of Budgetary Resources;
FY 2011: $451,063;
FY 2010: $451,910.
Change In Obligated Balance:
Obligations Incurred Net;
FY 2011: $112;
FY 2010: [Empty].
Gross Outlays;
FY 2011: $(112);
FY 2010: [Empty].
Total, Unpaid Obligated Balance, Net, End of Period (Note 6);
FY 2011: [Empty].
FY 2010: [Empty].
Net Outlays:
Net Outlays:
Gross Outlays;
FY 2011: $112;
FY 2010: [Empty].
Distributed Offsetting Receipts;
FY 2011: $847;
FY 2010: [Empty].
Net Outlays/(Collections);
FY 2011: $959;
FY 2010: [Empty].
[End of table]
The accompanying notes are an integral part of these financial
statements.
Notes to the Investor Protection Fund Financial Statements:
U.S. Securities And Exchange Commission:
As of September 30, 2011 and 2010:
NOTE 1. Summary of Significant Accounting Policies:
A. Reporting Structure:
The United States Securities and Exchange Commission (SEC) is an
independent agency of the United States Government established
pursuant to the Securities Exchange Act of 1934 (Exchange Act),
charged with regulating this country’s capital markets. The Dodd-Frank
Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act)
established the Securities and Exchange Commission Investor Protection
Fund. The Investor Protection Fund provides funding for a
Whistleblower Award Program and finances the operations of the SEC
Office of the Inspector General’s (OIG) employee suggestion program.
The Investor Protection Fund is a fund within the SEC, and these
financial statements present a segment of the SEC’s financial activity.
B. Basis of Presentation and Accounting:
The accompanying financial statements present the financial position,
net cost of operations, changes in net position, and budgetary
resources of the Investor Protection Fund as required by Exchange Act
Section 21F(g)(5). The Act requires a complete set of financial
statements that includes a balance sheet, income statement, and cash
flow analysis. The Investor Protection Fund is a Federal reporting
entity. As such, its financial statements are prepared in conformity
with Generally Accepted Accounting Principles (GAAP) for the Federal
Government, and are presented in conformity with OMB Circular A-136,
Financial Reporting Requirements. The legislative requirements to
prepare an income statement and cash flow analysis are addressed by
the Statement of Net Cost and Note 2. Fund Balance with Treasury,
respectively.
The SEC’s books and records serve as the source of the information
presented in the accompanying financial statements.
The agency classifies assets, liabilities, revenues, and costs in
these financial statements according to the type of entity associated
with the transactions. Intragovernmental assets and liabilities are
those due from or to other Federal entities, including those
activities within the SEC. Intragovernmental revenues and costs result
from transactions with other Federal entities.
The Balance Sheet, Statement of Net Cost and Statement of Changes in
Net Position are prepared using the accrual basis of accounting.
Accordingly, revenues are recognized when earned and expenses are
recognized when incurred without regard to the receipt or payment of
cash. These principles differ from budgetary accounting and reporting
principles on which the Statement of Budgetary Resources is prepared.
The statements may differ from other financial reports submitted
pursuant to Office of Management and Budget (OMB) directives for the
purpose of monitoring and controlling the use of budgetary resources,
due to differences in applicable accounting and reporting principles
discussed in the following paragraphs. Conceptually, the differences
relate primarily to the capitalization and depreciation of property
and equipment, as well as the recognition of other long-term assets
and liabilities and are not currently applicable to the Investor
Protection Fund.
C. Use of Estimates:
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities. These estimates and
assumptions include the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates.
D. Intra- and Inter-Agency Relationships:
Transactions with Other SEC Entities:
The Investor Protection Fund is comprised of a single Federal Treasury
Fund Symbol and has no intra-entity transactions. The Investor
Protection Fund is the recipient of non-exchange revenues collected by
the SEC and reported on the SEC’s Statement of Custodial Activity. The
Investor Protection Fund finances the OIG’s employee suggestion
program on a reimbursable basis.
