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United States Government Accountability Office:
GAO:
Report to the Chairman, United States Securities and Exchange
Commission:
November 2010:
Financial Audit:
Securities and Exchange Commission's Financial Statements for Fiscal
Years 2010 and 2009:
GAO-11-202:
GAO Highlights:
Highlights of GAO-11-202, a report to the Chairman, U.S. Securities
and Exchange Commission.
Why GAO Did This Study:
Pursuant to the Accountability of Tax Dollars Act of 2002, the United
States Securities and Exchange Commission (SEC) is required to prepare
and submit to Congress and the Office of Management and Budget audited
financial statements. GAO, under its audit authority, audited SEC’s
financial statements to determine whether (1) the financial statements
are fairly stated, and (2) SEC management maintained effective
internal control over financial reporting. GAO also tested SEC’s
compliance with selected provisions of significant laws and
regulations. In accordance with the Dodd-Frank Wall Street Reform and
Consumer Protection Act, GAO also reported on SEC’s assessment of its
internal control over financial reporting.
What GAO Found:
In GAO’s opinion, SEC’s fiscal years 2010 and 2009 financial
statements are fairly presented in all material respects. However, in
GAO’s opinion, SEC did not maintain effective internal control over
financial reporting as of September 30, 2010, due to material
weaknesses involving SEC’s internal control over information systems
and its financial reporting and accounting processes. GAO’s opinion on
SEC’s internal control over financial reporting is consistent with
SEC’s assessment of its internal control over financial reporting. GAO
found no reportable instances of noncompliance with the provisions of
laws and regulations it tested.
Since SEC began preparing financial statements in 2004, it has
struggled with maintaining effective internal control over financial
reporting. SEC has taken actions to address previously reported
deficiencies. For example, it took sufficient actions during fiscal
year 2010 such that its controls over its fund balance with Treasury
and its risk assessment processes are no longer considered significant
deficiencies. Notwithstanding this progress, as of September 30, 2010,
GAO identified continuing deficiencies over SEC’s information
security, financial reporting process, budgetary resources, and
registrant deposits, combined with newly identified deficiencies in
the areas of information systems, disgorgements and penalties and
required supplementary information. These deficiencies were judged to
represent two material weaknesses in internal control that have
reduced assurance that data processed by its information systems are
reliable and appropriately protected and have resulted in errors and
misstatements in SEC’s financial reporting during the fiscal year. SEC
made the necessary adjustments and was able to prepare financial
statements that were fairly stated in all material respects by fiscal
year end.
These material weaknesses are likely to continue to exist until SEC’s
accounting system is either significantly enhanced or replaced, key
accounting activity in other systems is fully integrated with the
accounting system at the transaction level, information security
controls are significantly strengthened, and appropriate resources are
dedicated to maintaining effective internal controls.
In commenting on a draft of this report, SEC stated that, as part of
its strategy for remediating the material weaknesses, SEC has
initiated actions to replace its core financial system by migrating to
a federal government shared service provider in fiscal year 2012.
What GAO Recommends:
GAO will be separately reporting to SEC on additional details
concerning the deficiencies discussed in this report along with
recommendations for corrective actions and the status of
recommendations from previously reported deficiencies.
View [hyperlink, http://www.gao.gov/products/GAO-11-202] or key
components. For more information, contact James R. Dalkin at (202) 512-
9406 or dalkinj@gao.gov.
[End of section]
Contents:
Letter:
Opinion on Financial Statements:
Opinion on Internal Control:
Compliance with Laws and Regulations:
Consistency of Other Information:
Objectives, Scope, and Methodology:
SEC Comments and Our Evaluation:
Management's Discussion and Analysis:
Financial Statements:
Required Supplementary Information:
Appendix I: Material Weaknesses:
Information Systems:
Financial Reporting and Accounting Processes:
Appendix II: Comments from the United States Securities and Exchange
Commission:
Abbreviations:
FMFIA: Federal Managers' Financial Integrity Act:
OMB: Office of Management and Budget:
SEC: United States Securities and Exchange Commission:
SRO: Self-Regulatory Organization:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
November 15, 2010:
The Honorable Mary Schapiro:
Chairman:
United States Securities and Exchange Commission:
Dear Ms. Schapiro:
The accompanying report presents the results of our audits of the
financial statements of the United States Securities and Exchange
Commission (SEC) as of, and for the fiscal years ending, September 30,
2010, and 2009. The Accountability of Tax Dollars Act of 2002 requires
that SEC prepare and submit audited financial statements to Congress
and the Office of Management and Budget (OMB). We agreed, under our
audit authority, to audit SEC's financial statements. The Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
further requires that, effective for fiscal year 2010, SEC submit a
report to Congress describing management's responsibility for internal
control over financial reporting and attesting to the effectiveness of
such internal control during the fiscal year; the SEC Chairman and
Chief Financial Officer attest to SEC's report; and GAO submit a
report to Congress attesting to the internal control assessment made
by SEC.[Footnote 1] Accordingly, this report also responds to our
requirement under the Dodd-Frank Act.
This report contains our (1) unqualified opinions on SEC's financial
statements, (2) opinion that SEC's internal control over financial
reporting was not effective as of September 30, 2010,[Footnote 2] and
(3) conclusion that we found no reportable noncompliance with laws and
regulations we tested.
We are sending copies of this report to the Chairmen and Ranking
Members of the Senate Committee on Banking, Housing, and Urban
Affairs; the Senate Committee on Homeland Security and Governmental
Affairs; the House Committee on Financial Services; and the House
Committee on Oversight and Government Reform. We are also sending
copies to the Secretary of the Treasury, the Director of the Office of
Management and Budget, and other interested parties. In addition, this
report will be available at no charge on our Web site at [hyperlink,
http://www.gao.gov[.
If you have questions about this report, or if I can be of further
assistance, please contact me at (202) 512-9406 or dalkinj@gao.gov.
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report.
Sincerely yours,
Signed by:
James R. Dalkin:
Director:
Financial Management and Assurance:
[End of letter]
United States Government Accountability Office:
Washington, DC 20548:
To the Chairman of the United States Securities and Exchange
Commission:
In our audits of the United States Securities and Exchange Commission
(SEC) for fiscal years 2010 and 2009, we found:
* the financial statements as of and for the fiscal years ended
September 30, 2010, and 2009, including the accompanying notes, are
presented fairly, in all material respects, in conformity with U.S.
generally accepted accounting principles;
* SEC did not maintain, in all material respects, effective internal
control over financial reporting as of September 30, 2010; and:
* no reportable noncompliance with laws and regulations we tested.
Since SEC began preparing financial statements in 2004, it has
struggled with maintaining effective internal control over financial
reporting. As of September 30, 2010, we identified two material
weaknesses[Footnote 3] in internal control over financial reporting
related to SEC's information systems and its financial reporting and
accounting processes. These material weaknesses, which are discussed
in more detail later in this report, comprise many of the deficiencies
we reported in previous years as well as newly identified deficiencies.
SEC took actions during fiscal year 2010 to address previously
reported deficiencies. For example, SEC took sufficient actions to
improve controls over its fund balance with Treasury, including
dedicating staff to perform monthly reconciliations and resolve
differences with Treasury on a timely basis, such that we no longer
consider this area to be a deficiency in internal control. In
addition, SEC, with significant contractor support, made sufficient
progress in improving its risk assessment processes pertaining to
SEC's financial reporting control environment such that we no longer
consider the remaining issues in this area to be a deficiency in
internal control. SEC also took actions in fiscal year 2010 toward
improving control processes related to other previously reported
deficiencies. However, notwithstanding these efforts, the material
weaknesses we identified this year, which in part, represent
continuing deficiencies, give rise to significant management
challenges that have (1) reduced assurance that data processed by
SEC's information systems are reliable and appropriately protected;
and (2) resulted in errors and misstatements in SEC's financial
reporting that were not prevented or detected in a timely manner.
These material weaknesses are likely to continue to exist until SEC's
accounting system is either significantly enhanced or replaced, key
financial reporting applications are fully integrated with the
accounting system at the transaction level, information security
controls are significantly strengthened, and appropriate resources are
dedicated to maintaining effective internal controls.
The following sections discuss in more detail (1) these conclusions,
(2) our conclusions on Management's Discussion and Analysis and
required supplementary and other accompanying information, (3) our
audit objectives, scope, and methodology, and (4) agency comments and
our evaluation.
Opinion on Financial Statements:
SEC's financial statements, including the accompanying notes, present
fairly, in all material respects, in conformity with U.S. generally
accepted accounting principles, SEC's assets, liabilities, and net
position as of September 30, 2010, and September 30, 2009; and net
costs, changes in net position, budgetary resources, and custodial
activity for the fiscal years then ended.
Opinion on Internal Control:
Because of two material weaknesses in internal control discussed
below, SEC did not maintain, in all material respects, effective
internal control over financial reporting as of September 30, 2010,
and thus did not provide reasonable assurance that misstatements,
losses, or noncompliance material in relation to the financial
statements would be prevented or detected and corrected on a timely
basis. Our opinion is based on criteria established under 31 U.S.C.
3512(c), (d), commonly known as the Federal Managers' Financial
Integrity Act (FMFIA). Our opinion is consistent with SEC's evaluation
of, and attestation on, the effectiveness of its internal controls
during fiscal year 2010, which identified and reported similar
material weaknesses in internal control over financial reporting.
[Footnote 4]
We identified pervasive information system control deficiencies, some
of which are continuing deficiencies reported in prior audits, that
span across SEC's general support system and all key applications that
support SEC's financial reporting. As a result of these system
deficiencies, SEC is not able to rely on its information system
controls to provide reasonable assurance that (1) the financial
statements are fairly stated in accordance with U.S. generally
accepted accounting principles, (2) financial information management
relies on to support day-to-day decision making is current, complete,
and accurate, and (3) proprietary information processed by these
automated systems is appropriately safeguarded. In fiscal year 2009,
we reported information security as a significant deficiency[Footnote
5] and included it as a component of the material weakness in
financial reporting.[Footnote 6] However, while SEC took some actions
to address its information security deficiencies, continuing security
deficiencies as well as newly identified deficiencies in information
security controls and other system controls were serious enough, that
they collectively represent a material weakness in information systems
given their pervasive impact on financial reporting.
During fiscal year 2010, we also identified five areas of deficiencies
in internal control concerning SEC's financial reporting and
accounting processes. We reported on many of these deficiencies in
fiscal year 2009, and at various times in prior audits dating back to
fiscal year 2004. These continuing deficiencies and the newly
identified deficiencies this year indicate that SEC's monitoring
process was not always effective in identifying and correcting
internal control issues in a timely manner. The collective nature of
these significant control deficiencies are such that a reasonable
possibility exists that a material misstatement of SEC's financial
statements would not be prevented, or detected and corrected on a
timely basis. Consequently, these control deficiencies collectively
represent a material weakness in SEC's internal control over financial
reporting and accounting processes. The five areas of deficiencies
that collectively comprise a material weakness over financial
reporting and accounting processes concern internal control over:
* SEC's financial reporting process, resulting in significant errors
in financial reporting that were not always detected and corrected on
a timely basis;
* accounting for budgetary resources, resulting in obligations and
deobligations that were not always recorded timely or accurately, and
obligations that were not valid;
* registrant deposit transactions, resulting in SEC misstating filing
fee revenue and the related registrant deposit account liability
amounts in the proper period;
* accounting for disgorgement and penalties,[Footnote 7] resulting in
SEC misstating related accounts receivable, liability, and collections
amounts in the proper period; and:
* reporting required supplementary information, resulting in SEC
omitting the required information in its draft fiscal year 2010
financial report.
For significant errors and issues that were identified, SEC made
necessary adjustments to the financial statements, the notes
accompanying the financial statements, and other required
supplementary information, as appropriate, and was therefore able to
prepare financial statements that were fairly stated in all material
respects for fiscal years 2010 and 2009. However, the material
weaknesses in SEC's internal control over information systems and over
financial reporting and accounting processes may adversely affect
information used by SEC's management that is based, in whole or in
part, on information that is inaccurate because of these weaknesses.
In addition, unaudited financial information reported by SEC may also
contain misstatements resulting from these weaknesses. We considered
the material weaknesses identified above in determining the nature,
timing, and extent of our audit procedures on SEC's fiscal year 2010
financial statements. We caution that misstatements may occur and not
be detected by our tests and that such testing may not be sufficient
for other purposes.
These material weaknesses are discussed in more detail in appendix I
to this report. We will be reporting additional details concerning
these material weaknesses separately to SEC management, along with
recommendations for corrective actions. We also identified other
deficiencies in SEC's system of internal control that we do not
consider to be material weaknesses or significant deficiencies but
which merit SEC management's attention and correction. We have
communicated these matters to SEC management informally and as
appropriate, will be reporting them in writing to SEC separately.
Compliance with Laws and Regulations:
Our tests of SEC's compliance with selected provisions of laws and
regulations for fiscal year 2010 disclosed no instances of
noncompliance that would be reportable under U.S. generally accepted
government auditing standards. The objective of our audit was not to
provide an opinion on overall compliance with laws and regulations.
Accordingly, we do not express such an opinion.
Consistency of Other Information:
SEC's Management's Discussion and Analysis, required supplementary
information, and other accompanying information contain a wide range
of information, some of which is not directly related to the financial
statements. We did not audit and we do not express an opinion on this
information. However, we compared this information for consistency
with the financial statements and discussed the methods of measurement
and presentation with SEC officials. On the basis of this limited
work, we found no material inconsistencies with the financial
statements, U.S. generally accepted accounting principles, or Office
of Management and Budget Circular No. A-136, Financial Reporting
Requirements.
Objectives, Scope, and Methodology:
SEC management is responsible for (1) preparing the financial
statements in conformity with U.S. generally accepted accounting
principles; (2) establishing and maintaining effective internal
control over financial reporting, and evaluating its effectiveness;
and (3) complying with applicable laws and regulations. SEC management
evaluated the effectiveness of SEC's internal control over financial
reporting as of September 30, 2010, based on the criteria established
under FMFIA. Effective for fiscal year 2010, SEC is also responsible
for attesting to the effectiveness of its internal control during the
fiscal year.[Footnote 8] SEC management's assertion, based on its
evaluation, is included in its Management's Discussion and Analysis
included in this report.
We are responsible for planning and performing the audit to obtain
reasonable assurance and provide our opinion about whether (1) SEC's
financial statements are presented fairly, in all material respects,
in conformity with U.S. generally accepted accounting principles; and
(2) SEC management maintained, in all material respects, effective
internal control over financial reporting as of September 30, 2010. We
are also responsible for (1) testing compliance with selected
provisions of laws and regulations that have a direct and material
effect on the financial statements, and (2) performing limited
procedures with respect to certain other information accompanying the
financial statements.
In order to fulfill these responsibilities, we:
* examined, on a test basis, evidence supporting the amounts and
disclosures in the financial statements;
* assessed the accounting principles used and significant estimates
made by SEC management;
* evaluated the overall presentation of the financial statements;
* obtained an understanding of SEC and its operations, including its
internal control over financial reporting;
* considered SEC's process for evaluating and reporting on internal
control over financial reporting that SEC is required to perform by
FMFIA;
* assessed the risk that a material misstatement exists in the
financial statements and the risk that a material weakness exists in
internal control over financial reporting;
* evaluated the design and operating effectiveness of internal control
over financial reporting based on the assessed risk;
* tested relevant internal control over financial reporting;
* tested compliance with selected provisions of the following laws and
regulations: the Securities Exchange Act of 1934, as amended; the
Securities Act of 1933, as amended; the Antideficiency Act; laws
governing the pay and allowance system for SEC employees; the Debt
Collection Improvement Act; the Prompt Payment Act; the Federal
Employees' Retirement System Act of 1986; Financial Services and
General Government Appropriations Act, 2010; and the Dodd-Frank Wall
Street Reform and Consumer Protection Act; and:
* performed such other procedures as we considered necessary in the
circumstances.
An entity's internal control over financial reporting is a process
effected by those charged with governance, management, and other
personnel, the objectives of which are to provide reasonable assurance
that (1) transactions are properly recorded, processed, and summarized
to permit the preparation of financial statements in accordance with
U.S. generally accepted accounting principles, and assets are
safeguarded against loss from unauthorized acquisition, use, or
disposition; and (2) transactions are executed in accordance with the
laws governing the use of budgetary authority and other laws and
regulations that could have a direct and material effect on the
financial statements.
We did not evaluate all internal control relevant to operating
objectives as broadly established under FMFIA, such as controls
relevant to preparing statistical reports and ensuring efficient
operations. We limited our internal control testing to testing
controls over financial reporting. Our internal control testing was
for the purpose of expressing an opinion on the effectiveness of
internal control over financial reporting and may not be sufficient
for other purposes. Consequently, our audit may not identify all
deficiencies in internal control over financial reporting that are
less severe than a material weakness. Because of inherent limitations,
internal control may not prevent or detect and correct misstatements
due to error or fraud, losses, or noncompliance. We also caution that
projecting any evaluation of effectiveness to future periods is
subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
We did not test compliance with all laws and regulations applicable to
SEC. We limited our tests of compliance to selected provisions of laws
and regulations that have a direct and material effect on the
financial statements for the fiscal year ended September 30, 2010. We
caution that other deficiencies in internal control may exist and not
be detected by our tests and that our testing may not be sufficient
for other purposes.
We performed our audit in accordance with U.S. generally accepted
government auditing standards. We believe our audit provides a
reasonable basis for our opinions and other conclusions.
SEC Comments and Our Evaluation:
In commenting on a draft of this report, SEC's Chairman said she was
pleased to receive an unqualified opinion on SEC's financial
statements. The Chairman stated that SEC plans to address the material
weaknesses in information systems and in financial reporting and
accounting processes through improvements in its core financial
system, which SEC believes will both enhance security and
significantly reduce manual processes. According to the Chairman, SEC
has already initiated actions to replace the agency's core financial
system by migrating to a federal government shared service provider in
order to put in place better protections for financial data and to
enhance its financial reporting processes through further automation.
SEC plans to shift to the new environment in fiscal year 2012. The
complete text of SEC's response is reprinted in appendix II.
Sincerely yours,
Signed by:
James R. Dalkin:
Director:
Financial Management and Assurance:
November 12, 2010:
[End of section]
Management's Discussion and Analysis:
The U.S. Securities and Exchange Commission's (SEC) Management's
Discussion and Analysis (MD&A) serves as a brief overview of this
entire report. It provides a concise description of the agency's
performance measures, financial statements, systems and controls,
compliance with laws and regulations, and actions taken or planned. It
also provides a balanced assessment of the SEC programs and financial
performance, and the efficiency and effectiveness of the SEC's
operations.
Vision, Mission, Values, and Goals:
Vision:
The SEC strives to promote a market environment that is worthy of the
public's trust and characterized by transparency and integrity.
Mission:
The mission of the SEC is to protect investors; maintain fair,
orderly, and efficient markets; and facilitate capital formation.
Values:
Integrity;
Accountability;
Effectiveness;
Teamwork;
Fairness;
Commitment to Excellence.
Strategic Goals and Outcomes:
Goal 1: Foster and enforce compliance with the federal securities laws:
Outcome 1.1: The SEC fosters compliance with the federal securities
laws.
Outcome 1.2: The SEC promptly detects violations of the federal
securities laws.
Outcome 1.3: The SEC prosecutes violations of federal securities laws
and holds violators accountable.
Goal 2: Establish an effective regulatory environment:
Outcome 2.1: The SEC establishes and maintains a regulatory
environment that promotes high-quality disclosure, financial
reporting, and governance, and that prevents abusive practices by
registrants, financial intermediaries, and other market participants.
Outcome 2.2: The U.S. capital markets operate in a fair, efficient,
transparent, and competitive manner, fostering capital formation and
useful innovation.
Outcome 2.3: The SEC adopts and administers rules and regulations that
enable market participants to understand clearly their obligations
under the securities laws.
In FY 2010, the Commission approved a new strategic plan covering FY
2010 - FY2015. The plan sets out the agency's mission, vision, values,
and strategic goals through FY2015. The plan also details the outcomes
the agency is seeking to achieve, the strategies and initiatives that
will be undertaken to accomplish those outcomes, and the performance
measures that will be used to gauge the agency's progress. The plan
can be accessed on the SEC's website at [hyperlink,
http://www.sec.gov/about/secstratplan1015tpdf].
Goal 3: Facilitate access to the information investors need to make
informed investment decisions:
Outcome 3.1: Investors have access to high-quality disclosure
materials that are useful to investment decision making.
Outcome 3.2: Agency rulemaking and investor education programs are
informed by an understanding of the wide range of investor needs.
Goal 4: Enhance the Commission's performance through effective
alignment and management of human, information, and financial capital.
Outcome 4.1: The SEC maintains a work environment that attracts,
engages, and retains a technically proficient and diverse workforce
that can excel and meet the dynamic challenges of market oversight.
Outcome 4.2: The SEC retains a diverse team of world-class leaders who
provide motivation and strategic direction to the SEC workforce.
Outcome 4.3: Information within and available to the SEC becomes a
Commission-wide shared resource, appropriately protected, that enables
a collaborative and knowledge-based working environment.
Outcome 4.4: Resource decisions and operations reflect sound financial
and risk management principles.
Organizational Structure and Resources:
The SEC is an independent federal agency established pursuant to the
Securities Exchange Act of 1934 (Exchange Act). It is headed by a
bipartisan five-member Commission, comprised of the Chairman and four
Commissioners, who are appointed by the President and confirmed by the
Senate (see Appendix A: Chairman and Commissioners). The Chairman
serves as the Chief Executive Officer (CEO). The SEC is organized into
five main divisions: Enforcement; Corporation Finance; Investment
Management; Trading and Markets; and Risk, Strategy, and Financial
Innovation. The SEC's headquarters are in Washington, D.C., and it has
11 regional offices located throughout the country. In Fiscal Year
(FY) 2010, the SEC received budget authority of $1,571 million
consisting of current-year offsetting collections in the amount of
$1,095 million, $452 million for the SEC Investor Protection Fund, and
$24 million in funds carried over from prior fiscal years. In FY 2010,
the agency employed 3,748 Full-time Equivalents (FTE), including 3,664
permanent and 84 temporary FTEs.
Chart 1.1: Sec Organization Chart:
Top level:
Chairman (Office of the Chairman);
Associated with the Office of the Chairman:
* Commissioners (4).
Second level, reporting to the Office of the Chairman:
* Enforcement:
* Corporation Finance:
* Investment Management:
* Trading and Markets:
* Risk, Strategy, and Financial Innovation:
* Executive Director:
* General Counsel:
* Secretary:
* Chief Accountant:
* Investor Education and Advocacy:
* Compliance Inspection and Examinations:
* Administrative Law Judges:
* Equal Employment Opportunity:
* Information TEchnology:
* Inspector General:
* International Affairs:
* Legislative and Intergovernmental Affairs:
* Public Affairs:
Third level, reporting to the Executive Director:
* Financial Management:
* Human Resources:
* Administrative Services:
Third level, reporting to the Chief Operating Office:
* Financial Management:
* Freedom of Information Act and Records Management Services;
* Information Technology.
Fourth level: regional offices:
New York:
Boston:
Philadelphia:
Atlanta:
Miami:
Chicago:
Fort Worth:
Denver:
Salt Lake:
Los Angeles:
San Francisco:
[End of chart]
The SEC organizes its divisions and offices under the 10 major
programs outlined below in Table 1.1, SEC Programs and Program
Descriptions.
Table 1.1: Sec Programs And Program Descriptions:
Program: Enforcement;
Divisions and Offices: Division of Enforcement and enforcement staff
within the SEC's regional offices;
Program Descriptions: This program investigates and brings civil
charges in federal district court or in administrative proceedings
based on violations of the federal securities laws. An integral part
of the program's function is to seek penalties and the disgorgement of
ill-gotten gains in order to return funds to harmed investors.
Program: Compliance Inspections and Examinations;
Divisions and Offices: Office of Compliance Inspections and
Examinations staff within the SEC's regional offices;
Program Descriptions: This program conducts the SEC's examinations of
registrants such as investment advisers, investment companies, broker-
dealers, self-regulatory organizations, credit rating agencies,
transfer agents, and
clearing agencies.
Program: Corporation Finance;
Divisions and Offices: Division of Corporation Finance;
Program Descriptions: This program performs functions to assure that
investors have access
to materially complete and accurate information, and to deter fraud
and misrepresentation in the public offering, trading, voting, and
tendering of securities.
Program: Trading and Markets;
Divisions and Offices: Division of Trading and Markets;
Program Descriptions: This program conducts activities to establish
and maintain standards for fair, orderly and efficient markets, while
fostering investor protection and confidence in the markets.
Program: Investment Management;
Divisions and Offices: Division of Investment Management;
Program Descriptions: This program seeks to minimize the financial
risks to investors from fraud, mismanagement, self-dealing, and
misleading or incomplete disclosure in the investment company and
investment adviser segments of the financial services industry.
Program: Risk, Strategy, and Financial Innovation;
Divisions and Offices: Division of Risk, Strategy, and Financial
Innovation;
Program Descriptions: This program's responsibilities cover three
broad areas: risk and economic analysis, strategic research, and
financial innovation. Its activities relate to policymaking,
rulemaking, examination and enforcement matters agency-wide.
Program: General Counsel:
Divisions and Offices: Office of the General Counsel;
Program Descriptions: OGC serves as the chief legal officer of the
Commission and provides independent legal analysis and advice to the
Chairman, Commissioners, and operating divisions on all aspects of the
Commission's activities. The General Counsel also defends the
Commission in federal district courts, represents the Commission in
all appellate matters and amicus curiae flings, and oversees the SEC's
bankruptcy program.
Program: Other Program Offices;
Divisions and Offices:
* Office of Chief Accountant;
* Office of Investor Education and Advocacy;
* Office of International Affairs; and;
* Office of Administrative Law Judges.
Program Descriptions: These offices are responsible for:
* serving as the chief advisor on all accounting and auditing policy
and overseeing private sector standards setting;
* serving investors who contact the SEC, ensuring that retail
investors' perspectives inform the Commission's regulatory policies
and disclosure programs; and improving investors' financial literacy;
* advancing international regulatory and enforcement cooperation,
promoting converged high regulatory standards worldwide, and;
facilitating technical assistance programs in foreign countries; and
* adjudicating allegations of securities law violations.
Program: Agency Direction and Administrative Support;
Divisions and Offices:
* The Chairman and Commission;
* Office of Legislative and Intergovernmental Affairs;
* Office of Public Affairs;
* Office of the Secretary;
* Office of the Chief Operating Officer;
* Office of Information Technology;
* Office of Freedom of Information Act and Records Management Services;
* Office of Financial Management;
* Office of the Executive Director;
* Office of Human Resources;
* Office of Administrative Services; and;
* Office of Equal Employment Opportunity.
Program Descriptions: The Chairman is responsible for overseeing all
aspects of agency operations, and the Chairman and Commissioners are
responsible for the review and approval of enforcement cases and
formal orders of investigation and the development, consideration, and
execution of policies and rules. The other offices in Agency Direction
and Administrative Support are responsible for:
* working with Members of Congress on issues that affect the
Commission;
* coordinating the SEC's communications with the media, the general
public, and foreign visitors;
* reviewing all documents issued by the Commission, and preparing and
maintaining records of Commission actions;
* maximizing the use of SEC resources by overseeing the strategic
planning, information technology program, financial management,
records management, human resources, and administrative functions of
the agency; and;
* ensuring that the SEC is an equal opportunity employer in full
compliance with all federal EEO laws.
Program: Inspector General;
Divisions and Offices: Office of the Inspector General;
Program Descriptions: OIG is an independent office that conducts
audits of programs and operations of the SEC and investigations into
allegations of misconduct by staff or contractors. The mission of OIG
is to detect fraud, waste, and abuse and to promote integrity,
economy, efficiency, and effectiveness in the SEC's programs and
operations.
[End of table]
As shown in the Statement of Net Cost, on page 83, the SEC presents
its net costs of operations by the programs outlined above, consistent
with the presentation used by the agency in submitting its budget
requests. A detailed discussion of program achievements and program
contributions to accomplishing the mission of the SEC can be found in
the Performance Section.
FY 2010 Year in Review:
Opening: Continuing the Path of Reform:
Over the past year, the SEC continued its efforts to reform its
operations and focus on its core mission of protecting investors.
During that time, it also began preparing to implement the mandates of
the newly-enacted Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank).
The agency continued its internal reform efforts by completing the
restructuring of its enforcement division and launching a
reorganization of its inspection unit with the intention of more
aggressively and effectively spotting violations and pursuing fraud.
The agency also continued to recruit individuals with a range of skill-
sets, increase staff training, upgrade its technology, and foster a
culture of collaboration among the various divisions and offices.
On the rule-making front, the SEC adopted regulations designed to
better protect investors from fraud and abusive practices, assure
investors have access to timely and accurate information, including
with regard to corporate governance at the companies in which they
invest.
The agency's new structures and approaches were tested by the events
of May 6, when a volatile market sent the Dow Jones down more than 500
points in a matter of minutes — and back up almost as rapidly. In
response, Chairman Schapiro immediately brought together
representatives of the exchanges and self-regulatory organizations to
identify measures that could reduce the risk of another similar
disruption. Within weeks, the SEC had approved new rules that pause
trading when stock prices experience steep, rapid movements.
Additionally, the SEC — together with the Commodity Futures Trading
Commission (CFTC) — launched an extensive review that ultimately
determined the cause and exacerbating factors of that day's market
volatility.
Finally, when Dodd-Frank became law, the SEC was ready with a detailed
internal agenda, cross-agency working groups, and a comprehensive
strategy for facilitating public input as the agency develops the
rules required by the new law.
In short, the SEC continued to work toward becoming a more responsive
and effective agency, committed to protecting investors and restoring
confidence in the markets.
