Securities and Exchange Commission:

Additional Actions Needed to Ensure Planned Improvements Address Limitations in Enforcement Division Operations

GAO-07-830: Published: Aug 15, 2007. Publicly Released: Sep 17, 2007.

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The Securities and Exchange Commission's (SEC) ability to conduct investigations and bring enforcement actions for violations of securities laws is critical to its mission to protect investors and maintain fair and orderly markets. SEC's Division of Enforcement (Enforcement) is charged with investigating securities law violations; recommending civil enforcement actions when appropriate, either in a federal court or before an administrative law judge; and negotiating settlements on behalf of the Commission. The types of sanctions that Enforcement can seek on behalf of the Commission include monetary penalties or fines and disgorgements of the profits that individuals or companies may derive by having committed securities violations. While SEC has only civil authority, it also works with various law enforcement agencies, including the United States Department of Justice (Justice), to bring criminal cases when appropriate. In addition, Enforcement is responsible for overseeing the Fair Fund program, which seeks to compensate investors who suffer losses resulting from fraud or other securities violations by individuals and companies. Under the Fair Fund program, SEC can combine the proceeds of monetary penalties and disgorgements into a single fund and then distribute the proceeds to harmed investors. In recent years, Enforcement has initiated high-profile actions that resulted in record civil fines against companies and senior officers and in some cases contributed to criminal convictions. However, the capacity of SEC in general and Enforcement in particular to appropriately plan and effectively manage their activities and fulfill their critical law enforcement and investor protection responsibilities on an ongoing basis has been criticized in the past. Although SEC received a substantial increase in its appropriations as a result of the Sarbanes-Oxley Act of 2002, questions have been raised in Congress and elsewhere on the extent to which the agency is using these resources to better fulfill its mission. Moreover, we have reported that aspects of Enforcement's information systems and management procedures could limit the efficiency and effectiveness of its operations. For example, we found in 2004 that Enforcement faced challenges in developing the advanced information technology necessary to facilitate the investigative process. In addition, we reported in 2005 that the distribution of funds to harmed investors under the Fair Fund program was limited and that Enforcement had not developed adequate systems and data to fulfill its oversight responsibilities. Because of congressional interest in ensuring that SEC effectively manages its resources and helps ensure compliance with securities laws and regulations, Congress requested that we review key Enforcement management processes and systems and follow up on our previous work where appropriate. Accordingly, this report evaluates Enforcement's (1) internal processes and information systems for planning, tracking, and closing investigations and planned changes to these processes and systems; (2) implementation of SEC's Fair Fund program responsibilities; and (3) efforts to coordinate investigative activities with other SEC divisions and federal and state law enforcement agencies.

Enforcement's processes and systems for planning, tracking, and closing investigations have had some significant limitations that have hampered the division's capacity to effectively manage its operations and allocate limited resources. While Enforcement and SEC officials are aware of these deficiencies and have recently begun addressing them, additional actions are necessary to help ensure that the planned improvements fully address limitations in the division's operations. In March 2007, Enforcement said it would centrally review and approve all new investigations of potential securities law violations by individuals or companies. Under Enforcement's previous, largely decentralized approach, the division was not always able to ensure the efficient allocation of resources or maintain quality control in the investigative process. While the new centralized approach was designed to help address these issues, Enforcement has not yet established written procedures and criteria for reviewing and approving new investigations. Without such procedures and criteria, Enforcement may face challenges in consistently communicating the new approach to existing and new staff. The lack of written procedures and criteria could also limit the Commission's ability to evaluate the implementation of the new approach and help ensure that the division is managing its operations and resources efficiently. Recognizing that the division's current information system for tracking investigations and enforcement actions--Case Activity Tracking System (CATS)--is severely limited as a management tool, Enforcement plans to start using a new system (the Hub) by late 2007. The deficiencies of CATS include its inability to produce detailed reports on investigations of certain types or the status of such investigations. While the Hub is designed to address many of CATS's deficiencies the way that the system is being implemented may not address all existing limitations. More specifically, Enforcement has not established written controls to help ensure that staff enter investigative data in the Hub in a timely and consistent manner. Without such controls, management reports generated by the Hub may have limited usefulness, and the system's capacity to assist Enforcement in better managing ongoing investigations will not be fully realized. In May 2007, Enforcement implemented procedures to help ensure the prompt closure of investigations that are no longer being pursued and thereby better ensure the fair treatment of individuals and companies under review, but these procedures do not fully address the entire backlog of these investigations. One regional Enforcement official said that as of March 2007, nearly 300 of the office's 840 open investigations were 2 or more years old, were no longer being pursued, and had no pending enforcement actions. Enforcement officials said that the failure to close such investigations promptly could have negative consequences for individuals and companies no longer suspected of having committed securities violations. They attributed the failure to close many investigations to several factors, such as time-consuming administrative requirements for attorneys to prepare detailed investigation closing memorandums that then must be routed to senior division officials for review and approval. To address these issues, Enforcement plans to inform individuals and companies more promptly that they are no longer under review and expedite the review and closure of the existing backlog of investigations for which administrative tasks have been completed (as of March 2007, there were 464 such investigations). However, Enforcement's plans do not include clearing the potentially large backlog of investigations for which such administrative tasks have not been completed, which could be negatively impacting individuals and companies no longer actively under review.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To strengthen Enforcement's management processes and systems and help ensure compliance with securities laws, the Chairman of the Securities and Exchange Commission should direct the Division of Enforcement and other agency offices, such as the Office of Information Technology or Office of the Executive Director, as appropriate, to consider developing expedited administrative and review procedures for closing investigations that have not resulted in enforcement actions and are no longer being actively pursued.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: SEC's enforcement division has made case closing a higher priority as described in a recent GAO report (GAO-09-358). SEC's a new enforcement manual encourages staff to close investigations when it becomes apparent that no enforcement action will be recommended. According to SEC's fiscal year 2008 Performance and Accountability Report, the division closed 1,355 cases in fiscal year 2008 "its highest annual total, according to Enforcement management" compared to 374 in fiscal year 2007, a 262 percent increase. Officials attributed this to the new guidance, new quarterly reports that list investigations that are 5 or more years old, and periodic conference calls and meetings to discuss closings and case status.

