**OFFICE OF THE INSPECTOR GENERAL**

**COMMODITY FUTURES TRADING COMMISSION**

**SEMIANNUAL REPORT**

**FOR THE PERIOD FROM**

**April 1, 1997 THROUGH September 31, 1997**

**TABLE OF CONTENTS**

SUMMARY OF OIG ACTIVITIES \[including a description of

significant problems, abuses, and deficiencies and a description of OIG
recommendations for corrective action (Mandated by Section 5(a)(1) and
(2) of the

Act)\] . . . . . . . . . . . . . . . . . . . . . . . . . . 1

AUDITS. . . . . . . . . . . . . . . . . . . . . . . . . . 1

INVESTIGATIONS. . . . . . . . . . . . . . . . . . . . . . 3

LEGISLATIVE AND REGULATORY REVIEWS. . . . . . . . . . . . 3

OIG RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . . . 4

OIG RESOURCES. . . . . . . . . . . . . . . . . . . . . . . . . 5

CFTC PROGRAMS AND OPERATIONS . . . . . . . . . . . . . . . . . 5

COMPLETED WORK . . . . . . . . . . . . . . . . . . . . . . . . 6

AUDITS \[including a list of each audit report issued and a summary of
each particularly significant report

(Mandated by Section 5(a)(6) and (7) of the Act). . . . . 6
INVESTIGATIONS. . . . . . . . . . . . . . . . . . . . . . 9

LEGISLATIVE AND REGULATORY REVIEWS. . . . . . . . . . . . 11

AUDIT REPORTS OVER SIX MONTHS OLD. . . . . . . . . . . . . . . 14

CORRECTIVE ACTION NOT COMPLETED \[including an

identification of each significant recommendation described in previous
semiannual reports on which corrective action has not been completed
(Mandated

by Section 5(a)(3) of the Act)\] . . . . . . . . . . . . . 14

CORRECTIVE ACTION COMPLETED. . . . . . . . . . . . . . . 14

MANAGEMENT DECISION NOT MADE \[including a summary of each audit report
issued before the commencement of the reporting period for which no
management decision has been made by the end of the reporting period
(including the date and title of each such report), an explanation of
the reasons such a management decision has not been made, and a
statement concerning the desired timetable for achieving a management
decision on each such report

(Mandated by Section 5(a)(10) of the Act)\]. . . . . . . . 15

SUMMARY OF MATTERS REFERRED TO PROSECUTIVE AUTHORITIES and

the prosecutions and convictions which have resulted

(Mandated by Section 5(a)(4) of the Act). . . . . . . . . 15

SUMMARY OF EACH REPORT MADE TO THE AGENCY HEAD under

Section 6(b)(2) concerning information or assistance unreasonably
refused or not provided (Mandated by

Section 5(a)(5) of the Act) . . . . . . . . . . . . . . . 15

REVISED MANAGEMENT DECISIONS \[including description and explanation of
the reasons for any significant revised management decision made during
the reporting period (Mandated by Section 5(a)(11) of the Act)\]. . . .
. . . . 15

INSPECTOR GENERAL DISAGREEMENT \[including information

concerning any significant management decision with which the Inspector
General is in disagreement