Internal Reforms:
In the past 12 months, the agency has continued its efforts to improve
its operational capacity — working to transform the culture, breaking
down silos, investing in human and technological capital, and adopting
new procedures that broadly encourage individual initiative and
improve agency performance.
Consistent with its increasingly collaborative culture, the agency
created interdisciplinary groups that worked together on a host of
specific issues — including life settlements and the development of a
consolidated audit trail.
The agency increased funding for training that allows agency staff to
build skills and keep current with accelerating legal, technical and
financial changes. New hires are being selected for their industry
knowledge and their varied backgrounds, bringing new expertise into
the agency and a sharper focus on emerging products and areas in need
of specialized oversight.
The SEC also has begun a long-term effort to improve its technology,
beginning with a system designed to better track, store, and compare
tips, complaints, and referrals. Mother key area of investment has
been in workflow and document management systems that are already
improving the management of enforcement cases and the consistency of
inspections and examinations. These systems are all being built on the
same software platform so that information can be easily researched
and shared across organizational lines.
Reinvigorating the Enforcement Program:
In 2010, the Division of Enforcement completed its comprehensive
internal review and subsequent structural reforms — the most
significant in four decades. As a result of the restructuring, the
division has redeployed hundreds of experienced attorneys to front-
line investigations and created nationwide specialized units to
concentrate on high-priority areas of enforcement. The units will
focus on Asset Management (hedge funds and investment advisers),
Market Abuse (large-scale insider trading and market manipulation),
Structured and New Products (various derivative products), Foreign
Corrupt Practices Act violations, and Municipal Securities and Public
Pensions. They will rely on enhanced training, industry experience and
skills, and targeted investigative approaches to better detect links
and patterns suggesting wrongdoing. Each of the units is in the
process of hiring additional professionals with specialized experience
to assist in investigative and enforcement efforts.
In addition, the Division established an Office of Market Intelligence
to serve as a central office for handling tips, complaints, and
referrals. This office will enable enforcement staff to provide a
coherent and coordinated response to the huge volume of potential
leads the agency receives every day. OMI also will house the new
whistleblower office created by Dodd-Frank.
OMI will also benefit from the agency-wide technology initiative. The
first phase of the initiative successfully consolidated the multiple,
dispersed repositories for tips and complaints into a single,
searchable database. In the second phase, the agency will deploy a new
intake and resolution system that will allow the agency to capture
more--and more valuable--information. And in the third phase, the
agency will add risk analytics tools that help to efficiently identify
high-value tips and to search for trends and patterns across the
database.
Enforcement Cases:
Despite the demands involved in making these important changes, the
Division's enforcement efforts continued to bring excellent results.
The numbers do not tell the whole story, but the Division obtained
$2.8 billion in penalties and disgorgement; barred numerous wrongdoers
from engaging in improper business practices in the future; required
companies to institute internal controls to prevent future harm from
such practices; and obtained other remedies that send a strong
deterrent message.
Key Enforcement Cases:
In FY 2010, the SEC brought 681 enforcement cases covering a broad
spectrum of financial wrongdoing. What follows is a selection of some
of those enforcement actions.
Financial Crisis:
In the aftermath of the financial crisis, the SEC filed many cases
involving mortgage-related securities and mortgage-related products
linked to the crisis. In three such cases, involving Countrywide,
American Home Mortgage and Evergreen, the SEC filed charges in FY
2009. In 2010, the SEC continued to pursue cases related to the
financial crisis, including:
Goldman Sachs. In April 2010, in an action led by the agency's
Structured and New Products Unit, the Commission charged Goldman Sachs
and one of its vice presidents with defrauding investors by misstating
and omitting key facts regarding a financial product tied to subprime
mortgages. Goldman Sachs failed to disclose to investors that Paulson
& Co., a major hedge fund player, had taken a significant role in
assembling a synthetic collateralized debt obligation tied to the
performance of subprime residential mortgage-backed securities, and
had taken a short position against it. Goldman Sachs settled with the
SEC in July, paying $550 million in penalties and disgorgement and
agreeing to reform its business practices.
Citigroup. In July 2010, Citigroup and two senior executives agreed to
settle charges that it had misled investors about the company's
exposure to subprime mortgage-related assets, making misleading
statements in earnings calls and public filings about the extent of
its holdings of assets backed by subprime mortgages. Between July and
mid-October 2007, Citigroup represented that subprime exposure in its
investment banking unit was $13 billion or less when, in fact, it was
more than $50 billion.
New Century. In July 2010, three former officers of New Century
Financial Corporation agreed to pay more than $1.5 million in
disgorgement, interest and fines to settle charges that they defrauded
investors. In December 2009, the SEC alleged that Brad A. Mortice, the
former CEO and co-founder; Patti M. Dodge, the former chief financial
officer (CFO); and David N. Kenneally, the former controller had
falsely assured New Century investors that all was well, while failing
to disclose key negative information known to them, including a
dramatic increase in ban defaults, loan repurchases and loan
repurchase requests. New Century had been, at one point, one of the
largest subprime mortgage lenders in the nation.
ICP Asset Management. In June 2010, the SEC charged New York-based ICP
Asset Management, its president, Thomas Priore, and two affiliated
firms with defrauding four multi-billion dollar collateralized debt
obligations (CD0s) by engaging in fraudulent practices and
misrepresentations that caused the CDOs to lose tens of millions of
dollars. Priore and his companies also improperly obtained tens of
millions of dollars in advisory fees and undisclosed profits at the
expense of their clients and investors.
Taylor, Bean & Whitaker. In June 2010, the SEC charged the former
chairman and majority owner of what was once the nation's Largest non-
depository mortgage lender with orchestrating a large-scale securities
fraud scheme and attempting to scam the U.S. Treasury's Troubled Asset
Relief Program (TARP). The SEC alleged that Lee B. Farkas, through his
company, Taylor, Bean & Whitaker Mortgage Corp., sold more than $1.5
billion worth of fabricated or impaired mortgage loans and securities
to Colonial Bank Farkas also was responsible for a bogus equity
investment that caused Colonial Bank to misrepresent that it had
satisfied a prerequisite necessary to qualify for TARP funds.
Morgan Keegan. In April 2010, the SEC brought administrative
proceedings against Morgan Keegan & Company, Morgan Asset Management
and two employees for allegedly overstating the value of securities
backed by subprime mortgages. The SEC alleged that Morgan Keegan
failed to employ reasonable procedures to internally price the
portfolio securities in five funds and sold shares to investors based
on the inflated prices.
Brookstreet Securities. In December 2009, CEO Stanley C. Brooks and
Brookstreet Securities were charged with fraud for allegedly
systematically selling approximately $300 million worth of risky and
illiquid collateralized mortgage obligations (CMOs) to more than 1,000
seniors and retirees with conservative investment goals. Additionally,
in a failed last-ditch effort to stave off bankruptcy, Brooks directed
the unauthorized sale of CMOs from Brookstreet customers' cash-only
accounts, causing substantial investor losses.
Return of Monies to Harmed Investors:
FY 2010 also saw several SEC-ordered distributions to share-
holders harmed by misleading statements and material omissions
regarding defendants' exposures to subprime mortgages and other
investments. The agency also returned approximately $2.2 billion
dollars to investors as a result of SEC enforcement actions.
State Street Bank and Trust In February 2010, State Street Bank and
Trust agreed to distribute more than $300 million to investors who
lost money during the subprime market meltdown. The distribution
resulted from State Street's settlement of SEC charges that it misled
investors about their exposure to subprime investments while
selectively disclosing more complete information to favored investors.
Reserve Primary Fund. In January 2010, the Reserve Primary Fund
completed the distribution of $3.4 billion in assets to investors who
held shares of the fund when its net asset value fell below $1 per
share in September 2008. In May 2009, the SEC brought charges against
entities and individuals who operated the Reserve Fund for failing to
provide material facts regarding exposure of the fund to Lehman
Brothers, whose bankruptcy left the fund unable to meet investor
requests for redemptions. In November 2009, the court adopted the
SEC's proposed distribution plan, which resulted in investors
recovering more than 98 cents on the dollar.
Pay-to-Play:
Another enforcement focus was on 'pay-to-play' arrangements, in which
lucrative financial management deals are struck between municipalities
and firms who reward the well-connected individuals who arrange those
deals with cash, campaign contributions or other favors. Contracts
based on connections - rather than competence - potentially harm both
taxpayers and the beneficiaries of these funds, through higher fees
and lower performance.
Quadrangle. In April 2010, Quadrangle Group LLC and Quadrangle GP
Investors II, L.P. settled charges that they had participated in a
kickback scheme to obtain a $100 million investment from the New York
State Common Retirement Fund, the state's largest public pension fund.
The investment came only after a then-executive at Quadrangle arranged
for an affiliate to distribute the DVD of a low-budget film that
former New York State Deputy Comptroller David Loglisci and his
brothers had produced.
The SEC further charged that the Quadrangle executive agreed to pay
more than $1 million in purported "finder' fees to Henry Morris, the
top political advisor and chief fundraiser for former New York State
Comptroller Alan Hevesi.
Quadrangle agreed to settle the SEC's charges and to pay a $5 million
penalty. The SEC's investigation continues.
JP Morgan. In November 2009, J.P. Morgan Securities Inc. settled
charges springing from an unlawful payment scheme that enabled them to
win business involving municipal bond offerings and swap agreement
transactions with Jefferson County, Ala by agreeing to pay a penalty
of $25 million, make a payment of $50 million to Jefferson County, and
forfeit more than $647 million in claimed termination fees.
The SEC also brought charges against two former managing directors,
alleging that Charles LeCroy and Douglas MacFaddin made more than $8
million in undisclosed payments to close friends of certain Jefferson
County commissioners.
Auditors:
Investors rely on accurate financial information to make critical
financial decisions. By focusing on the auditors who sign off on
companies' reporting, the SEC helps deter Enron-type accounting fraud
that might cost investors Mons.
Ernst & Young LIP. In December 2009, Ernst & Young LLP, independent
auditor of Chicago-based Bally Total Fitness, paid $8.5 million to
settle charges that it knew or should have known about Bally's
fraudulent financial accounting and disclosures. In addition, six
current and former Ernst & Young partners settled with the SEC. The
SEC found that Ernst & Young issued false and misleading audit
opinions stating that Bally's 2001 to 2003 financial statements were
presented in conformity with generally accepted accounting principles
and that Ernest & Young's audits were conducted in accordance with
Generally Accepted Auditing Standards.
Insider Trading:
The SEC continues to focus on insider trading - both by individuals
and by large-scale institutional traders - through its new Market
Abuse Unit.
Galleon. In October 2009, the SEC charged billionaire Raj Rajaratnam
and his New York-based hedge fund advisory firm Galleon Management LP
with engaging in an insider trading scheme that generated more than
$33 million in illicit gains. The SEC also charged six others involved
in the scheme, including senior executives at IBM, Intel, and McKinsey
& Company.
In November, the SEC broadened its case, charging 13 additional
individuals and entities, including three hedge fund managers, three
professional traders at New York-based Schottenfeld Group, and a
senior executive at Atheros Communications, a California-based
developer of networking technologies. This is the largest hedge fund
insider trading investigation to date.
Cutillo. In November 2009, the SEC charged Arthur J. Cutillo and Jason
Goldfarb with trading inside information in exchange for kickbacks, as
well as six Wall Street traders and a proprietary trading firm who
were also involved in a $20 million insider trading scheme.
The SEC alleged that Cutillo, an attorney in the New York office of
law firm Ropes & Gray LLP, had access to confidential information
about at least four major proposed corporate transactions in which his
firm's clients participated.
Offering Frauds/Ponzi Schemes:
The SM's efforts to hold accountable perpetrators of offering frauds
and Ponzi schemes - aided by the adoption of significant post-Madoff
reforms and the establishment of the Asset Management Unit - continue
to uncover numerous large-scale frauds.
Meredon Mining. In June 2010, the SEC charged four Canadian men and
two others living in Florida with perpetrating a $300 million
international Ponzi scheme on investors in a purportedly successful
gold mining operation. The SEC alleged that Milowe Allen Brost and
Gary Allen Sorenson, of Calgary, were the primary architects and
beneficiaries of a scheme that persuaded more than 3,000 investors
across the U.S. and Canada to invest their savings, retirement funds
and even home equity, in shell companies owned or controlled by Brost
or Sorenson.
Foreign Corrupt Practices Act:
The SEC continues to prosecute companies that make illegal payments to
win business overseas. A renewed focus on these practices in recent
years, coupled with the efforts of the FCPA Unit, continues to yield
significant settlements.
ENI. In July 2010, the SEC charged an Italian company, ENI, S.p.A. and
its former Dutch subsidiary, Snamprogetti Netherlands B.V., with
violations of the Foreign Corrupt Practices Act for providing cash-
filled briefcases and vehicles to Nigerian government officials in an
effort to win lucrative construction contracts. ENI agreed to pay $125
million to settle the SEC's charges, and Snamprogetti paid an
additional $240 million penalty to settle separate criminal
proceedings announced by the U.S. Department of Justice. According to
the SEC's complaint, senior executives at Snamprogetti and the other
joint venture companies authorized the hiring of two agents who
funneled more than $180 million in bribes to Nigerian government
officials to obtain several contracts to build liquefied natural gas
facilities in Nigeria.
Daimler. In March 2010, Daimler AG agreed to pay $91.4 million in
disgorgement to settle charges that it engaged in a repeated and
systematic practice of paying bribes to foreign government officials
to secure business in Asia, Africa, Eastern Europe, and the Middle
East. Daimler also agreed to pay $93.6 million in fines to settle
charges in separate criminal proceedings by the U.S. Department of
Justice.
Financial Fraud:
Financial fraud can cost investors billions in lost equity. Both
companies and corporate officers are accountable to shareholders for
timely and, especially, honest reporting.
Dell. In July 2010, the SEC charged Dell Inc. with failing to disclose
material information to investors and using fraudulent accounting to
make it falsely appear that the company was consistently meeting Wall
Street earnings targets and reducing its operating expenses. Among
others, Dell Chairman and CEO Michael Dell, former CEO Kevin Rollins,
and former CFO James Schneider were charged by the SEC for their roles
in the disclosure violations. Dell Inc. agreed to pay a $100 million
penalty to settle the SEC's charges. Michael Dell and Rollins each
agreed to pay a $4 million penalty, and Schneider agreed to pay $3
million, to settle the SEC's charges against them.
Municipal Securities and Public Pensions:
As the financial health of municipalities and its effect on the
securities they issue become a matter of greater concern, the SEC has
focused on ensuring that investors are aware of factors which could
affect the ability of municipalities to meet their financial
obligations.
New Jersey. In August 2010, in an investigation handled by the
Municipal Securities and Public Pensions Unit, New Jersey became the
first state ever charged by the SEC for violations of federal
securities laws, when it was charged with failing to disclose that it
was underfunding the state's two largest pension plans, to investors
in billions of dollars worth of municipal bonds. As a result,
investors were not provided adequate information to evaluate the
state's ability to fund the pensions or to assess their impact on the
state's financial condition. New Jersey agreed to settle the case
without admitting or denying the SEC's findings.
Strengthening Examinations and Oversight:
Like the Enforcement Division, the Office of Compliance Inspections
and Examinations (OCIE) engaged in a comprehensive self-examination to
improve its examination program in critical areas of strategy,
structure, people, processes, and technology.
During FY 2010, OCIE established a new, national governance structure
designed to break down silos and increase consistency among regional
offices, and to improve collaboration with other divisions. For the
first time, leaders from across the country began working together to
develop an integrated strategy and implement enhanced policies,
procedures and tools to drive consistency and effectiveness across the
national exam program.
Staffing strategies are changing, as well. Instead of creating fixed
examination teams that remain together over time, OCIE will now
customize teams for each examination, matching the strengths of
individual examiners to the unique challenges offered by the entity
being examined. And managers are spending more time in the field,
leading their teams on-site.
Vastly outnumbered by the entities it is charged with overseeing, OCIE
also is increasingly utilizing a risk-based inspection strategy that
relies on a variety of data points to determine which entities pose
the greater risk to investors. To this end, OCIE has created a
centralized Risk Assessment and Surveillance Unit, which is working
with the agency's recently-created Division of Risk, Strategy, and
Financial Innovation to develop new risk assessment toots that will
allow OCIE to engage in more sophisticated risk assessment and earlier
action. Finally, OCIE is placing greater emphasis on hiring staff with
strong industry experience, as well as training and certifying
examiners In support of these functions, OCIE is deploying a new suite
of technology tools to more fully equip examiners in the field.
Investor-Focused Rulemaking:
In 2010, the SEC continued to engage in one of the most active
investor-focused regulatory agendas in the agency's history. The rules
reflect the agency's efforts to create a more secure marketplace,
assure that investors have the timely and accurate information they
need, and support effective and responsive governance.
A More Secure Marketplace:
One key SEC focus has been on creating tools and procedures that help
protect investors from fraud and manipulation, and which enhance the
ability of the SEC to investigate when malfeasance is suspected To
make the markets safer for investors, the SEC proposed or adopted the
following rules:
* Custody Controls. The SEC adopted a rule designed to provide greater
protections to investors who entrust their assets to investment
advisers. The rule requires that independent public accountants
confirm — in the course of a surprise exam — the existence and value
of the assets a client has placed in an investment adviser account and
to review custody controls in situations where the possibility for
misappropriation of client assets is most acute. These rules will
diminish the ability of dishonest advisers to distribute false account
statements purporting to document assets that do not exist, or for the
adviser to misappropriate assets under their control.
* Consolidated Audit Trail. The SEC proposed a rule that would require
self-regulatory organizations to establish a consolidated audit trail
system which will allow regulators to track information about orders
received and executed across the securities markets. Currently, there
is no single database of comprehensive and readily accessible data
regarding orders and executions across markets. If adopted, for the
first time ever, this data could be tracked across multiple markets,
products and participants in real time, allowing more rapid
reconstruction of trading activity and to better analysis of both
suspicious trading behavior and unusual market events.
* Short Selling/Fails-to-Deliver. The SEC adopted a rule designed to
limit the downward price pressure applied by short-selling to a stock
that has dropped more than 10 percent in one day, promoting market
stability and preserving investor confidence. This rule also enables
long sellers to stand in the front of the line once the 10 percent
benchmark is breached and to sell their shares before any short
sellers. In addition, the SEC addressed the potentially harmful
effects of abusive "naked" short selling, adopting rules that require
that fails-to-deliver resulting from short sales be closed out
immediately after they occur. Since this rule was adopted, the number
of failures to deliver securities has dropped significantly.
* Sponsored Access. The SEC proposed a new rule that would effectively
prohibit broker-dealers from providing customers with "unfiltered" or
"naked" access to an exchange or ATS. The rule would require those
with market access to put in place risk management controls and
supervisory procedures, in order to minimize the chances that a client
with unfiltered access will enter erroneous orders, fail to comply
with various regulatory requirements, or breach a credit or capital
limit.
* Money Market Funds. In the wake of the financial crisis, the SEC
adopted rules strengthening the oversight and resiliency of money
market funds by requiring, among other things, higher credit quality,
greater liquidity, shorter maturities, stress testing and the
disclosure of the funds' actual "mark-to-market" net asset value.
* Pay-to-Play. The SEC adopted rubs prohibiting an investment adviser
from providing advisory services for compensation within two years
after contributing to the campaigns of elected officials in a position
to influence selection of managers for public funds. The rules also
restricted the bundling by an adviser of contributions from others.
The rules will help prevent "pay-to-play" arrangements and assure
investors and taxpayers that advisers to public accounts — such as
public employee pension funds — are selected on merit, rather than
political favor.
Better Information:
Mother important principle is that all investors should have access to
timely and accurate information. To facilitate better disclosure, the
SEC took the following actions:
* Municipal Securities Disclosure. The SEC adopted rules improving the
quality and timeliness of the disclosure of material events related to
municipal securities. These events, which could affect the risk and
value of a municipal security, include such occurrences as payment
defaults, rating changes and tender offers. The rules will allow
investors to make more knowledgeable decisions about municipal
securities.
* Form ADV Part 2. The SEC updated the principal investment adviser
disclosure document, Form ADV Part 2, to improve the quality of the
information investors receive regarding their advisers' conflicts,
compensation strategy, business activities and disciplinary history.
The new form will offer detailed, relevant information in plain
English, on both advisory firms and individual advisers. The brochure
will provide improved and expanded information in a more user-friendly
format describing advisers' qualifications, investment strategies and
business practices in plain English.
* 12b-1 Fees. The SEC proposed rules that would create a new and more
equitable framework governing the way in which mutual funds are
marketed and sold to investors. The rules would limit the amount of
asset-based sales charges that individual investors pay and would
improve the information provided to investors regarding fees deducted
from mutual funds to compensate those who sell the funds.
* Target Date Funds. The SEC proposed rules to help clarify the
meaning of a date in a target date fund's name and to enhance the
information in target date fund advertising and marketing materials.
Information would be provided in chart, table, or graph format in
order to enhance investor understanding of a fund's asset mix and how
the mix is expected to change as the investor's retirement approaches
and thereafter.
* Asset-Backed Securities. The SEC proposed new rules that would
significantly improve the disclosure and offering process for asset-
backed securities. The new rules would require reporting of detailed
data on each ban in the pool both at the time of securitization and on
an ongoing basis. In addition, the rule would require that a computer
program be filed with the SEC that demonstrated the effect of the
"waterfall" — how loan payments and losses are distributed among
different tranches of the security. The rule also would assure that
investors have enough time to utilize this enhanced information by
imposing a minimum offering period. For expedited "off the shelf'
offerings, sponsors would be required to retain some interest in the
securities, better aligning interests of sponsors and investors by
keeping "skin in the game." Since the SEC proposed its rule, Congress
passed Dodd-Frank, which also imposes an asset-backed securities risk
retention requirement to be adopted by financial regulators.
* Dark Pools. The growth of private trading systems known as dark
pools — in which participants can execute trades without displaying
public quotations — threatens to create a two-tiered market, in which
only privileged investors have full price and liquidity information.
The SEC proposed rules to generally require that information about an
investor's interest in buying or selling a stock be made publicly
available, instead of available only to a select group operating
within a dark pool.
* Market Structure Concept Release. U.S. equity markets are changing
significantly as trading speed accelerates, alternative trading
centers emerge and liquidity and pricing information disperses across
many exchanges. In light of these changes, the SEC launched a broad
review of equities market structure, issuing a concept release seeking
public comment on issues such as high-frequency trading, co-locating
trading terminals, and markets that do not publicly display price
quotations. In conducting this review, which was launched several
months ahead of the May 6 disruptions, the Commission has sought to
learn how all types of, and all sizes of, individual investors are
faring in the current market structure.
Corporate Governance:
The SEC is committed to supporting effective corporate governance that
benefits both shareholders and companies. It is working to see that
proxy and disclosure rules give market participants access to the
full, timely, and accurate information they need.
* Proxy Enhancements. The SEC adopted rules that allow shareholders to
better evaluate the leadership of public companies by requiring
companies to provide more meaningful and detailed information about
the leadership structure of boards, the qualifications of board
nominees, potential conflicts of interest faced by compensation
consultants, and the relationship between a company's overall
compensation policies and risk taking. In place for just a single
proxy season so far, this regulation has substantially increased the
quality of many flings, giving investors much greater insight into the
talents and qualifications of the men and women who run their
companies.
* Proxy Access. The SEC adopted rules designed to facilitate the
ability of shareholders to exercise their traditional rights under
state law to nominate and elect members to company boards of
directors. Under the rules, shareholders will be eligible to have
their nominees included in a company's proxy materials if they meet
certain requirements, including owning at least 3 percent of the
company's shares continuously for at least the prior three years.
* Voting Infrastructure Concept Release. Every year, more than 600
billion shares are voted at more than 13,000 shareholder meetings. The
proxy is the principal means through which shareholders and public
companies communicate around these elections. Yet it has been 30 years
since the Commission has conducted a thorough review of this
infrastructure. In light of the vast changes in the intervening
decades, the SEC issued a concept release related to the state of
proxy infrastructure and how it might be improved. The goal is to hear
whether the U.S. proxy system as a whole operates with the accuracy,
reliability, transparency, accountability, and integrity that
shareholders and issuers expect.
May 6 Market Disruption:
On May 6, 2010, the Dow Jones Industrial Average dropped more than 500
points in under five minutes of trading. It then dramatically reversed
itself, recovering most of the loss in the following five minutes.
These gyrations deprived investors of essential price discovery
function, and brought uncertainty to investors counting on safe and
stable markets.
With the markets unsettled, the SEC moved immediately to search for
causes and to prevent a similar situation from occurring again. Within
hours, cross-functional SEC teams were collaborating with exchange
representatives, the Financial Industry Regulatory Authority (FINRA)
and CFTC, discussing a coordinated response.
Within two weeks, the staffs of the SEC and CFTC released a
preliminary report on the events of May 6. In addition, the SEC posted
for comment proposed rules that would require — for the first time —
that FINRA and the exchanges impose a uniform circuit-breaker system
to halt trading for certain securities if their price moved 10 percent
in a five minute period. These pauses are designed to give market
participants time to provide liquidity and for the affected security
to attract new trading interest, so that trading can resume in a fair
and orderly fashion.
By June, slightly more than six weeks after the event, FINRA and the
exchanges began putting in place a pilot circuit breaker program for
S&P 500 stocks. In September, the program was expanded to include
stocks listed in the Russell 1000 and to cover several hundred
exchange-traded funds, or ETFs.
Also in September, the SEC approved new rules submitted by the
exchanges and FINRA clarifying the process for breaking clearly
erroneous trades. On May 6, nearly 20,000 trades were invalidated —
but only for those stocks that traded 60 percent or more away from
their price at 2:40 PM, a benchmark that was set after the fact. The
new rule reduces investor uncertainty by more fully defining the
conditions under which the exchanges and FINRA may cancel erroneous
trades.
In September, the Commission also posted for comment proposed exchange
rules that would effectively eliminate the practice by market makers
of submitting "stub" quotes to exchanges when they do not want to
participate in the markets. Stub quotes are priced far away from the
prevailing market price (e.g., a buy order at a penny or a sell order
at $100,000) and are not intended to be executed; however, the
extraordinary volatility on May 6 caused a Large number of stub quotes
to be executed, thereby generating a substantial portion of the trades
that needed to be broken.
At the end of September, the staffs of the SEC and CFTC released a
report of their findings regarding the events of May 6. The report
describes what occurred that afternoon as the result of "two liquidity
crises — one at the broad index level in the E-mini S&P futures
contract, the other with respect to individual stocks." The report
details how a large trade in the E-Mini S&P futures contract led to a
loss of liquidity in that instrument and how a similar loss of
liquidity occurred in the equity markets, as many providers of
liquidity curtailed their activity or temporarily withdrew, leading to
some trades being executed at absurdly low or high prices.
Wall Street Reform:
In the interest of full transparency, the SEC is posting on its
website both the transcripts of these roundtables, and the written
comments it receives. Additionally, the SEC is posting descriptions of
any rule-related meetings between staff and outside parties —
including participants, agendas and materials distributed.
On July 21, President Obama signed into law Dodd-Frank, the most
significant piece of financial reform legislation since the 1930s.
Dodd-Frank gives the SEC significant new investor protection
responsibilities and provides new tools with which to carry out agency
responsibilities, old and new.
Over the two years following the bill-signing, the SEC will be
responsible for more than 100 new rulemakings, 20 reports and five new
offices to be created within the agency. While this is a significant
task, the SEC continues to fulfill both its mandates under the Act and
its pre-existing responsibilities.
The SEC began planning for the demands of the new legislation months
before passage. Internal processes and cross-disciplinary working
groups — planned before the bill's signing for each of the major
rulemakings and studies — came on-line immediately after the bill's
signing, and continue to drive the process. Rule writing divisions and
offices meet weekly to review the status of rulemakings and studies,
and to plan for the upcoming weeks. SEC staff also meet regularly with
other financial regulators charged with bringing Dodd-Frank to life.
The SEC's Office of International Affairs meets weekly with
rulewriting staff to ensure appropriate coordination with foreign
regulators.
One key goal during Dodd-Frank rulemaking is to maximize the
opportunity for public comment against a background of complete
transparency.
The SEC opened a series of e-mail boxes less than a week after
President Obama signed the Act, to encourage public comment even
before the various rules were proposed and the official comment
periods began.
As the rulemakings progress, the SEC is making an effort not only to
meet with every party who expresses interest, but also to reach out to
stakeholders whose interests are affected but whose views do not
appear to be fully represented. The SEC is also holding public
roundtables and hearings on selected topics.
The Act will result in a number of important SEC actions including:
Over-the-Counter Derivatives. Dodd-Frank provides a comprehensive
framework for the regulation of the over-the-counter derivatives
market — bringing daylight into an opaque market that contributed to
the economic crisis of recent years. In directing the SEC and CFTC to
create a comprehensive regulatory framework where none currently
exists, Dodd-Frank imposes a number of substantial tasks. The SEC and
CFTC must distinguish between swaps and security-based swaps, and
decide how to regulate mixed swaps that are security-based swaps with
a commodity component. The agencies also must work together to define
other key terms. They are writing rules that address, among other
issues, mandatory clearing, the end-user exception to mandatory
clearing and transactional information transparency.
The SEC and CFTC are also charged with designating and defining new
classes of market participants. And they must register and oversee
these market participants.
Executive Compensation. In 2011, the SEC will finalize a number of
corporate governance rules, with a particular focus on executive
compensation. Dodd-Frank requires that shareholders have advisory say-
on-pay votes on executive compensation — non-binding up-or-down votes
on executive pay packages — at all companies at least once every three
years. Shareholders will also vote on the frequency of the say-on-pay
vote, and will have a similar "say" on golden parachutes.