Accounts receivable that may be used to fund the Investor Protection
Fund are recognized as assets of the SEC. These resources are not
assets of the Investor Protection Fund until the determination is made
to deposit collections in the Investor Protection Fund.
Transactions with Other Federal Agencies:
Whistleblower payments may be made from the Investor Protection Fund
as a result of monetary sanctions paid to other Federal agencies in
related actions, but only if there has been a Commission enforcement
action resulting in sanctions of a million dollars or greater and the
Commission has determined that the whistleblower is eligible for an
award and recommended the percentage. In those instances, the SEC
remains liable for paying the whistleblower. However, in instances
where a whistleblower has already received an award from the Commodity
Futures Trading Commission (CFTC), the whistleblower is not entitled
to an award from the SEC.
E. Earmarked Fund:
Earmarked funds are financed by specifically identified revenues,
often supplemented by other financing sources, which remain available
over time. Investor Protection Fund resources are earmarked and may
only be used for the purposes specified by the Dodd-Frank Act.
F. Entity Assets:
Assets that an agency is authorized to use in its operations are
entity assets. The SEC is authorized to use all funds in the Investor
Protection Fund for its operations. Accordingly, all assets are
recognized as entity assets.
G. Fund Balance with Treasury:
Fund Balance with Treasury reflects amounts the Investor Protection
Fund holds in the U.S. Treasury that have not been invested in Federal
securities. The SEC conducts all of its banking activity in accordance
with directives issued by the United States Department of the
Treasury’s Financial Management Service.
H. Investments:
The SEC has authority to invest amounts in the Investor Protection
Fund in overnight and short-term, market-based Treasury securities.
The interest earned on the investments is a component of the Fund and
is available to be used for expenses of the Investor Protection Fund.
Additional details regarding Investor Protection Fund investments are
provided in Note 3. Investments, Net.
Market-based Treasury securities are debt securities that the U.S.
Treasury issues to Federal entities without statutorily determined
interest rates. Although the securities are not marketable, the terms
(prices and interest rates) mirror the terms of marketable Treasury
securities.
Treasury securities are an asset of the Investor Protection Fund and a
liability of the U.S. Treasury. Because the Investor Protection Fund
and the U.S. Treasury are both components of the Federal Government,
these assets and liabilities offset each other from the standpoint of
the Government as a whole. For this reason, the investments presented
by the Investor Protection Fund do not represent an asset or a
liability in the U.S. Government-wide financial statements.
The Federal Government does not set aside assets to pay future
benefits or other expenditures associated with the investment by
Federal agencies in non-marketable Federal securities. The balances
underlying these investments are deposited in the U.S. Treasury, which
uses the cash for general Government purposes. When the Investor
Protection Fund requires redemption of these securities to make
expenditures, the Government finances those expenditures out of
accumulated cash balances by raising taxes or other receipts, by
borrowing from the public or repaying less debt, or by curtailing
other expenditures. This is the same manner in which the Government
finances all expenditures.
I. Liabilities:
The SEC records liabilities for probable future outflows or other
sacrifices of resources as a result of events that have occurred as of
the Balance Sheet date. Investor Protection Fund’s liabilities will
consist of payables to whistleblowers and reimbursable expenses that
the Office of Inspector General incurs to operate the Employee
Suggestion Program. There are no liabilities or contingent liabilities
related to the Investor Protection Fund as of September 30, 2011 and
2010, respectively.
The Dodd-Frank Act and the SEC implementing regulations establish the
eligibility criteria for Whistleblower awards. Refer to Note 4.
Commitments and Contingencies for information regarding the disclosure
and recognition of actual and contingent liabilities for Whistleblower
awards.
