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United States General Accounting Office: 
GAO: 

Report to Congressional Requesters: 

March 2002: 

SEC Operations: 

Increased Workload Creates Challenges: 

GAO-02-302: 

GAO Highlights: 

Highlights of GAO-02-302, a report to Paul S. Sarbanes, Chairman, 
Committee on Banking, Housing, and Urban Affairs, U.S. Senate; 
Christopher J. Dodd, Chairman, Subcommittee of Securities and 
Investment; and Jon S. Corzine, Member, Committee on Banking, Housing 
and Urban Affairs, U.S. Senate. 

Why GAO Did This Study: 

In the past decade, securities markets have undergone tremendous growth 
and innovation. Responding to concern that the Securities and Exchange 
Commission’s (SEC) workload has outgrown its resources and impaired 
SEC’s ability to fulfill its mission, GAO undertook a study to (1) 
determine how the securities markets have changed, (2) identify whether 
SEC’s resource levels have affected its ability to regulate and oversee 
the markets, and (3) identify any other factors that may affect SEC’s 
ability to fulfill its mission. 

What GAO Found: 

U. S. securities markets have grown tremendously and become more 
complex and international. As a result, SEC’s workload has increased in 
volume and complexity over the past decade. As illustrated below, 
around 1996, SEC’s workload (e.g., filings, applications, and 
examinations) started to increase at a much higher rate than SEC staff 
years devoted to this workload. Although industry officials said that 
they respect SEC as a regulator, they said that SEC’s limited staff 
resources have resulted in substantial delays in SEC regulatory and 
oversight processes, which hampers competition and reduces market 
efficiencies. In addition, they said information technology issues need 
additional funding, and SEC needs more expertise to keep pace with 
rapidly changing financial markets. Finally, the officials said that 
SEC’s reliance on a small number of seasoned staff to do the majority 
of the routine work does not allow those staff to adequately deal with 
emerging issues. 

Although most officials said that SEC’s resource limitations create 
challenges for SEC, they identified other contributing factors. First, 
SEC’s high staff turnover has resulted in it having a more 
inexperienced staff, which contributes to the identified delays in 
SEC’s regulatory processes. Second, existing securities laws, which 
require SEC approval of most market innovations and new products, can 
contribute to regulatory bottlenecks. Finally, SEC’s budget and 
strategic planning processes could be better linked to help SEC 
identify the types and amounts of additional resources needed to 
fulfill its mission. 

Figure: Percent Change in SEC Staff Years and Workload from 1991 to 
2000: 

[Refer to PDF for image] 

This figure is a multiple line graph depicting SEC staff years and SEC 
workload changes in percentage from 1991 through 2000. 

Source: GAO analysis of SEC data. 

[End of figure] 

What GAO Recommends: 

GAO recommends that SEC explore short-and long-term recommendations to 
address its current challenges. In the short-term, SEC should ensure 
that it explores ways to use all of its available resources to address 
its recruiting and retention problems. In the long-term, we recommend 
that SEC broaden its strategic planning process to determine its 
regulatory priorities and the resources needed to fulfill its mission, 
including identifying the skills needed. SEC, generally, agreed with 
the report’s findings, conclusions, and recommendations. 

This is a test for developing highlights for a GAO report. The full 
report, including GAO's objectives, scope, methodology, and analysis is 
available at [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-02-302]. 
For additional information about the report, contact Richard J. Hillman 
(202-512-8678). To provide comments on this test highlights, contact 
Keith Fultz (202-512-3200) or email HighlightsTest@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Securities Markets Have Become Larger and More Complex: 

SEC’s Ability to Fulfill Its Mission Has Become Increasingly Strained: 

Other Factors Contribute to the Challenges Facing SEC: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Scope and Methodology: 

Appendix I: Comments from the Securities and Exchange Commission: 

Figures: 

Figure 1: SEC Divisions and Selected Offices: 

Figure 2: Number of Times Stock Market Trading Volume and the Value of 
IPOs Have Increased between 1980 and 2000: 

Figure 3: Growth in Dollars Households Invested in Funds, 1980-2000 
(trillions of dollars): 

Figure 4: Percent of U.S. Households Owning Mutual Funds, 1980-2000: 

Figure 5: Percent Change in SEC Staff Years and Workload from 1991 to 
2000: 

Figure 6: Percent Change in Workload and Staff Years for Selected SEC 
Activities: 

Figure 7: SEC Fees Collected and Appropriated Funding, 1991-2001 
(billions of dollars): 

Abbreviations: 

ARP: Automation Review Policy: 

ATS: alternative trading system: 

ECN: electronic communication network: 

EDGAR: Electronic Data Gathering Analysis and Retrieval: 

GLBA: Gramm-Leach-Bliley Act of 1999: 

GPRA: Government Performance and Results Act: 

IA: investment adviser: 

IARD: investment adviser registration depository: 

IC: investment company: 

IG: inspector general: 

IPO: initial public offering: 

OCIE: Office of Compliance Inspections and Examinations: 

OMB: Office of Management and Budget: 

SEC: Securities and Exchange Commission: 

SRO: self-regulatory organization: 

[End of section] 

United States General Accounting Office: 
Washington, DC 20548: 

March 5, 2002: 

The Honorable Paul S. Sarbanes: 
Chairman, Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

The Honorable Christopher J. Dodd:
Chairman, Subcommittee on Securities and Investment:
Committee on Banking, Housing, and Urban Affairs:
United States Senate: 

The Honorable Jon S. Corzine:
United States Senate: 

The securities markets have undergone tremendous change and innovation 
over the last decade, and the Securities and Exchange Commission (SEC) 
faces growing regulatory and oversight challenges to stay abreast of 
these advances. More recently, the sudden highly publicized collapse of 
Enron Corporation has increased the pressure on SEC to ensure that 
investors receive accurate and meaningful financial disclosure, an 
important part of SEC’s mission to protect investors. In addition, 
technological advances have increased the complexity of securities 
markets and the range of products offered to the public. Moreover, 
technology has changed the way investors can buy and sell securities, 
for example through on-line brokerages, and how investors are 
solicited, given the increased access to information on the Internet. 
These changes and the internationalization of securities markets have 
presented SEC with increasing responsibilities in a dynamic regulatory 
environment. Also, legislative changes, such as the Gramm-Leach-Bliley 
Act of 1999 (GLBA), the Commodity Futures Modernization Act of 2000, 
and the USA PATRIOT Act of 2001, place added demands on SEC. Because 
more individuals and families are now invested in the markets, the role 
SEC plays has become even more important to the investing public. 

You asked that GAO review whether SEC had sufficient resources to stay
abreast of the changes in the markets. Our objectives were to (1) 
identify how securities markets have changed, (2) determine whether 
SEC’s resource levels and workload have affected SEC’s ability to 
regulate and oversee the markets, and (3) identify any other factors 
that may affect SEC’s ability to fulfill its mission. 

In addressing these objectives, we analyzed securities market and 
available SEC workload trend data. However, in certain instances, 
quantifiable data was not provided to us for workload measures, such as 
the length of review and approval processes conducted within SEC 
divisions. We met with various knowledgeable SEC and industry officials 
to obtain their views on whether these processes were affected by SEC’s 
existing workload demands and resources levels. To obtain information 
on whether SEC’s ability to regulate and oversee the markets has been 
affected by resource constraints, we interviewed current and past SEC 
officials, including division and office directors, regional office 
directors, budget officials, former commissioners, and academics. In 
addition, we interviewed numerous industry officials, including those 
from various exchanges, associations, investment companies, and broker-
dealers. We also asked these parties about any other factors that might 
affect SEC’s ability to fulfill its mission. We also reviewed relevant 
GAO and inspector general reports on SEC’s oversight activities. 
Finally, we reviewed and evaluated SEC’s strategic plan and Government 
Performance and Results Act (GPRA) reports. 

Background: 

SEC’s primary mission is to protect investors and the integrity of the 
securities markets. SEC seeks to (1) promote full and fair disclosure, 
(2) prevent and suppress fraud, (3) supervise and regulate the 
securities markets, and (4) regulate and oversee investment companies, 
investment advisers, and public utility holding companies. It works to 
fulfill this mission through various divisions and offices. In 2001, 
GAO issued a report that addressed many of the human capital challenges 
SEC faces.[Footnote 1] 

SEC Focuses on Disclosure, Oversight, and Enforcement: 

SEC fulfills its mission to protect investors and the integrity of 
securities markets through activities focused on disclosure, oversight, 
and enforcement. The laws and rules governing the securities industry 
are based on the concept that all investors, whether large institutions 
or private individuals, should have access to basic information about 
an investment prior to trading. To achieve this, the securities laws 
require public companies to register with SEC and to periodically make 
public meaningful financial and other information for all investors to 
use to determine whether a company’s securities are an appropriate 
investment. 

SEC also oversees the activities of a variety of key market 
participants. In 2001, SEC was responsible for 9 exchanges, the over-
the-counter market, approximately 70 alternative trading systems 
(ATSs),[Footnote 2] 12 registered clearing agencies, about 8,000 
registered broker-dealers employing over 700,000 registered 
representatives, almost 8,000 transfer agents,[Footnote 3] over 5,000 
investment companies and 7,400 registered investment advisers. In 
addition, over 14,000 companies that have issued securities filed 
annual reports with SEC. SEC’s oversight includes rulemaking, 
surveilling the markets, interpreting laws and regulations, reviewing 
corporate filings, processing applications, conducting inspections and 
examinations, and determining compliance with federal securities laws. 
SEC is also responsible for regulating public utility holding 
companies. 

Each year SEC brings hundreds of civil enforcement actions against 
individuals and companies that violate securities laws. Violations 
include insider trading, financial and accounting fraud, providing 
false or misleading information about securities and the companies that 
issue them, selling of securities without proper registration, and 
violating broker-dealer responsibility to treat customers fairly. An 
ongoing program to educate investors and ensure that their concerns are 
known throughout SEC supplements SEC’s enforcement efforts. SEC’s 
Organizational Structure As of September 30, 2001, SEC had 3,285 staff 
(or 2,936 full-time equivalent staff years) working in 4 divisions and 
18 offices in Washington, D.C. and in 11 regional and district offices. 
Of these, approximately 39 percent were attorneys, 18 percent were 
accountants or financial analysts, and 6 percent were investigators or 
examiners. The remaining 37 percent were various other professional, 
technical, administrative, and clerical staff. See figure 1 for a 
description of SEC’s major divisions and offices. 