    Recommendation: To strengthen Enforcement's management processes and systems and help ensure compliance with securities laws, the Chairman of the Securities and Exchange Commission should direct the Division of Enforcement and other agency offices, such as the Office of Information Technology or Office of the Executive Director, as appropriate, to establish written procedures that reinforce the importance of attorneys entering investigative data into the Hub, provide guidance on how to do so in a timely and consistent way, and establish a control process by which other division officials can independently assess the reliability of investigative data maintained in the system.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: SEC's enforcement division has established relevant procedures for the operation of the HUD investigation management system as described in a recent GAO report (GAO-09-358). To the extent that the Hub relies on the Case Activity Tracking System (CATS) information, there are already some processes for monitoring entry of information, because the CATS system, which Enforcement officials call their system of record, has controls on data entered into the system. This includes use of case management specialists, whose specific duties include entry of case information. According to Enforcement management, under the current implementation of the Hub, investigative staff are responsible for entering quarterly, narrative-style case updates into the system. Specifically, staff attorneys are to enter this narrative data into the Hub as part of quarterly case reviews that management conducts, plus other Hub-only information not kept in CATS. Enforcement management told us the formal control on entry of this data is that all staff are aware of the management reviews and that the Hub user guide directs that information should be updated at least quarterly. They said that ultimately, it is a manager?s responsibility to make sure the information indeed gets into the Hub system. The officials said that if the narrative case updates are not entered into the system on a timely basis as directed, this information, which is not quantitative data used to track items such as dollar amounts or caseload, is considered to be a low-risk area that will not compromise overall system quality.

    Recommendation: To strengthen Enforcement's management processes and systems and help ensure compliance with securities laws, the Chairman of the Securities and Exchange Commission should direct the Division of Enforcement and other agency offices, such as the Office of Information Technology or Office of the Executive Director, as appropriate, to establish written procedures and criteria on which to base the review and approval of new investigations.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: SEC's enforcement division has developed relevant procedures for the operation of the HUB as described in a recent GAO report (GAO-09-358). Specifically, Enforcement has now developed written procedures for review and approval of new investigations, which are included in a recently completed enforcement manual. The procedures address various steps in the investigative process, such as handling tips, referrals, and complaints; opening a Matter Under Inquiry, which can be a preliminary step toward opening a full investigation; and opening a full investigation. According to the procedures, the primary consideration for opening an investigation should be whether the inquiry has the potential to substantively and effectively address the potentially improper conduct at issue. Other key factors are the magnitude or nature of the violation, the size of the victim group, and the amount of potential or actual losses to investors.

    Recommendation: To strengthen Enforcement's management processes and systems and help ensure compliance with securities laws, the Chairman of the Securities and Exchange Commission should direct the Division of Enforcement and other agency offices, such as the Office of Information Technology or Office of the Executive Director, as appropriate, to establish and implement a comprehensive plan for improving the management of the Fair Fund program, to include (1) staffing the new central Fair Fund office, defining its roles and responsibilities, and establishing relevant written procedures and (2) ensuring the consistency of and analyzing final accounting reports on completed Fair Fund plans.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: SEC has staffed the fair fund office and developed relevant fair fund reporting forms. (GAO-09-358). In February 2008, SEC announced creation of OCD, to handle disgorgements and Fair Fund activity, plus other collection and distribution functions, such as collection of delinquent penalties or disgorgements that are not part of Fair Fund plans, and investment of funds received. As of October 2008, 23 of 25 full-time positions earmarked for OCD had been staffed. Efforts were continuing to formulate policies and procedures for the office, in areas such as conflict-of-interest and ethics rules, as well as guidance for selection of consultants, distribution agents, and others who assist with distributions. OCD was envisioned as having agencywide responsibilities, but to date, has handled collections for the headquarters office in Washington and the Boston regional office only. For other offices, OCD advises on collections and distributions, and Enforcement staff remain responsible for collections and distributions in their respective offices. Finally, in response to our recommendation that SEC implement a plan for ensuring the consistency and analysis of final accounting reports for completed Fair Fund plans, Enforcement staff, with the assistance of the agency?s Office of Financial Management, have created templates to standardize reporting of final accounting for completed distributions and Fair Fund plans. SEC uses outside consultants for Fair Fund duties, such as identifying investors harmed in a particular case, or making payments to investors. The nature of such duties may vary by case type. With creation of the templates, SEC has taken a step toward collecting information to examine administrative costs.

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