J. Program Costs:
The Investor Protection Fund reimburses the SEC’s General Fund (X0100)
for expenses incurred by the Office of Inspector General to administer
the Employee Suggestion Program. The Investor Protection Fund also
finances payments to whistleblowers under Section 21F of the Exchange
Act. The SEC adopted the final rules to implement the Whistleblower
Program on May 25, 2011. As of September 30, 2011, there are no
amounts paid or payable under the Whistleblower Program.
K. Non-Exchange Revenue:
Disgorgement and Penalty Transfers:
Non-exchange revenue arises from the Government’s ability to demand
payment. The Investor Protection Fund is financed through the receipt
of portions of monetary sanctions collected by the SEC in judicial or
administrative actions brought by the SEC under the securities laws
that are not either: (1) added to the disgorgement fund or other fund
under Section 308 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7246)
or (2) otherwise distributed to victims of a violation of the
securities laws. The Investor Protection Fund recognizes non-exchange
revenue for disgorgement and penalty amounts transferred into the fund
from the SEC’s Disgorgement and Penalties Fund (X6563). No sanction
collected by the SEC can be deposited into the Investor Protection
Fund if the balance in the fund exceeds $300 million on the day of
collection.
Interest Earnings on Investments with Treasury:
Interest earned from investments in U.S. Treasury securities is
classified in the same way as the predominant source of revenue to the
fund. The Investor Protection Fund is financed through the receipt of
non-exchange revenues and thus interest earnings are also recognized
as non-exchange revenues.
L. Budgets and Budgetary Accounting:
The Investor Protection Fund (Fund X5567) is a special fund
established through a permanent indefinite appropriation that has the
authority to retain revenues and other financing sources not used in
the current period for future use. The Dodd-Frank Act provides that
the Fund is available to the SEC without further appropriation or
fiscal year limitation for the purpose of paying awards to
whistleblowers and funding the activities of the OIG’s employee
suggestion program. However, the SEC is required to request and obtain
an annual apportionment from OMB to use these funds. In FY 2010, the
SEC received a $451.9 million apportionment for the Fund for
use in FY 2011.
The resources of the Investor Protection Fund are apportioned under
Category B authority, which means that the funds represent budgetary
resources distributed by a specified time period, activity, project,
object, or a combination of these categories and are not subject to
quarterly apportionment. Thus, all obligations incurred as presented
on the Statement of Budgetary Resources are derived from Category B
funds.
Note 2. Fund Balance with Treasury:
The Fund Balance with Treasury by type of fund and Status of Fund
Balance with Treasury as of September 30, 2011 and 2010 consists of
the following: (Dollars In Thousands):
Fund Balances:
Special Fund:
FY 2011: $73;
FY 2010: $451,910.
Total Fund Balance with Treasury:
FY 2011: $73;
FY 2010: $451,910.
Status of Fund Balance with Treasury:
Unobligated Balance:
Available
FY 2011: $73;
FY 2010: [Empty].
Unavailable
FY 2011: [Empty];
FY 2010: $451,910.
Total Fund Balance with Treasury:
FY 2011: $73;
FY 2010: $451,910.
[End of table]
Unobligated balances reported for the status of Fund Balance with
Treasury do not agree with the amounts reported in the Statement
of Budgetary Resources due to the fact that unobligated balances are
not reduced when investments are purchased.
There were no differences between the Fund Balance reflected in the
Investor Protection Fund financial statements and the balance
in the Treasury accounts.
Cash flow:
The Investor Protection Fund cash flows are reflected in investments
and in the Statement of Budgetary Resources. Such cash flows during FY
2011 consisted of net investment purchases of $453.8 million (which
includes $2 million of reinvested interest of the total $2.1 million
interest received), and the cost of operating the OIG Employee
Suggestion Program of $112 thousand. Cash flows during FY 2010
consisted of a transfer from Disgorgements and Penalties of $451.9
million.