(Mandated by Section 5(a)(12) of the Act)\]. . . . . . . . 16

CURRENT AUDITS . . . . . . . . . . . . . . . . . . . . . . . . 16

GAO LIAISON. . . . . . . . . . . . . . . . . . . . . . . . . . 19

STRATEGIC PLAN . . . . . . . . . . . . . . . . . . . . . . . . 20

CONTACTING THE OFFICE OF THE INSPECTOR GENERAL . . . . . . . . 25

TABLE 1 \-- REPORTS ISSUED WITH QUESTIONED COSTS (Mandated

by Section 5(a)(8) of the Act). . . . . . . . . . . . . . 26

TABLE 2 \-- REPORTS ISSUED WITH RECOMMENDATIONS THAT FUNDS

BE PUT TO BETTER USE (Mandated by Section 5(a)(9) of

the Act). . . . . . . . . . . . . . . . . . . . . . . . . 27

**INDEX OF IG ACT REPORTING REQUIREMENTS**

Section 5(a)(1). . . . . . . . . . . . . . . . . . . . . . . . 1

Section 5(a)(2). . . . . . . . . . . . . . . . . . . . . . . . 1

Section 5(a)(3). . . . . . . . . . . . . . . . . . . . . . . . 14

Section 5(a)(4). . . . . . . . . . . . . . . . . . . . . . . . 15

Section 5(a)(5). . . . . . . . . . . . . . . . . . . . . . . . 15

Section 5(a)(6). . . . . . . . . . . . . . . . . . . . . . . . 6

Section 5(a)(7). . . . . . . . . . . . . . . . . . . . . . . . 6

Section 5(a)(8). . . . . . . . . . . . . . . . . . . . . . . . 26

Section 5(a)(9). . . . . . . . . . . . . . . . . . . . . . . . 27

Section 5(a)(10) . . . . . . . . . . . . . . . . . . . . . . . 15

Section 5(a)(11) . . . . . . . . . . . . . . . . . . . . . . . 15

Section 5(a)(12) . . . . . . . . . . . . . . . . . . . . . . . 16

**SUMMARY OF OIG ACTIVITIES**

**[AUDITS]{.underline}**

The primary objectives of the Office of the Inspector General (OIG) are
to help promote long-term efficiency and effectiveness in the
administration and operation of the Commission and to protect against
fraud and abuse. This reporting period\'s OIG audit activities which are
listed below reflect these objectives.

[Current Audits]{.underline}

The following are the audits being conducted during the current
reporting period and continuing into the next reporting period. (For
additional details, see the section on current audits beginning on page
16.)

> [Review of Enforcement Information Requirements.]{.underline} The
> objectives of this review are to determine what the information needs
> of all levels in the Division of Enforcement are, whether the
> information needs are being met, and if the required information can
> be created, stored, and retrieved in a more effective and efficient
> manner. (For additional details, see the section on current audits on
> page 17.)
>
> [Audit of Compliance with the Federal Managers' Financial Integrity
> Act.]{.underline} In support of OMB Circular A-123 (Revised), the
> Inspector General will evaluate, provide technical assistance, and
> advise the agency head as to whether the agency's review and
> evaluation process was conducted in accordance with the circular's
> requirements. (For additional details, see the section on current
> audits on page 18.)

[Imprest Funds.]{.underline} The OIG will conduct final audits of the
Chicago and Kansas City imprest funds. (For additional details, see the
section on current audits on page 18.)

[Completed Audits]{.underline}

The following are the audits completed during this reporting period.
(For additional details, see the section on completed audits on page 6.)

> [Audit of Imprest Fund \-- Kansas City.]{.underline} The OIG
> determined that all funds were properly accounted for, the amount of
> the fund was not in excess of cash requirements, the cashier was
> generally following procedures that adequately protect the funds from
> loss or misuse, and the cashier was not making unauthorized use of the
> fund. (For additional details, see the section on completed audits on
> page 6.)

[Audit of Imprest Fund \-- Chicago.]{.underline} The OIG determined that
all funds were properly accounted for, the amount of the fund was not in
excess of cash requirements, the cashier was generally following
procedures that adequately protect the funds from loss or misuse, and
the cashier was not making unauthorized use of the fund. (For additional
details, see the section on completed audits on page 7.)

[Final Audit of Imprest Fund \-- New York.]{.underline} The OIG
determined that all funds were properly accounted for, the cashier
followed procedures that adequately protected the funds from loss or
misuse, and the cashier did not make unauthorized use of the fund. The
fund was properly liquidated on June 17, 1997. (For additional details,
see the section on completed audits on page 8.)

[Cash Verification of Imprest Fund -- Washington, D.C.]{.underline} The
OIG found that all funds were accounted for. (For additional details,
see the section on completed audits on page8.)

[Use of Commission Vehicles.]{.underline} The review disclosed that the
vehicles were used to pick up and deliver supplies and transport
Commission personnel. However, because several records were either
missing or incomplete, OIG was unable to determine whether any misuse of
the vehicles took place.

(For additional details, see the section on completed audits on page 9.)

**[INVESTIGATIONS]{.underline}**

The Inspector General Act of 1978, as amended, provides that the
Inspector General may receive and investigate complaints or information
from the Commission\'s employees concerning the possible existence of an
activity constituting a violation of law, rules or regulations, or
mismanagement, abuse of authority, or gross waste of funds, or a
substantial and specific danger to the public health and safety.

No investigations were pending as of the beginning of the reporting
period. The OIG opened one investigation during the reporting period and
completed one investigations. No investigations remained open at the end
of the period. (For more detailed descriptions of these investigations,
see the section on investigations beginning on page 9.)