Companies will be required to calculate and disclose the median total
compensation of all employees, and the ratio of CEO compensation to
that figure. Companies will also be required to disclose the
relationship between senior executives' compensation and the company's
financial performance, as well as whether employees or directors are
permitted to hedge against a decrease in value of equity securities
granted as part of their compensation.
In addition, the SEC is creating standards under which listed
companies will be required to develop "clawback" policies for
reclaiming incentive-based compensation from current and former
executive officers after a material financial restatement.
The SEC will also adopt rules requiring stock exchanges to set forth
listing standards for compensation committees including independence
requirements. In addition, the Commission will adopt disclosure
requirements addressing compensation consultant conflicts of interest.
Fiduciary Duty. Currently, registered investment advisers are held to
what is known as a "fiduciary" standard of conduct, meaning they must
put their clients' interests before their own, and avoid or reveal any
conflicts of interest. Registered broker-dealers, however, are held to
a "suitability" standard, that does not necessarily require the broker-
dealer to disclose all conflicts or put investors' needs first. This
distinction is lost on many investors, who do not realize that they
can be treated differently based on who is advising them. Dodd-Frank
requires that the SEC conduct a study of the effectiveness of existing
disparate standards of conduct.
After completion of the study, the legislation also gives the SEC
authority to write rules that would impose a harmonized fiduciary
standard on broker-dealers and investment advisers providing
personalized investment advice and recommendations about securities to
retail customers (and other customers as determined by the SEC). The
Act requires that this standard be "no less stringent" than the
standard applicable to investment advisers and further gives the SEC
the ability to better harmonize the regulatory requirements applicable
to broker-dealers and investment advisers.
Private Fund Adviser Registration. Dodd-Frank requires advisers to
most private funds — including hedge funds — with assets under
management of more than $150 million to register with the SEC. The Act
eliminates the so-called "15 client" provision which allows advisers
to avoid registration while managing substantial amounts of assets on
behalf of a large number of ultimate investors. It also authorizes the
Commission to require advisers to maintain records of — and file
reports regarding — the private funds they advise. The Large number of
unregistered private fund advisers presented significant potential for
fraud and questionable practices. In addition, the lack of a
comprehensive database for private funds has made it virtually
impossible to monitor them for systemic risk.
Asset-backed Securities. Dodd-Frank requires the SEC to issue rules
designed to improve the asset-backed securitization process.
Dodd-Frank requires the SEC to work with fellow regulators to adopt
rules requiring certain parties who put together securitizations to
retain an economic interest in a material portion of the credit risk
in assets transferred or sold in connection with securitizations. Dodd-
Frank includes this provision — known as "risk retention" or "skin in
the game" — in order to align the economic interests of securitizers
with those of investors in asset-backed securities.
The SEC also expects to finalize rubs in 2011 requiring that
securitizers provide enhanced disclosure about representations and
warranties, as well as fulfilled and unfulfilled asset repurchase
requests. These rules will allow investors to identify asset
originators with clear underwriting deficiencies. Dodd-Frank also
requires the SEC to issue rules requiring any issuer of an asset-
backed security to perform a review of the assets underlying the
security and to disclose the nature of this analysis.
The legislation also directs the SEC to promulgate rules requiring
asset-level or loan-level data about the underlying assets, if
individual ban data are necessary for investors to independently
perform due diligence. Dodd-Frank requires specific types of data to
be disclosed, many of which were included in the SEC's 2010 proposals
to revise Regulation AB.
Finally, Dodd-Frank requires the SEC to adopt rules to address
material conflicts of interest in connection with securitizations.
Specifically, Dodd-Frank mandates rules to prohibit underwriters,
placement agents, initial purchasers or sponsors of an asset-backed
security (or their affiliates or subsidiaries) from engaging in any
transaction within one year of the date of the first closing of the
sale of an asset-backed security that would constitute a material
conflict of interest with respect to any investor in a transaction
arising out of such activity.
Credit Rating Agencies. The Act builds on existing SEC authority to
designate Nationally Recognized Statistical Rating Organizations
(NRSR0s), requiring the Commission to adopt rules designed both to
improve the accuracy of individual ratings, and to give investors
greater insight into the factors behind those ratings. New regulations
will address potential conflicts of interest with respect to NRSRO
sales and marketing practices. They will also require annual reports
on internal controls designed to eliminate bias in favor of issuer/
clients; prescribe "look-back" analyses when an analyst leaves an
organization — searching for patterns of bias; and grant the SEC
authority to impose fines and penalties.
New rules will also require that NRSROs disclose performance
statistics, reveal their rating methodologies and disclose — in an
easily accessible format — the data and assumptions underlying credit
ratings. In addition, new regulations will establish an analyst
training and testing regime and consistent application of rating
symbols and definitions, creating a clarity of communication that
allows investors to easily understand rating agency opinions,
regardless of their source, and to compare performance of one agency
against another.
Financial Highlights:
This section provides key financial information for FY 2010. It
summarizes the SEC's efforts to manage resources efficiently and
responsibly while accomplishing the agency's mission.
In FY 2010, the SEC's total budgetary authority equaled $1,571
million, a 62 percent increase over the FY 2009 level of $970 million.
The largest contributor of the increase is the establishment of
Investor Protection Fund authorized in Dodd-Frank. The funding
authority in FY 2010 included $1,095 million in offsetting collections
(X0100), $452 million for the Investor Protection Fund p(5567), and
$24 million in carryover of unobligated balances and recoveries from
prior-year obligations. In FY 2009, the funding included $894 million
in offsetting collections ((0100), $10 million in a supplemental
appropriation (09/10 0100) issued by Congress to use for investigating
securities fraud, and $66 million in carry-over of unobligated
balances and recoveries from prior-year obligations. This is
illustrated in Chart 1.2, Spending Authority by Source.
The SEC employed a total of 3,748 FTE in FY 2010. This represents an
increase of 106 FTE over FY 2009. The increase in FTE from FY 2009 to
FY 2010 is due to the increase in funding and the agency's focus on
hiring new staff with the requisite skills and experience to further
the SEC's mission.
Chart 1.2: Spending Authority By Source:
[Refer to PDF for image: vertical bar graph]
General Fund FY 2009:
Appropriation X0100: $894 million;
Appropriation X5567: $10 million;
Carry over: $66 million.
General Fund FY 2010:
Appropriation X0100: $1,095 billion;
Carry over: $24 million.
Investor Protection Fund FY 2009: [Empty];
Investor Protection Fund FY 2010: $452 million.
Note: The Investor Protection Fund (X5567) was established in FY 2010.
[End of figure]
The SEC has steadily reduced the "Unobligated Balance Brought Forward,
October 1" line of the Statement of Budgetary Resources, as
illustrated in Chart 1.3, Unobligated Balance, Brought Forward. In FY
2010, of the $27 million brought forward, $7.8 million was related to
a $10 million supplemental appropriation for investigations of
securities fraud.
Chart 1.3: Unobligated Balance, Brought Forward:
[Refer to PDF for image: vertical bar graph]
FY 2007: $187 million;
FY 2008: $90 million;
FY 2009: $58 million;
FY 2010: $27 million.
[End of figure]
Of the $10 million supplemental appropriation, $107 thousand remains
unobligated as of September 30, 2010. This supplemental appropriation
is also reflected on the "Unexpended Appropriations — Other Funds"
line of the Balance Sheet. The status of funds for the supplemental
appropriation is illustrated in Chart 1.4, Status of the Supplemental
Fund.
Chart 1.4: Status Of The Supplemental Fund (Dollars In Thousands):
[Refer to PDF for image: pie-chart]
Obligations Delivered: $8,251;
Unobligated Funds: $107;
Obligations Undelivered: $1,642.
[End of figure]
The Commission adjusts the rates (dollars per million
dollars transacted) for Section 31 transaction fees
periodically in accordance with the Investor and Capital
$30.00
Markets Fee Relief Act of 2002. As shown in Chart 1.5, c3
Section 31 Exchange Fee Rate, the first half of FY 2009, 0
$24.05
the Section 31 Fee rate was $5.60. It was subsequently
E2
increased to $25.70 for the second half of FY 2009
slaw
through the first quarter of FY 2010. The rate was then reduced to
$12.70 on January 15, 2010, and then $12.00 increased to $16.90 on
April 1, 2010.
$6.50 $5.00 $560
The overall securities transactions volume subject to
Section 31 Fees was nearly unchanged between FY
2009 and FY 2010. However, the monthly volume $000 .
FY 2009 FY2009 FY2009 FY2009 FY 2010 FY 2010 FY 2010 FY 2010
fluctuations applied to the varying fee rates produced average
weighted fee rates of $14.34 and $18.33 for FY 2009 and FY 2010,
respectively. As a result, there was approximately a 26 percent
increase in Section 31 Fee revenues.
Chart 1.5: Section 31 Exchange Fee Rate:
[Refer to PDF for image: vertical bar graph]
FY 2009, Q1:
Dollars per millions dollars transacted: $5.60.
FY 2009, Q2:
Dollars per millions dollars transacted: $5.60.
FY 2009, Q3:
Dollars per millions dollars transacted: $25.70.
FY 2009, Q4:
Dollars per millions dollars transacted: $25.70.
FY 2010, Q1:
Dollars per millions dollars transacted: $25.70.
FY 2010, Q2:
Dollars per millions dollars transacted: $12.70.
FY 2010, Q3:
Dollars per millions dollars transacted: $16.90.
FY 2010, Q4:
Dollars per millions dollars transacted: $16.90.
[End of figure]
Chart 1.6, Offsetting Collections vs. New Budgetary Authority,
[Footnote 1] presents the budget authority and offsetting collections
related to transactions fees and filing fees from FYs 2002 through
2010. The sum of the offsetting collections targets for Section 31
Fees and filing fees in FY 2010 was $1,495 million. The actual
offsetting collections for FY 2010 was $1,443 million.
In FY 2010, there was a $273 million decrease to the accounts
receivable balance. The decrease was primarily due to a $155 million
increase in the Allowance for Loss on Accounts Receivable for
disgorgement and penalties. Secondly, receivables for Section 31 Fees
declined by $60 million, comprised of $48 million due to fee rate
changes, and $12 million due to adjustments from prior year fees owed
in FY 2009 that were paid in FY 2010. Finally, there was a $58 million
decrease in gross disgorgement and penalties receivables.
Chart 1.6: Offsetting Collections vs. New Budget Authority Section 31
Fees And Filing Fees:
[Refer to PDF for image: combination vertical bar and line graph]
FY 2002:
Total Actual Offsetting Collections: $1.013 billion;
New Budgetary Authority: $438 million.
FY 2003:
Total Actual Offsetting Collections: $1.077 billion;
New Budgetary Authority: $716 million.
FY 2004:
Total Actual Offsetting Collections: $1,392 billion;
New Budgetary Authority: $812 million.
FY 2005:
Total Actual Offsetting Collections: $1,665 billion;
New Budgetary Authority: $856 million.
FY 2006:
Total Actual Offsetting Collections: $1.903 billion;
New Budgetary Authority: $863 million.
FY 2007:
Total Actual Offsetting Collections: $1,538 billion;
New Budgetary Authority: $868 million.
FY 2008:
Total Actual Offsetting Collections: $984 million;
New Budgetary Authority: $843 million.
FY 2009:
Total Actual Offsetting Collections: $1,016 billion;
New Budgetary Authority: $894 million.
FY 2010:
Total Actual Offsetting Collections: $1,443 billion;
New Budgetary Authority: $1.095 billion.
Chart 1.6 Footnote:
[1] The above chart only reflects offsetting collections related to
fees collected on Section 31 securities transactions and Section 6(b),
13(e), 14(g), and 24f-2 filings and does not include reimbursable type
collections and refunds as reported on the "Offsetting Collections"
line of the Statement of Budgetary Resources.
[End of figure]
As of September 30, 2010, Total Assets decreased by $401 million
compared to the September 30, 2009 balance, as illustrated in Chart
1.7, Assets, Liabilities, and Net Position. This decrease is primarily
due to a $1,035 million decline in Investments, stemming from the
SEC's continued efforts to accelerate distributions to harmed
investors. This decline was offset by a $906 million increase in Fund
Balance with Treasury (FBVVT), due largely to $452 million in funding
for the new Investor Protection Fund authorized by Dodd-Frank and an
increase of $348 million in filing fees and Section 31 fees.
The decrease of $1,213 million in Total Liabilities is mostly due to
distributions to harmed investors and a lower accounts receivable
balance.
The SEC does not record on its financial statements any asset amounts
that another government entity such as a court, or a non-governmental
entity, such as a receiver, has collected or will collect and will
subsequently disburse.
Chart 1.7: Assets, Liabilities, And Net Position:
[Refer to PDF for image: vertical bar graph]
Total Assets:
FY 2009: $8,663 billion;
FY 2010: $8,162 billion.
Total Liabilities:
FY 2009: $2,495 billion;
FY 2010: $1,282 billion.
Net Position:
FY 2009: $6.088 billion;
FY 2010: $6.880 billion.
[End of figure]
The 'Total Program Costs" line on the Statement of Net Cost and the
"Gross Outlays" line on the Statement of Budgetary Resources increased
primarily as a result of increases in salaries and benefits. In
FY2010, the SEC incurred costs resulting from an increase in staffing
levels and cost of living adjustments. The increase in the SEC's
salary and benefits related costs is evidenced in Chart 1.8, Expense
Comparison.
Chart 1.8: Expense Comparison:
[Refer to PDF for image: vertical bar graph]
Salaries and Benefit Expenses:
FY 2009: $689 million;
FY 2010: $755 million.
Other Expenses:
FY 2009: $292 million;
FY 2010: $303 million.
[End of figure]
Limitations of the Financial Statements:
The principal financial statements included in this report have been
prepared by SEC Management to report the financial position and
results of operations of the SEC, pursuant to the requirements of 31
U.S. Code Section 3515(b). While the statements have been prepared
from the books and records of the SEC in accordance with GAAP for
federal entities and the formats prescribed by the Office of
Management and Budget (OMB), the statements are in addition to the
financial reports used to monitor and control budgetary resources,
which are prepared from the same books and records. The statements
should be read with the understanding that they are for a component of
the U.S. Government, a sovereign entity.
Performance Highlights:
This section provides key performance information for FY 2010. It
outlines the SEC's strategic and performance planning framework and
progress toward reaching planned performance targets. Additionally,
this section includes a list of performance indicators that provide
useful information for understanding the agency's activities.
Strategic and Performance Planning Framework:
The FY 2010 strategic and performance planning framework
is based on the SEC's new strategic plan covering FY 2010 —
FY 2015, available at [hyperlink,
http://www.sec.gov/about/secstratplan1015f.pdf]. This updated plan
addresses the agency's mission, vision, values, and revised strategic
goals. The plan further details the outcomes the agency is seeking to
achieve, the strategies and initiatives that will be undertaken to
accomplish those outcomes, and the performance measures that will be
used to gauge the agency's progress.
The SEC's goals and priorities in the Strategic Plan are influenced by
a number of external environmental factors, including the demands of
fulfilling the agency mission in complex and global financial markets
and changes in legislation affecting the agency. During the past two
years, this environment has changed dramatically. While the Strategic
Plan attempts to anticipate various ways in which markets, regulated
industries, and legislative underpinnings may transform over time, no
plan can anticipate all possible scenarios. Because the accompanying
performance measures were significantly revised in the FY 2010 — FY
2015 strategic plan, there is limited prior year performance
information provided in this report.
The SEC's work is structured around four strategic goals and 12
outcomes that gauge the SEC's performance within each strategic goal.
Table 1.2:
Strategic Goals with Resources Invested: Foster and enforce compliance
with the federal securities laws;
Cost: $841.7 million;
Outcomes:
The SEC fosters compliance with the federal securities laws.
The SEC promptly detects violations of the federal securities laws.
The SEC prosecutes violations of federal securities laws and holds
violators accountable.
Strategic Goals with Resources Invested: Establish an effective
regulatory environment;
Cost: $106.1 million;
Outcomes:
The SEC establishes and maintains a regulatory environment that
promotes high-quality disclosure, financial reporting, and governance,
and prevents abusive practices by registrants, financial
intermediaries, and other market participants.
The U.S. capital markets operate in a fair, efficient, transparent,
and competitive manner, fostering capital formation and useful
innovation.
The SEC adopts and administers rules and regulations that enable
market participants to understand clearly their obligations under the
securities laws.
Strategic Goals with Resources Invested: Facilitate access to the
information investors need to make informed investment decisions;
Cost: 1183.1 million;
Outcomes:
Investors have access to high-quality disclosure materials that are
useful to investment decision making.
Agency rulemaking and investor education programs are informed by an
understanding of the wide range of investor needs.
Strategic Goals with Resources Invested: Enhance the Commission's
performance through effective alignment and management of human,
information, and financial capital;
Cost: $127.5 million;
Outcomes:
The SEC maintains a work environment that attracts, engages, and
retains a technically proficient and diverse workforce that can excel
and meet the dynamic challenges of market oversight.
The SEC retains a diverse team of world-class leaders who provide
motivation and strategic direction to the SEC workforce.
Information within and available to the SEC becomes a Commission-wide
shared resource, appropriately protected, that enables a collaborative
and knowledge-based working environment.
Resource decisions and operations reflect sound financial and risk
management principles.
Performance Measures Overview:
To assess the SEC's performance results against the Strategic Plan's
established targets, a results rating methodology is used to assign
one of the following three performance ratings for a given result:
Below Target: Not Met;
On Target: Met;
Above Target: Exceeded.
The new strategic plan identified 51 performance measures. Several of
these performance measures track multiple performance targets, and
Chart 1.9, Summary of FY 2010 Performance Results shows the
performance results for each of the 70 performance targets. Twenty-
seven of these targets have not yet been established or FY 2010 data
is not available (categorized as not applicable (N/A)). As the agency
refines its processes for collecting the information, targets will be
established and data will be reported.
Performance indicators, outlined in Table 1.4, Performance Indicators
Results Summary, do not include planned targets because it would be
inappropriate for the agency to conduct certain activities with an eye
towards meeting predetermined targets. Therefore, results for
performance indicators are not included in Chart 1.9, Summary of FY
2010 Performance Results.
Chart 1.9: Summary Of FY 2010 Performance Results:
[Refer to PDF for image: pie-chart]
Exceeded: 23;
Met: 10;
Not Met: 10;
N/A: 27.
[End of figure]
Performance Results Summary:
The SEC has established various performance measures for assessing
program performance against strategic goals and planned outcomes. For
each performance measure, one or more performance targets have been
established. Table 1.3, Performance Measures Results Summary provides
a summary of actual performance results during FY 2009 and FY 2010 for
each performance measure, and Table 1.4, Performance Indicators
Results Summary provides a summary of indicators by outcome within
each strategic goal. A detailed discussion of the agency's program
achievements and performance results is boated in the Performance
Section.
Table 1.3: Performance Measures Results Summary:
Goal 1: Foster and Enforce Compliance with the Federal Securities Laws:
Outcome 1.1: The SEC fosters compliance with the federal securities
laws:
Measure 1: Number of new investor education materials designed
specifically to help investors protect themselves from fraud:
FY 2009 Actual: N/A;
FY 2010 Target: N/A;
FY 2010 Actual: 16;
FY 2010 Results: N/A.
Measure 2: Number of industry outreach and education programs targeted
to areas identified as raising particular compliance risks:
FY 2009 Actual: N/A;
FY 2010 Target: N/A;
FY 2010 Actual: 6;
FY 2010 Results: N/A.
Measure 3: Percentage of firms receiving deficiency letters that take
corrective action in response to all exam findings:
FY 2009 Actual: 94%;
FY 2010 Target: 95%;
FY 2010 Actual: 90%;
FY 2010 Results: Not Met.
Measure 4: Percentage of attendees at CG Outreach that rated the
program as "Useful" or "Extremely Useful" in their compliance efforts:
FY 2009 Actual: 84%;
FY 2010 Target: 92%;
FY 2010 Actual: 77%;
FY 2010 Results: Not Met.
Outcome 1.2: The SEC promptly detects ablations of the federal
securities laws:
Measure 5: Percentage of cause and special exams (sweeps) conducted as a
result of risk assessment process that includes multi-dimensional
input:
FY 2009 Actual: N/A;
FY 2010 Target: N/A;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Measure 6: Percentage of advisers deemed "high risk" examined during
the year:
FY 2009 Actual: 22%;
FY 2010 Target: 33%;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Measure 7: Percentage of registrant population examined during the
year:
Investment advisers:
FY 2009 Actual: 10%;
FY 2010 Target: 9%;
FY 2010 Actual: 9%;
FY 2010 Results: Met.
Investment companies:
FY 2009 Actual: 29%;
FY 2010 Target: 15%;
FY 2010 Actual: 10%;
FY 2010 Results: Not Met.
Broker-dealers (exams by SEC and SR0s):
FY 2009 Actual: 54%;
FY 2010 Target: 55%;
FY 2010 Actual: 44%;
FY 2010 Results: Not Met.
Measure 8: Percentage of non-sweep and non-cause exams that are
concluded within 120 days:
FY 2009 Actual: 65%;
FY 2010 Target: 75%;
FY 2010 Actual: 48%;
FY 2010 Results: Not Met.
Outcome 1.3: The SEC prosecutes violation of federal securities laws
and holds violators accountable:
Measure 9: Percentage of enforcement actions successfully resolved:
FY 2009 Actual: 92%;
FY 2010 Target: 90%;
FY 2010 Actual: 92%;
FY 2010 Results: Exceeded.
Measure 10: Percentage of first enforcement actions fled within two
years:
FY 2009 Actual: 70%;
FY 2010 Target: 65%;
FY 2010 Actual: 67%;
FY 2010 Results: Exceeded.
Measure 11: Percentage of debts where either a payment has been made
or a collection activity has been initiated within six months of the
due date of the debt:
FY 2009 Actual: 90%;
FY 2010 Target: 92%;
FY 2010 Actual: 86%;
FY 2010 Results: Not Met.
Measure 12: Percentage of Fair Fund and disgorgement fund plans that
distributed the final tranche of funds to injured investors within 24
months of the order appointing the fund administrator:
FY 2009 Actual: N/A;
FY 2010 Target: N/A;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Measure 13: Percentage of Fair Fund and disgorgement fund plans approved
by final order within the prior fiscal year which had a first tranche
of funds distributed under those plans within 12 months of such
approval date:
FY 2009 Actual: N/A;
FY 2010 Target: 60%;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Goal 2: Establish an Effective Regulatory Environment:
Outcome 2.1: The SEC establishes and maintains a regulatory
environment that promotes high-quality disclosure, financial
reporting, and governance, and that prevents abusive practices by
registrants, financial Intermediaries, and other market
participants.
Measure 1: Survey on quality of disclosure;
FY 2009 Actual: N/A;
FY 2010 Target: N/A;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Measure 2: Number of consultations; joint events, reports, or
initiatives; and joint examinations and other mutual supervisory
efforts with SROs and other federal, state, and non-U.S. regulators;
FY 2009 Actual: N/A;
FY 2010 Target: N/A;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Measure 3: Number of non-U.S. regulators trained
FY 2009 Actual: N/A;
FY 2010 Target: 1,905;
FY 2010 Actual: 1,997;
FY 2010 Results: Exceeded.
Outcome 2.2: The US. capital markets operate in a fair, efficient,
transparent, and competitive manner, fostering capital formation and
useful innovation.
Measure 4: Percentage of transaction dollars settled on time each year;
FY 2009 Actual: 99%;
FY 2010 Target: 99%;
FY 2010 Actual: 99%;
FY 2010 Results: Met.
Measure 5: Average institutional transaction costs for exchange listed
stocks on a monthly basis;
FY 2009 Actual: N/A;
FY 2010 Target: N/A;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Measure 6: Percentage of market outages at SROs and electronic
communications networks (ECNs) that are corrected within targeted
timeframes:
Within 2 hours:
FY 2009 Actual: 87%;
FY 2010 Target: 60%;
FY 2010 Actual: 7%;
FY 2010 Results: Exceeded.
Within 4 hours:
FY 2009 Actual: 98%;
FY 2010 Target: 75%;
FY 2010 Actual: 85%;
FY 2010 Results: Exceeded.
Within 24 hours:
FY 2009 Actual: 98%;
FY 2010 Target: 96%;
FY 2010 Actual: 100%;
FY 2010 Results: Exceeded.
Outcome 2.3: The SEC adopts and administers rules and regulations that
enable market participants to understand clearly their obligations
under the securities laws.
Measure 7: Length of time to respond to written requests for no-action
letters, exemptive applications, and written interpretive requests:
Trading and Markets - No-action letters, exemptive applications, and
written interpretive requests (combined figure):
FY 2009 Actual: 70%;
FY 2010 Target: 85%;
FY 2010 Actual: 91%;
FY 2010 Results: Exceeded.
Investment Management - No-action letters and interpretive requests:
FY 2009 Actual: 200%;
FY 2010 Target: 75%;
FY 2010 Actual: 100%;
FY 2010 Results: Exceeded.
Investment Management - Exemptive applications:
FY 2009 Actual: 95%;
FY 2010 Target: 80%;
FY 2010 Actual: 100%;
FY 2010 Results: Exceeded.
Corporation Finance - No-action letters and interpretive requests:
FY 2009 Actual: 85%;
FY 2010 Target: 90%;
FY 2010 Actual: 97%;
FY 2010 Results: Exceeded.
Corporation Finance - Shareholder proposals:
FY 2009 Actual: 100%;
FY 2010 Target: 100%;
FY 2010 Actual: 100%;
FY 2010 Results: Exceeded.
Measure 8: Survey on whether SEC rules and regulations are dearly
understandable;
FY 2009 Actual: N/A;
FY 2010 Target: N/A;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Measure 9: Time to complete SEC review of SRO rules that are subject
to SEC approval:
Within 35 days:
FY 2009 Actual: N/A;
FY 2010 Target: 40%;
FY 2010 Actual: 73%;
FY 2010 Results: Exceeded.
Within 45 days:
FY 2009 Actual: N/A%;
FY 2010 Target: 80%;
FY 2010 Actual: 99%;
FY 2010 Results: Exceeded.
Goal 3: Facilitate Access to the Information Investors Need to Make
Informed Investment Decisions:
Outcome 3.1: Investors have access to high-quality disclosure
materials that are useful to investment decision making.
Measure 1: Percentage of public companies and investment companies
with disclosures reviewed each year:
Corporations:
FY 2009 Actual: 40%;
FY 2010 Target: 34%;
FY 2010 Actual: 44%;
FY 2010 Results: Exceeded.
Investment company portfolios:
FY 2009 Actual: 35%;
FY 2010 Target: 33%;
FY 2010 Actual: 35%;
FY 2010 Results: Exceeded.
Measure 2: Time to issue initial comments on Securities At filings;
FY 2009 Actual: 25.3 days;
FY 2010 Target: less than 30 days;
FY 2010 Actual: 24.1 days;
FY 2010 Results: Met.
Measure 3: Percentage of investment company disclosure reviews for
which initial comments are completed within timeliness goals:
Initial registration statements:
FY 2009 Actual: 95%;
FY 2010 Target: 85%;
FY 2010 Actual: 93%;
FY 2010 Results: Exceeded.
Post-effective amendments:
FY 2009 Actual: 97%;
FY 2010 Target: 90%;
FY 2010 Actual: 94%;
FY 2010 Results: Exceeded.
Preliminary proxy statements:
FY 2009 Actual: 99%;
FY 2010 Target: 99%;
FY 2010 Actual: 99%;
FY 2010 Results: Met.
Measure 4: Point of sale "click-through rate;"
FY 2009 Actual: N/A;
FY 2010 Target: N/A;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Measure 5: Access to broker-dealer and investment adviser background
checks:
BrokerCheck System:
FY 2009 Actual: N/A;
FY 2010 Target: N/A;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
IAPD System:
FY 2009 Actual: N/A;
FY 2010 Target: N/A;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Measure 6: Investor demand for disclosures on municipal securities;
FY 2009 Actual: N/A;
FY 2010 Target: N/A;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Measure 7: Satisfaction index for disclosure process;
FY 2009 Actual: N/A;
FY 2010 Target: N/A;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Outcome 3.2: Agency rulemaking and investor education programs are
informed by an understanding of the wide range of investor needs.
Measure 8: Number of investors reached, and number of in-person events
with specifically targeted communities and organizations:
Number of investors reached (in millions):
FY 2009 Actual: N/A;
FY 2010 Target: 17.3;
FY 2010 Actual: 17.8;
FY 2010 Results: Exceeded.
Number of in-person events:
FY 2009 Actual: N/A;
FY 2010 Target: 25;
FY 2010 Actual: 42;
FY 2010 Results: Exceeded.
Measure 9: Number of investor educational initiatives organized and
produced;
FY 2009 Actual: N/A;
FY 2010 Target: 8;
FY 2010 Actual: 9;
FY 2010 Results: Exceeded.
Measure 10: Timeliness of responses to investor contacts:
Closed within 7 days:
FY 2009 Actual: 70%;
FY 2010 Target: 80%;
FY 2010 Actual: 72%;
FY 2010 Results: Not Met.
Closed within 30 days:
FY 2009 Actual: 90%;
FY 2010 Target: 90%;
FY 2010 Actual: 93%;
FY 2010 Results: Exceeded.
Measure 11: Percentage of rules impacting investors that are presented
in alternate user-friendly formats;
FY 2009 Actual: N/A%;
FY 2010 Target: 100%;
FY 2010 Actual: 100%;
FY 2010 Results: Met.
Measure 12: Customer satisfaction with usefulness of investor
educational programs and materials;
FY 2009 Actual: N/A;
FY 2010 Target: N/A;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Goal 4: Enhance the Commission's Performance Through Effective
Alignment and Management of Human, Information, and Financial Capital.
Outcome 4.1: The SEC maintains a work environment that attracts,
engages, and retains a technically proficient and diverse workforce
that can excel and meet the dynamic challenges of market oversight.