Note 3. Investments, Net:
The SEC invests funds in overnight and short-term non-marketable
market-based Treasury bills. The SEC records the value of its
investments in Treasury bills at cost and amortizes any premium or
discount on a straight-line basis (S/L) through the maturity date of
these securities. Non-marketable market-based Treasury securities are
issued by the Bureau of Public Debt to Federal agencies. They are not
traded on any securities exchange but mirror the prices of similar
Treasury securities trading in the Government securities market.
At September 30, 2011, investments consisted of the following:
(Dollars In Thousands):
Non-Marketable Market-Based Securities:
Investor Protection Fund – Entity:
Cost: $453,799;
Amortization Method: S/L;
Amortized (Premium) Discount: ($2,314)
Interest Receivable: $1,230;
Investment, Net: $452,715;
Market Value Disclosure: $451,696.
[End of table]
Note 4. Commitments and Contingencies:
As mentioned in Note 1.I. Liabilities, the Investor Protection Fund
will be used to pay awards to whistleblowers if they voluntarily
provide original information to the SEC and meet other conditions. The
legislation allows whistleblowers to receive between 10 and 30 percent
of the monetary sanctions collected in the covered action or in a
related action, with the actual percentage being determined at the
discretion of the SEC using criteria provided in the legislation and
the related rules to implement the legislation adopted by the SEC.
A contingent liability is recognized in instances where a positive
Preliminary Determination has been made by the Claims Review Staff in
the Office of the Whistleblower and the amount can be estimated. A
Preliminary Determination is a first assessment, made by the Claims
Review Staff, as to whether the claim should be allowed or denied and,
if allowed, setting forth the proposed award percentage amount.
Liabilities are recognized in instances where a collection has been
received and a positive Proposed Final Determination has been reached
by the Claims Review Staff. However, the actual payment of the
whistleblower award would not occur until after the Determination
became final.
Note 5. Intragovernmental Costs:
The Statement of Net Cost presents the Investor Protection Fund’s
results of operations for its two activities: the Employee
Suggestion Program and Payments to Whistleblowers.
Intragovernmental costs arise from purchases of goods and services
from other components of the Federal Government (including other SEC
funds). In contrast, public costs are those which arise from the
purchase of goods and services from non-Federal entities. The Employee
Suggestion Program incurred $111 thousand of intragovernmental costs
and $1 thousand of costs with the public in FY 2011.
Note 6. Status of Budgetary Resources:
A. Explanation of Differences between the Statement of Budgetary
Resources and the Budget of the U.S. Government:
A comparison between the FY 2011 Statement of Budgetary Resources
(SBR) and the actual FY 2011 data in the President’s budget cannot be
presented, as the FY 2013 President’s budget which will contain FY
2011 actual data is not yet available; the comparison will be
presented in next year’s financial statements. There are no
differences between the FY 2010 SBR and the FY 2010 data in the
President’s budget.
B. Other Budgetary Disclosures:
There are no budgetary resources obligated for undelivered orders as
of September 30, 2011.
There are no legal arrangements affecting the use of unobligated
balances of budget authority, such as time limits, purpose, and
obligation limitations.
Note 7. Reconciliation of Net Cost of Operations (Proprietary) to Budget
(formerly the Statement of Financing):
For the fiscal year ended September 30, 2011, Obligations Incurred
equaled the Net Cost of Operations and there were no reconciling
items. For the fiscal year ended September 30, 2010, there was no
activity in either Obligations Incurred or the Net Cost of Operations.
[End of section]
Appendix I: Comments from the United States Securities and Exchange
Commission:
United States Securities And Exchange Commission:
The Chairman:
Washington, D.C. 20549:
November 10, 2011:
Mr. James R. Dalkin:
Director:
Financial Management and Assurance:
United States Government Accountability Office:
441 G Street, N.W.
Washington, DC 20548:
Dear Mr. Dalkin:
Thank you for the opportunity to review and comment on the audit
report of the Government Accountability Office (GAO). I am pleased
that the GAO's FY 2011 audit found that the SEC's financial statements
and notes were presented fairly, in all material respects, and in
conformity with U.S. generally accepted accounting principles.