**[LEGISLATIVE AND REGULATORY REVIEWS]{.underline}**

The OIG reviews proposed and final CFTC regulations and legislation and
selected exchange rules using the following basic criteria: Whether the
agency: (1) has identified specifically the problem(s) to be addressed
by the proposal; (2) has defined through case study or data analysis a
clear link between the proposed solution and the identified problem(s);
(3) has specified clearly the means to effectively and efficiently
enforce the proposal; (4) has assessed the likely efficiency and
effectiveness of alternative solutions; (5) can reasonably document that
the proposal will yield positive net benefits over the long term; and
(6) has met the requirements of the Regulatory Flexibility Act and the
Paperwork Reduction Act.

The Regulatory Flexibility Act requires the agency to evaluate the
impact of its regulations on small entities. The Paperwork Reduction Act
requires the agency to manage effectively and efficiently its
information collections so that they are the least burdensome necessary
to achieve the stipulated objectives. (For more detailed descriptions of
these reviews, see the section on legislative and regulatory reviews
beginning on page 11.)

Regulations reviewed during this period include:

 Proposal to Permit Agricultural Trade Options, and the

 Proposed Rule Amendments Relating to Risk Disclosure Documents.

**OIG RESPONSIBILITIES**

The Office of the Inspector General in the Commodity Futures Trading
Commission (CFTC) was created in accordance with the Inspector General
Act of 1978 (P.L. 95-452), as amended by the Inspector General Act
Amendments of 1988 (P.L. 100-504). The OIG was established to create an
independent unit to:

 Promote economy, efficiency, and effectiveness in the administration
of CFTC programs and operations and to detect and prevent fraud and
abuse in such programs and operations;

 Conduct and supervise audits and, where necessary, investigations
relating to the administration of CFTC programs and operations;

 Review existing and proposed legislation and regulations and make
recommendations concerning their impact on the economy and efficiency of
CFTC programs and operations or the prevention and detection of fraud
and abuse; and

 Keep the Chairman and Congress fully informed about any problems or
deficiencies in the administration of CFTC programs and operations and
provide recommendations for correction of these problems or
deficiencies.

Given that the CFTC does not have extensive contracts or grant making
authority, the OIG\'s efforts have been focused on the review of
legislative and regulatory proposals and the monitoring of internal CFTC
operations.

**OIG RESOURCES**

The OIG consists of the Inspector General, two professional staff
members, and a secretary. The present Inspector General assumed his
position on October 7, 1990.

The OIG, on December 4, 1989, signed a Memorandum of Understanding with
the Office of General Counsel (OGC). This Memorandum details the
procedures that will be used to provide the OIG with OGC legal services.
An OGC staff member has been assigned to provide such services to the
OIG on an as-needed basis.

**CFTC PROGRAMS AND OPERATIONS**

The CFTC was established in 1974 as an independent agency to regulate
commodity futures and options trading in the United States. The CFTC is
headquartered in Washington, D.C., with additional offices in Chicago,
New York, Kansas City, Los Angeles, and Minneapolis.

The basic objectives of the CFTC are to prevent manipulation of the
markets, abusive trade practices, and fraudulent activities; to maintain
effective oversight of the markets and self-regulatory organizations;
and to enforce the Commodity Exchange Act and Commission rules without
hindering the futures markets\' provision of price discovery and risk
shifting services. The CFTC regulates the futures activities of
brokerage firms, salespersons, floor brokers, floor traders, commodity
pool operators, commodity trading advisors, introducing brokers, and
leverage transaction merchants. In addition, the agency ensures the
effective enforcement of exchange rules, reviews the terms and
conditions of proposed futures contracts and the registration of firms
and individuals who provide advice or handle customer funds, and
oversees the activities of the National Futures Association.

**COMPLETED WORK**

**[AUDITS]{.underline}**

The OIG is required to conduct, supervise and coordinate audits of CFTC
programs and operations and to ensure that the audits are conducted in
accordance with generally accepted government auditing standards. The
OIG is also required to recommend changes to existing and proposed CFTC
programs and operations to promote economy, efficiency, and
effectiveness and to prevent and detect fraud and abuse.

The purpose of these audits is to ensure that:

 Funds have been expended in a manner consistent with related laws,
regulations, and policies;

 Resources have been managed effectively and efficiently;

 Stipulated program objectives have been achieved; and

 Resources have been safeguarded.

The following audit reports have been issued during the reporting
period.

1\. **Audit of Imprest Fund \-- Kansas City.**

[Objectives]{.underline}.