Figure 1: SEC Divisions and Selected Offices: 

[Refer to PDF for image] 

The Division of Corporation Finance oversees corporate disclosure of 
important information to the investing public. Public corporations are 
required to comply with regulations pertaining to disclosure that must 
be made when stock is initially sold and then on a continuing and 
periodic basis. This division routinely reviews the disclosure 
documents filed by public companies. It also provides public companies 
with assistance interpreting SEC's rules and recommends new rules for 
adoption. 

The Division of Enforcement investigates possible violations of 
securities laws, recommends SEC action, when appropriate, either in a 
federal court or before an administrative law judge, and negotiates 
settlements on behalf of the SEC commissioners. While SEC has civil 
enforcement authority only, it works closely with various criminal law 
enforcement agencies such as the Department of Justice and U.S. 
Attorney General offices throughout the country to develop and bring 
criminal cases when the misconduct warrants more severe action. 

The Division of Market Regulation establishes and maintains standards 
for fair, orderly, and efficient markets. It does this primarily by 
regulating the major securities market participants including broker-
dealers, self-regulatory organizations (SROs), transfer agents, and 
securities information processors. 

The Division of Investment Management oversees and regulates the 
investment management industry and administers the securities laws 
affecting investment companies, including mutual funds and investment 
advisers. In applying the federal securities laws to this industry, 
this division seeks to improve disclosure and minimize risk for 
investors without imposing undue costs on regulated entities. The 
division also administers the Public Utility Holding Company Act of 
1935. 

The Office of Compliance Inspections and Examinations administers SEC's 
nationwide examination and inspection program for registered SROs, 
broker-dealers, transfer agents, clearing agencies, investment 
companies, and investment advisers. This office conducts inspections to 
promote compliance with the securities laws, to detect violations of 
the law, and to keep the SEC commissioners informed of developments in 
the regulated community. 

The Office of Economic Analysis advises the SEC commissioners and SEC 
staff on the economic issues associated with SEC's regulatory and 
policy activities. This office analyzes the potential impacts and 
benefits of proposed regulations, conducts studies on specific rules, 
and engages in long-term research and policy planning. 

The Office of the General Counsel is the chief legal officer of SEC. 
Primary duties of this office include representing SEC in certain 
civil, private, or appellate proceedings, preparing legislative 
material, and providing independent advice and assistance to the SEC 
commissioners, the divisions, and the offices. 

The Office of Investor Education and Assistance serves individual 
investors, ensuring that their problems and concerns are known 
throughout SEC and considered when the agency takes action. Investor 
assistance specialists answer questions, analyze complaints, and seek 
informal resolutions. 

The Office of Information Technology is responsible for supporting the 
SEC commissioners and SEC staff in all aspects of information 
technology. This office operates the Electronic Data Gathering Analysis 
and Retrieval (EDGAR) system, which electronically receives, processes, 
and disseminates more than 500,000 financial statements every year. 
This office also maintains SEC's Web site. 

Other SEC offices: administrative law judges; administrative and 
personnel management; chief accountant; comptroller; equal employment 
opportunity; executive director; filings and information services; 
inspector general; international affairs; legislative affairs; public 
affairs, policy evaluation, and research; and the office of the 
secretary. SEC regional and district offices include field staff to 
conduct its enforcement, examination, and inspection functions. 

Source: SEC. 

[End of figure] 

2001 GAO Report Found SEC Faces Human Capital Challenges: 

In 2001, we issued a report, which discussed the human capital 
challenges SEC faces.[Footnote 4] We surveyed current and former SEC 
attorneys, accountants, and examiners to determine why they had left or 
would consider leaving SEC. Overwhelmingly, compensation was cited as 
the primary reason for leaving. Respondents also identified other 
nonpay factors that had or would affect their decisions to leave, such 
as the lack of opportunities for advancement, the amount of 
uncompensated overtime, and the quality of administrative support. 

To recruit, retain, and motivate employees, we found that SEC used 
various compensation-based programs, such as recruitment bonuses, 
retention allowances, and special pay rates, more actively than other 
government agencies. For example, in March 2001, SEC received OPM 
approval to update its special rates for attorneys, accountants, and 
examiners. These special pay rates are generally equivalent to a 
several-step increase in the basic government pay scale. Because staff 
cannot receive the special pay rate and a locality pay adjustment, SEC 
would have to request special pay adjustments annually to prevent the 
locality pay adjustments from eroding the benefit of the special pay. 
We also found that while SEC also offers a number of work life 
programs, it has only recently increased its focus on providing greater 
flexibilities to its staff such as opportunities to work compressed 
work schedules. 

We also found that SEC management had made improvements to its 
recruitment program, which included additional training for recruiters 
and expanded on-campus recruiting and added a new human capital goal to 
its performance plan. However, more remains to be done in order for SEC 
to strategically align its core mission with its ability to recruit and 
retain qualified employees. We recommended that the chairman, SEC, 
periodically survey employees to measure job satisfaction, identify 
employee concerns, and analyze the effectiveness of the agency’s 
programs to retain employees. We also recommended that the chairman, 
SEC, include a strategy for succession planning and a comprehensive, 
coordinated workforce planning effort in the agency’s annual 
performance plan. Finally, we recommended that the chairman, SEC, 
identify ways to involve human capital leaders in decision making and 
establish a practice that requires management to continually ensure the 
effectiveness of SEC’s human capital approaches in addressing 
employees’ needs, including working with the National Treasury 
Employees Union to expeditiously address the areas of dissatisfaction 
identified in our survey.[Footnote 5] 

Securities Markets Have Become Larger and More Complex: 

Over the last decade, securities markets have experienced unprecedented 
growth and change. Moreover, technology has fundamentally changed the 
way markets operate and how investors access markets. These changes 
have made the markets more complex. In addition to these market-driven 
changes, the markets have become more international, and legislative 
changes have resulted in a regulatory framework that requires increased 
coordination among financial regulators and requires that SEC regulate 
a greater range of products. 

U.S. Capital Markets Have Grown Rapidly: 

Over recent decades, U.S. capital markets have experienced substantial 
growth, especially in the 1990s. As shown in figure 2, the volume of 
shares traded in U.S. stock markets in 2000 was over 30 times higher 
than the volume in 1980. Although many factors contributed to this 
unprecedented growth, it was in part spurred by technological advances 
and decreasing transaction costs, which made it easier and more 
affordable for investors to participate in the market. Figure 2 also 
shows that the value of initial public offerings (IPOs) of securities 
issued in 2000 was over 50 times the number of IPOs issued in 1980 as 
private companies took advantage of the strong economy and favorable 
market conditions and issued stock to raise capital. 

Figure 2: Number of Times Stock Market Trading Volume and the Value of 
IPOs Have Increased between 1980 and 2000: 

[Refer to PDF for image] 

This figure is a multiple line graph depicting the number of time stock 
market trading value and the Value of IPOs have increased during the 
time period of 1980 through 2000. 

Source: GAO analysis of SEC data. 

[End of figure] 

Likewise, in the 1990s many more individuals became investors by buying 
shares in mutual funds, further elevating the importance of SEC as a 
regulator. Figure 3 shows that the dollars that households had invested 
in mutual funds, excluding money market funds, grew from $46 billion in 
1980 to $3.3 trillion in 2000. Moreover, as of December 2001, the total 
dollars invested[Footnote 6] in mutual funds was almost $7 trillion, 
about twice the amount on deposit at commercial banks. This growth in 
amounts invested was due in part to higher stock values. 

Figure 3: Growth in Dollars Households Invested in Funds, 1980-2000 
(trillions of dollars): 

[Refer to PDF for image] 

This figure is a line graph depicting the growth in dollars households 
invested in funds during the time period of 1980 through 2000. 

Source: GAO analysis of SEC data. 

[End of figure] 

Between 1980 and 2000, more households and individuals became investors 
in mutual funds and stocks. Figure 4 shows that the percent of U.S. 
households owning mutual funds also had increased to almost 50 percent 
of households by 2000. According to SEC, the number of households 
owning mutual funds in 2001 continued to increase with 52 percent of 
households owning funds. According to SEC, stock funds account for 
almost half of all mutual fund assets, and 75 percent of cash inflows 
to these funds come from retirement plans. Since 1990, the percent of 
U.S. retirement assets held in mutual funds has more than tripled. 
Moreover, according to New York Stock Exchange data, the number of 
individuals that owned shares of stocks increased 61 percent between 
1989 and 1998. 

Figure 4: Percent of U.S. Households Owning Mutual Funds, 1980-2000: 

[Refer to PDF for image] 

This figure is a vertical bar graph depicting the percent of households 
owning mutual funds during the time period of 1980 through 2000. 

Source: Investment Company Institute. 

[End of figure] 

Securities Markets Have Become More Complex and International: 

Driven by technological advances, the securities markets have become 
more complex with an array of new products and market participants. 
Exchange-traded funds,[Footnote 7] single-stock futures,[Footnote 8] 
and on-line portfolios add to the products that SEC must oversee. Other 
technology-driven innovations such as ATSs, on-line brokerages, and day 
trading firms have also stretched SEC’s regulatory capacity. For 
example, SEC regulates about 70 ATSs. Electronic communication networks 
(ECNs),[Footnote 9] one type of ATS, account for about 30 percent of 
the daily share volume in Nasdaq securities. On-line brokerages, which 
were unknown a few years ago, are used by almost 12 million investors 
in making about 1.1 million trades per day. Likewise, investor 
protection concerns about day trading firms’ activities resulted in 
greater regulatory activity in this area over the past few years. 

New technology also has affected how the markets operate and how 
participants communicate. Stock exchanges and markets use complex 
electronic trading systems that SEC must understand and monitor. The 
Internet has allowed for rapid, widespread dissemination of information 
to investors, which also presents ongoing regulatory challenges to 
which SEC has been responding. For example, the Internet has provided 
simple, effective, and essentially anonymous ways for unscrupulous 
persons to exploit investors. As of May 2001, SEC had brought more than 
240 Internet-related enforcements actions, charging close to 800 
persons and entities with federal securities law violations. 