Measure 1: Survey of employee engagement;
FY 2009 Actual: N/A;
FY 2010 Target: 65%;
FY 2010 Actual: 58%;
FY 2010 Results: Not Met.
Measure 2: Best Places to Work ranking;
FY 2009 Actual: Ranked #11;
FY 2010 Target: Ranked #5;
FY 2010 Actual: Ranked #24;
FY 2010 Results: Not Met.
Measure 3: Turnover;
FY 2009 Actual: 3.70%;
FY 2010 Target: less than 8%;
FY 2010 Actual: 5%;
FY 2010 Results: Met.
Measure 4: Expanding staff expertise;
FY 2009 Actual: N/A;
FY 2010 Target: N/A;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Measure 5: Size of competency gaps;
FY 2009 Actual: N/A;
FY 2010 Target: 10%;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Measure 6: Number of diversity-related partnerships/alliances;
FY 2009 Actual: N/A;
FY 2010 Target: 1;
FY 2010 Actual: 2;
FY 2010 Results: Exceeded.
Measure 7: Survey feedback on the quality of the SEC's performance
management program;
FY 2009 Actual: N/A;
FY 2010 Target: 65%;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Outcome 4.2: The SEC retains a diverse team of world-class leaders who
provide motivation and strategic direction to the SEC workforce.
Measure 8: Quality of hire;
FY 2009 Actual: N/A;
FY 2010 Target: 75%;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Measure 9: Leadership competency gaps;
FY 2009 Actual: N/A;
FY 2010 Target: 10%;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Measure 10: Satisfaction with Leadership Development Program (5-point
scale);
FY 2009 Actual: N/A;
FY 2010 Target: 4;
FY 2010 Actual: 4.46;
FY 2010 Results: Exceeded.
Outcome 4.3: information within and available to the SEC becomes a
Commission-wide shared resource, appropriately protected, that enables
a collaborative and knowledge-based working environment.
Measure 11: Percentage of SEC data sources accessible through a virtual
data warehouse, and milestones achieved towards the creation of a robust
information management program;
FY 2009 Actual: N/A;
FY 2010 Target: N/A;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Measure 12: Deployment of document management and workflow tools;
FY 2009 Actual: N/A;
FY 2010 Target: Enforcement and Examinations;
FY 2010 Actual: Enforcement and Examinations;
FY 2010 Results: Met.
Measure 13: Time to process evidentiary material for enforcement
investigations;
FY 2009 Actual: N/A;
FY 2010 Target: N/A;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Measure 14: System availability:
Systems availability:
FY 2009 Actual: N/A;
FY 2010 Target: 99%;
FY 2010 Actual: 99.97%;
FY 2010 Results: Exceeded.
Percentage fail over within 4 hours:
FY 2009 Actual: N/A;
FY 2010 Target: 100%;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Systems virtualized:
FY 2009 Actual: N/A;
FY 2010 Target: N/A;
FY 2010 Actual: 22%;
FY 2010 Results: N/A.
Outcome 4.4: Resource decisions and operations reflect sound financial
and risk management principles.
Measure 15: Milestones achieved towards establishment of a robust data
management program;
FY 2009 Actual: N/A;
FY 2010 Target: Administrative data and reporting requirements
identified;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Measure 16: Financial Systems Integration;
FY 2009 Actual: N/A;
FY 2010 Target: 17%;
FY 2010 Actual: N/A;
FY 2010 Results: N/A.
Measure 17: Financial Audit Results:
Unqualified opinion:
FY 2009 Actual: Yes;
FY 2010 Target: Yes;
FY 2010 Actual: Yes;
FY 2010 Results: Met.
Material weaknesses:
FY 2009 Actual: 1;
FY 2010 Target: 0;
FY 2010 Actual: 2;
FY 2010 Results: Not Met.
Significant deficiency:
FY 2009 Actual: 6;
FY 2010 Target: 0;
FY 2010 Actual: 0;
FY 2010 Results: Met.
N/A - Signifies data does not currently exist or targets were not
established.
[End of table]
Table 1.4: Performance Indicators Results Summary:
Goal 1: Foster and Enforce Compliance with the Federal Securities Laws.
Outcome 1.1: The SEC fosters compliance with the federal securities
laws.
Indicator 1: Percentage of actions identified as "high impact" which
have resulted in significant corrective industry reaction;
FY 2009 Actual: N/A;
FY 2010 Actual: 100%.
Indicator 2: Annual increases or decreases in the number of CCOs
attending CCOutreach programs;
FY 2009 Actual: N/A;
FY 2010 Actual: N/A.
Outcome 1.2: The SEC promptly detects violations of the federal
securities laws.
Indicator 3: Percentage of exams that identify deficiencies, and the
percentage that result in a "significant finding:"
Percentage identify deficiencies:
FY 2009 Actual: N/A;
FY 2010 Actual: 72%.
Percentage that result in a "significant finding:"
FY 2009 Actual: N/A;
FY 2010 Actual: 42%.
Indicator 4: Number of investigations or cause exams from tips:
Number of investigations:
FY 2009 Actual: N/A;
FY 2010 Actual: 303.
Number of cause exams:
FY 2009 Actual: N/A;
FY 2010 Actual: N/A.
Outcome 1.3: The SEC prosecutes violations of federal securities laws
and holds violators accountable.
Indicator 5: SEC investigations referred to SROs or other state,
federal, and foreign authorities for enforcement;
FY 2009 Actual: N/A;
FY 2010 Actual: 492.
Indicator 6: Percent of all enforcement investigations deemed "high
impact;"
FY 2009 Actual: N/A;
FY 2010 Actual: 3.26%.
Indicator 7: Percent of investigations that come from internally-
generated referrals or prospects;
FY 2009 Actual: N/A;
FY 2010 Actual: 21.9%.
Indicator 8: Criminal investigations relating to SEC investigations;
FY 2009 Actual: N/A;
FY 2010 Actual: 139.
Indicator 9: Disgorgement and penalties ordered and the amounts
collected by the SEC:
Ordered amounts (in millions):
FY 2009 Actual: $2,442;
FY 2010 Actual: $2,846.
Collected amounts (in millions):
FY 2009 Actual: $1,683;
FY 2010 Actual: $1,724.
Indicator 10: Requests from foreign authorities for SEC assistance and
SEC requests for assistance from foreign authorities:
Number of requests from foreign authorities:
FY 2009 Actual: 408;
FY 2010 Actual: 457.
Number of SEC requests:
FY 2009 Actual: 774;
FY 2010 Actual: 605.
Goal 2: Establish an Effective Regulatory Environment.
Outcome 2.1: The SEC establishes and maintains a regulatory
environment that promotes high-quality disclosure, financial reporting
and governance, and that prevents abusive practices by registrants,
financial intermediaries, and other market participants.
Indicator 1: Average cost of capital in U.S. relative to the rest of
the world;
FY 2009 Actual: N/A;
FY 2010 Actual: 10.99%.
Outcome 2.2: The U.S capital markets operate in a fair, efficient,
transparent and competitive manner, fostering capital formation and
useful innovation.
Indicator 2: Average quoted spread for exchange listed stocks on a
monthly basis (in cents);
FY 2009 Actual: N/A;
FY 2010 Actual: 2.52.
Indicator 3: Average effective spread for exchange listed stocks on a
monthly basis (in cents);
FY 2009 Actual: N/A;
FY 2010 Actual: 2.65.
Indicator 4: Speed of execution (in seconds);
FY 2009 Actual: N/A;
FY 2010 Actual: 1.77.
Indicator 5: Average quoted size of exchange listed stocks on a
monthly basis;
FY 2009 Actual: N/A;
FY 2010 Actual: N/A.
Indicator 6: Average daily volatility of exchange listed stocks on a
monthly basis;
FY 2009 Actual: N/A;
FY 2010 Actual: 1.18%.
Outcome 2.3: The SEC adopts and administers rules and regulations that
enable market participants to understand clearly their obligations
under the securities laws.
Indicator 7: Percentage of SRO rule flings that are submitted for
immediate effectiveness;
FY 2009 Actual: N/A;
FY 2010 Actual: 69%.
N/A - Signifies data does not currently exist for existing or newly
added measures.
[End of table]
Management Assurances:
The SEC is firmly committed to building and maintaining strong
internal controls. Internal control is an integral component of
effective agency management, providing reasonable assurance that the
following objectives are being achieved: effectiveness and efficiency
of operations, reliability of financial reporting, and compliance with
laws and regulations. The Federal Managers' Financial Integrity Act of
1982 (FMFIA) requires agencies to annually assess and report on
internal controls that protect the integrity of federal programs and
on the conformance of financial management systems with certain
requirements.
Guidance for implementing the FMFIA is provided through OMB Circular
No. A-123. In addition to requiring agencies to provide an assurance
statement on the effectiveness of programmatic internal controls and
financial system conformance, the Circular requires agencies to
provide an assurance statement on the effectiveness of internal
control over financial reporting.
In addition, Section 963 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act public Law 111-203), signed into law on July
21, 2010, describes the responsibility of SEC management to establish
and maintain adequate internal controls and procedures for financial
reporting. Dodd-Frank requires an annual financial controls audit, an
assessment of the effectiveness of internal control, and an
attestation by the Chairman and Chief Financial Officer.
The following Assurance Statement is issued in accordance with the
FMFIA, OMB Circular No. A-123 and Section 963 of Dodd-Frank.
Annual Assurance Statement:
Assurance Statement Under FMFIA. The management of the SEC is
responsible for establishing and maintaining effective internal
control and financial management systems that meet the objectives of
the Federal Managers' Financial Integrity Act of 1982. In accordance
with OMB Circular No. A-123, the SEC conducted its annual assessment
of the effectiveness of internal control. The results of this
assessment identified two material weaknesses: one in information
systems and a second in the agency's financial reporting and
accounting processes, this latter material weakness is the combination
of five deficiencies in financial reporting, budgetary resources,
filing fees, disgorgement and penalty transactions, and required
supplementary information. Because of these material weaknesses, the
SEC is able to provide a qualified statement of assurance that the
internal controls and financial management systems meet the objectives
of FMFIA. Details to support this qualified statement of assurance
appear in the section titled Material Weaknesses in Internal Control.
Assurance Statement On Internal Controls Over Financial Reporting: In
accordance with Appendix A of OMB Circular No. A-123, the SEC
conducted an assessment of the effectiveness of internal control over
financial reporting, which includes safeguarding of assets and
compliance with applicable laws and regulations Based on the results
of this assessment, the SEC identified two material weaknesses: one in
information systems and a second in the agency's financial reporting
and accounting processes, this latter material weakness is the
combination of five deficiencies in financial reporting, budgetary
resources, filing fees, disgorgement and penalty transactions, and
required supplementary information. Because of these material
weaknesses, SEC management concludes that the agency's internal
controls over financial reporting were not effective as of September
30, 2010.
Signed by:
Mary Schapiro:
Chairman:
November 15, 2010:
Signed by:
Kenneth A. Johnson:
Chief Financial Officer:
November 15, 2010:
Management's Responsibility for Internal Control:
The Federal Managers' Financial Integrity Act requires that the
head of the agency, based on the agency's internal evaluation, provide
an annual Statement of Assurance on whether the agency has met the
requirements of FMFIA. OMB Circular No. A-123, Management's
Responsibility for Internal Control, implements the FMFIA and defines
management's responsibility for internal control in federal agencies.
Section 2 of the FMFIA requires agencies to establish internal control
and financial systems that provide reasonable assurance that the
following objectives are achieved:
* Effective and efficient operations,
* Compliance with applicable laws and regulations, and,
* Reliability of financial reporting.
Section 4 of the FMFIA requires that agencies annually evaluate and
report on whether financial management systems conform to government-
wide requirements. The SEC evaluated its financial management systems
for the fiscal year ending September 30, 2010, in accordance with the
Federal Financial Management Improvement Act of 1996 (FFMIA) and OMB
Circular No. A-127, Financial Management Systems, as applicable.
Appendix A of OMB Circular No. A-123 requires the agency head to
provide a separate assurance statement on the effectiveness of
internal control over financial reporting (ICFR), in addition to the
overall FMFIA assurance statement. The 2010 Annual Assurance Statement
for FMFIA and ICFR is provided on the preceding page. This report also
provides a Summary of Financial Statement Audits and Management
Assurances under the section entitled Other Accompanying Information,
as required by OMB Circular No. A-136, Financial Reporting
Requirements.
As part of the overall FMFIA assurance process, SEC management
assessed internal control at the entity level, as well as at the
process, transaction, and application level. To assess the
effectiveness of entity-level control, SEC management used the
Government Accountability Office's (GAO) document titled Internal
Control Management and Evaluation Tool (GAO-011008G) to define entity-
level control objectives. Then, SEC management identified control
activities performed by staff across the SEC that address the control
objectives. Information on these entity-level control activities was
gathered through meetings with relevant points of contact and feedback
in the form of survey responses from SEC supervisors.
The effectiveness of process-level controls was assessed through
detailed test procedures related to the agency's financial reporting
objectives. As part of this effort, the agency performed a
comprehensive risk assessment in which SEC management identified:
* Significant financial reports and materiality;
* Significant line items, accounts, disclosures, and laws and
regulations;
* Major classes of transactions;
* Relevant assertions, risks of material misstatement and control
objectives;
* Reporting and regulatory requirements; and;
* Existing deficiencies and corrective action plans.
From the results of the risk assessment, SEC management documented
business processes and control activities designed to mitigate
significant financial reporting and compliance risks. These control
activities were tested for design and operating effectiveness. The
test results served as a basis for management's assessment of the
effectiveness of internal control over financial reporting.
In addition, each division director and office head provided an
assurance statement identifying any management challenges. These
statements were based on information gathered from various sources
including, among other things:
* Internal management reviews, self-assessments, and tests of internal
controls as described above;
* Management's personal knowledge gained from daily operations;
* Reports from the GAO and the SEC's Office of Inspector General (OIG);
* Reviews of financial management systems under OMB Circular No. A-
127, Financial Management Systems;
* Annual performance plans and reports pursuant to the Federal
Information Security Management Act (FISMA) and OMB Circular No. A-
130, Management of Federal Information Resources;
* Annual reviews and reports pursuant to the Improper Payments
Information Act;
* Reports and other information from Congress or agencies such as OMB,
the Office of Personnel Management (OPM), or the General Services
Administration (GSA) reflecting the adequacy of internal controls; and;
* Additional reviews relating to a division or office's operations,
including those discussed in the Other Reviews section below.
Each year, the agency's Financial Management Oversight Committee
(FMOC) evaluates the assurance statements from directors and office
heads, recommendations from OIG, and other supplemental sources of
information. Based on this review, the FMOC advises the Chairman as to
whether the SEC had any deficiencies in internal control or financial
system design significant enough to be reported as a material weakness
or non-conformance.
Other Reviews:
GAO audited the SEC's financial statements. The objective of GAO's
audit was to express an opinion on the financial statements and on
internal control over financial reporting and to report on tests of
compliance with selected laws and regulations.
The OIG conducted 13 audits and reviews during the fiscal year. The
reviews covered 14 of the 33 assessable units (42 percent). Some
components had multiple reviews.
Material Weaknesses in Internal Control:
Information Systems. For FY 2009, the SEC reported information
security as one of six significant deficiencies which collectively
represented a material weakness in internal control. Although the SEC
undertook corrective actions in FY 2010, the SEC continues to have
pervasive information technology and security control deficiencies
which span across its general support system and all key applications.
New security control deficiencies identified during the SEC FY 2010
assessment include an inconsistent patch management program, informal
processes to ensure secure baseline system configurations, gaps in
user access controls, and untimely remediation of self-identified
information security control deficiencies. Because of these
deficiencies, the SEC cannot rely upon automated controls across its
financial applications. These security deficiencies are heightened
because some of the agency's financial reporting processes
are reliant on databases and spreadsheets, which are inherently less
secure.
A material weakness is a deficiency, or combination of deficiencies,
in internal control, such that there is a reasonable possibility that
a material misstatement of the SEC's financial statements will not be
prevented, or detected and corrected on a timely basis. Information
systems are integral to the financial reporting process. Therefore,
the SEC has determined that the conditions noted above related to
information systems meet the definition of a material weakness since a
reasonable possibility exists that a material misstatement would not
be prevented, or detected and corrected on a timely basis.
Financial Reporting and Accounting Processes. The SEC's second
material weakness stems from the agency's reliance on manual processes
for financial reporting and accounting, many of which are necessary
because of gaps in the agency's core financial system. In several
areas, these manual processes are not operating effectively, because
they are prone to error and because the agency's monitoring does not
always detect the errors. This material weakness relates to the
combination of five deficiencies in the areas of financial reporting,
budgetary resources, fling fees, disgorgement and penalty
transactions, and required supplementary information.
Financial Reporting. This deficiency is similar in nature to the
findings from the FY 2009 financial audit. In FY 2010, the SEC
launched efforts to enhance its tracking of investments and formalized
processes for evaluating prior period adjustments and capturing
contingent liabilities. However, the agency has continuing gaps in the
functionality of its core financial system, and therefore many of the
agency's financial reporting processes still are manual in nature and
reliant on spreadsheets and databases to both initiate transactions
and perform key control functions. The FY 2010 assessments of internal
controls over financial reporting continued to find errors in the
agency's financial reporting processes, including in reviews of
calculations and reconciliations; in the preparation, review and
approval of journal voucher adjustments; and in draft financial
statement notes. The SEC also identified the need for additional
external validation points within its spreadsheets and databases to
ensure that manual compensating controls are operating effectively.
Budgetary Resources. This area was found to be a significant
deficiency in FY 2009, and in response the SEC corrected posting
models and developed new policies and procedures related to posting
obligations, creating miscellaneous obligating documents, and
processing deobligations. However, the agency's FY 2010 assessment of
internal controls over financial reporting found continuing problems,
specifically in the design and operation of controls to:
* Record obligations and adjustments to obligations accurately and on
a timely basis, upon contract execution;
* Ensure completeness of recorded obligations between the core
financial reporting and sub-ledger systems;
* Certify funds availability prior to the period of performance;
* Ensure that open obligations identified by the divisions and offices
as no longer needed are timely de-obligated by the contracting officer
per the closeout procedures contained in Federal Acquisition
Regulation.
The conditions described above increase the likelihood that obligation
and adjustment transactions and balances could be misstated and not
detected by SEC management in a timely manner.
Registrant Deposits and Filing Fees. In FY 2009, the SEC reported a
significant deficiency over registrant deposits and filing fees,
because the SEC was not ensuring that revenues were recorded on a
timely basis and because the agency had a backlog of inactive accounts
for which the balances should be returned to registrants in accordance
with SEC regulations. In FY 2010, the SEC hired an outside vendor to
assist with the process of returning these funds, and the agency is
currently in the process of adding staff positions dedicated to the
review of current filings and dormant registrant deposit accounts.
However, as of September 30, 2010, the agency did not yet have
sufficient control activities in place to routinely review, research,
and monitor registrant deposit account activity to determine if
amounts should be refunded or recognized as revenue.
Disgorgement and Penalty Transactions. The SEC collects disgorgement
and penalty amounts from violators of securities law for subsequent
distribution to harmed investors. As part of the FY 2010 audit, the
agency was found to have insufficient control procedures to ensure
that receivables and payments related to disgorgements and penalties
are recorded in the proper accounting period. For example, the
agency's external auditor noted that checks received on September 30
were not recorded in the general ledger until the following day and
therefore were not recognized in FY 2010 for year-end reporting. The
SEC failed to record on a timely basis disgorgement receivables that
were initially payable to a court but then were changed to be payable
to the Treasury General Fund through a subsequent court order.
Although all funds identified for transfer to the Treasury General
Fund were properly and accurately transferred as of September 30,
2010, some amounts collected on behalf of the U.S. Treasury during the
fiscal year were not transferred in a timely manner.
Required Supplementary Information. OMB Circular No. A-136 requires
that agencies produce required supplementary information (RSI) in
their financial statements, to disaggregate budgetary information for
each major budget account The agency's external auditors found that
the SEC had not included RSI, particularly with respect to the new
Investor Protection Fund, in its draft financial statements. The SEC
must ensure that its processes for preparing financial statements and
notes properly reflect the requirements of OMB guidance.
Corrective Action Plans:
The core of the SEC's strategy for remediating these material
weaknesses is to launch a major new initiative to replace the agency's
core financial system, by migrating to a federal government Shared
Service Provider (SSP). This effort will help address the agency's
material weakness in information systems reported for FY 2010 by
moving the agency's financial and secondary mixed financial systems
into a strong, proven security environment. In addition, through this
initiative, the SEC will aim to eliminate many of its manual processes
that rely on Microsoft Access databases and spreadsheets and
consolidate them within the new SSP environment. The SEC has issued a
Letter of Intent with the Enterprise Services Center (ESC) at the
Department of Transportation to develop detailed requirements for the
system, and is planning to migrate to the new environment in FY 2012.
The agency also has strengthened its management team by hiring a new
Chief Operating Officer, Chief Information Officer, and Chief
Financial Officer, as well as seeking to appoint a new Chief
Accounting Officer.
While the SSP initiative is in progress, during FY2011, the SEC will
continue to implement improvements in its information security
environment. For example, the agency will improve its monitoring
capability over system configuration changes, so that all changes to
system requirements, design, and scripts are evaluated by a
Configuration Control Board on the basis of cost, benefits, and risk
to the agency. Future system upgrades will be documented to show both
the impact on security and evidence of approval by the Board. The
agency also will work to certify the technical team managing the core
financial application as Capability Maturity Model Integration (CMMI)
Level 3, to ensure that the system is managed to strict configuration
management standards. During the first quarter of FY 2011, the Office
of Information Technology (OIT) will update patches all across the
agency's financial systems and workstations and will enable Secure
Sockets Layer (SSL) communication protocol to ensure sensitive EDGAR
data is transmitted using a secure, approved communications method.
OIT also will work to resolve outstanding security weaknesses in its
systems identified by management through its certifications and
accreditations.
Major improvements in the SEC's financial reporting processes will be
affected through the SSP initiative described above. During FY 2011
before the agency migrates to the SSP environment, the SEC will reduce
the number of manual processes by tracking investments at the detail
level within the financial system and building an automated interface
with the Bureau of Public Debt for handling investments. In addition,
the agency will seek in the short term to bolster the databases and
spreadsheets still in use, for example by incorporating the use of
independent, external data sources wherever possible as validation
tools.
The agency's controls over budgetary resources will be significantly
enhanced through integration of procurement and financial systems,
which the agency aims to achieve as part of the migration to a federal
Shared Services Provider. In addition, in FY 2011 the SEC will
continue to refine its business processes in this area, including by
further enhancing the processes by which the agency records
miscellaneous obligating documents and deobligates unliquidated
amounts from prior year contracts.
In FY 2011, the SEC will continue its efforts to resolve the backlog
of filing fees in need of verification and inactive deposit accounts
that must be returned to registrants. In addition, the agency will
work to re-engineer this business process and plan for a new automated
solution to replace Fee Momentum. With continued remediation efforts,
the SEC intends to ensure that registrant filings and deposits are
matched on a timely basis, record revenues in the period earned, and
eliminate the backlog of dormant registrant deposit accounts.
Effective October 2010, the SEC modernized the cash receipt process by
electronically scanning checks upon receipt. The scanned checks are
recorded in the general ledger through an automated interface. The SEC
will establish a process for recording deposits in transit to ensure
all checks received are recognized in the proper accounting period. In
addition, the SEC is working to enhance processes for timely
recognition of disgorgement and penalty receivables deemed payable to
the Treasury General Fund. In FY 2011, the SEC will make any
adjustments necessary to ensure these enhanced processes and controls
are operating effectively.
The SEC's draft financial reporting results did not include required
supplementary information, however, SEC ultimately prepared the
required supplementary information for the September 30, 2010
financial reporting. In addition, the SEC will focus on performing a
detailed review of OMB Circular No. A-136 and other relevant guidance
to ensure that such requirements are properly reflected in the
agency's financial statements.
Status of Prior Year Internal Control over Financial Reporting Issues:
The SEC's FY 2009 financial audit identified a material weakness in
internal controls over financial reporting, that resulted from the
combination of six significant deficiencies:
* Information Security,
* Financial Reporting,
* Budgetary Resources,
* Registrant Deposits,
* Risk Assessment and Monitoring, and,
* Fund Balance with Treasury.
The first area, information security was reassessed as a material
weakness in information systems for FY 2010. Prior year significant
deficiencies related to financial reporting, budgetary resources, and
registrant deposits remain and, combined with deficiencies related to
disgorgement and penalty transactions and required supplementary
information, together remain a material weakness. The agency initiated
efforts to address last year's audit findings, and successfully
remediated two of the six significant deficiencies disclosed in the FY
2009 PAR, related to risk assessment and monitoring and the SEC's
FBWT. The agency's efforts to remediate these two areas is described
further below.
Risk Assessment and Monitoring Process:
As mentioned above, the SEC's external auditor cited deficiencies in
internal control monitoring as a contributing factor to the agency's
second material weakness related to financial reporting and accounting
processes. However, the SEC's efforts to improve its risk assessment
process during FY 2010 resulted in the remediation of this significant
deficiency. The SEC, with the assistance of contractor support,
implemented a top-down, risk-based approach for FY 2010 and thereafter
to:
* Identify all key elements of the SEC's financial reporting control
environment and evaluate all significant financial reporting and
compliance risks, including those related to its information systems
and external service providers;
* Document internal controls designed to mitigate financial reporting
risks, including client control considerations identified in service
organization SAS 70 reports;
* Document the evaluation of design effectiveness of key internal
controls and monitor the effectiveness of internal controls throughout
the year;
* Perform test work to assess the operational effectiveness of
internal controls;
* Develop corrective action plans for internal controls not properly
designed or operating effectively;
* Assess the magnitude of internal control deficiencies and determined
impact on the Statement of Assurance under FMFIA.
OFM will continue to perform a robust internal control assessment in
FY 2011, and plans to implement improvements that will help to
effectively manage, track, monitor, and test key risks and controls
over financial reporting throughout the year.
Fund Balance with Treasury:
In FY 2010, the SEC successfully resolved its previous significant
deficiency over the reconciliations of its FBWT. Whereas previously
this monthly reconciliation was an ancillary duty for OFM staff, the
SEC created a new Treasury Operations Branch within the Office of
Financial Management with personnel dedicated to this function. SEC
staff re-engineered the reconciliation processes to be fully compliant
with the Treasury Financial Manual, developed new standard operating
procedures, and automated the reconciliations to reduce input errors
and streamline the effort. The agency also fully resolved the backlog
of differences with Treasury records and is now compliant with the
policy to resolve variances within 60 days.
Financial Management System Conformance:
The FFMIA requires that each agency shall implement and maintain
financial management systems that comply substantially with federal
financial management systems requirements, applicable federal
accounting standards, and the U.S. Standard General Ledger at the
transaction level. The purpose of the FFMIA is to advance federal
financial management by ensuring that financial management systems
provide accurate, reliable, and timely financial management
information. Although the SEC is exempt from the requirement to
determine substantial compliance with FFMIA, the agency assesses its
financial management systems annually for conformance with the
requirements of OMB Circular No. A-127 and other federal financial
system requirements.
The SEC's process for assessing its financial management systems is in
compliance with the January 9, 2009 revision of OMB Circular No. A-127
and included the use of an FFMIA risk model which ranks risks from
nominal to significant. Based on the results of the review, the SEC
concluded that its risk rating is moderate. After reviewing the
criteria in OMB Circular No. A-127 for agencies with moderate risk,
the SEC determined its financial core and mixed systems are not in
substantial compliance with Section 803(a) of the FFMIA requirements.
This decision was based on the presence of material weaknesses in FY
2009 and FY 2010 and of persistent deficiencies in areas related to
the SEC financial and secondary mixed systems.
Summary of Current Financial System and Future Strategies:
The SEC's primary objective for its financial and secondary moved
systems is to remediate the FY 2010 material weaknesses and other
internal control deficiencies identified by management and external
auditors. In addition, the agency aims to establish an integrated
financial management environment; build a single data model for
transaction processing and reporting; standardize business and
technology processes, and prevent future internal control problems.
The SEC's current financial management system environment is
characterized by an underutilized core financial system; silo
applications providing key financial management functionality;
external data marts with embedded business logic used for reporting;
and processes that rely extensively on human capital for data entry,
cleansing, and reconciliation. The SEC's core financial system,
Momentum Version 6.1.5, is used to record all accounting transactions,
maintain an agency-wide general ledger, produce financial reports, and
produce external reports submitted periodically to Treasury and other
Federal entities. The core financial system has automated interfaces
with mixed systems such as the Budget Planning and Performance
Management System for budget formulation and execution; the Central
Contractor Registry for SEC vendor information; FedTraveler for travel
orders and vouchers; Fee Momentum for the agency's filing fees; and
the Department of the Interior's payroll systems. The agency's
financial reporting and processes are dependent upon a number of
Microsoft Access databases, such as those related to disgorgements and
penalties receivables, financial reporting and analysis, payments to
harmed investors, investments with the Bureau of Public Debt, and
accounts payable accruals.
The centerpiece of the SEC's strategy for achieving its financial
system objectives listed above is to migrate to a core financial
system offered by a federal Shared Service Provider. As part of this
effort, the agency aims to consolidate moved systems, eliminate manual
processes, integrate with programmatic systems where necessary, and
adopt standard business and technology practices. Under this
initiative, led by the SEC's Office of Financial Management, the
agency will work with an OMB-designated federal Shared Services
Provider to deploy the new system in FY 2012.
Federal Information Security Management Act (FISMA):
FISMA requires federal agencies to conduct annual assessments of their
information technology security and privacy programs, to develop and
implement remediation efforts for identified weaknesses and
vulnerabilities, and to report compliance to OMB. As of this writing,
the SEC's Inspector General (IC), Chief Information Security Officer,
and Privacy Officer are performing a joint review of the agency's
compliance with FISMA requirements during 2010, and will submit the
report to OMB on November 15, 2010, as required.