The purpose of the audit is to determine whether the

imprest fund is being administered in compliance with the

Department of the Treasury Manual of Procedures and Instructions for
Cashiers (Treasury Manual), the Treasury Financial Manual

(I TFM 4-3000), and CFTC Instruction 344-1. The audit is designed to
ensure that all funds are properly accounted for, the amount of the fund
is not in excess of cash requirements, the cashier is following
procedures that adequately protect the funds from loss or misuse, and
the cashier is not making unauthorized use of the funds. The audit
covered the period from April 24, 1996 through April 28, 1997.

[Results]{.underline}.

A report issued on June 11, 1997 disclosed that all funds were properly
accounted for, the amount of the fund was not in excess of cash
requirements, the cashier was following procedures that adequately
protect the funds from loss or misuse, and the cashier was not making
unauthorized use of the fund. Use of the fund was discontinued effective
February 3, 1997. Consequently no recommendations were made.

2\. **Audit of Imprest Fund \-- Chicago.**

[Objectives]{.underline}.

The purpose of the audit is to determine whether the

imprest fund is being administered in compliance with the

Department of the Treasury Manual of Procedures and Instructions for
Cashiers (Treasury Manual), the Treasury Financial Manual

(I TFM 4-3000), and CFTC Instruction 344-1. The audit is designed to
ensure that all funds are properly accounted for, the amount of the fund
is not in excess of cash requirements, the cashier is following
procedures that adequately protect the funds from loss or misuse, and
the cashier is not making unauthorized use of the funds. The audit
covered the period from April 30, 1996 through April 30, 1997.

[Results]{.underline}.

A report issued on June 30, 1997 disclosed that all funds were properly
accounted for, the amount of the fund was not in excess of cash
requirements, the cashier was following procedures that adequately
protect the funds from loss or misuse, and the cashier was not making
unauthorized use of the fund. Use of the fund was discontinued effective
June 2, 1997. Consequently no recommendations were made.

3\. **Final Audit of Imprest Fund \-- New York.**

[Objectives]{.underline}.

The purpose of the audit was to determine whether the

imprest fund was liquidated in compliance with the

Department of the Treasury Manual of Procedures and Instructions for
Cashiers (Treasury Manual), and the Treasury Financial Manual

(I TFM 4-3000). The audit was designed to ensure that all funds were
properly accounted for, the cashier followed procedures that adequately
protected the funds from loss or misuse, and the cashier did not make
unauthorized use of the funds during the period that the imprest fund
was in operation. The audit covered the period from June 5, 1996 through
June 17, 1997.

[Results]{.underline}.

A report issued on July 18, 1997 disclosed that all funds were properly
accounted for, the cashier followed procedures that adequately protected
the funds from loss or misuse, and the cashier did not make unauthorized
use of the fund. On June 17, 1997, the fund was liquidated and the total
amount was deposited to CFTC's account at the U.S Treasury.

4\. **Cash Verification of Imprest Fund -- Washington, D.C.**

[Objectives]{.underline}.

In accordance with the "Manual of Procedures and Instructions for
Cashiers" distributed by the Department of the Treasury, the Commission
is required to conduct an unannounced verification of the cash balance
in each imprest fund at least once each quarter.

[Results]{.underline}.

No deficiencies were noted in the May 13, 1997 cash verification of the
Washington, D.C. imprest fund.

5\. Use of Commission Vehicles

[Objectives]{.underline}.

The purpose of this review was to determine whether the CFTC's
Government leased motor vehicles were being used for official purposes
only. The period covered by the review was from August 26, 1996, through
July 7, 1997.

[Results]{.underline}.

A report issued on August 22, 1997 disclosed that the vehicles were used
to pick up and deliver supplies and transport Commission personnel.
However, because several records were either missing or incomplete, OIG
was unable to determine whether

Any misuse of the vehicles took place. OIG recommended a number of
changes in procedures in order to assure that a complete record of
vehicle usage is maintained.

**[INVESTIGATIONS]{.underline}**

The Inspector General Act of 1978, as amended, provides that the
Inspector General may receive and investigate complaints or information
from the Commission\'s employees concerning the possible existence of an
activity constituting a violation of law, rules or regulations, or
mismanagement, abuse of authority, or gross waste of funds, or a
substantial and specific danger to the public health and safety.

There were no investigations pending as of the beginning of the
reporting period. The OIG opened and closed one investigation during the
reporting period. No investigations remained open at the end of the
period.

An anonymous letter alleging abuse of government time and telephone
privileges by an employee of the Commission was referred to the OIG by
the Chairperson. The subsequent OIG review of the pertinent telephone
records disclosed a limited number of calls which could be personal.
This matter was discussed with the employee who admitted the personal
nature of those calls, acknowledged the violation of government rules,
and agreed to cease making such calls. The OIG determined that the
number and length of the calls and the minimal expense involved was not
sufficient to require further action. Accordingly, this investigation
was closed.