The internationalization of securities markets also presents new 
challenges for SEC. In 1991, U.S. investors purchased and sold $949 
billion in foreign securities. By 2000, that number had risen to $5.484 
trillion—an increase of 478 percent. According to SEC documents, in 
2001, approximately 130 foreign companies from 29 countries entered 
U.S. securities markets for the first time and filed over $312 billion 
in public offerings. In addition, over 1,300 foreign companies from 
over 59 countries filed periodic reports. SEC also recognizes the 
importance of being able to work closely with its international 
counterparts in enforcement and inspection activities, and to 
participate in international initiatives that relate to the supervision 
of global securities markets. 

Legislative Changes Spur New Products and Regulatory Responsibilities: 

Legislative changes also created additional workload for SEC. For 
example, GLBA made SEC the primary regulator for all securities firms, 
including broker-dealers and investment advisers affiliated with 
financial holding companies.[Footnote 10] While SEC has always 
coordinated with other financial regulators to a certain extent, GBLA 
requires that SEC undertake additional examinations and inspections of 
highly complex financial services firms, both to fulfill its own 
oversight responsibilities and to provide the Federal Reserve and other 
relevant agencies with the information and analyses to fulfill their 
missions. Likewise, the Commodity Futures Modernization Act of 2000, 
which allowed single-stock futures to trade in the United States, 
increases the number of potential regulated entities over which SEC has 
responsibility. It requires futures markets and certain futures 
commission merchants[Footnote 11] to register with SEC as national 
securities exchanges and broker-dealers for the limited purpose of 
trading these products. In addition, the USA PATRIOT Act of 2001 
assigned to SEC an expanded role in the fight against money laundering 
and terrorism. SEC is working with the Department of Treasury on 
rulemakings related to shell banks, customer identification, suspicious 
activity reporting, and correspondent and private banking, as well as 
studies on managed funds and the overall operation of the legislation. 
SEC has expanded examination responsibilities for broker-dealer 
compliance under the Bank Secrecy Act and new examination 
responsibilities for other financial institutions regulated by SEC, 
including investment companies. 

SEC’s Ability to Fulfill Its Mission Has Become Increasingly Strained: 

SEC and industry officials said SEC’s ability to fulfill its mission 
has become increasingly strained due in part to imbalances between 
SEC’s workload (e.g., filings, complaints, inquiries, investigations, 
examinations, and inspections) and staff resources.[Footnote 12] As 
figure 5 illustrates, since 1996 SEC’s staff resources have not grown 
commensurate with its workload.[Footnote 13] Although industry 
officials complimented SEC’s regulation of the industry given its staff 
size and budget, both SEC and industry officials identified several 
challenges SEC faces. First, resource constraints have contributed to 
substantial delays in the turnaround time for many SEC regulatory and 
oversight activities, such as approvals for rule filings and exemptive 
applications.[Footnote 14] Second, SEC’s resource constraints 
contributed to bottlenecks in the examination and inspection area as 
workload grew. Third, limited resources have forced SEC to be selective 
in its enforcement activities and have lengthened the time required to 
complete certain enforcement investigations.[Footnote 15] Fourth, 
certain filings were subject to less frequent and less complete reviews 
as workloads increased. Fifth, today’s technology-driven markets have 
created ongoing budgetary and staff challenges. Finally, SEC and 
industry officials said that SEC has been increasingly challenged in 
addressing emerging issues, such as the ongoing internationalization of 
securities markets and technology-driven innovations like ATSs and 
exchange-traded funds. 

Figure 5: Percent Change in SEC Staff Years and Workload from 1991 to 
2000: 

[Refer to PDF for image] 

This figure is a multiple line graph depicting SEC staff years and SEC 
workload changes in percentage from 1991 through 2000. 

Source: GAO analysis of SEC data. 

[End of figure] 

SEC Resource Levels Have Not Grown Commensurate with Its Workload: 

Although there may not be a need for an identical offsetting increase 
in SEC staff compared to the increases in its workload, larger, more 
active, and more complex markets have produced more market 
participants, registrants, filings, examinations and inspections, legal 
interpretations, complaints, and opportunities for fraudulent activity. 
Over the last decade, staffing, within different areas of SEC’s 
regulatory oversight activities, has grown between 9 and 166 percent, 
while workload measures in those areas have grown from 60 to 264 
percent. As figure 6 illustrates, the increases in SEC’s workload 
substantially outpaced the increases in SEC’s staff. For example, the 
number of corporate filings increased 60 percent, while related review 
staff increased 29 percent. This figure also shows that the number of 
complaints and inquiries received increased by 100 percent, while the 
enforcement staff dedicated to investigate complaints and other matters 
increased by 16 percent.[Footnote 16] In addition, the number of market 
and firm supervision actions increased 137 percent, but the number of 
staff responsible for these activities increased 51 percent. Market and 
firm supervision actions include: 

* SRO[Footnote 17] and SEC rule proposals; 

* interpretive guidance and exemptive applications; 

* analyses of proposed enforcement actions, disclosure documents, and 
risk assessment reports; 

* automated trading system analyses and automation reviews of SRO 
systems; 

* policy papers; 

* Congressional, governmental, industry, and public correspondence; 
and; 

* other reports and analyses of SEC’s Division of Market Regulation. 

Investment company filings increased 108 percent while staff increased 
9 percent. Likewise, total assets under management by investment 
companies (IC) and investment advisers (IA) increased by about 264 
percent over 10 years, while the number of IC and IA examination staff 
increased by 166 percent. 

Figure 6: Percent Change in Workload and Staff Years for Selected SEC 
Activities: 

[Refer to PDF for image] 

This figure is a multiple vertical bar graph depicting the percent 
change in workload and staff years for selected SEC activities, as 
follows: 

Activity: Review of corporate filings; 
Increase in workload: 60%; 
Increase in staff years: 29%. 

Activity: Complaints and inquiries; 
Increase in workload: 100%; 
Increase in staff years: 16%. 

Activity: Market and firm supervision; 
Increase in workload: 137%; 
Increase in staff years: 51%. 

Activity: Review of investment company filings; 
Increase in workload: 108%; 
Increase in staff years: 9%. 

Activity: IC & IA assets under management; 
Increase in workload: 264%; 
Increase in staff years: 166%. 

Source: GAO analysis of SEC data. 

[End of figure] 

Substantial Delays Exist in the Completion of Many Regulatory and 
Oversight Activities: 

The imbalance between workload and resources has resulted in SEC taking 
longer to process various types of filings, issue guidance, and review 
applications. Although SEC did not provide statistics on the time 
frames to process its workload, various industry officials told us they 
have to wait longer to receive SEC’s response to their filings and 
applications. They said that SRO rule filings take longer to get 
approved as SEC’s workload has increased. Likewise, the officials said 
that the amount of time SEC takes to process interpretive guidance and 
no-action letters[Footnote 18] has increased, as has the length of time 
taken to process exemptive applications. Finally, the amount of time 
taken to review IPOs filings had also increased. The officials said 
these delays could affect industry competition and efficiency. 

Backlog of SRO Rule Filings Has Grown: 

According to SEC officials, a growing backlog of SRO rule filings 
resulted in delays in responding to filings. As of January 2002, SEC 
officials said that there were 284 SRO rule proposals in the pipeline. 
The officials said that because of the high staff turnover in recent 
years, SEC did not have enough seasoned staff available to process the 
rule proposals more quickly. SEC data shows that the number of rule 
filings open at year-end increased 40 percent from 174 in 1998 to 243 
in 2001. Also, SEC expects the number of SRO rule filings to continue 
to increase because of registration of new exchanges and the 
implementation of additional oversight responsibilities for exchanges 
trading single-stock futures. In 2001, SEC received 638 proposed rule 
changes compared to 444 in 1991—a 44 percent increase. Industry 
officials believed resource constraints were one reason that SEC now 
takes longer to complete these reviews than in the past. Such delays 
can have important affects on those making the filings. For example, an 
SRO official said that when SEC takes a year or more to approve a 
proposed change, the SRO can lose the competitive advantage from making 
the change. Although SEC officials said that they do not keep 
statistics on the length of time it takes to review filings, other 
industry officials said that they have waited months with no response 
from SEC. 

In addition to approving SRO rule filings, SEC also develops its own 
rules. For example, in 2001, SEC developed 74 rule proposals and 
interpretive releases. One rule proposal SEC is considering would 
improve the SRO rule proposal review process. To address many of the 
concerns mentioned previously, the proposed Rule 19b-6 would, among 
other things, require SEC to (1) issue a release relating to filed 
proposed rule changes within 10 business days of receipt of the filing, 
(2) eliminate the pre-filing requirement and the 30-day delayed 
operational period before which noncontroversial rule changes can be 
filed or become operative, (3) expand the categories of proposed rule 
changes that qualify for immediate effectiveness to include certain 
trading rules, and (4) permit SROs to file proposed rule changes 
electronically. According to SEC staff, the initial rule proposal that 
was released over a year ago, in January 2001, was considered to be 
controversial. For example, some of the exchanges did not think the 
proposal went far enough in streamlining the rule filing process, while 
many broker-dealers were concerned about reduced SEC oversight. SEC is 
still considering comments it received from the industry and has not 
decided on the final contents of the rule. 

Staff Constraints Result in Delays in Guidance: 

In addition to reviewing and approving SRO rule filings, SEC provides 
guidance to registrants, prospective registrants, and the public to 
help them comply with securities laws. This usually takes the form of 
interpretive guidance and no-action letters, and each year SEC 
processes hundreds of these requests. Industry officials said that they 
have to wait longer to obtain SEC guidance in the form of no-action 
letters and interpretive guidance than in past years. SEC officials 
said that there were numerous no-action letters and interpretive 
guidance in process. In 2001, SEC processed over 1,600 requests for 
guidance from securities firms, investment companies, and investment 
advisors, which increased from about 1,360 in 1991. SEC staff also said 
that, as of January 2002, the chairman was reviewing SEC’s interpretive 
guidance process. Industry officials said that delays in obtaining SEC 
guidance can create legal uncertainties and stifle innovation. In the 
future, although staff levels are expected to remain static, SEC 
expects its workload in this area to increase as more firms request 
guidance on how SEC’s financial responsibility and investor protection 
rules apply to securities firms that become part of large financial 
services organizations and enter into increasingly complex financial 
transactions. 