During the year, 07, in conjunction with system owners, completed
certification and accreditation activities for 18 reportable systems
in FY 2010, including recertifying and reaccrediting systems such as
the Momentum core financial system. As a result, the SEC has now
certified and accredited a total of 63 reportable systems in
accordance with guidance from OMB and the National Institute of
Standards and Technology. OIT also completed contingency testing on
the majority of the SEC's accredited systems as part of several
disaster recovery exercises.
In addition, OFT, in conjunction with system owners, has completed
Privacy Impact Assessments (PIA) on 14 systems during FY 2010. As a
result, the SEC has completed PIAs for 53 of the agency's 61 required
systems.
[End of Management Discussion and Analysis section]
Financial Statements:
Financial Section:
This section of the Performance and Accountability Report contains the
U.S. Securities and Exchange Commission's (SEC) financial statements,
required supplementary information, and related Independent Auditor's
Report, as well as other information on the agency's financial
management. Information presented here satisfies the reporting
requirements of Office of Management and Budget (OMB) Circular No. A-
136, Financial Reporting Requirements, as well as the Accountability
of Tax Dollars Act of 2002.
The first portion of this section contains the principal financial
statements. The statements provide a comparison of Fiscal Year (FY
2010 and FY 2009 information. The SEC prepares the following required
financial statements:
* Balance Sheet — presents, as of a specific time, amounts of future
economic benefits owned or managed by the reporting entity exclusive
of items subject to stewardship reporting (assets), amounts owed by
the entity (liabilities), and amounts which comprise the difference
(net position).
* Statement of Net Cost — presents the gross cost incurred by the
reporting entity less any exchange revenue earned from its activities.
The SEC also prepares a Statement of Net Cost by program to provide
cost information at the program level.
* Statement of Changes in Net Position — reports the change in net
position during the reporting period. Net position is affected by
changes to Cumulative Results of Operations.
Statement of Budgetary Resources — provides information about how
budgetary resources were made available as well as their status at the
end of the year.
* Statement of Custodial Activity — reports collection of non-exchange
revenue for the Treasury General Fund. The SEC, as the collecting
entity, does not recognize these collections as revenue. Rather, the
agency accounts for sources and disposition of the collections as
custodial activities on this statement.
The SEC does not have stewardship over resources or responsibilities
for which supplementary stewardship reporting would be required.
The accompanying Notes to the Financial Statements provide a
description of significant accounting policies as well as detailed
information on select statement lines. These notes and the principal
financial statements are audited by the U.S. Government Accountability
Office (GAO).
Message from the Chief Financial Officer:
I am delighted to join Chairman Schapiro in presenting the SEC's
Performance and Accountability Report (PAR) for FY 2010. We hope you
find the PAR a useful summary of the SEC's use of resources, operating
performance, financial stewardship, and internal control.
Because of its mission, the SEC is a staunch believer in the value of
strong internal controls. The agency made significant strides in FY
2010 in its multi-year effort to build a strong, sustainable internal
control environment and once again sustained an unqualified audit
opinion on its FY 2010 financial statements. In FY 2010, the SEC
successfully resolved two of the six significant deficiencies
identified in the previous year by GAO. For example, the agency
significantly enhanced its risk assessment and monitoring program,
undertaking its most comprehensive assessment yet of its internal
controls over financial reporting, in accordance with OMB guidance. In
the second area, related to the agency's Fund Balance with Treasury,
the SEC created a new branch within the Office of Financial Management
with dedicated staff who reformed and strengthened this key process.
Despite noteworthy progress, for FY 2010 the SEC identified two
material weaknesses in internal controls over financial reporting. The
first material weakness is in information systems, because of issues
related to patch management, configuration management, user access
controls, and security management. The second material weakness
relates to financial reporting and accounting processes, it is the
combination of deficiencies in financial reporting, budgetary
resources, filing fees, disgorgement and penalty transactions, and
required supplementary information. A core element of this second
material weakness relates to gaps in the functionality of our
financial system and a reliance on manually intensive processes that
are prone to error.
The centerpiece of our remediation strategy is to shift to a new
financial system offered by a federal shared service provider (SSP).
Through this initiative, the SEC aims to strengthen the security over
the SEC's financial data and to consolidate or integrate financial
functions within the new system, minimizing manual processes. The SEC
has issued a Letter of Intent with the Enterprise Services Center at
the Department of Transportation, and the agency will work in the
coming months to develop detailed requirements, in preparation to go
live with a new system in FY 2012.
The SEC's other planned remediation efforts in FY 2011 include:
* Improving its monitoring capability over system configuration
changes, as overseen by a Configuration Control Board;
* Continuing to resolve outstanding security weaknesses in its systems
identified by management through its certifications and accreditations;
* Updating security patches across the agency's systems environment;
* Bolstering user access controls related to key financial
applications;
* Working to deploy the capability within the agency's current
financial system to track investments at the detail level, and
building an interface with the Bureau of Public Debt for handling
investments;
* Re-examining the business process organizational structure, and
information systems supporting the agency's handling of disgorgements
and penalties;
* Strengthening the agency's process governing the recording of
obligations and the identification and deobligation of undelivered
orders;
* Adding resources to the agency's filing fees function, to reduce
backlogs of filings for which the SEC must determine the proper
amounts owed;
* Implementing enhancements to the agency's process for recording cash
collections and disgorgement and penalty receivables, to ensure they
are accounted for in the proper period; and;
* Conducting a detailed review of OMB Circular No. A-136 and other
requirements to ensure they are properly reflected in agency financial
statements.
The SEC is committed to investing the time and resources to fully
resolve these material weaknesses. The public has every right to
expect strong internal controls from their government, and that goal
remains one of the SEC's top priorities in the coming months.
Sincerely,
Signed by:
Kenneth A. Johnson:
Chief Financial Officer:
November 15, 2010:
[End of Message from the Chief Financial Officer]
U.S. Securities And Exchange Commission:
Balance Sheet:
As of September 30, 2010 and 2009
(Dollars In Thousands):
Assets (Notes 2 and 13):
Intragovernmental:
Fund Balance with Treasury (Note 3):
FY 2010: $696,367;
FY 2009: $6,083,307.
Investments, Net (Note 5):
FY 2010: $924,823;
FY 2009: $1,959,611.
Accounts Receivable (Note 5):
FY 2010: [Empty];
FY 2009: $188.
Advances and Prepayments:
FY 2010: $2,198;
FY 2009: $2,284.
Total Intragovernmental:
FY 2010: $7,916,388;
FY 2009: $8,045,390.
Cash and other Monetary Assets (Note 4):
FY 2010: $2,815;
FY 2009: [Empty].
Accounts Receivable, Net (Note 6):
FY 2010: $161,143;
FY 2009: $434,033.
Advances and Prepayments:
FY 2010: $2,381;
FY 2009: $1,273.
Property and Equipment, Net (Note 7):
FY 2010: $79,712;
FY 2009: $82,435.
Total Assets:
FY 2010: $8,162,439;
FY 2009: $8,563,131.
Liabilities (Notes 8 and 13 ):
Intragovernmental:
Accounts Payable:
FY 2010: $5,185;
FY 2009: $9,080.
Employee Benefits:
FY 2010: $6,088;
FY 2009: $5,213.
Unfunded FECA and Unemployment Liability:
FY 2010: $1,719;
FY 2009: $1,441.
Custodial Liability (Note 17):
FY 2010: $42,380;
FY 2009: $4.
Liability for Non-Entity Assets:
FY 2010: $4;
FY 2009: $1.
Other:
FY 2010: [Empty];
FY 2009: $157.
Total Intragovernmental:
FY 2010: $55,376;
FY 2009: $15,896.
Accounts Payable:
FY 2010: $46,260;
FY 2009: $34,084.
Accrued Payroll and Benefits:
FY 2010: $31,649;
FY 2009: $27,131.
Accrued Leave:
FY 2010: $45,629;
FY 2009: $42,696.
Registrant Deposits:
FY 2010: $44,729;
FY 2009: $40,898.
Actuarial FECA Liability (Note 9):
FY 2010: $7,576;
FY 2009: $6,178.
Liability for Disgorgement and Penalties (Note 19):
FY 2010: $1,021,466;
FY 2009: $2,297,741.
Contingent Liabilities (Note 12.B):
FY 2010: [Empty];
FY 2009: $9,500.
Other Accrued Liabilities (Note 10):
FY 2010: $29,270;
FY 2009: $20,922.
Total Liabilities:
FY 2010: $1,281,955;
FY 2009: $2,495,046.
Commitments and Contingencies (Note 12):
Net Position (Note 13):
Unexpended Appropriations—Other Funds:
FY 2010: $1,749;
FY 2009: $9,860.
Cumulative Results of Operations—Earmarked Funds:
FY 2010: $6,878,132;
FY 2009: $6,058,225.
Total Net Position:
FY 2010: $6,880,484;
FY 2009: $6,068,085.
Total Liabilities and Net Position:
FY 2010: $8,162,439;
FY 2009: $8,563,131.
The accompanying notes are an integral part of these financial
statements.
U.S. Securities And Exchange Commission:
Statement of Net Cost:
For the years ended September 30, 2010 and 2009:
(Dollars In Thousands):
Program Costs (Note 14):
Enforcement:
FY 2010: $355,451;
FY 2009 (Reclassified): $333,382.
Compliance Inspections and Examinations:
FY 2010: $229,389;
FY 2009 (Reclassified): $212,061.
Corporation Finance:
FY 2010: $131,166;
FY 2009 (Reclassified): $123,782.
Trading and Markets:
FY 2010: $54,107;
FY 2009 (Reclassified): $47,010.
Investment Management:
FY 2010: $47,873;
FY 2009 (Reclassified): $48,295.
Risk, Strategy and Financial Innovation:
FY 2010: $18,143;
FY 2009 (Reclassified): $14,354.
General Counsel:
FY 2010: $39,780;
FY 2009 (Reclassified): $36,948.
Other Program Offices:
FY 2010: $48,603;
FY 2009 (Reclassified): $45,140.
Agency Direction and Administrative Support:
FY 2010: $128,531;
FY 2009 (Reclassified): $115,158.
Inspector General:
FY 2010: $5,380;
FY 2009 (Reclassified): $4,835.
Promote healthy capital markets through an effective and flexible
regulatory environment:
Total Program Cost4:
FY 2010: $1,058,423
FY 2009 (Reclassified): $980,965.
Less: Earned Revenue Not Attributed to Programs (Note 15):
FY 2010: $1,382,856;
FY 2009 (Reclassified): $1,109,891.
Net (Income) Cost from Operations (Note 18):
FY 2010: ($324,433);
FY 2009 (Reclassified): ($128,926).
The accompanying notes are an integral part of these financial
statements.
U.S. Securities And Exchange Commission:
Statement of Changes in Net Position:
For the years ended September 30, 2010 and 2009:
(Dollars In Thousands):
Cumulative Results Of Operations:
Beginning Balances:
FY 2010 Earmarked Funds: $6,058,225;
FY 2010 All Other Funds: [Empty];
FY 2010 Consolidated Total: $6,058,225.
Budgetary Financing Sources:
Appropriations Used;
FY 2010 Earmarked Funds: [Empty];
FY 2010 All Other Funds: $8,111;
FY 2010 Consolidated Total: $8,111.
Non-Exchange Revenue:
FY 2010 Earmarked Funds: $451,910;
FY 2010 All Other Funds: [Empty];
FY 2010 Consolidated Total: $451,910.
Other Financing Sources:
Imputed Financing (Note 11):
FY 2010 Earmarked Funds: $36,216;
FY 2010 All Other Funds: [Empty];
FY 2010 Consolidated Total: $36,216.
Other:
FY 2010 Earmarked Funds: [Empty];
FY 2010 All Other Funds: ($160);
FY 2010 Consolidated Total: ($160).
Total Financing Sources:
FY 2010 Earmarked Funds: $488,126;
FY 2010 All Other Funds: $7,951;
FY 2010 Consolidated Total: $496,077.
Net Income (Cost) from Operations:
FY 2010 Earmarked Funds: $331,781;
FY 2010 All Other Funds: ($7,348);
FY 2010 Consolidated Total: $324,433.
Net Change:
FY 2010 Earmarked Funds: $819,907;
FY 2010 All Other Funds: $603;
FY 2010 Consolidated Total: $820,510.
Cumulative Results of Operations (Note 13):
FY 2010 Earmarked Funds: $6,878,132;
FY 2010 All Other Funds: $603;
FY 2010 Consolidated Total: $6,878,735.
Unexpended Appropriations:
Beginning Balance:
FY 2010 Earmarked Funds: [Empty];
FY 2010 All Other Funds: $9,860;
FY 2010 Consolidated Total: $9,860.
Budgetary Financing Sources:
Appropriations Received:
FY 2010 Earmarked Funds: [Empty];
FY 2010 All Other Funds: [Empty];
FY 2010 Consolidated Total: [Empty].
Appropriations Used:
FY 2010 Earmarked Funds: [Empty];
FY 2010 All Other Funds: ($8,111);
FY 2010 Consolidated Total: ($8,111).
Total Unexpended Appropriations:
FY 2010 Earmarked Funds: [Empty];
FY 2010 All Other Funds: $1,749;
FY 2010 Consolidated Total: $1,749.
Net Position, End of Period:
FY 2010 Earmarked Funds: $6,878,132;
FY 2010 All Other Funds: $2,352;
FY 2010 Consolidated Total: $6,880,484.
Cumulative Results Of Operations:
Beginning Balances:
FY 2009 Earmarked Funds: $5,903,289;
FY 2009 All Other Funds: [Empty];
FY 2009 Consolidated Total: $5,903,289.
Budgetary Financing Sources:
Appropriations Used:
FY 2009 Earmarked Funds: [Empty];
FY 2009 All Other Funds: $140;
FY 2009 Consolidated Total: $140.
Non-Exchange Revenue:
FY 2010 Earmarked Funds: [Empty];
FY 2010 All Other Funds: [Empty];
FY 2010 Consolidated Total: [Empty].
Other Financing Sources:
Imputed Financing (Note 11):
FY 2009 Earmarked Funds: $25,955;
FY 2009 All Other Funds: [Empty];
FY 2009 Consolidated Total: $25,955.
Other:
FY 2009 Earmarked Funds: [Empty];
FY 2009 All Other Funds: ($85);
FY 2009 Consolidated Total: ($85).
Total Financing Sources:
FY 2009 Earmarked Funds: $25,955;
FY 2009 All Other Funds: [Empty];
FY 2009 Consolidated Total: $25,955.
Net Income (Cost) from Operations:
FY 2009 Earmarked Funds: $128,981;
FY 2009 All Other Funds: ($55);
FY 2009 Consolidated Total: $128,926.
Net Change:
FY 2009 Earmarked Funds: $154,936;
FY 2009 All Other Funds: [Empty];
FY 2009 Consolidated Total: $154,936.
Cumulative Results of Operations (Note 13):
FY 2009 Earmarked Funds: $6,058,225;
FY 2009 All Other Funds: [Empty];
FY 2009 Consolidated Total: $6,058,225.
Unexpended Appropriations:
Beginning Balance:
FY 2010 Earmarked Funds: [Empty];
FY 2010 All Other Funds: [Empty];
FY 2010 Consolidated Total: [Empty].
Budgetary Financing Sources:
Appropriations Received:
FY 2009 Earmarked Funds: [Empty];
FY 2009 All Other Funds: $10,000;
FY 2009 Consolidated Total: $10,000.
Appropriations Used:
FY 2009 Earmarked Funds: [Empty];
FY 2009 All Other Funds: ($140);
FY 2009 Consolidated Total: ($140).
Total Unexpended Appropriations:
FY 2009 Earmarked Funds: [Empty];
FY 2009 All Other Funds: $9,860;
FY 2009 Consolidated Total: $9,860.
Net Position, End of Period:
FY 2009 Earmarked Funds: $6,058,225;
FY 2009 All Other Funds: $9,860;
FY 2009 Consolidated Total: $6,068,085.
The accompanying notes are an integral part of panto/these financial
statements.
U.S. Securities And Exchange Commission:
Statement of Budgetary Resources:
For the years ended September 30, 2010 and 2009:
(Dollars In Thousands):
Budgetary Resources:
Unobligated Balance, Brought Forward, October 1:
FY 2010: $26,765;
2009: $57,696.
Recoveries of Prior Year Unpaid Obligations:
FY 2010: $18,753;
2009: $28,982.
Budget Authority:
Appropriation:
FY 2010: $451,910;
2009: $10,000.
Spending Authority from Offsetting Collections: Earned:
Collected:
FY 2010: $1,443,347;
2009: $1,017,763.
Change in Receivables from Federal Sources:
FY 2010: ($188);
2009: $143.
Change in Unfilled Customer: Advance Received:
FY 2010: ($157);
2009: $157.
Change in Unfilled Customer: Without Advance from Federal Sources:
FY 2010: ($98);
2009: $1.
Subtotal:
FY 2010: $1,894,814;
2009: $1,028,064.
Temporarily not Available Pursuant to Public Law:
FY 2010: ($347,694);
2009: ($122,101.
Total Budgetary Resources:
FY 2010: $1,592,638;
2009: $992,641.
Status Of Budgetary Resources:
Obligations Incurred:
Direct (Note 16):
FY 2010: $1,103,007;
2009: $964,640.
Reimbursable (Note 16):
FY 2010: $282;
2009: $1,2363.
Subtotal:
FY 2010: $1,103,289;
2009: $965,876.
Unobligated Balance Available:
Realized and Apportioned for Current Period:
FY 2010: $17,213;
2009: $9,968.
Unobligated Balance Not Available:
FY 2010: $472,136;
2009: $16,797.
Total Status of Budgetary Resources:
FY 2010: $1,592,638;
2009: $992,641.
Change In Obligated Balance:
Obligated Balance, Net:
Unpaid Obligations, Brought Forward, October 1:
FY 2010: $236,399;
2009: $250,974.
Uncollected Customer Payments from Federal Sources, Brought Forward,
October 1:
FY 2010: ($311);
2009: ($167).
Total Unpaid Obligated Balance, Net:
FY 2010: $236,088;
2009: $250,807.
Obligations Incurred Net:
FY 2010: $1,103,289;
2009: $965,876.
Gross Outlays:
FY 2010: ($1,003,163);
2009: ($951,469).
Recoveries of Prior Year Unpaid, Obligations Actual:
FY 2010: ($18,753);
2009: ($28,982).
Change in Uncollected Customer Payments from Federal Sources:
FY 2010: $286;
2009: ($144).
Obligated Balance, Net, End of Period:
Unpaid Obligations:
FY 2010: $317,772;
2009: $236,399.
Uncollected Customer Payments from Federal Sources:
FY 2010: ($25);
2009: ($311).
Total, Unpaid Obligated Balance, Net, End of Period (Note 11):
FY 2010: $317,747;
2009: $236,088.
Net Outlays:
Gross Outlays:
FY 2010: $1,003,163;
2009: $951,469.
Offsetting Collections:
FY 2010: ($1,443,190);
2009: ($1,017,920).
Distributed Offsetting Receipts:
FY 2010: $194;
2009: ($702).
Net Outlays/(Collections):
FY 2010: ($439,833);
2009: ($67,153).
The accompanying notes are an integral part of these financial
statements.
U.S. Securities And Exchange Commission:
Statement of Custodial Activity:
For the years ended September 30, 2010 and 2009:
(Dollars In Thousands):
Revenue Activity:
Sources of Cash Collections:
Disgorgement and Penalties (Note 18):
FY 2010: $1,116,632;
2009: $815,802.
Other:
FY 2010: $1;
2009: $10.
Net Collections:
FY 2010: $1,116,633;
2009: $815,812.
Accrual Adjustments:
FY 2010: $42,380;
2009: $4.
Total Custodial Revenue (Note 17):
FY 2010: $1,159,013;
2009: $815,816.
Disposition Of Collections:
Amounts Transferred to Department of the Treasury:
FY 2010: $664,723;
2009: $815,812.
Investor Protection Fund:
FY 2010: $451,910;
2009: [Empty].
Accounts yet to be Transferred:
FY 2010: $42,380;
2009: $4.
Total Disposition of Collections:
FY 2010: $1,159,013;
2009: $815,816.
Net Custodial Activity:
FY 2010: [Empty];
2009: [Empty].
The accompanying notes are an integral part of these financial
statements.
Notes to the Financial Statements: As of September 30, 2010 and 2009:
Note 1. Summary of Significant Accounting Policies:
A. Reporting Entity:
The SEC is an independent agency of the U.S. Government established
pursuant to the Securities Exchange Act of 1934, charged with
regulating this country’s capital markets. The SEC’s mission is to
protect investors; maintain fair, orderly, and efficient securities
markets; and facilitate capital formation. The SEC works with
Congress, other executive branch agencies, SROs (e.g., stock exchanges
and FINRA), accounting and auditing standards setters, state
securities regulators, law enforcement officials, and many other
organizations in support of the agency’s mission.
The agency's programs protect investors and promote the public
interest by fostering and enforcing compliance with the federal
securities laws; establishing an effective regulatory environment;
facilitating access to the information investors need to make informed
investment decisions; and enhancing the Commission's performance
through effective alignment and management of human, information, and
financial capital.
B. Basis of Presentation and Accounting:
The accompanying financial statements present the financial position,
net cost of operations, changes in net position, budgetary resources,
and custodial activities of the SEC's core business activities as
required by the Accountability of Tax Dollars Act of 2002 The
statements may differ from other financial reports submitted pursuant
to OMB directives for the purpose of monitoring and controlling the
use of the SEC budgetary resources. The SEC's books and records serve
as the source of the information presented in the accompanying
financial statements. The agency classified assets, liabilities,
revenues, and costs in these financial statements according to the
type of entity associated with the transactions. Intragovernmental
assets and liabilities are those due from or to other federal
entities. Intragovemmental earned revenues are collections or accruals
due from other federal entities. Intragovernmental costs are payments
or accruals due to other federal entities.
The SEC's financial statements have been prepared on the accrual basis
of accounting in conformity with generally accepted accounting
principles (GAAP) for the federal government. Accordingly, revenues
are recognized when earned and expenses are recognized when incurred,
without regard to the receipt or payment of cash. These principles
differ from budgetary accounting and reporting principles from which
the Statement of Budgetary Resources (SBR) is prepared. The
differences relate primarily to the capitalization and depreciation of
property and equipment, as well as the recognition of other long-term
assets and liabilities. The Statement of Custodial Activity is
presented on the modified cash basis of accounting. Cash collections
and disbursements to Treasury are reported on a cash basis and the
change in receivables and related payables are reported on an accrual
basis. The statements were also prepared in conformity with OMB
Circular No. A-136, Financial Reporting Requirements.
C. Use of Estimates:
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities. These estimates and
assumptions include, but are not limited to, the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from those estimates.
Estimates are also used in the allocation of costs to the SEC programs
presented in the Statement of Net Cost.
D. Changes in Accounting Presentation:
The SEC recognizes receivables stemming from judicial and
administrative proceedings that order violators of the federal
securities laws to pay disgorgement of ill-gotten gains, civil
monetary penalties, and pre-judgment and post-judgment interest.
Orders can identify whether the resulting proceeds are to be held on
behalf of harmed investors or whether they are to be remitted to the
Treasury General Fund.
Effective for FY 2010, the Statement of Custodial Activity includes
transfers to the newly created Investor Protection Fund and, as a
result of revised administrative processes, changes in disgorgements
and penalties payable to the Treasury General Fund. Previously, the
SEC had presented these receivables as non-custodial assets under the
control of the SEC with an equal and offsetting governmental liability
on the Balance Sheet. In FY 2010, the SEC presents these receivables
as custodial receivables with an equal and offsetting
intragovernmental custodial liability to the Treasury. In addition,
accrued revenue associated with the generation of these assets are
classified as custodial and recognized on the Statement of Custodial
Activity.
In FY 2010, the SEC changed its presentation from net cost of
operations by goal, to net cost of operations by program. OMB Circular
No. A-136, Financial Reporting Requirements, defines the term "major
program" as describing an agency's mission, strategic goals,
functions, activities, services, projects, processes, or any other
meaningful grouping. The presentation by program is consistent with
the presentation used by the agency in submitting its budget requests.
E. Intra- and Inter-Agency Relationships
The SEC is comprised of a single federal bureau. Therefore, the
current organizational structure does not give rise to the need for
intra-entity eliminations. Beginning in FY 2011, the Investor
Protection Fund will finance the operations of the SEC Office of the
Inspector General's employee suggestion program on a reimbursable
basis. This will give rise to intraentity eliminations of the related
revenue and expense transactions between the Investor Protection Fund
and the SEC's General Salaries and Expenses fund.
F. Fund Accounting Structure:
The SEC accounts for financial activities by Treasury Appropriation
Fund Symbol (TAFS), summarized as follows:
* General Funds — Salaries and Expenses 9(0100, 09/10 0100): The TAFS
X0100 consists of earmarked funds for use in carrying out the SEC's
mission and functions and revenues collected by the SEC in excess of
the amounts appropriated. In addition, the SEC received a supplemental
appropriation of $10 million for use in FY 2009 and FY 2010; the
supplemental appropriation is accounted for in TAFS 09/10 0100 and is
not earmarked (refer to Note 1.G. Earmarked Funds, Note 3. Fund
Balance with Treasury, and Note 13. Earmarked, Other, Disgorgement and
Penalties, and Non-Entity Funds).
Other Funds:
* Deposit and Suspense Funds (F3875, X6561, and X6563): These TAFS
hold disgorgement, penalties, and interest collected and held on
behalf of harmed investors, registrant monies held temporarily until
earned by the SEC, and collections awaiting disposition or
reclassification. At the end of FY 2010, the SEC discontinued the use
of the Budget Clearing Account (F3875).
* Miscellaneous Receipt Accounts (1099 and 3220): These TAFS hold non-
entity receipts and accounts receivable from custodial activities that
the SEC cannot deposit into funds under its control. These accounts
include receipts, pursuant to certain SEC enforcement actions, that
will be sent to the Treasury General Fund.
The SEC does not have lending or borrowing authority, except as
discussed in Note 12. Commitments and Contingencies. The SEC has
custodial responsibilities, as disclosed in Note 17. Custodial Revenues.
The Dodd-Frank Wall Street Reform and Consumer Protection (Dodd-Frank)
Act, signed into law on July 21, 2010, established the need for two
new additional TAFS in the SEC fund accounting structure: the
Securities and Exchange Commission Investor Protection Fund (Investor
Protection Fund) and the Securities and Exchange Commission Reserve
Fund (Reserve Fund).
* Investor Protection Fund (Special Fund X5567): This TAFS provides
earmarked funding for a whistleblower award program, through which
persons can receive award payments from the Fund if they provide
original information to the SEC that leads to successful enforcement
by the SEC of a judicial or administrative action in which monetary
sanctions exceeding $1 million are imposed. In addition, the Fund will
be used to finance the operations of the SEC Office of the Inspector
General's employee suggestion program. The suggestion program is
intended for the receipt of suggestions from SEC employees for
improvements in the work efficiency, effectiveness, productivity, and
use of the resources at the SEC, as well as allegations from SEC
employees of waste, abuse, misconduct, or mismanagement within the SEC.
The Investor Protection Fund is financed by transferring a portion of
monetary sanctions collected by the SEC in judicial or administrative
actions brought by the SEC under the securities laws that are not
added to the disgorgement fund or other funds under Section 308 of the
Sarbanes-Oxley Act of 2002 (15 U.S.C. 7246) or amounts in such funds
that are determined not to be distributed to injured investors. These
funds are considered financing sources. No sanction collected by the
Commission can be transferred to the Fund if its balance exceeds $300
million. The SEC may request the Secretary of the Treasury to invest
Investor Protection Fund amounts in Treasury obligations. Refer to
Note 1.J. Investments for additional details.
* Reserve Fund: This TAFS enables the SEC to obligate amounts, not to
exceed a total of $100 million in one fiscal year, as the SEC
determines necessary to carry out its functions. Effective on October
1, 2011, a portion of the SEC registration fee collections, not to
exceed $50 million in one fiscal year, shall be deposited in the
Reserve Fund. The balance of the fund cannot exceed $100 million. The
SEC will establish the TAFS in FY 2011 in anticipation of beginning
Reserve Fund operations in FY 2012. In addition, the SEC is required
to notify Congress when obligating amounts from the Reserve Fund.
G. Earmarked Funds:
Earmarked funds are financed by specifically identified revenues,
often supplemented by other financing sources, which remain available
over time. The SEC collects earmarked funds and is required to use
these funds for designated activities, benefits or purposes and to
account for them separately from the government's general revenues.
Some of the SEC's earmarked funds are offsetting collections which are
deposited into TAFS X0100, Salaries and Expenses. Also, all funds held
in the TAFS X5567, Investor Protection Fund, are considered earmarked
as detailed in Note 13. Earmarked, Other; Disgorgement and Penalties,
and Non-Entity Funds.
H. Entity/Non-Entity Assets:
Assets that an agency is authorized to use in its operations are
entity assets. Assets that an agency holds on behalf of another
federal agency or a third party and are not available for the agency's
use are non-entity assets. The SEC's nonentity assets include the
following: (i) disgorgement, penalties, and interest collected or to
be collected and held or invested by the SEC; (i) accounts receivable
with respect to Freedom of Information Act ("FOIA") fees; and (ii)
excess filing fees remitted by registrants (registrant deposits).
I. Fund Balance with Treasury:
Fund Balance with Treasury (FBWT) includes certain funds held on
behalf of third parties. These include registrant deposits and
uninvested disgorgement funds. FBWT also includes undisbursed account
balances with Treasury, balances in excess of appropriated amounts
that are unavailable to the SEC, and the Investor Protection Fund. The
SEC conducts all of its banking activity in accordance with directives
issued by Treasury's Financial Management Service (FMS). The SEC
deposits all revenue and receipts in commercial bank accounts
maintained by the FMS, or wires them directly to a Federal Reserve
Bank. Treasury processes all disbursements made by the SEC. The
Federal Reserve Bank transfers all monies maintained in commercial
bank accounts on the business day following the day of deposit.