Furthermore, I am delighted the GAO found that the SEC has
successfully remediated the two material weaknesses identified in
2010. Under the newly-completed leadership team of the Chief Operating
Officer, Chief Financial Officer, Chief Information Officer, and Chief
Accounting Officer, the SEC has treated this remediation effort as a
top priority, and GAO's opinion confirms the significant progress the
agency has made in strengthening its internal controls.
Although I am gratified by this achievement, the SEC's efforts in this
area will not cease. The SEC will continue working to ensure that our
controls infrastructure is strong and sustainable over the long term.
In this regard, the agency has been engaged in a multi-year effort to
migrate its core financial system to the Federal Shared Service
Provider (FSSP) at the Department of Transportation's Enterprise
Services Center (ESC). Through this initiative, the SEC will realize
improvements in system functionality, automate some manual processes,
and further enhance financial management and reporting. The SEC plans
to complete the migration in FY 2012.
In addition, in FY 2012 the SEC will continue remediation related to
the remaining deficiency areas identified in your report. The SEC
plans further progress on tightening information security, resolving
the backlog of inactive registrant deposit accounts, bolstering
controls over budgetary resources, and completing implementation of
our new program governing the use of spreadsheets and databases
related to financial reporting. We welcome GAO's feedback on these
initiatives throughout the process.
I very much appreciate the professional manner in which you and your
team conducted the audit for FY 2011. I look forward to continuing our
productive dialogue in the coming months on the financial system
migration and the SEC's efforts to address the areas noted in your
report. If you have any questions, please feel free to contact me.
Sincerely,
Signed by:
Mary L. Schapiro:
Chairman:
[End of section]
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
James R. Dalkin, (202) 512-9406 or d [Hyperlink, dalkinj@gao.gov]
alkinj@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, the following individuals made
key contributions to this report: Kristen A. Kociolek, Lead Assistant
Director; Edward R. Alexander, Jr.; Angela M. Bell; Sharon O. Byrd;
Cheryl E. Clark; Lauren S. Fassler; Clayton T. Clark; Edmund F.
Fernandez; Meafelia P. Gusukuma; Jacquelyn Hamilton; Bernice M.
Lemaire; Katherine Shea Lenane; Chelsea J. Lounsbury; Matthew C.
O'Connor; Laura S. Pacheco; David E. Ramirez; Sabrina Rivera; Andrew
D. Seehusen; Eric Stalcup; Henry I. Sutanto; and Charles M. Vrabel.
[End of section]
Footnotes:
[1] IPF was established in 2010 by section 922 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act to fund the activities of
SEC's whistleblower award program and the SEC Office of Inspector
General suggestion program. IPF is a separate fund within SEC and its
financial statements present a segment of SEC financial activity.
Accordingly, IPF's financial transactions are also included in SEC's
financial statements.
[2] Section 21F(g)(5) of the Securities Exchange Act of 1934, 15
U.S.C. § 78u-6(g)(5).
[3] Dodd-Frank Act, Pub. L. No. 111-203, § 963, 124 Stat. 1376, 1910
(July 21, 2010)(codified at 15 U.S.C. § 78d-8).
[4] Section 963(b) of the Dodd-Frank Act also requires, effective for
fiscal year 2011, GAO to assess the effectiveness of SEC's internal
control over financial reporting and SEC's assessment of the same. Our
audit satisfies these requirements. See 15 U.S.C. § 78d-8(b), which
codifies this requirement.
[5] Section 21F(g)(5) of the Securities Exchange Act of 1934, 15
U.S.C. § 78u-6(g)(5).
[6] Dodd-Frank Act, Pub. L. No. 111-203, § 963, 124 Stat. 1376, 1910
(July 21, 2010)(codified at 15 U.S.C. § 78d-8).
[7] A significant deficiency is a deficiency, or a combination of
deficiencies, in internal control that is less severe than a material
weakness, yet important enough to merit attention by those charged
with governance.
