Securities and Exchange Commission:

Greater Attention Needed to Enhance Communication and Utilization of Resources in the Division of Enforcement

GAO-09-358: Published: Mar 31, 2009. Publicly Released: May 6, 2009.

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The Securities and Exchange Commission's (SEC) Division of Enforcement (Enforcement) plays a key role in meeting the agency's mission to protect investors and maintain fair and orderly markets. In recent years, Enforcement has brought cases yielding record civil penalties, but questions have been raised about its capacity to manage its resources and fulfill its law enforcement and investor protection responsibilities. GAO was asked to evaluate, among other issues, (1) SEC's progress toward implementing GAO's 2007 recommendations; (2) the extent to which Enforcement has an appropriate mix of resources dedicated to achieving its objectives; and (3) the adoption, implementation, and effects of recent penalty policies. GAO analyzed information on resources, enforcement actions, and penalties; and interviewed current and former SEC officials and staff, and others.

SEC has fully implemented three of GAO's four 2007 recommendations. GAO recommended SEC establish procedures for approving new investigations and for operating its new investigation management information system called the Hub; consider procedures for closing inactive cases; and improve management of the Fair Funds program, which returns funds to harmed investors. Enforcement has developed the procedures for new investigations and for operating the Hub, and made case closings a higher priority. SEC has also staffed a new Office of Collections and Distributions (OCD), which is responsible in part for administering the Fair Funds program. However, OCD has a dual reporting structure in which most of the staff report to Enforcement, not the OCD director. According to OCD management, this structure has slowed work and confused staff. SEC strategic goals and GAO internal control standards call for making efficient and effective use of resources a priority. SEC's strategic plan also calls for improving program design and organizational structures. Recent overall Enforcement resources and activities have been relatively level, but the number of investigative attorneys has decreased 11.5 percent over fiscal years 2004 through 2008. Enforcement management said resource levels have allowed them to continue to bring cases across a range of violations, but both management and staff said resource challenges have delayed cases, reduced the number of cases that can be brought, and potentially undermined the quality of some cases. Specifically, investigative attorneys cited the low level of administrative, paralegal, and information technology support, and unavailability of specialized services and expertise, as challenges to bringing actions. Also, Enforcement staff said a burdensome system for internal case review has slowed cases and created a risk-averse culture. SEC's strategic plan calls for targeting resources strategically, examining whether positions are deployed effectively, and improving program design and organizational structure. Enforcement management has begun examining ways to streamline case review, but the focus is process-oriented and does not give consideration to assessing organizational culture issues. Enforcement management, investigative attorneys, and others agreed that two recent corporate penalty polices--on factors for imposing penalties, and Commission pre-approval of a settlement range--have delayed cases and produced fewer, smaller penalties. GAO also identified other concerns, including the perception that SEC had "retreated" on penalties, and made it more difficult for investigative staff to obtain "formal orders of investigation," which allow issuance of subpoenas for testimony and records. Our review also showed that in adopting and implementing the penalty policies, the Commission did not act in concert with agency strategic goals calling for broad communication with, and involvement of, the staff. In particular, Enforcement had limited input into the policies the division would be responsible for implementing. As a result, Enforcement attorneys reported frustration and uncertainty in application of the penalty policies.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The SEC Chairman agreed with our recommendation, and the Division of Enforcement has reported that in a subsequent review, the division has determined that it needs the position of Chief Operating Officer/Business Manager for Enforcement, in order to manage the Office of Collections and Distributions, among other tasks. According to the division, the position has been advertised, the posting closed, and the position is expected to be filled by 9/30/09.

    Recommendation: To help ensure that SEC is effectively and efficiently using its resources in bringing enforcement actions, and that its enforcement policies are working effectively, the SEC Chairman should, to help ensure effective and efficient operation of the Office of Collections and Distributions, consider an alternative organizational structure and reporting relationship for the office, to address the organizational concerns identified.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Implemented

    Comments: The SEC Chairman agreed with our recommendation, and the Division of Enforcement has reported that a number of actions have been taken: (1) The Director of Enforcement has conducted a top-to-bottom review of the division's processes and organizational culture. (2) The Director has determined that the highest-impact use of any additional funding will be to hire employees with specialized industry experience; hire additional trial lawyers; and hire additional non-attorney, non-accountant support staff, including information technology staff, paralegals and others. (3) The Commission has delegated "formal order" authority to the Director, which will allow the division to more quickly begin investigations. (4) The Director plans to restructure the division to include specialized investigative groups. (5) A level of management review -- by "branch chiefs" -- has been eliminated, in order to provide more staff to work on investigations and to increase efficiency of the internal case review process. (6) The division is creating an Office of Market Intelligence, which will be responsible for collecting, analyzing and monitoring the many thousands of complaints, tips, and referrals the division receives each year. (7) The division is developing improved metrics for measuring productivity and performance. Reflecting these changes, the division reports that staff requests have been made to Congress for the FY 2011 budget, as well as for additional positions for FY 2009 and FY 2010.

    Recommendation: To help ensure that SEC is effectively and efficiently using its resources in bringing enforcement actions, and that its enforcement policies are working effectively, the SEC Chairman should, as part of ongoing efforts to explore the more effective use of resources, and to streamline internal review of cases and investigations, expand Enforcement's current examination of its methods to include the level and mix of resources available to investigative staff in the areas of administrative and paralegal support, specialized services and expertise, and information technology support; and include in the examination an evaluation of the impact of the case review process on organizational culture factors such as risk aversion and incentives to drop or narrow the scope of cases.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Implemented

    Comments: The SEC Chairman agreed with our recommendation, and the Division of Enforcement has reported that it plans to submit a recommendation to the Commission, concerning application of the 2006 penalty policy, by September 30, 2009. Toward that end, the division reported that in April 2009, it began examining alternative approaches for applying the policy, and in June 2009, circulated a formal recommendation to the Office of the General Counsel for review and comment. As of early May 2013, the Enforcement Division continues to discuss with the Commissioners' staff whether the current policy and its current application are achieving the Commission's stated goals, and to evaluate alternative approaches.

    Recommendation: To help ensure that SEC is effectively and efficiently using its resources in bringing enforcement actions, and that its enforcement policies are working effectively, the SEC Chairman should examine the effects of the 2006 corporate penalty policy to determine whether the policy is achieving its stated goals and any other effects the policy may have had in adoption or implementation.

    Agency Affected: United States Securities and Exchange Commission

  4. Status: Closed - Implemented

    Comments: The SEC Chairman agreed with our recommendation, and in March 2009 hired a new Director of Enforcement. The Division of Enforcement reports that the Chairman and the Director have worked together to create a "climate of communication." The Director has held several "town hall" meetings with division staff, to outline future plans, explain a restructuring of the division, and ensure that management and staff were both represented on advisory groups formed to assist in these efforts. Ten advisory groups have been formed to make recommendations on the division?s structure and internal processes. According to the division, the Director will continue to have town hall meetings and to seek staff input.

    Recommendation: To help ensure that SEC is effectively and efficiently using its resources in bringing enforcement actions, and that its enforcement policies are working effectively, the SEC Chairman should take steps to ensure that the Commission, in creating, monitoring, and evaluating its policies, follows the agency strategic goal and other best practices for communication with, and involvement of, the staff affected by such changes.

    Agency Affected: United States Securities and Exchange Commission

 

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