J. Investments:
The SEC has the authority to invest disgorgement funds and amounts in
the Investor Protection Fund in Treasury securities, whenever
practicable. Disgorgement funds may also include civil penalties
collected under the "Fair Fund" provision of the Sarbanes-Oxley Act of
2002. As the funds are collected, the SEC holds them in a deposit fund
account and may invest them in overnight and short-term market-based
Treasury bills through a facility provided by the Bureau of the Public
Debt (MD), pending their distribution to investors. The SEC adds
interest earned to the funds, and these funds are subject to taxation
under Treasury Regulation Section 1 468B2. Additional details
regarding SEC investments are provided in Note 5. Investments, Net.
As of September 30, 2010, there are no investments made from the
Investor Protection Fund. The SEC is working with BPD to invest these
funds in FY 2011. As the funds are collected, the SEC will hold them
in a special receipt fund account and may invest them in overnight and
short-term market-based Treasury bills through a facility provided by
the BPD, pending their distribution. The interest earned on the
investments is a component of the balance of the Fund and available to
be used for expenses of the Investor Protection Fund.
K. Accounts Receivable and Allowance for Uncollectible Accounts:
Both SEC's entity and non-entity accounts receivable consist primarily
of amounts due from the public. Entity accounts receivable are amounts
that the SEC will retain upon collection. These generally include
claims arising from: (i) securities transaction fees, (ii) filing fees
paid by registrants, (iii) goods or services that the SEC has provided
to another federal agency pursuant to an inter-agency agreement, (iv)
host reimbursement of employee travel, and (v) employee-related debt.
Entity accounts receivable represent a small volume of the SEC's
business activities because agency fee legislation generally requires
payment of filing fees at the time of filing, and securities
transaction fees are payable to the SEC twice a year: in March for the
period September through December, and in September for the period
January through August. Accordingly, the year-end accounts receivable
accrual generally represents fees payable to the SEC for activity
during the month of September.
Non-entity accounts receivable are amounts that the SEC will not
retain upon collection. These mainly include disgorgement, penalties,
and interest assessments. The SEC recognizes these accounts receivable
when an order of the Commission or a court designates it to collect
the assessed disgorgement, penalties, and interest. The SEC does not
recognize interest as accounts receivable, unless specified by the
court or an administrative order.
The SEC is also party to court orders directing violators of federal
securities laws to pay the court or a receiver to collect the
disgorgement, penalties, and interest assessed against them. These
orders are not recognized as accounts receivable by the SEC because
the debts are payable to another party. However, these debts are
subject to change based on, for example, future orders issued by the
presiding court that could result in the SEC recognizing a receivable.
In the cases where the court order or other legally binding instrument
requires the debtor to remit funds to the SEC, a receivable is
recorded.
The SEC uses a three-tiered methodology to calculate the allowance for
loss on its disgorgement and penalty accounts receivable balances. The
first tier involves making an individual collection assessment of the
cases constituting the top 90 percent of the disgorgement and penalty
accounts receivable portfolio. The second and third tiers are composed
of cases in the bottom 10 percent that are equal to or less than 30
days old and over 30 days old, respectively. For the second and third
tiers, the SEC applies an allowance rate based on historical
collection data analysis.
The SEC bases the allowance for uncollectible amounts and the related
provision for estimated losses for filing fees and other accounts
receivable on analysis of historical collection data. No allowance for
uncollectible amounts or related provision for estimated losses have
been established for securities transaction fees payable by SROs, as
these gross accounts receivable are deemed to represent their net
realizable value based on historical experience.
L. Advances and Prepayments:
The SEC may prepay amounts in anticipation of receiving future
benefits such as training and supplemental health benefits for the SEC
employees. The agency expenses these payments when the goods are
received or services are performed.
M. Property and Equipment, Net:
The SEC's property and equipment consist of software, general-purpose
equipment used by the agency, capital improvements made to buildings
leased by the SEC for office space, and internal-use software
development costs for projects in development. The SEC reports
property and equipment purchases and additions at cost. The agency
expenses property and equipment acquisitions that do not meet the
capitalization criteria, normal repairs, and maintenance when received
or incurred by the SEC.
The SEC depreciates property and equipment over their estimated useful
lives using the straight-line method of depreciation. The agency
removes property and equipment from its asset accounts in the period
of disposal, retirement, or removal from service. The SEC recognizes
the difference between the book value and the proceeds in the same
period that the asset is removed.
N. Liabilities:
The SEC records liabilities for amounts that are likely to be paid as
a result of events that have occurred as of the relevant Balance Sheet
dates. The SEC's liabilities consist of routine operating accounts
payable, accrued payroll and benefits, registrant deposit accounts
that have not been returned to registrants, liabilities for
disgorgement and penalties, legal liabilities, and custodial
liabilities for amounts held on behalf of Treasury.
A liability for disgorgement and penalties arises when an order is
issued for the SEC to collect disgorgement, penalties, and interest
from securities law violators. When the Commission or court issues
such an order, the SEC establishes an accounts receivable due to the
SEC with an offsetting liability. The SEC reports all disgorgement and
penalty assets and offsetting liabilities as non-entity items on the
Balance Sheet. Previously, all disgorgement and penalty receivables
and their offsetting liabilities were held in an SEC deposit account
as governmental and non-custodial until distributed to harmed
investors or transferred to the Treasury General Fund. As of September
30, 2010, the SEC only recognizes these assets and liabilities as
governmental and non-custodial if they are payable to the SEC. If the
court order stipulates that collections are to be transferred to the
Treasury General Fund, the disgorgement and penalty assets are
classified as custodial and the offsetting liabilities are classified
as custodial and intragovemmental.
Prior to the enactment of Dodd-Frank on July 21, 2010 collections not
distributed to harmed investors were transferred to the Treasury
General Fund. After the enactment of Dodd-Frank, collections not
distributed to harmed investors could be transferred to either the
Investor Protection Fund or the Treasury General Fund. Collections not
distributed to harmed investors are transferred to the Investor
Protection Fund if the Fund's balance does not exceed $300 million.
The SEC recognizes liabilities covered by three types of resources:
realized budgetary resources, unrealized budgetary resources that
become available without further congressional action and amounts that
do not require the use of current budgetary resources. Realized
budgetary resources include obligated balances that fund existing
liabilities and unobligated balances as of the relevant Balance Sheet
dates. Unrealized budgetary resources represent fee collections in
excess of amounts appropriated for current fiscal year spending. The
SEC uses these resources to cover liabilities when appropriation
language makes these unrealized budgetary resources available in the
fiscal year without further congressional action. Amounts that do not
require the use of current budgetary resources are liabilities that
will be funded in future years, such as annual leave.
O. Employee Retirement Systems and Benefits:
The SEC's employees may participate in either the Civil Service
Retirement System (CSRS) or the Federal Employees Retirement System
(FERS), depending on when they started working for the federal
government. Pursuant to Public Law 99-335, FERS and Social Security
automatically cover most employees hired after December 31, 1983.
Employees who are rehired after a break in service of more than one
year and who had five years of federal civilian service prior to 1987
are eligible to participate in the CSRS offset retirement system or
may elect to join FERS.
The SEC does not report CSRS or FERS assets or accumulated plan
benefits that may be applicable to its employees in its financial
statements. The U.S. Office of Personnel Management (OPM) reports
them. Although the SEC reports no liability for future payments to
employees under these programs, the federal government is liable for
future payments to employees through the various agencies
administering these programs. The SEC does not fund post-retirement
benefits such as the Federal Employees Health Benefit Program and the
Federal Employees Group Life Insurance Program. The SEC is also not
required to fully fund CSRS pension liabilities. Instead, the
financial statements of the SEC recognize an imputed financing source
and corresponding expense that represent the SEC's share of the cost
to the federal government of providing pension, post-retirement
health, and life insurance benefits to all eligible SEC employees. All
employees are eligible to contribute to a Thrift Savings Plan (TSP).
For those employees participating in FERS, the TSP is automatically
established, and the SEC makes a mandatory one percent contribution to
this plan. In addition, the SEC matches contributions ranging from one
to four percent for FERS-eligible employees who contribute to their
TSP. The SEC contributes a matching amount to the Social Security
Administration under the Federal Insurance Contributions Act, which
fully covers FERS participating employees. Employees participating in
CSRS do not receive matching contributions to their TSP.
P. Injury and Post-employment Compensation:
The Federal Employees' Compensation Act (FECA), administered by the
U.S. Department of Labor (DOL), addresses all claims brought by SEC
employees for on-the-job injuries. The DOL bills the SEC annually as
its claims are paid, and the SEC in turn accrues a liability to
recognize the future payments.
Refer to Note 9. Actuarial FECA Liability for additional details.
Payment on these bills is deferred for two years to allow for funding
through the budget process. Similarly, employees that the SEC
terminates without cause may receive unemployment compensation
benefits under the unemployment insurance program also administered by
the DOL, which bills each agency quarterly for paid claims.
Q. Annual, Sick, and Other Leave:
The SEC accrues annual leave and compensatory time as earned and
reduces the accrual when leave is taken. The balances in the accrued
leave accounts reflect current leave balances and pay rates. No
portion of this liability has been obligated. Future financing sources
provide funding to the extent that current or prior year funding is
not available to pay for leave earned but not taken. The SEC expenses
sick leave and other types of non-vested leave as used.
R. Revenue and Other Financing Sources:
The SEC's revenue and financing sources include exchange revenues,
which are generated from arm's-length transactions, and non-exchange
revenues, which arise from the government's ability to demand payment.
The SEC's exchange revenue mainly consists of collections from
securities transaction fees. The SEC's non-exchange revenue consists
of amounts collected in enforcement proceedings from violators of
securities laws, as described below.
The SEC's funding is primarily through the collection of securities
transaction fees from SROs and securities registration, tender offer,
merger, and other fees from registrants. The fee rates are established
by the SEC in accordance with federal law and are applied to volumes
of activity reported by SROs or to flings submitted by registrants.
When received, the SEC records these fees as exchange revenue. The SEC
is permitted by law to include these amounts in its obligations]
authority or to offset its expenditures and liabilities upon
collection, up to authorized limits. The SEC records all amounts
remitted by registrants in excess of the fees for specific flings as
liabilities in deposit accounts until earned by the SEC from
registrant flings or returned to the registrant pursuant to the SEC's
regulation, which calls for the return of registrant deposits when an
account is dormant for at least 180 days.
The SEC also receives collections from proceedings that result in the
assessment of disgorgement, penalties, and interest against violators
of federal securities laws. When the SEC collects these funds, it
transfers the funds to a SEC deposit account at Treasury. The funds
may be later returned to injured investors, transferred to the
Investor Protection Fund, or transferred to the Treasury General Fund.
Non-exchange revenue is recognized by the SEC when the funds are
transferred to the Investor Protection Fund or the Treasury General
Fund. Non-exchange funds transferred to the Treasury General Fund are
reported in the Statement of Custodial Activity. The SEC does not
record amounts collected and held by another government entity, such
as a court registry, or a non-government entity, such as a receiver.
Funds transferred to the Investor Protection Fund are recognized as
non-exchange revenue by the Investor Protection Fund.
The Investor Protection Fund will provide financing for payments to
whistleblowers under Section 21F of the Exchange Act and for the SEC
Office of the Inspector General's suggestion program. The Investor
Protection Fund is financed by transferring a portion of monetary
sanctions collected by the SEC in judicial or administrative actions
brought by the SEC under the securities laws that are not added to
disgorgement fund or other funds under Section 308 of the Satbanes-
Oxley Act of 2002 (15 U.S.C. 7246) or amounts in such funds that are
determined not to be distributed to injured investors. No sanction
collected by the Commission can be transferred to the Fund if its
balance exceeds $300 million. The balance of the Investor Protection
Fund as of September 30, 2010 is $451.9 million. The SEC may request
the Secretary of the Treasury to invest Investor Protection Fund
amounts in Treasury obligations.
S. Budgets and Budgetary Accounting:
The SEC is subject to certain restrictions on its use of statutory
fees. The SEC deposits all fee revenues in a designated account at
Treasury. However, the SEC may use funds from this account only as
authorized by Congress and made available by OMB apportionment, upon
issuance of a Treasury warrant. Revenue collected in excess of
appropriated amounts is restricted from use by the SEC.
The SEC can use fees other than the restricted excess fees from its
operations, subject to annual congressional limitations, which were
$1,095 million and $894.4 million for the budgets for FY 2010 and FY
2009, respectively. In addition, Congress made available approximately
$16.1 million and $65.6 million from prior year balances for FY 2010
and FY 2009, respectively. Funds appropriated that the SEC does not
use in a given fiscal year are maintained in a designated account for
use in future periods in accordance with the appropriation
requirements. Previously mentioned in Note 1.F Fund Accounting
Structure, the SEC received a supplemental appropriation for $10
million from the Treasury General Fund for use in FY 2009 and FY 2010.
Unlike the annual appropriation, the supplemental funds are not offset
by fees collected by the SEC.
Each fiscal year, the SEC receives Category Apportionments, which are
quarterly distributions of budgetary resources made by OMB. The SEC
also receives a small amount of Category B funds for reimbursable
activity, which are exempt from quarterly apportionment.
The Investor Protection Fund (TAFS X5567) is a special fund that has
the authority to retain revenues and other financing sources not used
in the current period for future use. Dodd-Frank provides that the
Fund is available to the SEC without further appropriation or fiscal
year limitation for the purpose of paying awards to whistleblowers and
funding the activities of the Office of the Inspector General's
employee suggestion program. Each fiscal year, the SEC is required to
request and obtain an apportionment from OMB to use these funds. In FY
2010, the SEC received a $451.9 million apportionment for the Fund for
use in FY 2011. All of the funds are Category B, which are exempt from
quarterly apportionment.
T. Disgorgement and Penalties:
The SEC maintains non-entity assets related to disgorgements and
penalties ordered pursuant to civil injunctive and administrative
proceedings. The SEC also recognizes an equal and offsetting liability
for these assets as discussed in Note 1.N. Liabilities. These non-
entity assets consist of disgorgement, penalties, and interest
assessed against securities law violators where the Commission,
administrative law judge, or in some cases, a court, has determined
that the SEC should return such funds to harmed investors or may be
transferred to the Investor Protection Fund or the Treasury General
Fund. The SEC does not record on its financial statements any asset
amounts another government entity such as a court, or a non-
governmental entity, such as a receiver, has collected or will
collect. Additional details regarding disgorgement and penalties are
presented in Note 13. Earmarked, Other; Disgorgement and Penalties,
and Non-Entity Funds and Note 19. Disgorgement and Penalties.
Note 2. Non-Entity Assets:
At September 30, non-entity assets of the SEC consisted of the
following: (Dollars In Thousands):
Intragovernmental:
Fund Balance with Treasury:
Registrant Deposits:
FY 2010: $44,729;
2009: $40,898.
Disgorgement and Penalties (Note 19):
FY 2010: $54,269;
2009: $43,622.
Investments, Net:
Disgorgement and Penalties (Note 19):
FY 2010: $924,823;
2009: $1,959,611.
Total Intragovernmental Non-Entity Assets:
FY 2010: $1,023,821;
2009: $2,044,131.
Cash and Other Monetary Assets:
Disgorgement and Penalties (Note 19):
FY 2010: $2,815;
2009: [].
Accounts Receivable, Net:
Disgorgement and Penalties (Note 19):
FY 2010: $81,939;
2009: $294,508.
Custodial:
FY 2010: [Empty];
2009: $4.
Other Non-Entity Assets:
FY 2010: $4;
2009: $1.
Total Non-Entity Assets:
FY 2010: $1,108,579;
2009: $2,338,644.
Total Entity Assets:
FY 2010: $7,053,860;
2009: $6,224,487.
Total Assets (Note 13):
FY 2010: $8,162,439;
2009: $8,563,131.
Note 3. Fund Balance with Treasury
FBWT by type of fund as of September 30, are as follows:
(Dollars In Thousands):
Fund Balances:
General Funds:
FY 2010: $6,438,459;
2009: $5,998,787.
Special Fund:
FY 2010: $451,910;
2009: [Empty];
Other Funds:
FY 2010: $98,998;
2009: $84,520;
Total Fund Balance with Treasury:
FY 2010: $6,989,367;
2009: $6,083,307.
Status of Fund Balance with Treasury:
Unobligated Balance:
Available:
FY 2010: $17,213;
2009: $9,968.
Unavailable:
FY 2010: $472,136;
2009: $16,797.
Obligated Balance not yet Disbursed:
FY 2010: $317,747;
2009: $236,088.
Non-Budgetary Fund Balance with Treasury:
FY 2010: $6,182,271;
2009: $5,820,454.
Total Fund Balance with Treasury:
FY 2010: $6,989,367;
2009: $6,083,307.
A significant portion of the increase in FBWT is due to the $451.9
million of non-exchange revenue transferred to the Investor Protection
Fund (Special Fund), which prior to the establishment of the Fund
would have been transferred to the Treasury General Fund. This Special
Fund will provide the financial resources for the whistleblower award
program and the SEC Office of Inspector General's employee suggestion
program, both of which were mandated in Dodd-Frank. As of September
30, 2010 the balance of the Special Fund is classified as unavailable
under the Status of Fund Balance with Treasury noted above.
Note 4. Cash and Other Monetary Assets:
The SEC received $2.8 million in disgorgement and penalties
collections on September 30, 2010. These collections are recorded as
deposits in transit as a result of the varying processing times and
cut-off dates between the SEC and Treasury. Once deposited, the SEC
holds receipts in FBWT or invests in Treasury securities pending
distribution to harmed investors, or transfer to the Investor
Protection Fund or Treasury General Fund. There were no cash and
monetary assets on September 30, 2009.
Note 5. Investments, Net:
The SEC invests funds in overnight and short-term non-marketable
market-based Treasury bills. Treasury bills are securities traded in
the primary and secondary U.S. Treasury markets. The U.S. government
auctions Treasury bills directly in the primary U.S. Treasury market,
and subsequently investors trade them in the secondary U.S. Treasury
market. In accordance with GAAP, the SEC records the value of its
investments in Treasury bills at cost and amortizes the discount on a
straight-line basis (S/L) through the maturity date of these
securities. The market value is determined by the secondary U.S.
Treasury market and represents the value an individual investor is
willing to pay for these securities, at a given point in time.
At September 30, 2010, investments consisted of the following:
Non-Marketable Market-Based Securities, Disgorgement and Penalties:
Cost: $924,651;
Amortization Method: S/L;
Amortized (Premium) Discount: $171;
Interest Receivable: $1;
Investment, Net: $924,823;
Market Value Disclosure: $924,837.
At September 30, 2009, investments consisted of the following:
Non-Marketable Market-Based Securities, Disgorgement and Penalties:
Cost: $1,959,163;
Amortization Method: S/L;
Amortized (Premium) Discount: $448;
Interest Receivable: [Empty];
Investment Net: $1,959,611;
Market Value Disclosure: $1,959,810.
Note 6. Accounts Receivable, Net:
At September 30, 2010, accounts receivable consisted of the following:
Intragovernmental Entity Accounts Receivable: Reimbursable Activity:
Gross Receivables: [Empty];
Allowance: [Empty];
Net Receivables: [Empty].
Subtotal Intragovernmental Accounts Receivable:
Gross Receivables: [Empty];
Allowance: [Empty];
Net Receivables: [Empty].
Entity Accounts Receivable:
Exchange Fees:
Gross Receivables: $78,461;
Allowance: [Empty];
Net Receivables: $78,461.
Filing Fees:
Gross Receivables: $690;
Allowance: $107;
Net Receivables: $583.
Other:
Gross Receivables: $180;
Allowance: $24;
Net Receivables: $156.
Non-Entity Accounts Receivable:
Disgorgement and Penalties (Note 19):
Gross Receivables: $656,495;
Allowance: $574,556;
Net Receivables: $81,939.
Other:
Gross Receivables: $9;
Allowance: $5;
Net Receivables: $4.
Subtotal Non-Intragovernmental Accounts Receivable:
Gross Receivables: $735,845;
Allowance: $574,692;
Net Receivables: $161,143.
Total Accounts Receivable:
Gross Receivables: $735,845;
Allowance: $574,692;
Net Receivables: $161,143.
At September 30, 2009, accounts receivable consisted of the following:
Intragovernmental Entity Accounts Receivable: Reimbursable Activity:
Gross Receivables: $188;
Allowance: [Empty];
Net Receivables: $188.
Subtotal Intragovernmental Accounts Receivable:
Gross Receivables: $188;
Allowance: [Empty];
Net Receivables: $188.
Entity Accounts Receivable:
Exchange Fees:
Gross Receivables: $138,654;
Allowance: [Empty];
Net Receivables: $138,654.
Filing Fees:
Gross Receivables: $720;
Allowance: $116;
Net Receivables: $604.
Other:
Gross Receivables: $283;
Allowance: $21;
Net Receivables: $262.
Non-Entity Accounts Receivable:
Disgorgement and Penalties (Note 19):
Gross Receivables: $713,851;
Allowance: $419,343;
Net Receivables: $294,508.
Other:
Gross Receivables: $7;
Allowance: $2;
Net Receivables: $5.
Subtotal Non-Intragovernmental Accounts Receivable:
Gross Receivables: $853,515;
Allowance: $419,482;
Net Receivables: $434,033.
Total Accounts Receivable:
Gross Receivables: $853,703;
Allowance: $419,482;
Net Receivables: $434,221.
The SEC writes off receivables aged two or more years by removing the
debt amounts from the gross accounts receivable and any related
allowance for uncollectible accounts. In FY 2009, the SEC enhanced the
criteria used to estimate the allowance for loss on disgorgement and
penalties accounts receivable. Refer to Note 1.K. Accounts Receivable
and Allowance for Uncollectible Accounts for methods used to estimate
allowances.
Note 7. Property and Equipment, Net:
At September 30, 2010, property and equipment consisted of the
following: (Dollars in Thousands):
Class of Property: Furniture and Equipment;
Depreciation/Amortization Method: S/L;
Capitalization Threshold for Individual Purchases: $15;
Capitalization Threshold for Bulk Purchases: $50;
Service Life (years): 3-5;
Acquisition Cost: $61,133;
Accumulated Depreciation/Amortization: $42,754;
Book Value: $18,379.
Class of Property: Software;
Depreciation/Amortization Method: S/L;
Capitalization Threshold for Individual Purchases: $300;
Capitalization Threshold for Bulk Purchases: $300;
Service Life (years): 3-5;
Acquisition Cost: $89,827;
Accumulated Depreciation/Amortization: $73,305;
Book Value: $16,522.
Class of Property: Leasehold Improvements;
Depreciation/Amortization Method: S/L;
Capitalization Threshold for Individual Purchases: $300;
Capitalization Threshold for Bulk Purchases: N/A;
Service Life (years): 10;
Acquisition Cost: $84,204;
Accumulated Depreciation/Amortization: $39,393;
Book Value: $44,811.
Class of Property: Total;
Acquisition Cost: $235,164;
Accumulated Depreciation/Amortization: $155,452;
Book Value: $79,712.
At September 30, 2009, property and equipment consisted of the
following:
Class of Property: Furniture and Equipment;
Depreciation/Amortization Method: S/L;
Capitalization Threshold for Individual Purchases: $15;
Capitalization Threshold for Bulk Purchases: $50;
Service Life (years): 3-5;
Acquisition Cost: $57,399;
Accumulated Depreciation/Amortization: $43,358;
Book Value: $14,041.
Class of Property: Software;
Depreciation/Amortization Method: S/L;
Capitalization Threshold for Individual Purchases: $300;
Capitalization Threshold for Bulk Purchases: $300;
Service Life (years): 3-5;
Acquisition Cost: $85,145;
Accumulated Depreciation/Amortization: $67,737;
Book Value: $17,408.
Class of Property: Leasehold Improvements;
Depreciation/Amortization Method: S/L;
Capitalization Threshold for Individual Purchases: $300;
Capitalization Threshold for Bulk Purchases: N/A;
Service Life (years): 10;
Acquisition Cost: $80,891;
Accumulated Depreciation/Amortization: $29,905;
Book Value: $50,986.
Class of Property: Total;
Acquisition Cost: $223,435;
Accumulated Depreciation/Amortization: $141,000;
Book Value: $82,435.
During FY 2010, the SEC recorded a disposal of $4.48 million in
software development project costs involving an effort to integrate
its Automated Procurement System (APS) and the core financial system.
The project was discontinued before it was ready for placement into
production. The SEC made the decision to end the project based on
cost/benefit considerations and the recent decision to move the SEC
core financial system to a Federal Shared Service Provider.
Note 8. Liabilities Not Covered by Budgetary Resources:
The SEC's liabilities include amounts that will not require the use of
budgetary resources. These liabilities include registrant deposit
accounts that have not been returned to registrants and the offsetting
liability that corresponds to assets the SEC holds relating to
collections from disgorgements and penalties and receivables as
discussed in Note 1.N. Liabilities.
At September 30, liabilities consisted of the following:
(Dollars In Thousands):
Liabilities Not Covered by Budgetary Resources:
Intragovernmental: Unfunded FECA and Unemployment Liability:
FY 2010: $1,719;
2009: $1,441.
Total Intragovernmental Liabilities:
FY 2010: $1,719;
2009: $1,441.
Accrued Leave:
FY 2010: $45,629;
2009: $42,696.
Actuarial Liability:
FY 2010: $7,576;
2009: $6,178.
Contingent Liability:
FY 2010: [Empty];
2009: $9,500.
Other Accrued Liabilities: Legal Liability:
FY 2010: $10,823;
FY 2009: [Empty].
Other Accrued Liabilities: Recognition of Lease Liability:
FY 2010: $9,202;
2009: $12,513.
Total Liabilities Not Covered by Budgetary Resources:
FY 2010: $74,949;
2009: $72,328.
Liabilities Not Requiring Budgetary Resources:
Intragovernmental: Custodial Liability:
FY 2010: $42,380;
2009: $4.
Intragovernmental: Liability for Non-Entity Assets:
FY 2010: $4;
2009: $1.
Total Intragovernmental Liabilities:
FY 2010: $42,384;
2009: $5.
Registrant Deposits:
FY 2010: $44,729;
2009: $40,898.
Liability for Disgorgement and Penalties:
FY 2010: $1,021,466;
2009: $2,297,741.
Total Liabilities Not Requiring Budgetary Resources:
FY 2010: $1,108,579;
2009: $2,338,644.
Liabilities Covered by Budgetary Resources:
Intragovernmental: Accounts Payable:
FY 2010: $5,185;
2009: $9,080.
Intragovernmental: Employee Benefits:
FY 2010: $6,088;
2009: $5,213.
Intragovernmental: Other:
FY 2010: [Empty];
2009: $157.
Total Intragovernmental Liabilities:
FY 2010: $11,273;
2009: $14,450.
Accounts Payable:
FY 2010: $46,260;
2009: $34,084.
Accrued Payroll and Benefits:
FY 2010: $31,649;
2009: $27,131.
Other Accrued Liabilities:
FY 2010: $9,245;
2009: $8,409.
Total Liabilities Covered by Budgetary Resources:
FY 2010: $98,427;
2009: $84,074.
Total Liabilities (Note 13):
FY 2010: $1,281,955;
2009: $2,495,046.
On June 12, 2009, the Court of Appeals affirmed the decision of the
Federal Labor Relations Authority (ELBA) and upheld the award on SEC
v. FLRA, No. 08-1256, 08-1294 p.C.Cir.). This matter involved a
complaint filed by the National Treasury Employees Union (NfTEU)
before FLRA. No specific amount was claimed by the NITEU. In FY 2009,
the SEC recognized the award as a $9 million contingent liability, as
discussed further in the Contingencies section of Note 12. Commitments
and Contingencies. In FY 2010, the SEC reclassified the contingent
liability to a legal liability, developed a methodology for processing
the ordered retroactive wage adjustments, and began making payments in
the fourth quarter of FY 2010. As of September 30, 2010, the SEC has
estimated a range of $10.8 million to $12.6 million for this award
liability. The SEC accrued the minimum amount in the range, $10.8
million for FY 2010, because no amount in the estimated range is
considered more probable than any other amount within the range. As of
September 30, 2009 the SEC had accrued $500,000 for other claims;
there were no other claims in 2010.
Note 9. Actuarial FECA Liability:
FECA provides income and medical cost protection to covered federal
civilian employees harmed on the job or who have contracted an
occupational disease, and dependents of employees whose death is
attributable to a job-related injury or occupational disease. Claims
incurred for benefits under FECA for the SEC's employees are
administered by the DOL and ultimately paid by the SEC when funding
becomes available.
The SEC bases its estimate for FECA actuarial liability on the DOL's
FECA model. The model considers the average amount of benefit payments
incurred by the SEC for the past three fiscal years, multiplied by the
medical and compensation liability to benefits paid (LBP) ratio for
the whole FECA program. The SEC uses the overall average percentages
of the LBP ratios summarized in the table below.
For FY 2010, the LBP ratios were as follows:
LBP Category: Highest;
Medical: 10.50%;
Compensation: 12.30%.
LBP Category: Overall Average;
Medical: 9.90%;
Compensation: 11.30%.
LBP Category: Lowest;
Medical: 8.90%;
Compensation: 10.30%.
For FY 2009, the LBP ratios were as follows:
LBP Category: Highest;
Medical: 9.90%;
Compensation: 12.20%.
LBP Category: Overall Average;
Medical: 9.30%;
Compensation: 11.00%.
LBP Category: Lowest;
Medical: 8.40%;
Compensation: 10.10%.