SEC Also Takes Longer to Review Exemptive Applications: 

SEC’s processing of exemptive applications has also experienced delays. 
SEC is responsible for processing applications for exemptive relief 
from various statutory provisions and rules. The Investment Company and 
the Investment Adviser Acts authorize SEC to exempt any person, 
security, or transaction from one or more provisions of the acts. 
Exemptive applications usually take about 3 to 6 months to process but 
as the issues involved become increasingly complex it can take much 
longer. A 1996 SEC inspector general (IG) report[Footnote 19] noted 
that it was not unusual for the length of time required for staff 
review to be a year or longer due to the complexity of the issues, the 
lack of delegated authority, or workload pressures.[Footnote 20] 
Industry officials said that the time that SEC takes to approve 
exemptive applications has continued to increase and that inadequate 
staffing was part of the problem. For example, in the more extreme 
cases, an official said that SEC took over 1 year to process “a 
relatively routine” exemptive application and over 5 years to render a 
decision on another application. The IG also found that to avoid 
lengthy delays some firms abandoned plans that require exemptive relief 
or altered them to adopt a less innovative approach that did not 
require filing for an exemption. 

Industry officials we spoke with also said that these delays stifled 
innovation and hampered competition. 

SEC Reviews of IPO Filings Can Be Lengthy: 

Industry officials also said that the time SEC takes to approve IPOs 
has grown. Although the number of IPOs has decreased substantially in 
the past 2 years, industry officials continued to cite this as a 
challenge for SEC albeit a less pressing one. In 2001, SEC completed 
745 IPO issuer reviews, down from 1,350 in 2000. SEC said that IPOs are 
a priority and that every IPO gets a full review. Industry officials 
said that it generally takes SEC 4 to 7 weeks to complete the review 
process, but the officials added that they see no reason that the 
process should take that long. These officials also said that the 
industry perception is that SEC’s existing staffing level is 
insufficient given its workload. The length of time it takes to review 
an IPO has economic implications for the issuing company because market 
conditions can change (e.g., the estimated value of the stock can fall 
in adverse market conditions), thereby increasing the cost of the IPO 
or making the IPO not feasible. Moreover, the officials said that 
lengthy delays in the completion of IPO filings can increase the 
likelihood that issuers may opt for private placements or go offshore 
even if it is more costly. They also said that lengthy delays may 
discourage foreign companies from entering U.S. markets. 

Workload Adversely Affects SEC Examination and Inspection Function: 

The increasing complexity and growth of the capital markets has also 
affected SEC’s ability to inspect and examine the operations of various 
regulated entities. Each year, SEC usually conducts from 800 to 900 
inspections and examinations of SROs, broker-dealers (including their 
branch offices and registered representatives), transfer agents, and 
clearing agents for compliance with the federal securities laws and 
regulations. To better utilize its resources, in the mid-1990s the 
Office of Compliance Inspections and Examinations (OCIE) began 
conducting fewer full scope examinations, which review all aspects of 
operations, and more frequent risk-based examinations, which focus on 
specific areas or issues. 

Although staff levels are expected to remain unchanged in 2003, SEC 
expects the number of larger, more complex brokerage firms and other 
financial institutions to grow. SEC also expects to enhance its 
internal control examination program. These internal control 
examinations usually take longer to complete and require special 
training and skills.[Footnote 21] In 2001, SEC said that they conducted 
about 22 to 25 broker-dealer internal control examinations compared to 
1 to 3 when they started the program in 1995. However, with no increase 
in staffing SEC may find it difficult to continue to increase the 
number of internal control examinations completed. 

Although SEC officials said that they had been able to maintain their 
examination schedules and workload with their existing staff levels, 
some officials were concerned that the cycle for certain types of 
reviews could stretch beyond the planned time frames. For example, some 
officials said that the investment adviser reviews could stretch beyond 
the existing 5-year cycle in the future, if that examination program 
does not have sufficient resources. They added that a minimum review 1 
in every 5 years was vital to the level of oversight needed to protect 
investors. SEC officials also said that new rules that have been 
implemented will add time and complexity to the reviews. Overall, SEC 
officials said that OCIE had lost a lot of experienced staff at the 
junior level and that new staff requires constant training. 

Several industry officials also said that the time between the 
completion of SRO inspections and the issuance of final inspection 
reports is lengthy. SRO officials said that after an inspection is done 
it usually takes a year or two before the report is final. Some SRO 
officials said that the lag between the completion of the inspection 
and the issuance of the report could result in findings and 
recommendations becoming obsolete because the recommended changes had 
already been made or programs revised. These officials said that they 
would prefer to have the problem pointed out during the inspection 
process so as not to delay any necessary corrective action. Such lags 
in the inspection process can cause inefficiencies in SROs’ operations. 

According to SEC officials, other factors, in addition to resource 
constraints, also contribute to the extended time required to complete 
SRO inspections. SRO inspection reports require a more extensive level 
of review due to the variety of complex issues relating to SROs. 
Moreover, any recommendations must receive higher scrutiny because they 
could potentially impact SRO members. However, SEC officials said they 
recognize this is an issue and that steps are being taken to improve 
the inspection process. For example, SEC plans to provide more detailed 
information about preliminary findings at exit interviews and inform 
SROs sooner about the issues that will likely be addressed in the final 
inspection reports. They also said that they plan to do more risk-based 
inspections of SROs. 

Workload Growth and Limited Staffing Raise Concerns about Enforcement: 

SEC and industry officials said that delays in closing cases and a 
backlog of smaller investigations presented ongoing challenges for SEC. 
Between 1991 and 2000, Division of Enforcement staff devoted to 
investigations increased 16 percent, from 414 to 482 staff years, while 
the number of cases opened increased 65 percent, from 338 to 558. 
Although increased staff has allowed more work to be initiated, delays 
in completion of individual cases persist. Moreover, the number of 
cases pending at the end of the year increased 77 percent, from 1,264 
in 1991 to 2,240 in 2000. SEC officials said the increase in cases 
pending was partly attributable to high staff turnover, which has 
resulted in old cases not being closed or ongoing cases being delayed 
until other staff can take over. The officials said that in 2000, 58 
experienced staff left the division. 

SEC and industry officials said that SEC’s enforcement activities are 
important for carrying out SEC’s mandate to protect investors and deter 
fraud and abuse. SEC officials said that they cannot prosecute every 
case and, therefore, must prioritize the cases they will pursue. SEC 
officials said they recognize that they have limited resources and 
operate accordingly. According to SEC officials, SEC generally 
prioritizes the cases in terms of (1) the message delivered to the 
industry and public about the reach of SEC’s enforcement efforts, (2) 
the amount of investor harm done, (3) the deterrent value of the 
action, and (4) SEC’s visibility in certain areas such as insider 
trading and financial fraud. Except for the length of time taken to 
complete an investigation, most officials said that SEC was effective 
in this area. Although SEC data show that the average length of time to 
complete an investigation decreased, we did not perform a detailed 
review of the individual investigations to determine whether this was 
an improvement or whether SEC on average pursued less time-consuming 
matters for investigation. 

SEC Information Technology Systems and Funding Gaps Contribute to 
Inefficiencies: 

SEC and industry officials agree that SEC has improved its 
technological capabilities and expertise and has been proactive in 
creating innovative systems that assist the industry. However, SEC 
officials said that additional money is needed to improve the 
usefulness of many of its systems and to increase the technical 
knowledge of SEC staff. EDGAR[Footnote 22] and the investment adviser 
registration depository (IARD)[Footnote 23] systems were created to 
provide electronic collection, storage, and retrieval of data for the 
industry and investors. However, SEC staff and industry participants 
said that these systems provide limited capability to retrieve 
information. Currently, users can retrieve corporate and financial 
information from EDGAR, but the system is unable to generate trend 
information. SEC officials said that they must obtain this information 
from outside sources. An SEC staff member noted that the IARD system 
could be upgraded to include a variety of functions beyond storing 
investment adviser information including a search capability that 
identifies advisers according to state and specialty. However, the 
officials said that SEC was only allocated enough funds to meet the 
requirement of providing investors with a readily accessible database 
of information about investment advisers and persons associated with 
investment advisers. It did not receive sufficient funding to make the 
system fully useful for regulatory oversight or as an analytical tool. 
According to SEC officials, SEC’s 2002 information technology budget of 
$46.6 million was used primarily for hardware and software maintenance 
and technology infrastructure needs. These officials said that they 
requested, but did not receive, additional funding for capital 
improvements such as a nationwide network to support the examination 
and inspection activities and enhancements to the IARD. 

According to the officials, SEC has a list of technological improvement 
projects that have not been funded due to budgetary constraints. 
Several SEC officials said that requests have included applications 
that allow for better manipulation and connectivity of various SEC data 
systems and computerized reports. For example, one SEC official said 
that he must wait days for market surveillance data to be downloaded, 
even though technology exists that would allow SEC to obtain this 
information in seconds. The officials said that SEC’s technology needs 
vary from having a simple toll-free number for investors to contact SEC 
staff to having the capability to reconstruct trading activity in case 
of a major market failure, such as the 1987 market break. 

SEC and the industry also cited the lack of additional technical staff 
as another issue. Some SEC officials said that they would like to have 
more information technology specialists to participate in certain 
examinations. One official said that SEC needs more technical 
specialists to evaluate industry participants’ computer and information 
systems and to ensure compliance with new privacy laws that protect 
investor information and assets. As of January 2002, SEC had only two 
examination staff dedicated to technology issues involving broker-
dealers and other non-SRO examinations. 

SEC requested an additional $13 million in its 2003 budget 
authorization request to support the agency’s information technology 
and automation efforts. Such funding was necessary to enable SEC to: 

* respond to federal requirements to expand electronic interactions 
with filers, registrants, the public, and other external customers; 

* enhance SEC’s examination and inspection program by providing 
automated tools to analyze large information databases used by 
investment advisers; 

* upgrade the database, which is used in its investigative process to 
search and match lists of names received from other agencies; 

* respond to federal requirements to ensure information security with 
better intrusion-detection capabilities and incident responsiveness and 
provide additional information security awareness training; and; 

* obtain the necessary hardware for creation of a “virtual private 
network” that will allow secure access for off-site inspection and 
examination activities. 