In response to an e-mail complaint by an employee that the CFTC process
for dealing with requests for reasonable accommodation for disabled
employees was not being properly followed in her case, the OIG obtained
relevant documentation of the agency\'s dealings with the complaint. An
analysis of this documentation indicated that the agency was following
the prescribed course of action specified in its internal instruction.
The OIG informed the employee that, in personnel matters, where there is
a reasonable, functioning agency process established to deal with
particular types of matters and there is no indication that the process
is not being followed, the OIG, as a matter of policy, does not
interfere with the process. The OIG informed the employee that our
information was that there was a process in place and that the agency
was following the requirements of the process to deal with her request.
In the absence of information indicating a failure to follow the
prescribed process, the OIG closed this investigation.

An employee of the Commission informed us that a former CFTC employee
claimed that a current CFTC employee had sent him a lewd graphic via
e-mail. This former employee had not provided any evidence to support
his allegation. The OIG wrote an e-mail to the former employee asking
him to help us to verify his claim by sending a copy of the offending
e-mail to our office. In reply, the former employee repeated his
unsubstantiated charge, did not supply the requested copy of the e-mail
which led him to believe that a CFTC employee sent the offending graphic
to him, and requested that the matter be dropped. In the absence of more
complete information to be supplied by the former employee, the OIG
closed the investigation.

**[LEGISLATIVE AND REGULATORY REVIEWS]{.underline}**

As specified in Section 4(a)(2) of the Inspector General Act of 1978,
the OIG reviews the impact of existing and proposed legislation and
regulations on CFTC programs and operations and makes recommendations
regarding more effective or efficient alternatives or protections
against fraud and abuse. The OIG also reviews exchange rule proposals
and changes.

The OIG has notified the responsible Division as to any concerns with
draft and final documents for the legislation, rules or investigations
listed below. Formal comments were not filed with the Commission. A
summary of the principal legislation, regulations and investigations
reviewed and the OIG review results follows.

[RULE REVIEWS INITIATED IN PREVIOUS REPORTING PERIODS]{.underline}

1\. **Proposed amendments to allow certain customer orders to be placed
without specified customer account identification. (CFTC Rule
1.35(a-1)).**

[Summary of Rule]{.underline}.

The CFTC proposed amendments to Regulation 1.35 that would permit orders
submitted on behalf of multiple customer accounts not to have individual
identifying account numbers if the person placing the orders has
investment discretion as to each account and the executing FCM has a
single series designation for all the accounts. The designation has to
contain a predetermined order allocation applicable to all listed
individual accounts.

The amendments would also permit specified institutional accounts for
certain futures and options orders to be exempt from the account
identification requirement if executed as part of an intermarket
strategy involving securities. Such orders would have to be allocated no
later than the deadline for final submission of trade data to clearing
on the day the order is executed.

[OIG Review]{.underline}.

OIG commented on various sections of the rule and its accompanying
explanation. The comments focused on the coverage of the institutional
accounts and the reach of disqualifying interest in the specified
accounts. Staff drafted a proposed notice of interpretation and approval
order interpreting regulation 1.35(a-1)(2)(i) account identification
requirements as they pertain to bunched orders and approving an NFA
interpretive notice.

2\. **Exemption from Dual Trading Prohibition (CFTC Rule 155.5(d))**

[Summary of Rule]{.underline}.

Several exchanges submitted petitions for exemptions for various
contracts from the dual trading prohibitions in Commission Regulation
155.5. The prohibition prevents a broker from trading for his own
account and other specified accounts during the same trading session in
which he has executed customers orders in an affected contract market.

[OIG Review]{.underline}.

OIG discussed the issue with relevant staff and made comments and raised
questions. The Commission has approved unconditional exemptions for the
COMEX Division of the New York Mercantile Exchange, the New York Cotton
Exchange, and the Coffee Sugar & Cocoa Exchange. The Commission is
currently considering exemptions for the Chicago Board of Trade and the
Chicago Mercantile Exchange.

[RULE REVIEWS INITIATED THIS REPORTING PERIOD]{.underline}

1\. **Proposal to Permit Agricultural Trade Options**

[Summary of Action]{.underline}.

The CFTC staff prepared a paper discussing various alternatives relating
to agricultural trade options. Currently the trading of such options is
prohibited except when executed on designated contract markets.

[OIG Review]{.underline}.