For FY 2010 and FY 2009, the SEC used the overall average LBP ratios
to calculate the $7.6 million and $6.2 million FECA actuarial
liabilities for those years, respectively.
Note 10. Leases:
The SEC has the authority to negotiate long-term leases for office
space. At September 30, 2010, the SEC leased office space at 19
locations under operating lease agreements that expire between FY 2011
and FY 2022. The SEC paid $93.3 million and $82.8 million for rent for
the fiscal years ending September 30, 2010 and 2009, respectively.
Under existing commitments, minimum lease payments through FY 2016 and
thereafter are as follows:
(Dollars In Thousands):
Fiscal Year: 2011;
Minimum Lease Payments: $94,402.
Fiscal Year: 2012;
Minimum Lease Payments: $102,439.
Fiscal Year: 2013;
Minimum Lease Payments: $117,094.
Fiscal Year: 2014;
Minimum Lease Payments: $115,739.
Fiscal Year: 2015;
Minimum Lease Payments: $113,752.
Fiscal Year: 2016 and thereafter;
Minimum Lease Payments: $604,144.
Total Future Minimum Lease Payments: $1,147,570.
The total future minimum lease payments summarized includes a
continuing liability, until March 31, 2012, for space leased during FY
2005 in New York. To facilitate surrender of the SEC lease obligations
for the previously occupied space, the SEC and U.S. General Services
Administration (GSA) entered into separate agreements with the lessor
of that space whereby GSA agreed to rent the office space for the next
five years of the SEC's lease with an option to renew for an
additional five years which would, unless terminated early, overlap
the remaining 17 months of the SEC's lease As part of the SEC's
agreement with the previous lessor, the SEC was responsible for the
estimated $18 million difference between its annual lease liability
and the annual lease liability negotiated by GSA with that lessor. The
GSA exercised the five year renewal option in July 2009, so as of
September 30, 2010, the SEC is responsible for one more month covered
by the GSA original lease and then less than two additional years, at
a reduced rate, through March 31, 2012; this liability amounts to $3.6
million of lease payments that end in FY 2012. Required lease payments
through FY 2012 are as follows:
(Dollars In Thousands):
Fiscal Year: 2011;
Minimum Lease Payments: $2,413.
Fiscal Year: 2012;
Minimum Lease Payments: $1,192.
Total Future Estimated Lease Payments: $3,605.
In addition to the lease liability above, during FY 2005, the SEC
moved into temporary office space in New York due to renovations in
the new leased office space. This temporary space was being provided
to the SEC for only the lessor's operating costs, and therefore the
SEC did not make rent payments for the New York office for five months
of the fiscal year. The SEC attributed rent expense on a S/L over the
life of the new lease and recorded rent expense and an unfunded
liability estimated at $8 million in FY 2005 and FY 2006. Since 2006,
the SEC has recorded a reduction in the unfunded lease liability in
the amount of $2.4 million and currently has a remaining balance of
$5.6 million. The yearly future amortization amounts are shown in the
table below. Refer to Recognition of Lease Liability line in Note 8.
Liabilities Not Covered by Budgetary Resources.
(Dollars In Thousands):
Fiscal Year: 2011;
Future Amortization Amounts: $533.
Fiscal Year: 2012;
Future Amortization Amounts: $533.
Fiscal Year: 2013;
Future Amortization Amounts: $533.
Fiscal Year: 2014;
Future Amortization Amounts: $533.
Fiscal Year: 2015;
Future Amortization Amounts: $533.
Fiscal Year: 2016 and thereafter;
Future Amortization Amounts: $2,932.
Total Future Amortization Amounts: $5,597.
Note 11. Imputed Financing:
The SEC recognizes an imputed financing source and corresponding
expense to represent its share of the cost to the federal government
of providing pension and postretirement health and life insurance
benefits (Pension/Other Retirements Benefits) to all eligible SEC
employees. For September 30, 2010 and 2009, the total amount of
imputed financing amounted to approximately $36.2 million and $26.0
million, respectively.
Note 12. Commitments and Contingencies:
A. Commitments:
The Securities Investor Protection Act of 1970 (SIPA), as amended,
created the Securities Investor Protection Corporation (SIPC) to
provide certain financial protections to customers of insolvent
registered securities brokers, dealers, firms, and members of national
securities exchanges for up to $500,000 per customer. SIPA authorizes
the SIPC to create a fund to maintain all monies received and
disbursed by the SIPC. SIPA also gives the SIPC the authority to
borrow funds from the SEC in the event that the SIPC Fund is or may
appear insufficient for purposes of SIPA. Dodd-Frank amended Section
4(h) of the SIPA (15 U.S.C. 78ddd(h)) by increasing the borrowing
limit amount from $1 billion to $2.5 billion.
To borrow the funds, SIPC must file with the SEC a statement of the
uses of such a loan and a repayment plan, and then the SEC must
certify to the Secretary of the Treasury that the an is necessary to
protect broker-dealer customers and maintain confidence in the
securities markets. The Treasury would make these funds available to
the SEC through the purchase of notes or other obligating instruments
issued by the SEC. Such notes or other obligating instruments would
bear interest at a rate determined by the Secretary of the Treasury.
As of September 30, 2010, the SEC had not loaned any funds to the
SIPC, and there are no outstanding notes or other obligating
instruments issued by the SEC.
Based on the amounts of customer property and customer claims in the
Bernard L. Madoff Investment Securities LLC and Lehman Brothers Inc.
liquidations, the current size of the SIPA Fund and SIPC's ongoing
assessments on brokers are estimated to provide sufficient funds to
cover payments relating to the Madoff and Lehman matters. However, in
the event of other losses or claims or of liabilities in the Madoff
and Lehman matters that are higher than estimated, SIPC may determine
to seek a loan from the SEC.
As mentioned in Note 1.F Fund Accounting Structure, the Investor
Protection Fund will be used to pay awards to whistleblowers if they
voluntarily provide original information to the SEC that leads to the
successful enforcement by the SEC of a covered judicial or
administrative action in which monetary sanctions exceeding $1 million
are imposed. The legislation allows whistleblowers to receive between
10 and 30 percent of the monetary sanctions collected in the covered
action or in a related action, with the actual percentage being
determined at the discretion of the SEC using criteria provided in the
legislation. The statutory criteria requires the SEC to consider the
significance of the information to the success of the covered judicial
or administrative action, the degree of assistance provided by the
whistleblower and any legal representative of the whistleblower in a
covered judicial or administrative action, the programmatic interest
of the SEC in deterring violations of the securities laws by making
awards to whistleblowers who provide information that lead to the
successful enforcement of such laws, and such additional relevant
factors as the Commission may establish by rule or regulation. Section
924(a) of Dodd-Frank requires the SEC to issue regulations to
implement the program by April 2011. Among other things, these
regulations will delineate eligibility for a whistleblower award and
the procedures for applying for an award in SEC actions and related
actions. All potential whistleblowers, including those submitting
information before adoption of the SEC regulation, will be required to
comply with the procedures specified in the regulation in order to be
eligible for an award. The SEC will not pay whistleblower claims until
the final regulations are adopted by the Commission.
As of September 30, 2010, there am no submitted claims against the
Investor Protection Fund, and the SEC has not recognized any
liabilities associated with the Fund. The SEC has not recognized a
contingent liability in regards to potential whistleblower claims
because they do not meet the criteria for recognition in accordance
with the Statement of Federal Financial Accounting Standards (SFFAS)
5, Accounting for Liabilities of the Federal Government as amended by
SFFAS 12, Recognition of Contingent Liabilities of the Federal
Government.
In addition to future lease commitments discussed in Note 10. Leases,
the SEC is obligated for the purchase of goods and services that have
been ordered, but not received. As of September 30, 2010, net
obligations for all of the SEC's activities were $317.7 million, of
which $98.4 million was delivered and unpaid. As of September 30,
2009, net obligations for all of SEC's activities were $236.1 million,
of which $83.6 million was delivered and unpaid.
B. Contingencies:
The SEC recognizes contingent liabilities when a past event or
exchange transaction has occurred, a future outflow or other sacrifice
of resources is probable, and the future outflow or sacrifice of
resources is measurable. The SEC is party to various routine
administrative proceedings legal actions, and claims brought against
it, including threatened or pending litigation involving labor
relations claims, some of which may ultimately result in settlements
or decisions against the federal government. As of September 30, 2009,
the SEC had accrued $500,000 for claims of this type; there were no
claims of this type in 2010.
In a separate legal issue in FY 2009, the Court of Appeals affirmed
the decision of the FLRA and upheld the award on SEC v. FLRA. Further
information about this case can be found in Note 8. Liabilities Not
Covered by Budgetary Resources. As of September 30, 2009, the SEC had
estimated a range of $9 million to $12 million for this award
liability. In accordance with the SFFAS 5, Accounting for liabilities
of the Federal Government, the SEC accrued the minimum amount in the
range, $9 million for FY 2009, because no amount in the estimated
range was considered more probable than any other amount within the
range. Subsequently in FY 2010, the SEC recognized the contingency as
an unfunded legal liability.
Note 13. Earmarked, Other, Disgorgement and Penalties, and Non-Entity
Funds:
The SEC's earmarked funds arise from disgorgement and penalty
collections transferred to the Investor Protection Fund and offsetting
collections from securities transaction fees, registration fees, and
other fees authorized by the Securities Act and the Exchange Act. Note
1.G. Earmarked Funds displays additional details regarding the SEC's
earmarked funds.
As discussed in Note 1.F Fund Accounting Structure, the SEC received
supplemental appropriations for use in FY 2009 and FY 2010. These
funds are not earmarked and are presented under Other Entity Funds.
For FY 2010, the assets, liabilities, net position, and net income
from operations relating to earmarked, other, disgorgement and
penalties, and non-entity funds consisted of the following:
(Dollars In Thousands):
Balance Sheet as of September 30, 2010:
Assets:
Fund Balance with Treasury:
Earmarked: $6,888,373;
Other Entity Funds: $1,996;
Disgorgement and Penalties: $54,269;
Non-Entity Funds: $44,729;
Total: $6,989,367.
Cash and Other Monetary Assets:
Earmarked: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: $2,815;
Non-Entity Funds: [Empty];
Total: $2,815;
Investments, Net:
Earmarked: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: $924,823;
Non-Entity Funds: [Empty];
Total: $924,823.
Accounts Receivable, Net:
Earmarked: $79,200;
Other Entity Funds: [Empty];
Disgorgement and Penalties: $81,939;
Non-Entity Funds: $4;
Total: $161,143.
Advances and Prepayments:
Earmarked: $4,579;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $4,579.
Property and Equipment, Net:
Earmarked: $79,109;
Other Entity Funds: $603;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $79,712.
Total Assets (Note 2):
Earmarked: $7,051,261;
Other Entity Funds: $2,599;
Disgorgement and Penalties: $1,063,846;
Non-Entity Funds: $44,733;
Total: $8,162,439.
Liabilities:
Accounts Payable:
Earmarked: $51,313;
Other Entity Funds: $132;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $51,445.
Accrued Payroll and Benefits:
Earmarked: $37,622;
Other Entity Funds: $115;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $37,737.
FECA and Unemployment Liability:
Earmarked: $9,295;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $9,295.
Accrued Leave:
Earmarked: $45,629;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $45,629.
Custodial Liability:
Earmarked: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: $42,380
Non-Entity Funds: [Empty];
Total: $42,380.
Liability for Non-Entity Assets:
Earmarked: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: $4;
Total: $4.
Registrant Deposits:
Earmarked: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: $44,729;
Total: $44,729.
Liability for Disgorgement and Penalties:
Earmarked: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: $1,021,466;
Non-Entity Funds: [Empty];
Total: $1,021,466.
Contingent Liabilities:
Earmarked: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: [Empty].
Other Accrued Liabilities:
Earmarked: $29,270;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $29,270.
Other:
Earmarked: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: [Empty].
Total Liabilities (Note 8):
Earmarked: $173,129;
Other Entity Funds: $247;
Disgorgement and Penalties: $1,063,846;
Non-Entity Funds: $44,733;
Total: $1,281,955.
Net Position:
Unexpended Appropriations:
Earmarked: [Empty];
Other Entity Funds: $1,749;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $1,749.
Cumulative Results of Operations:
Earmarked: $6,878,132;
Other Entity Funds: $603
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $6,878,735.
Total Net Position:
Earmarked: $6,878,132;
Other Entity Funds: $2,352;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $6,880,484.
Total Liabilities and Net Position:
Earmarked: $7,051,261;
Other Entity Funds: $2,599;
Disgorgement and Penalties: $1,063,846;
Non-Entity Funds: $44,733.
Total: $8,162,439.
Statement of Net Cost:
For the Year Ended September 30, 2010:
Gross Program Costs:
Earmarked: $1,050,910;
Other Entity Funds: $7,508;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: $5;
Total: $1,058,423;
Less Earned Revenues Not Attributable to Program Costs:
Earmarked: $1,382,691;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: $165;
Total: $1,382,856;
Net (Income) Cost from Operations:
Earmarked: ($331,781);
Other Entity Funds: $7,508;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: ($160);
Total: ($324,433).
Statement of Changes In Net Position:
For the Year Ended September 30, 2010:
Net Position, Beginning of Period:
Earmarked: $6,058,225;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $6,058,225.
Appropriations Used:
Earmarked: [Empty];
Other Entity Funds: $8,111;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $8,111.
Non-Exchange Revenue:
Earmarked: $451,910;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $451,910.
Imputed Financing:
Earmarked: $36,216;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $36,216.
Other:
Earmarked: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: ($160);
Total: ($160).
Net Income (Cost) from Operations:
Earmarked: $331,781;
Other Entity Funds: ($7,508);
Disgorgement and Penalties: [Empty];
Non-Entity Funds: $160;
Total: $324,433.
Net Change:
Earmarked: $819,907;
Other Entity Funds: $603;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $820,510.
Cumulative Results of Operations:
Earmarked: $6,878,132;
Other Entity Funds: $603;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $6,878,735.
Unexpended Appropriations:
Beginning Balances:
Earmarked: [Empty];
Other Entity Funds: $9,860;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $9,860.
Appropriations Received:
Earmarked: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: [Empty].
Appropriations Used:
Earmarked: [Empty];
Other Entity Funds: ($8,111);
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: ($8,111).
Total Unexpended Appropriations:
Earmarked: [Empty];
Other Entity Funds: $1,749;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $1,749.
Net Position, End of Period:
Earmarked: $6,878,132;
Other Entity Funds: $2,352;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $6,880,484.
For FY 2009, the assets, liabilities, net position, and net income
from operations relating to earmarked, other, disgorgement and
penalties, and non-entity funds consisted of the following:
Balance Sheet as of September 30, 2009:
Assets:
Fund Balance with Treasury:
Earmarked: $5,988,927;
Other Entity Funds: $9,860;
Disgorgement and Penalties: $43,622;
Non-Entity Funds: $40,898;
Total: $6,083,307.
Investments, Net:
Earmarked: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: $1,959,611;
Non-Entity Funds: [Empty];
Total: $1,959,611.
Accounts Receivable, Net:
Earmarked: $139,708;
Other Entity Funds: [Empty];
Disgorgement and Penalties: $294,508;
Non-Entity Funds: $5;
Total: $434,221.
Advances and Prepayments:
Earmarked: $3,557;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $3,557.
Property and Equipment, Net:
Earmarked: $82,435;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $82,435.
Total Assets (Note 2):
Earmarked: $6,214,627;
Other Entity Funds: $9,860;
Disgorgement and Penalties: $2,297,741;
Non-Entity Funds: $40,903;
Total: $8,563,131.
Liabilities:
Accounts Payable:
Earmarked: $43,164;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $43,164.
Accrued Payroll and Benefits:
Earmarked: $32,344;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $32,344.
FECA and Unemployment Liability:
Earmarked: $7,619;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $7,619.
Accrued Leave:
Earmarked: $42,696;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $42,696.
Custodial Liability:
Earmarked: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: $4;
Total: $4.
Liability for Non-Entity Assets:
Earmarked: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: $1;
Total: $1.
Registrant Deposits:
Earmarked: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: $40,898;
Total: $40,898.
Liability for Disgorgement and Penalties:
Earmarked: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: $2,297,741;
Non-Entity Funds: [Empty];
Total: $2,297,741.
Contingent Liabilities:
Earmarked: $9,500;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $9,500.
Other Accrued Liabilities:
Earmarked: $20,922;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $20,922.
Other:
Earmarked: $157;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $157.
Total Liabilities (Note 8):
Earmarked: $156,402;
Other Entity Funds: [Empty];
Disgorgement and Penalties: $2,297,741;
Non-Entity Funds: $40,903;
Total: $2,495,046.
Net Position:
Unexpended Appropriations:
Earmarked: [Empty];
Other Entity Funds: $9,860;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $9,860.
Cumulative Results of Operations:
Earmarked: $6,058,225;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $6,058,225.
Total Net Position:
Earmarked: $6,058,225;
Other Entity Funds: $9,860;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $6,068,085.
Total Liabilities and Net Position:
Earmarked: $6,214,627;
Other Entity Funds: $9,860;
Disgorgement and Penalties: $2,297,741;
Non-Entity Funds: $40,903;
Total: $8,563,131.
Statement of Net Cost For the Year Ended September 30, 2009:
Gross Program Costs:
Earmarked: $980,825;
Other Entity Funds: $140;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $980,965.
Less Earned Revenues Not Attributable to Program Costs:
Earmarked: $1,109,806;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: $85;
Total: $1,109,891.
Net (Income) Cost from Operations:
Earmarked: ($128,981);
Other Entity Funds: $140;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: ($85);
Total: ($128,926).
Statement of Changes in Net Position For the Year Ended September 30,
2009:
Net Position Beginning of Period:
Earmarked: $5,903,289;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $5,903,289.
Appropriations Used:
Earmarked: [Empty];
Other Entity Funds: $140;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $140.
Imputed Financing:
Earmarked: $25,955;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $25,955.
Other:
Earmarked: [Empty];
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: ($85);
Total: ($85).
Net Income (Cost) from Operations:
Earmarked: $128,981;
Other Entity Funds: ($140);
Disgorgement and Penalties: [Empty];
Non-Entity Funds: $85;
Total: $128,926.
Net Change:
Earmarked: $154,936;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $154,936.
Cumulative Results of Operations:
Earmarked: $6,058,225;
Other Entity Funds: [Empty];
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $6,058,225.
Unexpended Appropriations:
Appropriations Received:
Earmarked: [Empty];
Other Entity Funds: $10,000;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $10,000.
Appropriations Used:
Earmarked: [Empty];
Other Entity Funds: ($140);
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: ($140).
Total Unexpended Appropriations:
Earmarked: [Empty];
Other Entity Funds: $9,860;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $9,860.
Net Position End of Period:
Earmarked: $6,058,225;
Other Entity Funds: $9,860;
Disgorgement and Penalties: [Empty];
Non-Entity Funds: [Empty];
Total: $6,068,085.
Note 14. Intragovernmental Costs and Exchange Revenue:
The Statement of Net Cost presents the SEC's results of operations for
its major programs. The SEC assigns all costs incurred to ten
programs, consistent with its budget submissions. The full cost of SEC
programs is determined by the sum of (1) the costs of resources
directly or indirectly consumed, and (2) the costs of identifiable
supporting services provided by other responsibility segments within
the agency. Typical examples of indirect costs include costs of
general administrative services, general research and technical
support, security, rent, and operating and maintenance costs for
buildings, equipment, and utilities. The SEC allocates support costs
to its programs using activity-based cost accounting.
Exchange revenue is not directly assignable to a specific program and
is presented in total. Total intragovernmental and public costs for
the fiscal years ended September 30, 2010 and 2009, are summarized
below.
(Dollars In Thousands):
FY 2010:
SEC Programs:
Enforcement:
Intragovernmental Gross Cost: $61,669;
Gross Cost with the Public: $293,782;
Total: $355,451.
Compliance Inspections and Examinations:
Intragovernmental Gross Cost: $39,798;
Gross Cost with the Public: $189,591;
Total: $229,389.
Corporation Finance:
Intragovernmental Gross Cost: $22,757;
Gross Cost with the Public: $108,409;
Total: $131,166.
Trading and Markets:
Intragovernmental Gross Cost: $9,388;
Gross Cost with the Public: $44,719;
Total: $54,107.
Investment Management:
Intragovernmental Gross Cost: $8,306;
Gross Cost with the Public: $39,567;
Total: $47,873.
Risk, Strategy, and Financial Innovation:
Intragovernmental Gross Cost: $3,148;
Gross Cost with the Public: $14,995;
Total: $18,143.
General Counsel:
Intragovernmental Gross Cost: $6,901;
Gross Cost with the Public: $32,879;
Total: $39,780.
Other Program Offices:
Intragovernmental Gross Cost: $8,432;
Gross Cost with the Public: $40,171;
Total: $48,603.
Agency Direction and Administrative Support:
Intragovernmental Gross Cost: $22,300;
Gross Cost with the Public: $106,231;
Total: $128,531.
Inspector General:
Intragovernmental Gross Cost: $933;
Gross Cost with the Public: $4,447;
Total: $5,380.
Total Entity:
Intragovernmental Gross Cost: $183,632;
Gross Cost with the Public: $874,791;
Total: $1,058,423.
Less: Exchange Revenues:
Total: $$1,382,856.
Net (Income) Cost from Operations:
Total: ($324,433).
FY 2009 (reclassified):
SEC Programs:
Enforcement:
Intragovernmental Gross Cost: $56,284;
Gross Cost with the Public: $277,098;
Total: $333,382.
Compliance Inspections and Examinations:
Intragovernmental Gross Cost: $35,802;
Gross Cost with the Public: $176,259;
Total: $212,061.
Corporation Finance:
Intragovernmental Gross Cost: $20,898;
Gross Cost with the Public: $102,884;
Total: $123,782.
Trading and Markets:
Intragovernmental Gross Cost: $7,937;
Gross Cost with the Public: $39,073;
Total: $47,101.
Investment Management:
Intragovernmental Gross Cost: $8,154;
Gross Cost with the Public: $40,141;
Total: $48,295.
Risk, Strategy, and Financial Innovation:
Intragovernmental Gross Cost: $2,423;
Gross Cost with the Public: $11,931;
Total: $4,354.
General Counsel:
Intragovernmental Gross Cost: $6,238;
Gross Cost with the Public: $30,710;
Total: $36,948.
Other Program Offices:
Intragovernmental Gross Cost: $7,621;
Gross Cost with the Public: $37,519;
Total: $45,410.
Agency Direction and Administrative Support:
Intragovernmental Gross Cost: $19,442;
Gross Cost with the Public: $96,716;
Total: $115,158.
Inspector General:
Intragovernmental Gross Cost: $816;
Gross Cost with the Public: $4,019;
Total: $4,835.
Total Entity:
Intragovernmental Gross Cost: $165,615;
Gross Cost with the Public: $815,350;
Total: $980,965.
Less: Exchange Revenues:
Total: $$1,109,891.
Net (Income) Cost from Operations:
Total: ($128.926).
Intragovemmental costs arise from exchange transactions made between
two reporting entities within the federal government, in contrast with
public costs which arise from exchange transactions made with a non-
federal entity.
Note 15. Exchange Revenues:
For the fiscal years ended September 30, 2010 and 2009, exchange
revenues consisted of the following:
(Dollars In Thousands):
Securities Transactions Fees:
FY 2010: $1,163,633;
FY 2009: $927,112.
Securities Registration, Tender Offer, and Merger Fees:
FY 2010: $218,755;
FY 2009: $181,671.
Other:
FY 2010: $468;
FY 2009: $1,108.
Total Exchange Revenues:
FY 2010: $1,382,856;
FY 2009: $1,109,891.
Note 16. Status of Budgetary Resources:
A. Apportionment Categories of Obligations Incurred:
The distinction between Category A and B funds is the time of
apportionment. Category A funds are subject to quarterly apportionment
by OMB. Category B funds represent budgetary resources distributed by
a specified time period, activity, project, object, or a combination
of these categories. The SEC's Category B funds represent amounts
apportioned at the beginning of the fiscal year for the SEC's
reimbursable activity. For the fiscal years ended September 30, 2010
and 2009, obligations incurred as reported on the SBR consisted of the
following:
Obligations incurred:
(Dollars In Thousands):
Direct Obligations: Category A;
FY 2010: $1,103,007.
Reimbursable Obligations: Category B;
FY 2010: $282;
FY 2009: $1,236.
Total Obligations Incurred:
FY 2010: $1,103,289;
FY 2009: $965,876.
In addition, the amounts of budgetary resources obligated for
undelivered orders include $219.3 million and $152.8 million at
September 30, 2010 and 2009, respectively.
B. Explanation of Differences between the Statement of Budgetary
Resources and the Budget of the U.S. Government:
A comparison between the FY 2010 SBR and the actual FY 2010 data in
the President's budget cannot be presented, as the FY 2012 President's
budget which will contain the FY 2010 data is not yet available; the
comparison will be presented in next year's financial statements.
There are no differences between the FY 2009 SBR and the FY 2009 data
in the President's budget except for a rounding difference of $1
million in Gross Outlays.
Note 17. Custodial Revenues:
As of September 30, 2010, $42.4 million of disgorgement and penalty
accounts receivables, net of allowance, was designated as payable to
the Treasury General Fund per court order. As discussed in Note 1.D.
Changes in Accounting Presentation and Note 1.N. Liabilities, these
receivables, their offsetting liabilities, and the revenues generated
in obtaining them, are classified as custodial.
For the fiscal years ended September 30, 2010 and 2009, the source of
custodial non-exchange revenues is shown below. Collections will be
transferred to Treasury or the Investor Protection Fund.
(Dollars In Thousands:
Cash Collections:
Disgorgement and Penalties:
FY 2010: $1,116,632;
FY 2009: $815,802.
Other:
FY 2010: $1;
FY 2009: $10.
Amounts to Be Collected:
FY 2010: $42,380;
FY 2009: $4.
Total Non-Exchange Revenues:
FY 2010: $1,159,013;
FY 2009: $815,816.
Note 18. Reconciliation of Net Cost of Operations (Proprietary) to
Budget (formerly the Statement of Financing):
For the fiscal years ended September 30, 2010 and 2009:
(Dollars In Thousands):
Resources Used To Finance Activities:
Budgetary Resources Obligated: Obligations Incurred (Note 16):
FY 2010: $1,103,289;
FY 2009: $965,876.
Budgetary Resources Obligated: Less Spending Authority from Offsetting
Collections and Recoveries;
FY 2010: ($1,461,657);
FY 2009: ($1,047,046).
Net Obligations:
FY 2010: ($358,368);
FY 2009: ($81,170).
Other Resources:
Imputed Financing from Cost Absorbed by Others (Note 10):
FY 2010: $36,216;
FY 2009: $25,955.
Total Resources Used to Finance Activities:
FY 2010: ($322,152);
FY 2009: ($55,215).
Resources Used To Finance Items Not Part Of The Net Cost Of Operations:
Change in Budgetary Resources Obligated for Goods, Services, and
Benefits Ordered But Not Yet Provided:
FY 2010: ($67,775);
FY 2009: $6,185.
Resources That Finance the Acquisition of Assets Capitalized on the
Balance Sheet:
FY 2010: ($27,319);
FY 2009: ($24,844).
Total Resources Used to Finance Items Not Part of the Net Cost of
Operations:
FY 2010: ($95,094);
FY 2009: ($18,659).
Total Resources Used to Finance the Net Cost of Operations:
FY 2010: ($417,246);
FY 2009: ($73,874).
Components Of Net Cost Of Operations That Will Not Require Or
Generate Resources In The Current Period:
Components Requiring or Generating Resources in Future Periods:
Costs That Will Be Funded by Resources in Future Periods:
FY 2010: $2,933;
FY 2009: $3,867.
Net Increase in Revenue Receivables Not Generating Resources until
Collected:
FY 2010: $60,320;
FY 2009: ($92,169).
Change in Lease Liability:
FY 2010: ($3,311);
FY 2009: ($3,255).
Change in Legal Liability:
FY 2010: $10,823;
FY 2009: [Empty].
Change in Unfunded Liability:
FY 2010: ($7,824);
FY 2009: $10,176.
Total Components of Net Cost of Operations That Will Require or
Generate Resources in Future Periods:
FY 2010: $62,941;
FY 2009: ($81,381).
Components Not Requiring or Generating Resources:
Depreciation and Amortization:
FY 2010: $25,408;
FY 2009: $26,414.
Revaluation of Assets or Liabilities:
FY 2010: $4,634;
FY 2009: [Empty].
Other Costs That Will Not Require Resources:
FY 2010: ($170);
FY 2009: ($85).
Total Components of Net Cost of Operations That Will Not Require or
Generate Resources in Future Periods:
FY 2010: $29,872;
FY 2009: $26,329.
Total Components of Net Cost of Operations That Will Not Require or
Generate Resources in the Current Period:
FY 2010: $92,813;
FY 2009: ($55,052.
Net (Income) from Operations:
FY 2010: ($324,433);
FY 2009: ($128,926).
Note 19. Disgorgement and Penalties:
The SEC's non-entity assets consist of disgorgement, penalties, and
interest assessed against securities law violators by the Commission,
administrative law judge, or in some cases, a court. The SEC also
recognizes an equal and offsetting liability for these non-entity
assets as discussed in Note 1.N. Liabilities. When the Commission or
court issues an order for the SEC to collect disgorgement, penalties,
and interest from securities law violators, the SEC establishes an
account receivable due to the SEC. When collected, the SEC holds
receipts in FBWT or invests in Treasury securities pending
distribution to harmed investors or transfer to the Investor
Protection Fund or the Treasury General Fund. Disbursements related to
disgorgements and penalties include distributions to harmed investors,
payments to tax authorities, and fees paid to plan administrators and
the Bureau of Public Debt. When it is not practical to return funds to
investors or when court orders expressly state that funds are to be
remitted to the U.S. Treasury, the SEC transfers funds to the Investor
Protection Fund or to the Treasury General Fund. The SEC does not
record on its financial statements any amounts ordered to another
government entity such as a court, or a non-governmental entity such
as a receiver. Additional details regarding disgorgement and penalties
are presented in Note IT Disgorgement and Penalties, Note 2. Non-
Entity Assets and Note 13. Earmarked, Other; Disgorgement and
Penalties, and Non-Entity Funds.