[8] Dodd-Frank Act, Pub. L. No. 111-203, § 963, 124 Stat. 1376, 1910
(July 21, 2010)(codified at 15 U.S.C. § 78d-8), requires that (1) SEC
submit a report to Congress describing management's responsibility for
internal control over financial reporting and assessing the
effectiveness of such internal control during the fiscal year, (2) the
SEC Chairman and Chief Financial Officer attest to SEC's report, and
(3) GAO submit a report to Congress evaluating the effectiveness of
SEC management's internal control over financial reporting and
management's assessment of such control and attesting to the internal
control assessment made by SEC. SEC conducted an evaluation of its
internal control over financial reporting in accordance with the
Office of Management and Budget's Circular No. A-123, Management's
Responsibility for Internal Control, based on criteria established
under FMFIA.
[9] GAO, Financial Audit: Securities and Exchange Commission's
Financial Statements for Fiscal Years 2010 and 2009, [hyperlink,
http://www.gao.gov/products/GAO-11-202] (Washington, D.C.: Nov. 15,
2010).
[10] A material weakness is a deficiency, or a combination of
deficiencies, in internal control such that there is a reasonable
possibility that a material misstatement of the entity's financial
statements will not be prevented or detected and corrected on a timely
basis. A deficiency in internal control exists when the design or
operation of a control does not allow management or employees, in the
normal course of performing their assigned functions, to prevent or
detect and correct, misstatements on a timely basis.
[11] A disgorgement is the repayment of illegally gained profits (or
avoided losses) for distribution to harmed investors whenever
feasible. A penalty is a monetary payment from a violator of
securities law that SEC obtains pursuant to statutory authority. A
penalty is fundamentally a punitive measure, although penalties
occasionally can be used to compensate harmed investors.
[12] B-322160, Oct. 3, 2011 (Securities and Exchange Commission-
Recording of Obligation for Multiple-Year Contract).
[13] Pursuant to the recording statute, 31 U.S.C. § 1501(a)(1), an
agency is required to record the full amount of its contractual
obligation against funds available at the time a contract is executed,
and any authorization to record an obligation for an amount less than
the full amount of the government's contractual obligation must be
explicit.
[14] Dodd-Frank Act, Pub. L. No. 111-203, § 963, 124 Stat. 1376, 1910
(July 21, 2010)(codified at 15 U.S.C. § 78d-8).
[15] 15 U.S.C. § 78d-8(b)(1).
[16] [hyperlink, http://www.gao.gov/products/GAO-11-202].
[17] In fiscal year 2011, SEC also recorded $778 million in additional
obligations to recognize its full lease obligations pursuant to a GAO
legal decision--B-322160, Oct. 3, 2011--concerning SEC's multi-year
leasing authority. Refer to note 14 (Status of Budgetary Resources) to
the financial statements for a further discussion of this issue.
[18] Undelivered orders represent obligations incurred for goods or
services that have been ordered but not yet received. Offsetting
collections are amounts that SEC receives from businesslike
transactions with the public (e.g., fees for filing registration
statements), which SEC is authorized to credit to its appropriations
account for future obligations.
[19] In May 2011, for efficiency reasons and to better harmonize with
similar rules pertaining to registrant activity, SEC approved an
amendment to its account clearing procedures to extend the period in
which SEC should hold a registrant's funds in a dormant account from
180 days to 3 years. See SEC regulation at 17 C.F.R. § 202.3a(e)
(Return of Funds from Inactive Accounts); see also 76 Fed. Reg. 28,888
(May 19, 2011).
[20] Chart 1.10 above only reflects offsetting collections related to
fees collected on Section 31 securities transactions and Section 6(b),
13(e), 14(g), and 24f-2 filings and does not include reimbursable type
collections and refunds as reported on the “Offsetting Collections”
line of the Statement of Budgetary Resources.
[End of section]
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