The OIG raised questions about certain characterizations of political
stability of foreign countries. The office also asked about the meaning
of named market practices. Staff responded in a positive way to such
questions.

2\. **Proposed Rulemaking Relating to Rules 1.55, 1.65(a)(3), 30.6(a),
and 33.7(a)**

[Summary of Action]{.underline}.

The proposed rule amendments would relieve futures commission merchants
and introducing brokers from providing risk disclosure documents to
categories of financially accredited customers before opening an account
for such customers.

[OIG Review]{.underline}.

OIG raised issues about the interplay of the risk disclosure documents
and the general obligation to provide material information.

3\. **Description of the Office of the Inspector Generals**

[Summary of Action]{.underline}

A task force prepared a draft describing an Inspector General's Office
for use by Congressional staff.

[OIG Review]{.underline}

OIG noted an inaccuracy in the description of IG offices created by the
1988 amendments to the Inspector General Act. The requested changes were
made.

4\. **Audit Trail Review**

[Summary of Action]{.underline}

Staff reviewed the audit trails of several exchanges seeking exemption
from the ban on dual trading.

[OIG Review]{.underline}

OIG made suggestions and raised questions with staff concerning its
analysis. The Office referred staff to an OIG audit report of floor
surveillance by CFTC staff for potential relevance. Staff took account
of the report.

**AUDIT REPORTS OVER SIX MONTHS OLD**

**[CORRECTIVE ACTION NOT COMPLETED]{.underline}**

There were no instances of audit reports over six months old where
corrective action had not been completed.

**[CORRECTIVE ACTION COMPLETED]{.underline}**

There were no instances of reports issued before the commencement of the
reporting period for which corrective action had been completed by the
end of the reporting period.

**[MANAGEMENT DECISION NOT MADE]{.underline}**

There were no instances of reports issued before the commencement of the
reporting period for which a management decision had not been made by
the end of the reporting period.

**SUMMARY OF MATTERS REFERRED TO PROSECUTIVE AUTHORITIES**

No matters were referred to prosecutive authorities during the reporting
period.

**SUMMARY OF EACH REPORT MADE TO THE AGENCY HEAD**

No reports were made to the agency head under section 6(b)(2) concerning
information or assistance unreasonably refused or not provided.

**REVISED MANAGEMENT DECISIONS**

No management decisions were revised during the reporting period.

**INSPECTOR GENERAL DISAGREEMENT**

The Inspector General does not disagree with any management decisions on
OIG recommendations.

**CURRENT AUDITS**

The audit agenda and priorities for the OIG are determined based on the
following factors:

 Statutory and regulatory requirements;

 Adequacy of internal control systems as indicated by vulnerability
assessments and internal control reviews recommended by OMB Circular
A-123;

 Changes in the program conditions or particular vulnerability of the
organization, program, activity, or function to problems or
deficiencies;

 Current and potential dollar magnitude and likely benefits of a review
on the efficiency or effectiveness of CFTC programs and operations;

 Management priorities and improvements that may be possible;

 Results of audits of CFTC programs and operations by other Federal
agencies; and

 Availability of audit resources and the potential opportunity costs to
the agency.

The audit agenda and summary of progress for each audit which has not
yet been completed is summarized below. New agenda items periodically
will be added, as appropriate, along with a description of the audit
objective for each.

1\. **Review of Enforcement Information Requirements**

[Objectives]{.underline}.

The mission of the Division of Enforcement is to investigate and
prosecute fairly and effectively violations of the Commodity Exchange
Act and the Commission\'s regulations in order to safeguard the
integrity of U.S. futures and options markets and to protect market
participants and futures and options customers. In the course of its
activities, the division, with headquarters and regional components,
plans and follows an often complex course to achieve its objectives and
receives and creates a huge volume of documents which must be logically
stored and regularly accessed. To support the accomplishment of these
tasks, the division is relying on a collection of very old manual and
automated systems to track the progress of activities and to store and
retrieve documents. The objectives of this review are to determine what
the information needs of all levels in the division are, whether the
information needs are being met, and if the required information can be
created, stored, and retrieved in a more effective and efficient manner.

[Status]{.underline}.

The joint OIG/Enforcement team produced extensive and detailed narrative
flow charts of the current operational and administrative functions and
processes of the Division of Enforcement and delivered them to the
Division of Enforcement and the Office of Information Resources
Management (OIRM). These products were designed to inform the analysts
of OIRM of the inner workings of the Division of Enforcement and to
serve as the base on which the information requirements of the Division
of Enforcement will be defined.