At September 30, the net inflows and outflows for FBWT, Investments,
and Accounts Receivable related to disgorgement and penalties
consisted of the following:
(Dollars In Thousands):
Fund Balance with Treasury:
Beginning Balance:
FY 2010: $43,622;
FY 2009: $37,707.
Collections:
FY 2010: $1,214,911;
FY 2009: $885,318.
Purchases and Redemptions of Treasury Securities:
FY 2010: $1,036,168;
FY 2009: $1,032,328.
Disbursements:
FY 2010: ($1,123,799);
FY 2009: ($1,095,929).
Transfers to Treasury:
FY 2010: ($664,723);
FY 2009: $(815,802).
Total Fund Balance with Treasury (Note 2):
FY 2010: $54,269;
FY 2009: $43,622.
Cash and Other Monetary Assets: Net Activity:
FY 2010: $2,815;
FY 2009: [Empty].
Total Cash and Other Monetary Assets (Notes 2 and 4):
FY 2010: $2,815;
FY 2009: [Empty].
Investments, Net:
Beginning Balance:
FY 2010: $1,959,611;
FY 2009: $2,982,542.
Net Activity:
FY 2010: ($1,034,788);
FY 2009: ($1,022,931).
Total Investments, Net (Notes 2 and 5):
FY 2010: $924,823;
FY 2009: $1,959,611.
Accounts Receivable, Net:
Beginning Balance:
FY 2010: $294,508;
FY 2009: $88,118.
Net Activity:
FY 2010: ($212,569);
FY 2009: $206,390.
Total Accounts Receivable, Net (Notes 2 and 5):
FY 2010: $81,939;
FY 2009: $294,508.
Total Disgorgement and Penalties (Note 13):
FY 2010: $1,063,846;
FY 2009: $2,297,741.
[End of section]
Required Supplementary Information:
Required Supplementary Information (Unaudited):
This section provides the Required Supplementary Information as
prescribed by OMB Circular No. A-136, Financial Reporting Requirements.
Statement of Budgetary Resources by Fund:
For the fiscal years ended September 30, 2010 and 2009:
(Dollars In Thousands):
Budgetary Resources:
Unobligated Balance, Brought Forward, October 1:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $19,011;
Supplemental Fund: 09/10 0100: $7,754;
Investor Protection Fund: X513137: [Empty];
Total: $26,765;
FY 2009: $57,696;
Recoveries of Prior Year Unpaid Obligations:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $18,753;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: $18,753;
FY 2009: $28,982.
Budget Authority:
Appropriation:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: [Empty];
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: $451,910;
Total: $451,910;
FY 2009: $10,000.
Spending Authority from Offsetting Collections: Earned: Collected:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,443,347;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: $1,443,347;
FY 2009: $1,017,763.
Spending Authority from Offsetting Collections: Earned: Change in
Receivables from Federal Sources:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($188);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($188);
FY 2009: $143.
Spending Authority from Offsetting Collections: Change in Unfilled
Customer: Advance Received:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($157);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($157);
FY 2009: $157.
Spending Authority from Offsetting Collections: Change in Unfilled
Customer: Without Advance from Federal Sources:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($98);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($98);
FY 2009: $1.
Budget Authority: Subtotal:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,442,904;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: $451,910;
Total: $1,894,814;
FY 2009: $1,028,064.
Temporarily not Available Pursuant to Public Law:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($347,694);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($347,694);
FY 2009: ($122,101).
Total Budgetary Resources:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,132,974;
Supplemental Fund: 09/10 0100: $7,754;
Investor Protection Fund: X513137: $451,910;
Total: $1,592,638;
FY 2009: $992,641.
Status Of Budgetary Resources:
Obligations Incurred: Direct (Note 16):
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,095,360;
Supplemental Fund: 09/10 0100: $7,647;
Investor Protection Fund: X513137: [Empty];
Total: $1,103,007;
FY 2009: $964,640.
Obligations Incurred: Reimbursable (Note 16):
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $282;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: $282;
FY 2009: $1,236.
Obligations Incurred: Subtotal:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,095,642;
Supplemental Fund: 09/10 0100: $7,647;
Investor Protection Fund: X513137: [Empty];
Total: $1,103,289;
FY 2009: $965,876.
Unobligated Balance Available: Realized and Apportioned for Current
Period:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $17,106;
Supplemental Fund: 09/10 0100: $107;
Investor Protection Fund: X513137: [Empty];
Total: $17,213;
FY 2009: $9,968.
Unobligated Balance Not Available:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $20,226;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: $451,910;
Total: $472,136;
FY 2009: $16,797.
Total Status of Budgetary Resources:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,132,974;
Supplemental Fund: 09/10 0100: $7,754;
Investor Protection Fund: X513137: $451,910;
Total: $1,592,638;
FY 2009: $992,641.
Change In Obligated Balance:
Obligated Balance, Net:
Unpaid Obligations, Brought Forward, October 1:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $234,292;
Supplemental Fund: 09/10 0100: $2,107;
Investor Protection Fund: X513137: [Empty];
Total: $236,399;
FY 2009: $250,974.
Uncollected Customer Payments from Federal Sources, Brought Forward,
October 1:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($311);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($311);
FY 2009: ($167).
Total Unpaid Obligated Balance, Net:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $233,981;
Supplemental Fund: 09/10 0100: $2,107;
Investor Protection Fund: X513137: [Empty];
Total: $236,088;
FY 2009: $250,807.
Obligations Incurred Net:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $1,095,642;
Supplemental Fund: 09/10 0100: $7,647;
Investor Protection Fund: X513137: [Empty];
Total: $1,103,289;
FY 2009: $965,876;
Gross Outlays:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($995,299);
Supplemental Fund: 09/10 0100: ($7,864);
Investor Protection Fund: X513137: [Empty];
Total: ($1,003,163);
FY 2009: ($951,469).
Recoveries of Prior Year Unpaid, Obligations Actual:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($18,753);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($18,753);
FY 2009: ($28,982).
Change in Uncollected Customer Payments from Federal Sources:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $286;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: $286;
FY 2009: ($144).
Obligated Balance, Net, End of Period:
Unpaid Obligations:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $315,882;
Supplemental Fund: 09/10 0100: $1,890;
Investor Protection Fund: X513137: [Empty];
Total: $317,772;
FY 2009: $236,399.
Uncollected Customer Payments from Federal Sources:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($25);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($25);
FY 2009: ($311).
Total, Unpaid Obligated Balance, Net, End of Period (Note 12):
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $315,857;
Supplemental Fund: 09/10 0100: $1,890;
Investor Protection Fund: X513137: [Empty];
Total: $317,747;
FY 2009: $236,088;
Net Outlays:
Gross Outlays:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $995,299;
Supplemental Fund: 09/10 0100: $7,864;
Investor Protection Fund: X513137: [Empty];
Total: $$1,003,163;
FY 2009: $951,469.
Offsetting Collections:
Salaries and Expenses and Other Funds: X0100, 3220, F3875:
($1,443,190);
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: ($1,443,190);
FY 2009: ($1,017,920).
Distributed Offsetting Receipts:
Salaries and Expenses and Other Funds: X0100, 3220, F3875: $194;
Supplemental Fund: 09/10 0100: [Empty];
Investor Protection Fund: X513137: [Empty];
Total: $194;
FY 2009: ($702).
Net Outlays/(Collections):
Salaries and Expenses and Other Funds: X0100, 3220, F3875: ($447,697);
Supplemental Fund: 09/10 0100: $7,864;
Investor Protection Fund: X513137: [Empty];
Total: ($439,833);
FY 2009: ($67,153).
[End of section]
Appendix I: Material Weaknesses:
During our audit of the United States Securities and Exchange
Commission's (SEC) fiscal years 2010 and 2009 financial statements, we
identified two material weaknesses[Footnote 9] in internal control as
of September 30, 2010. These material weaknesses concern internal
control over SEC's (1) information systems, and (2) financial
reporting and accounting processes.
Information Systems:
During fiscal year 2010, SEC had pervasive deficiencies in the design
and operation of SEC's information security and other system controls
that span across its general support system and all key applications
that support financial reporting. Many of these deficiencies have
existed since SEC began preparing financial statements back in fiscal
year 2004. These deficiencies jeopardize the confidentiality,
availability, and integrity of information processed by SEC's key
financial reporting systems and pose a risk of material misstatement
in financial reporting. These continuing deficiencies and the newly
identified general and application control deficiencies are in the
areas of (1) security management, (2) access controls, (3)
configuration management, (4) segregation of duties, and (5)
contingency planning. Specifically, in fiscal year 2010, SEC did not
adequately:
* implement effective vulnerability and patch management programs,
* restrict system user privileges resulting in inappropriate or
unapproved user access to its systems,
* implement a sufficient change management process to prevent
unapproved and unauthorized changes to its general support system and
key applications,
* segregate computer-related duties and functions,
* transmit sensitive data securely,
* implement an effective disaster recovery or contingency planning
process, and:
* remediate information system deficiencies timely.
These general and application control deficiencies exist in part
because SEC does not have adequate technical resources and has not
fully established an overall effective security-wide program. In
addition, SEC has not implemented effective monitoring and oversight
procedures of its information systems operations. SEC also does not
have a mechanism in place to promptly resolve deficiencies found
during its information system control evaluations. Further, SEC does
not always effectively use corrective action plans as a tool to assist
in the prioritization of vulnerability remediation and is not
directing resources to address the vulnerabilities in a timely manner.
We also continued to find ineffective automated controls for SEC's
general ledger system and supporting applications, and ineffective
security controls over the databases and supporting processes used to
generate and maintain SEC's financial reports. Many of SEC's key
financial reporting applications occur manually outside the general
ledger system through the use of spreadsheets and databases because
many of SEC's key financial system applications do not automatically
interface with the general ledger system and because SEC's general
ledger system and certain software applications and configurations are
not designed to provide accurate, complete, and timely transaction-
level financial information needed to accumulate and readily report
reliable financial information. Further, SEC's general ledger system
lacks the capacity to timely and accurately generate and report
information needed to prepare financial statements and manage
operations on an ongoing basis. For example, the general ledger is
unable to generate an accurate consolidated trial balance that can be
used for the compilation of financial statements and cannot produce a
set of financial statements. Instead, SEC uses a financial reporting
and analysis tool to produce its monthly trial balances and financial
statements. However, this tool is housed in a database that did not
have electronic logging or an audit trail, and did not have the
capability to track login/logout activity and/or other security-
related events specified by the system's audit policy, such as when
records are updated, values are changed, or accounting data are
inappropriately altered. Therefore, an individual could gain access
and make unauthorized system changes that would not be detected.
As we have reported in previous years, SEC's general ledger has
unconventional posting models and other system limitations for certain
activities that require extensive recording of adjusting journal
entries, creating significant risk of error or misstatement in SEC's
financial reporting. For example, incorrect posting configurations in
its general ledger resulted in SEC recording invalid budget
transactions that necessitated over $39 million in adjusting entries
during fiscal year 2010 to properly record these transactions. In
addition, the accounts receivable module of the general ledger was not
configured to provide information to support activity in the related
general ledger accounts, such as providing an aging of its accounts
receivable. In another example, SEC's general ledger system is not
able to calculate and record interest due on delinquent disgorgement
receivable amounts as part of its disgorgement receivable balance.
Until these system deficiencies, limitations, and vulnerabilities are
addressed, SEC cannot rely on the internal controls contained in its
automated accounting system and supporting financial applications
systems to provide reasonable assurance that, in the absence of
effective compensating procedures, (1) its financial statements, taken
as a whole, are fairly stated; (2) the information SEC relies on to
make decisions on a daily basis is accurate, complete, and timely; and
(3) sensitive data and financial information are appropriately
safeguarded. Instead, SEC has to rely on manual compensating controls
that are cumbersome, labor-intensive, and error-prone, to ensure data
completeness and accuracy in order to achieve reliable financial
reporting. As discussed later in this report, during fiscal year 2010,
these manual compensating procedures were not always effective at
ensuring reliable financial reporting. Consequently, these
deficiencies represent a material weakness in internal control over
information systems given their pervasive impact on financial
reporting and SEC's ability to meet the fundamental objective of
internal control. Specifically, this material weakness in information
systems increases the potential for undetected material misstatements
in SEC's financial statements and inadvertent or deliberate misuse,
fraudulent use, improper disclosure, or destruction of its financial
information and assets.
Financial Reporting and Accounting Processes:
During fiscal year 2010, we continued to find deficiencies in controls
over SEC's financial reporting process, budgetary resources, and
registrant deposits. We reported these same deficiencies last year and
in prior audits. SEC has taken actions toward addressing these
previously reported deficiencies; however, notwithstanding these
efforts, these deficiencies remain in fiscal year 2010. During this
year's audit, we also identified new deficiencies concerning
disgorgement and penalties[Footnote 10] and required supplementary
information. These continuing deficiencies and the newly identified
deficiencies this year indicate that SEC's monitoring process was not
always effective in identifying and correcting internal control issues
in a timely manner. The collective nature of the deficiencies we
identified is such that a reasonable possibility exists that a
material misstatement of SEC's financial statements would not be
prevented, or detected and corrected on a timely basis. Consequently,
these deficiencies collectively represent a material weakness in SEC's
internal control over financial reporting.
Financial Reporting Process:
Because of serious deficiencies in information system controls
discussed previously, SEC is unable to rely on automated controls in
its general ledger system or any of its key financial reporting
applications to protect the integrity of the financial data. Instead,
the recording of significant transactions is accomplished through the
use of spreadsheets, databases, manual workarounds, and data handling
that rely on significant analysis, reconciliation, and review to
calculate amounts for the general ledger postings of transactions.
These compensating manual processes are resource-intensive and prone
to error, and coupled with the significant amount of data involved,
increase the risk of materially misstated account balances in the
general ledger. During this year's audit, SEC's compensating
procedures were not always effective at ensuring the completeness and
accuracy of the financial data obtained from the application systems
or at detecting errors and misstatements in financial reporting
activities. For example, in SEC's calculation of its monthly accounts
payable accrual, SEC's system query did not accurately and completely
capture all of the appropriate accounts payable activity, resulting in
understating the accounts payable balance during certain months of the
year. These errors were not identified through the spreadsheet control
checks, and the resulting understatements were not detected by the
supervisory review and approval of the entries posted to the general
ledger. We also found errors in SEC's spreadsheet used for calculating
future lease payments, which resulted in a $40 million understatement
of lease payments disclosed in the draft notes accompanying the
financial statements, and errors in its formula for calculating gross
cost with the public, which resulted in a $21 million misstatement in
the draft notes. In addition, SEC's monthly review of its fee rate
calculations pertaining to its securities transaction revenue did not
identify that SEC was using the wrong fee rate for April, May, and
June.[Footnote 11] In another example, SEC's initial June
reconciliation of investment transactions did not agree with
supporting documentation, yet the reconciliation was signed indicating
that it had been reviewed. SEC made the necessary adjustments to
enable it to present financial statements that were fairly stated in
all material respects for fiscal years 2010 and 2009.
Budgetary Resources:
Since our 2007 audit of SEC, we have reported significant deficiencies
in SEC's accounting for obligations, which represent legal liabilities
against funds available to SEC to pay for goods and services ordered,
and related budgetary transactions reported on its Statement of
Budgetary Resources. During fiscal year 2010, SEC incurred
approximately $1.1 billion in obligations. Also during the year, SEC
deobligated approximately $12 million for prior year transactions that
were either canceled or the dollar amount of the obligation was
decreased.
During this year's audit, we continued to identify the same
deficiencies over budgetary transactions that we identified in prior
audits, and we also identified new deficiencies in this area.
Specifically, as discussed previously in this report, we continued to
find posting configuration limitations that resulted in errors in
recording budget transactions. We also continued to find obligations
that were not always recorded timely and were not always supported by
documentation evidencing the obligation as having been approved by an
authorized individual. SEC took actions during fiscal year 2010 to
address these deficiencies. For example, SEC worked to enhance its
posting models and begin to fix issues within the general ledger that
were necessitating a significant amount of correcting entries. The
amount of adjusting entries was reduced this year because of these
fixes, but $39 million in corrections were still required to properly
record certain budget transactions because of continuing system
configuration deficiencies.
During fiscal year 2010, we found that SEC did not have an effective
process for monitoring and reviewing its open obligations to ensure
that they remained valid and that adjustments are made properly and
timely. In fiscal year 2010, SEC began using a system-generated Open
Obligations report to monitor and review its open obligations.
However, SEC's written procedures pertaining to the use of this report
do not provide guidance on the performance of validation procedures to
ensure the accuracy and completeness of the information in the report
prior to using the report. In our review of the Open Obligations
report for the month of June, we identified a number of issues
concerning the accuracy and completeness of the report. For example,
in the report were several instances where the liquidation amounts
were in excess of original obligation amounts and where the
liquidation amounts were recorded against nonexistent obligations,
both of which aggregated to about $1.1 million. Moreover, the
outstanding balance reflected in the report for many of the
obligations was calculated incorrectly and reflected amounts that
exceeded the amount per the invoice that initiated the obligation. In
response to our findings concerning the accuracy and completeness of
the report, SEC determined that the discrepancies were the result of
systemic errors in the logic of the report and plans to address these
issues in fiscal year 2011.
Further, our review this year of open obligations identified
obligations that did not appear to be valid because there was no
recent activity pertaining to these obligations. For example, we
identified several travel obligations related to SEC officials who
left the agency over 12 months ago, yet SEC continued to incorrectly
carry an open travel obligation for these individuals. We also found
several open obligations for which contract close out procedures were
not completed timely, resulting in SEC continuing to carry balances of
open obligations for contracts that have been completed. In addition,
we found several instances in which obligations that were approved to
be deobligated, were not done properly or in a timely manner. For
example, we found obligations that were approved for full deobligation
but were either partially deobligated or were deobligated in the wrong
accounting period. We also found instances in which the deobligation
took 15 months to be completed from the time it was approved.
Deobligating resources timely can be important to an agency to free up
resources that may be made available for incurring new obligations or
adding to existing obligations. Contributing to SEC's weakness in this
area is that SEC does not have a policy that addresses the timeframes
for recording deobligations for all types of its obligations.
Registrant Deposits:
SEC is partially funded through the collection of securities
registration, tender offer, merger, and other fees (filing fees) from
registrants. SEC records the filing fees it collects as revenue. If
registrants submit amounts to SEC in excess of the actual fee payment
due for a specific filing, SEC records the excess amounts collected in
a registrant deposit liability account until earned by SEC from a
future filing. SEC's policy is to return the amount in the deposit
liability account to the registrant if the account has not had any
activity against it for 6 months. As of September 30, 2010, SEC's
liability for registrant deposits totaled $45 million.
As in prior years, our testing of filing fee transactions during this
year's audit identified amounts recorded in the registrant deposit
account liability that were not properly returned to registrants and
amounts that were not properly recognized as revenue in the correct
fiscal year. Specifically, of the $45 million in registrant deposit
accounts at September 30, 2010, SEC reported over $25 million in
deposit accounts that were dormant for 6 months or more. Our audit
also identified amounts in the registrant account liability that SEC
earned in prior years and therefore should have been recognized as
revenue in those years. SEC was aware that some of the liability
amounts were earned. For example, as of September 30, 2010, SEC
identified $1.9 million in the liability account that should have been
recognized as revenue in prior years.
SEC has a process to recalculate and verify that the correct
registrant fee is collected for each filing. However, for 48 of the 53
filings we reviewed, SEC did not verify that the correct registrant
fee was collected. In one instance, SEC's review did identify an
incorrect registrant fee submission but did not take the necessary
steps to follow through to properly recognize the $3.2 million in
revenue pertaining to this submission until approximately 6 months
after the error was discovered, and only after being notified by the
filer upon the filer's review of its account statement. SEC
acknowledged that it has not dedicated the resources necessary to
address what it considers to be a labor-intensive process of
researching the deposit account activity to determine if amounts
should be refunded or recognized as revenue. Also because of
insufficient staff resources allocated to this area, SEC has a backlog
of filings that are still awaiting the review and verification process
to ensure the filings were submitted for the correct amounts. Until
this backlog of filings is reviewed and the filing fee amounts are
verified and properly recorded, filing fee revenue and the related
registrant deposit account liability amounts could be misstated and
not be detected by SEC in a timely manner.
Disgorgement and Penalties:
As part of its enforcement responsibilities, SEC issues orders and
administers judgments ordering, among other things, disgorgement,
civil monetary penalties, and interest against violators of federal
securities laws. SEC recognizes a receivable accompanied by an equal
and offsetting liability to account for amounts payable to SEC when
SEC is designated in an order or a final judgment to collect the
assessed disgorgement, penalties, and interest on behalf of harmed
investors or for payment to the general fund of the U.S. Treasury. SEC
recognizes amounts collected that are to be deposited in the general
fund of the U.S. Treasury as revenue on its Statement of Custodial
Activity. As of September 30, 2010, the net amount of SEC's
disgorgement and penalties accounts receivable was $82 million. SEC's
custodial revenue collected from disgorgement and penalties and
transferred to the general fund of the U.S. Treasury during fiscal
year 2010 was $665 million.
During this year's audit, we noted deficiencies in SEC's accounting
for disgorgement and penalties transactions that increase the
likelihood that the affected balance sheet amounts and custodial
balances could be misstated and not be detected in a timely manner.
Specifically, SEC does not have a process for recording receivables in
situations where the original order is superseded by a subsequent
order that redirects residual monies, remaining after a distribution
is made to harmed investors, to be paid to SEC for transfer to the
U.S. Treasury. These orders, referred to by SEC as transfer orders,
can be significant. For example, one of these judgments ordered that
$58 million in residual monies be paid to SEC for transfer to the U.S.
Treasury; however, SEC did not establish a receivable for this
approved transfer order. Moreover, once custodial-type collections
occur, we found that SEC was not transferring such collections to the
U.S. Treasury in a timely manner. We identified approximately $25
million in custodial collections that remained on SEC's balance sheet
at a point during the year when it should have been transferred to the
U.S. Treasury and recognized as revenue on its Statement of Custodial
Activity.
We also found concerns during this year's audit with SEC's process of
recording cash collections. SEC receives collections for the payment
of disgorgement and penalties and other activities, by check, wire
transfers, or automated clearing house deposits. During fiscal year
2010, SEC collected 1,577 checks totaling over $229 million. During
our review this year of SEC's collections, we found checks, totaling
about $2.8 million, that were not recorded in the proper accounting
period. This is largely because SEC's standard operating procedure for
the recording of check collections is to record the collection in the
general ledger after the SEC receives confirmation from the bank that
the check has been deposited. This process could take several days
from the date the check was initially received by SEC. However, SEC
does not have a compensating procedure to ensure that checks received,
particularly those checks received at, or close to, the end of an
accounting period, are recorded in a timely manner or in the proper
period.
Required Supplementary Information:
In fiscal year 2010, the Dodd-Frank Act established the need for a new
Treasury Account Symbol in SEC's fund accounting structure to account
for activities of the newly created SEC Investor Protection Fund.
[Footnote 12] SEC reports activity for this significant fund, which
totaled $452 million at September 30, 2010, together with activity
from other funds in the Statement of Budgetary Resources. U.S.
generally accepted accounting principles require that budgetary
information aggregated for purposes of the Statement of Budgetary
Resources should be disaggregated for each of the reporting entity's
major budget accounts and presented as required supplementary
information. However, because of a misinterpretation of accounting
principles, SEC's draft financial reporting results did not include
the required supplementary information pertaining to the budget
accounts for its Investor Protection Fund. SEC ultimately prepared the
required supplementary information for its September 30, 2010,
financial reporting.
[End of section]
Appendix II: Comments from the United States Securities and Exchange
Commission:
United States:
Securities And Exchange Commission:
The Chairman:
Washington, D.C. 20549:
November 12, 2010:
Mr. James R. Dalkin:
Director, Financial Management and Assurance:
United States Government Accountability Office:
441 G Street, N.W.
Washington, DC 20548:
Dear Mr. Dalkin:
Thank you for the opportunity to review and comment on the results of
your audit of the SEC's financial statements and internal controls
over financial reporting. I am pleased that the Government
Accountability Office's FY 2010 audit found that the SEC's financial
statements and notes are presented fairly, in all material respects,
and in conformity with U.S. generally accepted accounting principles.
As you know, the SEC has identified two material weaknesses, one in
information systems and a second in financial reporting and accounting
processes. This latter material weakness results from the combination
of five deficiencies related to financial reporting, budgetary
resources, filing fees, disgorgements and penalty transactions, and
required supplementary information.
Both of these material weaknesses can be addressed in large part
through improvements to our core financial system, which will both
enhance security and significantly reduce manual processes.
Thus, the key to the SEC's remediation strategy is our new initiative
to replace the agency's core financial system by migrating to a
federal government Shared Service Provider (SSP). This migration will
allow the agency to put in place better protections for financial data
and to enhance its financial reporting processes through further
automation. The SEC has issued a Letter of Intent with the Enterprise
Services Center at the Department of Transportation which formalizes
the joint effort to develop detailed requirements for the system. The
SEC plans to shift to the new environment in FY 2012.
To ensure effective leadership through a transition to a SSP, the SEC
will be heavily relying on several recently-hired senior financial
managers, including, our Chief Operating Officer, Chief Financial
Officer, and Chief Information Officer. We will also soon be hiring a
Chief Accounting Officer to further strengthen expertise in this
important area. This senior management team will lead the transition
to the SSP and a variety of other efforts to remediate the SEC's
material weaknesses.
I very much appreciate the professional manner in which you and your
team executed the audit, and I look forward to continuing our
productive dialogue in the coming months as we work to strengthen our
internal controls over financial reporting. If you have any questions
or concerns, please feel free to contact me.
Sincerely,
Signed by:
Mary Schapiro:
Chairman:
[End of section]
Footnotes:
[1] Dodd-Frank Act, Pub. Law No. 111-203, §§ 963(a), (b)(2), 124 Stat.
1376, 1910 (July 21, 2010)(codified at 15 U.S.C. §§ 78d-8(a), (b)(2)).
[2] Section 963(b)(1) of the Dodd-Frank Act also requires, effective
for fiscal year 2011, GAO to assess the effectiveness of SEC's
internal control over financial reporting and SEC's assessment of the
same. Our audit satisfies these requirements beginning this fiscal
year. See 15 U.S.C. § 78d-8(b)(1), which codifies this requirement.
[3] A material weakness is a deficiency, or a combination of
deficiencies, in internal control such that there is a reasonable
possibility that a material misstatement of the entity's financial
statements will not be prevented, or detected and corrected on a
timely basis.
[4] The Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act), Pub. Law No. 111-203, §§ 963(a), (b)(2), 124 Stat.
1376, 1910 (July 21, 2010)(codified at 15 U.S.C. §§ 78d-8(a), (b)(2)),
requires that, effective for fiscal year 2010, SEC submit a report to
Congress describing management's responsibility for internal control
over financial reporting and attesting to the effectiveness of such
internal control during the fiscal year; the SEC Chairman and Chief
Financial Officer attest to SEC's report; and GAO submit a report to
Congress attesting to the internal control assessment made by SEC. SEC
conducted an evaluation of its internal controls in accordance with
the Office of Management and Budget's Circular No. A-123, Management's
Responsibility for Internal Control, based on criteria established
under FMFIA.
[5] A significant deficiency is a deficiency, or a combination of
deficiencies, in internal control that is less severe than a material
weakness, yet important enough to merit attention by those charged
with governance.
[6] GAO, Financial Audit: Securities and Exchange Commission's
Financial Statements for Fiscal Years 2009 and 2008, [hyperlink,
http://www.gao.gov/products/GAO-10-250] (Washington, D.C.: Nov. 16,
2009).
[7] A disgorgement is the repayment of illegally gained profits (or
avoided losses) for distribution to harmed investors whenever
feasible. A penalty is a monetary payment from a violator of
securities law that SEC obtains pursuant to statutory authority. A
penalty is fundamentally a punitive measure, although penalties
occasionally can be used to compensate harmed investors.
[8] Dodd-Frank Act, Pub. Law No. 111-203, §§ 963(a), (b)(2), 124 Stat.
1376, 1910 (July 21, 2010)(codified at 15 U.S.C. §§ 78d-8(a), (b)(2)).
[9] A material weakness is a deficiency, or a combination of
deficiencies, in internal control such that there is a reasonable
possibility that a material misstatement of the entity's financial
statements will not be prevented, or detected and corrected on a
timely basis.
[10] A disgorgement is the repayment of illegally gained profits (or
avoided losses) for distribution to harmed investors whenever
feasible. A penalty is a monetary payment from a violator of
securities law that SEC obtains pursuant to statutory authority. A
penalty is fundamentally a punitive measure, although penalties
occasionally can be used to compensate harmed investors.
[11] SEC collects securities transaction fees paid by self-regulatory
organizations (SRO) to SEC for stock transactions. SEC calculates the
fees due and bills the SROs based on actual transaction volume
reported on a monthly basis by SROs to SEC.
[12] The Investor Protection Fund (Fund) provides funding for a
whistleblower award program, in which SEC makes award payments from
the Fund to eligible people who provide original information to SEC
that leads to SEC's successful enforcement of a judicial or
administrative action in which monetary sanctions exceeding $1 million
are imposed. See Dodd-Frank Act, Pub. Law No. 111-203, § 922(g), 124
Stat. 1376, 1844 (July 21, 2010)(codified at 15 U.S.C. § 78u-6).
[End of section]
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