SEC’s oversight of SRO information systems is conducted through SEC’s 
Automation Review Policy (ARP) program,[Footnote 24] which in mid-2001 
was administered by 10 staff members in the Office of Technology and 
Enforcement within the Division of Market Regulation. GAO reported in 
July 2001 that SEC’s ability to oversee information system issues was 
hampered by the limited resources available to the ARP program, a 
factor that also constrained its staffs’ ability to inspect the SRO’s 
automated systems on a timely basis.[Footnote 25] 

Industry officials were not impressed by SEC’s technology oversight. 
One industry official described SEC’s technology reviews as fairly 
basic. Another industry official said that SEC staff had limited 
technical knowledge. This knowledge is vital for overseeing transaction 
systems including settlement and trading systems. And yet another 
industry official highlighted a “lack of confidence” in SEC’s ability 
to effectively review technology and related capacity issues. SEC 
officials said that SEC has made improvement over the last several 
years and has tried to stay abreast of technological advances, but like 
most regulators SEC remains behind market developments. 

Certain Financial Statement and Other Filings Are Subject to Less 
Frequent Review by SEC Staff: 

The number of corporate filings SEC received increased 59 percent from 
61,925 in 1991 to 98,745 in 2000. The increase was primarily due to the 
tremendous increase in the number of IPOs and other market transactions 
filed with SEC. During this same time period, the staff years devoted 
to the review of these filings, primarily for accountants and 
attorneys, increased 29 percent from 125 in 1991 to 161 in 2000. SEC 
officials said that this limited staff growth combined with the high 
volume of IPOs limited SEC’s ability to review other filings, which 
also increased. The officials said that staff perform full reviews 
[Footnote 26] of all registration statements for IPOs and may review 
other transactional filings related to raising capital or mergers and 
acquisitions. As a result, fewer resources are available to review the 
annual and quarterly filings of previously registered securities 
issuers. The percent of all corporate filings that received a full 
review, a full financial review, or were just monitored for specific 
disclosure items decreased from about 21 percent in 1991 when 13,198 
were reviewed to about 8 percent in 2000 when 8,498 were reviewed. 

According to SEC officials, until the early 1980s, SEC completed full 
reviews of all transactional filings. The officials said that approach 
would not be possible in today’s market without a substantial increase 
in staff resources. In addition, SEC’s goal was to complete a full 
financial review of each issuer’s annual filings in at least 1 of every 
3 years—a review goal of about 30 to 35 percent of annual filings per 
year. According to SEC, this proposed level of review was expected to 
“ensure that material issues are disclosed clearly and completely and 
that possible fraudulent activities are addressed promptly.” However, 
in 2001, SEC completed full or full financial reviews of about 16 
percent, or 2,280 of 14,060 annual reports filed. 

In November 2001, the Division of Corporation Finance announced that 
staffing levels were expected to remain flat while filings were 
expected to continue to increase and be more complex. In this post-
Enron environment, SEC plans to reconsider its approach to determining 
how it will select filings for review and how it will review the 
filings selected. Rather than conducting full reviews of fewer firms, 
the officials said SEC may limit its review to a specific disclosure 
issue and review more filings for that issue. For example, SEC may 
choose to focus on off-balance sheet activities and work with the 
company to improve disclosure. However, the officials said that full 
reviews will not be completely abandoned, but the revised approach 
should help SEC better deploy limited staff resources and enable it to 
have a greater review presence across all types of corporate filings in 
the future. Further, in December 2001, in response to the disclosure 
and accounting problems of Enron Corporation, SEC said that it began 
reviewing the annual filings of the 500 largest U.S. companies. 

SEC also reviews investment company filings, such as mutual fund 
prospectuses for compliance with disclosure requirements. As previously 
shown in figure 6, the number of investment company filings more than 
doubled from 17,143 in 1991 to 35,686 in 2000, while staffing for that 
activity increased by only 9 percent from 45 staff years in 1991 to 49 
in 2000. However, the staff reviewed 33 percent of investment company 
filings in 1991 and increased that rate to 49 percent in 2000. SEC 
officials said the increase in the percentage of filings reviewed was 
due partly to changes in the types of filings coming into the agency, 
and partly to the fact that certain filings were counted as reviewed 
even though all aspects of the filings were not always fully reviewed. 
For example, if a mutual fund company introduces several new stock 
funds, only one of the new funds may be given a full review, and only 
the unique aspects of the other funds may be reviewed. 

SEC Is Not Addressing Many Current and Evolving Issues: 

Both SEC and industry officials agree that the current level of human 
capital and budgetary resources has strained SEC’s capacity to address 
current and evolving market issues. Industry officials generally hold 
SEC staff in high regard and said that SEC does a good job overall. 
However, industry officials also said that they would like to see SEC 
devote more effort to evolving and ongoing areas such as global market 
issues, technology, ATSs, financial statement reporting, and the net 
capital rule.[Footnote 27] For example, one industry official said that 
SEC should be more proactive in coordinating with other regulators and 
industry in dealing with these issues. The official noted that SEC’s 
reliance on a small number of seasoned staff to do the majority of the 
routine work does not allow those staff to adequately deal with new and 
emerging issues. For example, this official and others said that SEC 
needs to overhaul its approach to net capital to make use of modern 
risk management techniques. They said that SEC could benefit from 
hiring more financial economists to assist in this effort. They said 
that the current net capital rule imposes unnecessary costs on broker-
dealers that deal in multiple products. 

According to SEC officials, SEC lacks resources to deal with an 
increasing workload, review new products, and implement needed changes 
to rulemaking and policy interpretations. For example, one SEC official 
said that additional resources would be needed for SEC to review new 
products, like exchange-traded funds, and still be able to address its 
traditional workload. Likewise, recent high-profile accounting 
scandals, such as that involving Enron Corporation, have raised 
questions about SEC’s ability to monitor disclosure requirements, which 
is vital to its goal of protecting investors. 

Other Factors Contribute to the Challenges Facing SEC: 

In addition to the staff and workload imbalances, other factors also 
contribute to the challenges SEC currently faces. SEC officials said 
that, although additional resources could help SEC do more, additional 
resources alone would not help SEC to address its high staff turnover, 
which continues to be a problem. Furthermore, in recent years the staff 
turnover and large differentials in pay between SEC and other financial 
regulators and industry employers resulted in many staff positions 
remaining vacant as staff left at a faster rate than officials could 
hire new staff. Although SEC now has the authority to provide pay 
parity, implementing it will depend upon SEC receiving sufficient 
budgetary resources. Industry officials also said that existing 
securities laws, which require SEC to approve market innovations and 
changes before they can be introduced into the market, can create a 
regulatory bottleneck. Industry officials said that there are steps SEC 
could take to avoid these bottlenecks and work more efficiently and 
effectively, such as by reforming its regulatory approval processes. 
Finally, we found that SEC’s budget and strategic planning processes 
could be improved to better enable SEC to determine the resources 
needed to fulfill its mission. For example, unlike “high performing 
organizations,” SEC has not systematically utilized its strategic 
planning process to ensure (1) that resources are best used to 
accomplish its basic statutorily mandated duties and (2) that human 
capital planning addresses the resource needs that are necessary to 
fulfill the full scope of its mission, including activities to address 
emerging issues.[Footnote 28] 

SEC and Industry Officials Cite Turnover as a Primary Challenge: 

As we noted in our 2001 report on SEC’s human capital practices, about 
one-third of SEC’s staff left the agency from 1998 to 2000.[Footnote 
29] SEC’s turnover rate for attorneys, accountants, and examiners 
averaged 15 percent in 2000, more than twice the rate for comparable 
positions governmentwide. Although the rate had decreased to 9 percent 
in 2001, turnover at SEC was still almost twice as high as the rate 
governmentwide. Further, as a result of this turnover and inability to 
hire qualified staff quickly enough, about 250 positions remained 
unfilled in September 2001. SEC officials said that they could do more 
if they had more staff, but all cited SEC’s high turnover rate as a 
major challenge in managing its workload. Likewise, industry officials 
agreed that many of the challenges SEC faces today are exacerbated by 
its high turnover rate, which results in more inexperienced staff and 
slower, often less efficient, regulatory processes. From the industry’s 
perspective, SEC’s high turnover and resulting staff inexperience has 
contributed to many of the delays and problems discussed in the 
previous section. Industry officials said that, in the examination 
area, staff inexperience sometimes resulted in examinations taking 
longer to complete or focusing on procedural violations rather than 
substantive ones. At the beginning of 2000, 76 percent of examiners had 
worked at SEC fewer than 3 years. Likewise, from 1992 to 1999, the 
average tenure of an examiner declined from 2.9 to 1.9 years. SEC 
officials also told us that high staff turnover contributed to the 
delays in rulemaking and regulatory guidance discussed earlier. For 
example, SEC officials said that SEC has had problems retaining senior 
market supervision staff and that junior staff, on average, stay only 
for two years. In 1992, the average tenure for attorneys leaving SEC 
was 3.4 years, by 1999 the average had declined to 2.5 years. The 
officials said that this has contributed to the backlog in the SEC’s 
rulemaking, interpretive guidance, and other activities. The officials 
also said that they have to constantly focus on current priorities, 
while other work gets put aside. 

Although SEC and industry officials said that SEC would always have a 
certain amount of turnover because staff can significantly increase 
their salaries in the private sector, many said pay parity with other 
financial regulators could enable SEC to attract and retain staff for a 
few additional years. SEC estimated that a new employee generally takes 
about 2 years to become fully productive, and that pay parity could 
help them keep staff a year or two beyond the initial 2 years. Although 
industry officials said they were generally impressed by the caliber of 
staff that SEC hires and the amount of work they do, they said that 
staff inexperience often requires senior officials to become more 
involved in basic activities. Industry officials also said that certain 
divisions, such as the Division of Market Regulation, could benefit 
from more staff with a fundamental understanding of both how markets 
work and market experience. They said that such experience could help 
speed rulemaking and review processes. According to SEC, the Division 
of Market Regulation over the past two years hired six attorney 
“fellows”[Footnote 30] with considerable industry experience. However, 
one attorney fellow recently informed the division that he will be 
leaving the program because of the failure to implement pay parity. SEC 
officials said that they have a difficult time attracting staff with 
market experience, given the government’s pay structure. 