In September 1997, in a joint meeting of representatives of the Division
of Enforcement, the Office of the Inspector General, and the Office of
Information Resources Management (OIRM), the principals made commitments
of six staff years of effort from OIRM and approximately three staff
years of effort from Enforcement to define the system requirements of
Enforcement. The agreed-upon plan calls for the development and
implementation of a core system embracing the most vital functions of
the Division of Enforcement and the progressive development and
implementation over time of modular additions to the core system until
all of the automation needs of the Division are met.

The development effort is expected to get underway in the middle of
November 1997 with projected delivery of the first efforts at a core
system within six months.

2\. **Audit of Compliance with the Federal Managers\' Financial
Integrity Act**

[Objectives]{.underline}.

In support of OMB Circular A-123 (Revised), the Inspector General will
evaluate, provide technical assistance, and advise the agency head as to
whether the agency\'s review and evaluation process was conducted in
accordance with the circular\'s requirements.

[Status]{.underline}.

The OIG reviewed all of the draft submissions of the various
organizational entities assigned to produce internal control reviews by
the CFTC Internal Control Committee. After a number of iterations, this
review resulted in refocusing of some submissions and technical
corrections of others. The OIG will review all of the final submissions
and advise the Chairperson of the results of its review in its annual
assurance letters.

3\. **Imprest Funds**

[Objectives]{.underline}.

The OIG will review expenditures from four CFTC imprest funds to
determine compliance with the Department of the Treasury [Manual of
Procedures and Instructions for Cashiers]{.underline}. Specifically, the
audits are designed to verify that all funds were properly accounted
for; the cashier followed procedures that adequately protected the funds
from loss or misuse; the cashier did not make unauthorized use of the
funds, and appropriate closing procedures were followed. All four
imprest funds have been closed. The funds were maintained in Washington,
D.C.; Chicago, Illinois; Los Angeles, California; and Kansas City,
Missouri.

[Status]{.underline}.

The OIG has scheduled final audits of the Los Angeles, California, and
Washington, D.C**.** imprest funds for the first half of the fiscal
year.

**GAO LIAISON**

The OIG is charged with providing policy direction for, and conducting,
supervising, and coordinating audits and investigations relating to CFTC
programs and operations. In addition, the OIG is required to recommend
policies for, and conduct, supervise, and coordinate with other Federal
agencies, state and local Governmental agencies, and nongovernmental
entities, audits, investigations, and evaluations regarding the economy,
efficiency, and effectiveness of CFTC programs and operations.

GAO also conducts audits of CFTC activities, and OIG plans its audits so
as not to duplicate GAO\'s efforts. Moreover, OIG in its audit
activities identifies the goals of each audit and the methods of
reaching the goals so as to minimize the requirements placed on CFTC
resources.

**STRATEGIC PLAN**

**FOR THE**

**OFFICE OF THE INSPECTOR GENERAL**

**INTRODUCTION**

The Office of the Inspector General (OIG) in the Commodity Futures
Trading Commission (CFTC) was created in accordance with the Inspector
General Act of 1978 (P.L. 95-452), as amended by the Inspector General
Act Amendments of 1988 (P.L. 100-504). The OIG was established to create
an independent unit to:

 Promote economy, efficiency, and effectiveness in the administration
of CFTC programs and operations and to detect and prevent fraud and
abuse in such programs and operations;

 Conduct and supervise audits and investigations relating to the
administration of CFTC programs and operations;

 Review existing and proposed legislation and regulations and to make
recommendations concerning their impact on the economy and efficiency of
CFTC programs and operations or the prevention and detection of fraud
and abuse; and

 Keep the Chairman and Congress fully informed about any problems or
deficiencies in the administration of CFTC programs and operations and
provide recommendations for correction of these problems or
deficiencies.

Accordingly, the OIG has established three programs to carry out its
responsibilities: audit, investigation, and legislative and regulatory
review. A summary of those programs follows.

**AUDIT**

The primary objectives of the OIG are to promote long-term efficiency
and effectiveness in the administration and operation of the Commission
and to protect against fraud and abuse.

The key to effectively and efficiently managing the Commodity Futures
Trading Commission is information. Top level managers and decision
makers require a steady stream of organized data on the effects of their
policy decisions and resource allocations on the operations of the
Commission. Once having made the decision to change resource levels or
policy, managers must receive accurate and timely reports of the
operational effects of their decision so they can determine if the
change is in the direction and of the magnitude predicted. In the
absence of such information, top level managers cannot adequately
perform their jobs.