Some officials said that SEC’s turnover rate should decrease after pay 
parity is implemented. Presently, SEC professional staff are paid 
according to government pay rates. On January 16, 2002, the president 
of the United States signed legislation that exempted SEC from federal 
pay restrictions and provided it with the authority necessary to bring 
salaries in line with those of other federal financial regulators. 
Although SEC now has the authority to implement pay parity, as of March 
1, 2002, SEC has not received an additional appropriation to fund its 
implementation. In February 2002, SEC’s chairman wrote to the chairman, 
Committee on Banking, Housing, and Urban Affairs, U.S. Senate, that SEC 
urgently needed pay parity and, that since the legislation had passed 
and become law, any decision not to support funding for pay parity 
would exacerbate the staffing problems it was intended to cure. The 
chairman also advised that SEC could “face even greater employee losses 
and suffer greater irreparable harm to morale” if pay parity was not 
funded. Therefore, it is too soon to determine the effect, if any, of 
pay parity on SEC’s ability to attract and retain staff. 

Industry Cites Challenges Posed by the Securities Laws: 

In addition to turnover, industry officials said that provisions in 
securities laws, which require upfront approvals, determine the pace at 
which SEC can approve market innovations the participants want to 
implement. For example, the Securities Act of 1933 and the Securities 
Exchange Act of 1934 generally require SEC to approve certain new 
products or market innovations prior to their implementation. Unlike 
banking regulators, who generally allow banks to engage in various 
banking-related financial activities unless they are specifically 
prohibited by statute, SEC must approve many new products before they 
can be introduced into the market. The securities laws also require SEC 
approval of new activities before market participants can adopt them. 
For example, SEC must approve exemptive applications that are filed by 
investment companies to engage in activities that may be prohibited by 
statute. However, as the number of these applications filed increases 
and the activities become more complex, SEC may be able to close fewer 
applications each year, and the time taken to close the applications 
may increase. As a result, registrants are unable to engage in certain 
activities until SEC approves them, which may put them at a competitive 
disadvantage. Although an in-depth analysis of this issue was beyond 
the scope of this report, some industry officials questioned whether 
the cost of delaying potentially useful products from entering the 
market outweighed the benefit of blocking a few harmful products. 

Like any regulatory structure, provisions of these laws present 
advantages and disadvantages. First, the provisions enable SEC to 
prohibit new products or actions by industry participants that SEC 
believes to be harmful. Yet, SEC faces the difficult task of trying to 
evaluate the risks of products that are untested in the market. 
Conversely, the provisions can also stifle innovations and advances in 
the market if the review process is cumbersome. Some officials said 
that it would be a more efficient use of SEC resources if SEC were able 
to focus on oversight instead of advanced approvals when the exemptive 
applications, or proposed rule filings, would have no adverse 
competitive effects on other market participants. However, SEC 
officials said that if new products and innovations were no longer 
subject to review and approval before their introduction, SEC would 
need significantly more examiners to monitor the new products and 
innovations after they were introduced. 

SEC’s Could Improve Its Budget Planning Process: 

Although SEC annually participates in the federal budget process, SEC 
has not reviewed its staffing and resource needs independent of the 
budget process. That is, SEC generally develops its annual budget 
request based on the previous year’s appropriation, not on what it 
actually would need to fulfill its mission. Although SEC officials said 
that they can shift staff from one area to another to address new 
priorities, SEC’s reactive approach can result in regulatory gaps. 
Comprehensive strategic planning that relates SEC’s resource needs to 
its ability to fulfill its mission could help SEC better identify and 
manage resource needs. 

SEC’s Budget Process Begins with the Past Year as a Base: 

SEC officials said that the annual budget cycle begins with the 
preparation of an agency-wide estimate based on the previous budget 
year’s appropriation. Next, SEC develops a conforming budget estimate 
based on the budget guidance, including a specified budget amount that 
the Office of Management and Budget (OMB) provides to SEC. SEC budget 
staff then asks officials from each of SEC’s divisions and offices to 
review and update program information and provide estimates of their 
resource needs. However, the division and office officials said that 
they are often told how much of an increase they can request in order 
to be consistent with the budget guidance. The budget staff coordinates 
the requests and discusses staffing needs with the division and office 
officials. SEC’s proposed budget estimate is then sent to OMB, and a 
budget hearing is subsequently held. During the hearing, any policy 
changes or shifts in the SEC chairman’s priorities are discussed. SEC’s 
budget estimate is incorporated into the president’s budget, which is 
presented to Congress. However, before the budget is final, SEC has the 
opportunity to appeal to OMB to modify its approved funding level. 
SEC’s funding level is also subject to congressional review and 
appropriation before it becomes final.[Footnote 31] 

In addition to its budgeted funding level, SEC also has a “no-year 
account,” which consists of certain fees collected and funds that have 
been appropriated over the years but not expended by year-end. SEC, 
like several other agencies, is allowed to keep appropriated funds that 
are not expended at the end of the year.[Footnote 32] Money in this 
fund is generally used for one-time expenditures that are not included 
in the annual budget. SEC officials said SEC can use funds from the no-
year account after OMB and Congress approve these expenditures. SEC 
officials said that money from the no-year account was used to pay 
expenses incurred to reopen SEC’s Northeast Regional Office, which was 
located at 7 World Trade Center, following September 11th.[Footnote 33] 
SEC also used money from the no-year account to modernize its EDGAR 
system. Although SEC had over $75 million in its no-year account in 
fiscal year 2001, SEC officials said that Congress rescinded $50 
million from the no-year account as part of SEC’s 2002 appropriation. 
As of the beginning of fiscal year 2002, SEC had about $25 million in 
its no-year account. 

Similar to banking regulators collecting assessments and fees from 
banks, SEC collects fees on registrations, certain securities 
transactions, and other filings and reports. However, unlike the 
banking regulators, which are self-funded, SEC deposits its collections 
in an SEC-designated account at the U.S. Treasury that is used by SEC’s 
congressional appropriators for, among other things, providing 
appropriations to SEC.[Footnote 34] Public Law 107-123, which 
authorized pay parity for SEC, also amended the Securities Act of 1933, 
the Securities Exchange Act of 1934, and the Trust Indenture Act of 
1939 to reduce the fees collected by SEC while providing a stable long-
term funding source for SEC.[Footnote 35] According to SEC, even after 
the fee reduction, SEC fee collections are projected to bring in a 
sizable amount of revenues, of which those in excess of SEC’s 
appropriation would be available to fund other programs. For example, 
in 2003, SEC appropriators will have approximately $1.3 billion in 
projected SEC fee collections from which to fund the agency versus the 
president’s request of about $467 million.[Footnote 36] In 2001, SEC 
collected almost $2.1 billion compared to its appropriated funding of 
$423 million. SEC fee collections and appropriated funding levels are 
shown in figure 7. 

Figure 7: SEC Fees Collected and Appropriated Funding, 1991-2001 
(billions of dollars): 

[Refer to PDF for image] 

This figure is a multiple vertical bar graph depicting SEC fees 
collected and appropriated funding during the time period of 1991 
through 2001. 

Source: SEC. 

[End of figure] 

To respond to expanding markets and new challenges, SEC has requested 
additional resources and funding. For example, in 2001, SEC received 
funding for an additional 50 positions. However, in its 2002 budget, it 
lost 57 positions in order to absorb mandatory inflation-related 
increases that were not covered by its budget.[Footnote 37] However, 
SEC received $3.9 million for special pay rates for its most 
experienced attorneys, accountants, and examiners in 2002. In its May 
2001 authorization request submitted to Congress, SEC requested an 
additional $70 million in 2002, with adjustments for inflation for 
years thereafter, to fund staff pay parity. In addition for 2003, SEC 
requested authorization for an additional $36.4 million and 261 
positions. According to SEC, these additional staff resources would 
allow it to (1) respond to new regulatory, oversight, and examination 
requirements of GLBA; (2) undertake joint regulation of the market for 
single stock futures and narrow-based index futures under the Commodity 
Futures Modernization Act of 2000; (3) enforce and support its new 
auditor independence rules; (4) monitor and review exchange automation 
efforts; and (5) continue combating Internet fraud and insider trading. 
As previously noted, SEC also requested an additional $13 million to 
support its information technology initiatives. The president’s budget 
for 2003 did provide SEC an additional $7.6 million for certain 
technology and security initiatives but did not provide funding for any 
additional staff or for pay parity. As a result, SEC will continue to 
be restrained from fully addressing the new regulatory challenges and 
growing workload that it faces. 

Strategic Planning Could Help SEC to Better Identify and Manage Its 
Resource Needs: 

Previous GAO reports noted that high-performing organizations identify 
their current and future human capital needs—including the appropriate 
number of employees, the key competencies needed for mission 
accomplishment, and the appropriate deployment of staff across the 
organization—and then create strategies for identifying and filling any 
gaps.[Footnote 38] SEC generally has identified its available resources 
and determined what could be accomplished with existing staff. However, 
its inability to meet its goals due to resource constraints has 
resulted in SEC reconsidering the goals, for example, in its approach 
to selecting corporate filings for review and the type of review 
selected. According to SEC officials, SEC’s ability to redeploy its 
staff is limited by existing statutory requirements, which define the 
responsibilities that SEC must carry out and determine its use of the 
staff. Nevertheless, in determining how to address evolving issues, 
ideally, SEC would periodically evaluate the related resources needed 
to fulfill the full scope of its mission and develop strategies to 
achieve its goals. 

We performed a limited review of SEC’s strategic plan in light of its 
ongoing resource limitations and increased workload. We found that SEC 
has not engaged in a comprehensive strategic planning process. SEC’s 
GPRA strategic plan includes four goals: “protect investors; maintain 
fair, honest, and efficient markets; facilitate capital formation; and 
sustain and improve organizational excellence.” However, the 
performance measures for achieving these goals focus on outputs not 
outcomes. For example, SEC’s objectives for protecting investors 
include deterring fraud and requiring compliance with the federal 
securities laws, promoting informed investment decisions, and promoting 
the prevention of fraud through investor education. However, the output-
oriented performance measures include the number of enforcement actions 
taken, filings reviewed, examinations completed, and deficiencies 
identified. These measures generally would not help SEC gauge whether 
the actions taken actually result in greater protection for investors 
or establish the levels of these actions and activities needed to 
achieve its goals. In its annual GPRA performance plan and report, SEC 
has recognized that its performance measures are not outcome-oriented. 

In addition to its 5-year strategic plan, SEC develops annual 
programmatic budget estimates and GPRA performance plans and reports 
addressing its strategic goals and performance results. However, 
neither of these documents provide the detailed analysis and 
information needed to make informed workforce decisions, including 
information on (1) the relationship between budget requests for full-
time equivalent staff years and the ability to meet individual 
strategic goals and (2) any excesses or gaps in needed competencies 
within the agency’s various divisions and offices. Such an analysis 
would call upon each division and office to accurately identify the 
human capital resources needed to achieve their respective strategic 
goals. This information could help SEC better determine the right size, 
skill needs, and deployment of its workforce to fulfill its goals and 
mission. 

Conclusions: 

Securities markets have undergone tremendous growth and change over the 
past decade. More individuals than ever are invested in securities 
markets, either directly or through mutual funds. Likewise, these 
markets have become more complex and global as technology has 
fundamentally changed the way markets operate and how investors around 
the world interact with the markets. Moreover, the recent, sudden 
collapse of Enron Corporation and other corporate failures have 
stimulated an intense debate on the need for broad-based reform in such 
areas as financial reporting and accounting standards, oversight of the 
accounting profession, and corporate governance. All of these areas of 
possible reform hold significant repercussions and pose challenges for 
SEC’s oversight role. At the same time, SEC has been faced with an ever 
increasing workload and ongoing human capital challenges, most notably 
high staff turnover and numerous vacancies. 

SEC routinely prioritizes and allocates resources to meet agency 
demands, but SEC faces increasing pressure in managing its mounting 
workload and staffing imbalances that resulted from its workload 
growing much faster than its staff. Critical regulatory activities such 
as reviewing rule filings and exemptive applications and issuing 
guidance have suffered from delays due to limited staffing. According 
to industry officials, these delays have resulted in foregone revenue 
and have hampered market innovation. Oversight and supervisory 
functions have also been affected. For example, staffing limitations 
and increased workload have resulted in SEC reviewing a smaller 
percentage of corporate filings, an important investor protection 
function. In 2001, SEC reviewed about 16 percent of the annual 
corporate filings or about half of its annual goal of 30 to 35 percent. 
Although SEC is revamping its review process, recent disclosure and 
accounting scandals illustrate how important it is that SEC rise to the 
challenge of providing effective market oversight to help maintain 
investor confidence in securities markets. Although industry officials 
said that the challenges faced by SEC were in part attributable to 
resource constraints, they cited other issues such as SEC’s high 
turnover rate, which in 2001 was almost twice the governmentwide rate. 
They said that SEC’s high turnover created a staffing drain that often 
resulted in slower, less efficient regulatory processes. We explored 
the reasons for SEC’s turnover rate and actions taken to address this 
problem in our 2001 human capital report. 

Although SEC has taken numerous actions to address its high turnover 
including use of special pay rates and retention bonuses, the lack of 
funding for pay parity will provide little needed relief in the short-
term. In the 2001 report, we also identified several issues beyond pay 
that warranted ongoing attention by management and recommended actions 
on these issues that could help SEC mitigate its turnover problem. 
These actions included conducting periodic employee surveys to identify 
staff concerns, expanding SEC’s human capital plan to include a 
strategy for succession planning, finding ways to involve human capital 
leaders in decision making, and working with the union to address the 
areas of dissatisfaction identified in our 2001 survey (i.e., lack of 
opportunities for advancement, the amount of uncompensated overtime, 
and quality of administrative support services). 

Although SEC’s workload and staffing imbalances have challenged SEC’s 
ability to protect investors and maintain the integrity of securities 
markets, SEC has generally managed the gap between workload and staff 
by determining what basic, statutorily-mandated duties it could 
accomplish with existing resource levels. This approach, while 
practical, has forced SEC’s activities to be largely reactive rather 
than proactive. For instance, SEC has not put mechanisms in place to 
identify what it must do to address emerging and evolving issues. 
Although SEC has a strategic plan and has periodically adjusted 
staffing or program priorities to fulfill basic obligations, SEC has 
not engaged in a much needed, systematic reevaluation of its programs 
and activities in light of current and emerging challenges. Given the 
regulatory pressures facing SEC and its ongoing human capital 
challenges, it is clear that SEC could benefit from some additional 
funding. However, a comprehensive, agencywide planning effort could 
help SEC better determine the optimum human capital and funding needed 
to fulfill its mission. 

Recommendations for Executive Action: 

We recommend that the chairman, SEC, develop short-term and long-term 
strategies to address the challenges SEC faces. In the short-term, we 
recommend that SEC take definitive steps to continue to address its 
turnover problem and fill its vacant positions. These actions should 
include exploring use of its no-year fund to expand recruiting and 
retention efforts to ensure that all available resources are maximized 
to attract and retain staff. Likewise, we recommend that SEC explore 
innovative ways to attract senior level staff and bring in additional 
information technology expertise to better position itself to oversee 
evolving securities markets. 

In the long-term, we recommend that the chairman, SEC, address several 
issues relating to strategic planning by broadening SEC’s strategic 
planning process to systematically determine regulatory priorities and 
resource levels needed to fulfill its mission. Furthermore, we 
recommend that once SEC has completed the strategic planning process, 
each division and office accurately identify the skills needed to 
perform the regulatory priorities identified. Once this is completed, 
we recommend that SEC link the strategic plan to staffing allocation 
and workforce determinations and expand its existing recruiting effort 
to include any additional disciplines identified as necessary to 
effectively regulate evolving securities markets. 

Agency Comments and Our Evaluation: 

SEC provided written comments on a draft of this report that are 
reprinted in appendix I. In general, SEC agreed with most of the 
report’s findings, conclusions, and recommendations. In particular, SEC 
strongly supported our recommendation that strategic planning could 
help SEC better identify and manage its resource needs. SEC said that 
it had earlier planned to perform an in-depth review of its operations, 
effectiveness, and resource needs. However, the events of September 
11th, the loss of SEC’s Northeast Regional Office, and the recent 
bankruptcy of Enron Corporation have prohibited that review. 
Nevertheless, SEC stated that it was committed to completing an in-
depth review of SEC’s resource needs. 

In response to our recommendation that SEC take definitive steps to 
address its staffing problem, SEC agreed that the lack of funding for 
pay parity would provide it with little needed relief in the short 
term. However, SEC stated that, despite the lack of funding, it was 
planning to implement and manage pay parity within the agency. SEC will 
soon submit a Pay Parity Implementation Report to Congress and the 
Office of Personnel Management. The report is to consider the 
challenges SEC faces in implementing pay parity in light of all of the 
various interests in the issue. Although we have not reviewed SEC’s 
specific implementation plan, developing a plan to implement pay parity 
is a vital step in improving SEC’s staff recruiting and retention 
efforts. 

Scope and Methodology: 

To determine how the markets and SEC’s workload have changed, we 
analyzed various securities markets and SEC workload trend data. The 
various workload data used include numbers of corporation and 
investment company filings, complaints and inquiries, rule proposals, 
various industry interpretive and exemptive requests, investigations 
opened, and investment company and investment adviser assets under 
management, and examinations and inspections conducted. These workload 
data are published as part of SEC’s annual budget request. We did not 
attempt to verify any of these data. 

To determine whether SEC’s resources and workload have affected SEC’s 
ability to regulate and oversee the markets, we interviewed current and 
past SEC officials, including division and office directors, regional 
office directors, budget officials, former commissioners, and 
academics. Likewise, to obtain views from industry officials regarding 
how well SEC is functioning; we met with officials from various 
exchanges, associations, investment companies, and broker-dealers. 
Although SEC and industry officials agreed that the length of time 
taken to complete various reviews and issue guidance had increased, we 
were unable to quantify these effects, because SEC was unable to 
provide consistent detailed statistics on the time it takes to complete 
certain regulatory processes for the program areas discussed in the 
report such as reviewing filings, issuing guidance, and reviewing 
applications. We also obtained these parties’ views about any other 
factors that may affect SEC’s ability to fulfill its mission. 

We also met with OMB officials regarding SEC’s budget and the federal 
budget process. We met with banking industry regulators to obtain 
information on their funding and budget processes. We reviewed SEC GPRA 
performance plans and reports and recent GAO reports that address 
strategic planning at high performing organizations. We also reviewed 
relevant GAO reports on SEC’s oversight and its operations. 

We did our work in Los Angeles and San Francisco, California; 
Washington, D.C.; and New York, New York, between April 2001 and 
February 2002 in accordance with generally accepted government auditing 
standards. 

We are sending copies of this report to the ranking minority members of 
the Senate Committee on Banking, Housing, and Urban Affairs and its 
Subcommittee on Securities and Investment; the chairman and ranking 
minority member, Senate Committee on Governmental Affairs; the chairman 
and ranking minority member, House Committee on Financial Services; and 
other interested congressional committees. We will also send copies to 
the chairman of SEC and will make copies available to others upon 
request. 

If you or your staff have any questions regarding this report, please 
contact me or Orice M. Williams at (202) 512-8678. Key contributors to 
this report were Toayoa Aldridge, Edwin Lane, Barbara Roesmann, and 
David Tarosky. 

Signed by: 

Richard J. Hillman, Director: 
Financial Markets and Community Investment: 

[End of section] 

Appendix I: Comments from the Securities and Exchange Commission: 

United States: 
Securities And Exchange Commission: 
The Chairman: 
Washington, D.C. 20549: 

February 28, 2002: 

Mr. Richard J. Hillman: 
Director: 
Financial Markets and Community Investment: 
U.S. General Accounting Office: 
441 G Street, N.W. 
Washington, DC 20548: 

Re: Draft Report Entitled SEC Operations: Increased Workload Creates 
Challenges: 

Dear Mr. Hillman: 

Thank you for the opportunity to review and comment on the General 
Accounting Office's draft report addressing whether the Securities and 
Exchange Commission has sufficient resources to stay abreast of changes 
in the securities markets. The report identifies how securities markets 
have changed in recent years, and assesses whether the SEC's resource 
levels and workload have affected the Commission's ability to regulate 
and oversee the markets. 

We agree with most of the conclusions that GAO draws in the draft 
report. In particular, we agree that securities markets have 
experienced unprecedented growth and change in the last decade, that 
the markets have become more complex and international, and that 
legislative changes have spurred new products and created new 
regulatory responsibilities. We also agree that the SEC's ability to 
fulfill its mission has become increasingly strained. As noted in the 
report, SEC resource levels have not grown commensurate with its 
workload, and the SEC faces continuing challenges from its high staff 
turnover rate and difficulty in hiring qualified staff. 

We also strongly support the report's recommendation that strategic 
planning could help the SEC to better identify and manage its resource 
needs. When I returned to the SEC last fall, I had hoped to have the 
opportunity to perform an in-depth review of the Commission's 
operations, effectiveness, and resource needs prior to the beginning of 
the fiscal 2003 budget process. With the events of September 11th, the 
loss of our Northeast Regional Office, and the recent bankruptcy of 
Enron, I have not had the time to conduct a thorough review. 
Nevertheless, I am committed to completing an in-depth review of' the 
SEC's resource needs in the coming months. 

With respect to our staffing challenges in particular, we agree that 
the lack of funding for pay parity will provide us with little needed 
relief in the short term. It is critical that we receive current and 
future funding to implement an effective new compensation system. 
However, despite the lack of funding, we have developed a plan to 
implement and manage pay parity within the agency. 

In accordance with the directive in the Investor and Capital Markets 
Fee Relief Act (P.L. 107-123), we soon will submit a Pay Parity 
Implementation Report to Congress and the Office of Personnel 
Management. The Report considers the challenges we face in implementing 
pay parity in light of all of the various interests in the issue. In 
developing our compensation system, we strove to strike a delicate 
balance among competing interests that include the goals of the 
Administration, the concerns of Congress, and equity issues within the 
Agency. Recognizing our responsibility to appropriately manage 
performance as we improve staff compensation, our system includes 
implementing a strong system with merit/pay-for-performance principles, 
not large, across-the-board pay increases that we believe are 
inappropriate for the federal service. 

We tried to take best practices from all areas when developing this 
system and to learn from the experiences of the other financial 
regulatory agencies. Our intent with this reasonable approach is to 
provide increases to all staff in a way that can be implemented 
quickly, while also recognizing that this will be an on-going, long-
term effort. In seeking comparability with the other federal financial 
regulatory agencies, the SEC and our compensation consultant conducted 
various analyses of the salary and benefit structures that they 
provide. The research shows that there is a range of approaches 
available and that differences do exist among how each agency has 
decided to compensate their staff and how successful they have been. 

To ensure that the SEC acts responsibly, we are taking a rather 
conservative approach that will place the agency's proposed salary 
structure toward the lower end of those that we analyzed. We believe 
this will allow us the opportunity to ascertain over time how well our 
system is working before we get locked into a structure that might not 
meet our goals. In addition, the mix between salaries and benefits is 
not yet known at this time, as these items are negotiable with the 
union that represents a majority of SEC employees. To begin the program 
we plan to maintain the same benefits as are currently available to all 
Federal employees. 

Our proposed pay scale has 20 levels, each with up to 31 steps. Most 
staff will be placed within levels 1 through 17 (that include two 
additional supervisory levels), as opposed to the current 15 general 
schedule grades. Levels 18 through 20 are the executive levels with 
broad pay ranges, instead of the current 6. The step structure is 
designed to make extra steps available to attorneys, accountants, and 
securities compliance examiners with securities industry experience. 
Our goal is to apply this new structure so that we can have a broader 
range of salaries available to aid in hiring new employees and to 
provide incentives to staff to improve their performance. 

With respect to our immediate resource needs, we are conducting an 
evaluation as part of the fiscal 2003 budget process. As you know, the 
authorization process gives the SEC the opportunity to independently 
determine its needs and make a corresponding budget request. We are 
actively engaged in this process. 

While I cannot predict with absolute certainty what the results of our 
in-depth evaluation of resource needs will be, we will conduct the 
review recognizing the challenges we face, asking ourselves tough 
questions, and remaining mindful of the competing and important 
priorities our government faces. 

Thank you and your staff for the courtesy extended during this review. 

Yours truly, 

Signed by: 

Harvey L. Pitt: 

[End of section] 

Footnotes: 

[1] U.S. General Accounting Office, Securities and Exchange Commission: 
Human Capital Challenges Require Management Attention, [hyperlink, 
http://www.gao.gov/products/GAO-01-947] (Washington, D.C.: Sept. 17, 
2001). 

[2] An ATS is any entity that performs functions commonly performed by 
a stock exchange. 

[3] Transfer agents are parties that maintain records of stock and bond 
owners. 

[4] [hyperlink, http://www.gao.gov/products/GAO-01-947]. 

[5] In July 2000, SEC employees voted to join the National Treasury 
Employees Union. 

[6] Total dollars invested includes money market funds and funds owned 
by households; fiduciaries; and financial, business, and other 
organizations. 

[7] An exchange-traded fund is type of investment company whose shares 
can be bought and sold on the secondary market, as well as from the 
investment company in large blocks of shares. 

[8] A single-stock future is a contract to buy or sell a specific 
security at a particular price in a stipulated future month. 

[9] An ECN is an electronic trading system that automatically matches 
buy and sell orders at specified prices. ECNs register with the SEC as 
broker-dealers. 

[10] Before GLBA, most banks’ brokerage and investment adviser 
activities were not subject to SEC regulation. 

[11] Futures commission merchants are firms that buy and sell futures 
contracts as agents for customers. 

[12] Staff resources are measured in this report in terms of full-time 
equivalent staff years. 

[13] Information presented throughout this report on SEC’s staffing, 
resources, budget, and other operations relates to fiscal years. 

[14] A company files an exemptive application when it seeks an SEC 
decision to exempt a new activity from existing rules and laws. 

[15] The SEC chairman has recently announced an initiative called real-
time enforcement, which is intended to protect investors by: (1) 
obtaining emergency relief in federal court to stop illegal conduct 
expeditiously; (2) filing enforcement actions more quickly, thereby 
compelling disclosure of questionable conduct so that the public can 
make informed investment decisions; and (3) deterring future misconduct 
through imposing swift and stiff sanctions on those who commit 
egregious frauds, repeatedly abuse investor trust, or attempt to impede 
SEC’s investigatory processes. According to SEC, insufficient resources 
may inhibit the effectiveness of this initiative, which depends upon 
prompt action by enforcement staff. 

[16] Although complaints are not a comprehensive measure to compare 
with the level of investigative resources, many enforcement actions are 
initiated based on complaints received by SEC. Investigations might 
also be started, for example, from SEC inspections and examinations or 
matters referred to SEC by SROs or state regulators. 

[17] SROs are organizations responsible for regulation of member broker-
dealers. 

[18] A company would seek a no-action letter from SEC when it plans to 
act in a new or unclear area. 

[19] U.S. Securities and Exchange Commission, Inspector General, 
Applications for Exemptive Relief, Audit Report No. 230 (Washington, D. 
C.: March 1996). 

[20] SEC is required to publish notice in the Federal Register of 
proposed exemptions giving interested parties the opportunity to 
request a hearing before a final exemptive order is issued. The notice 
period typically is 25 days. 

[21] Internal control examinations are intense reviews of internal 
controls relating to trading, liquidity, credit, new products, and 
other aspects of broker-dealer operations. 

[22] EDGAR is a database system through which public companies 
electronically file registration statements, periodic reports, and 
other forms to SEC. Anyone can access and download EDGAR information 
for free. 

[23] IARD is the system that investment advisers must use to register 
with SEC. 

[24] ARP is a program under which SROs agree to submit to SEC oversight 
of their information systems. 

[25] U.S. General Accounting Office, Information Systems: Opportunities 
Exist to Strengthen SEC’s Oversight of Capacity and Security, 
[hyperlink, http://www.gao.gov/products/GAO-01-863] (Washington, D.C.: 
July 25, 2001). 

[26] SEC’s review of corporate filings may involve a full review, a 
full financial review, or certain filings may be monitored for specific 
disclosure items. A full review involves an in-depth examination of the 
accounting, financial, and legal aspects of an issuer’s filing. A full 
financial review involves an in-depth accounting analysis of an 
issuer’s financial statements and management’s discussion and analysis 
or business plan disclosure. 

[27] The net capital rule, SEC Rule 15c3-1, is a liquidity standard 
that requires broker-dealers to (1) maintain a minimum level of liquid 
capital sufficient to promptly satisfy all of its obligations to 
customers and other market participants and (2) provide a cushion of 
liquid assets to cover potential market, credit, and other risks. 

[28] High performing organizations are organizations that have been 
recognized in the current literature or by GAO as being innovative or 
effective in strategically managing their human capital. 

[29] [hyperlink, http://www.gao.gov/products/GAO-01-947]. 

[30] Like SEC’s Office of the Chief Accountant, Market Regulation has a 
fellows program to attract seasoned attorneys. According to SEC 
officials, twenty percent of the division’s GS-15 attorneys are 
attorney fellows. 

[31] Separate from this process, SEC also prepares a budget 
authorization request that gives it a greater opportunity to 
independently determine its needs and make a corresponding request, 
which is submitted to SEC’s congressional oversight committees. 

[32] The Departments of Commerce, Justice, State, and the Judiciary, 
for example, are also able to keep unspent funds. 

[33] SEC was subsequently reimbursed for the expenses it incurred as a 
result of the attacks. 

[34] Federal banking regulators, like the Federal Reserve System, the 
Federal Deposit Insurance Corporation, and the Office of the 
Comptroller of the Currency are self-funded and are not subject to the 
federal budget process. These agencies are funded from fees and 
assessments collected and earnings on investments. 

[35] The law also mandated a GAO study of SEC self-funding, which is 
currently under way. 

[36] The amendments include complex formulas designed to adjust SEC fee 
rates to result in predetermined amounts of fee collections over the 
next 9 years. Projected fee collections in excess of SEC’s 
appropriation are available to fund other programs. Prior to the 
amendments’ enactment, SEC was required to deposit a significant 
portion of its collections in the Treasury for general use. The 
amendments eliminated such deposits. 

[37] SEC was unaffected by this reduction in 2002 because it was 
absorbed from the agency’s many vacant positions, about 250 at the 
time. 

[38] See U.S. General Accounting Office, Managing for Results: Next 
Steps to Improve the Federal Government’s Management and Performance, 
[hyperlink, http://www.gao.gov/products/GAO-02-439T], (Washington, 
D.C.: Feb. 15, 2002) and Determining Performance and Accountability 
Challenges and High Risks, [hyperlink, 
http://www.gao.gov/products/GAO-01-159SP], (Washington, D.C.: Nov. 
2000). 

[End of section] 

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