A number of obstacles to acquiring and transmitting the desired
information to decision makers may exist in some programs. Principal
among them is the Commission\'s apparent difficulty in many instances in
tracking the progress of a particular action across organizational lines
within the Commission.

A simple example is the Reparations Program prior to the installation of
an OIG recommended unified, Commission-wide tracking system. Complaints
are received and processed and hearings are held in the Office of
Proceedings; appeals of initial decisions in reparations cases are
transmitted to the Office of General Counsel where proposed Commission
opinions are drafted; and appeals are decided by the Commission with the
paperwork being handled by the Office of the Secretariat. Each office
involved in the process had a separate tracking system without ties to
the tracking systems in the offices preceding them or following them in
the process. Each office treated the case as if it were brand new to the
Commission when they received it. As a result, there was no provision
for tracking information across organizational lines. If the Chairman
wanted to know how much time was spent on the average reparations case
of a particular description at each stage in the process, that
information was unavailable without an extensive expenditure of manual
labor.

A related problem is the difficulty the Commission has in associating
resources devoted to an activity with the results of that activity. The
Commission does a good job of tracking resources expended. It can
determine how much staff time and material at what cost was spent in a
particular activity. Some Commission organizations can even associate
costs with particular projects. What a program manager may have great
difficulty doing, however, is telling a decision maker that for a
specific level of increase in resources, the program manager will
deliver a specific level of increased output. Without this information
from all programs competing for limited resources, decision makers
cannot make reasoned resource allocation judgments. Decision makers are
forced to rely on intuition and anecdotal evidence.

To increase the efficiency and the effectiveness of the management of
CFTC programs and operations, the OIG will, in addition to the conduct
of mandatory audits, concentrate its audit resources on the
identification of information voids and the lack of continuity in the
flow of information across organizational lines from the beginning of a
process until its conclusion. The OIG will recommend the implementation
of any system improvements where the benefits of implementing the
changes exceed the costs.

**INVESTIGATION**

The Inspector General Act of 1978, as amended, provides that the
Inspector General may receive and investigate complaints or information
from the Commission\'s employees concerning the possible existence of an
activity constituting a violation of law, rules or regulations, or
mismanagement, gross waste of funds, abuse of authority or a substantial
and specific danger to the public health and safety.

The OIG has to date conducted only a reactive investigative program
chiefly relying on unsolicited employee complaints as the source of
investigative leads. This reactive program has resulted in only a
handful of investigations per year. This strategy was followed because
the OIG believed that an independent regulatory agency such as CFTC
without grant money or substantial contracts to award was not likely to
generate a substantial investigative workload.

To insure that employee complaints could easily reach the OIG, a 24 hour
hotline was established in February 1993 to receive complaints. The
hotline\'s existence is publicized on the back cover of the agency-wide
telephone book and in this semiannual report.

Because of the reactive nature of the OIG\'s investigative program, no
investigative agenda has been established.

**LEGISLATIVE AND REGULATORY REVIEW**

Because of the importance of this activity in an economic regulatory
agency, the OIG reviews proposed and final CFTC regulations and
legislation and selected exchange rules using five basic criteria:
Whether the agency: (1) has identified specifically the problem(s) to be
addressed by the proposal; (2) has defined through case study or data
analysis a clear link between the proposed solution and the identified
problem(s); (3) has specified clearly the means to effectively and
efficiently enforce the proposal; (4) has assessed the likely efficiency
and effectiveness of alternative solutions; (5) can reasonably document
that the proposal will yield positive net benefits over the long term;
and (6) has met the requirements of the Regulatory Flexibility Act and
the Paperwork Reduction Act.

The Regulatory Flexibility Act requires the agency to evaluate the
impact of its regulations on small entities. The Paperwork Reduction Act
requires the agency to manage effectively and efficiently its
information collections so that they are the least burdensome necessary
to achieve the stipulated objectives.

Because the OIG does not initiate legislation or, generally,
regulations, the OIG legislative and regulatory review program is
reactive to the legislative and regulatory proposals developed by
others. Accordingly, no independent legislative and regulatory review
agenda has been established.

**[AUDIT AGENDA]{.underline}**

**ANNUAL AUDITS**

The following audit is performed on an annual basis.

**Audit of Compliance with the Federal Managers\' Financial Integrity
Act**

In support of OMB Circular A-123 (Revised), the Inspector General will
evaluate, provide technical assistance, and advise the agency head as to
whether the agency\'s review and evaluation process was conducted in
accordance with the circular\'s requirements.

**OTHER AUDITS**

The OIG intends to focus the balance of its audit resources on insuring
that the Chairperson, the Commissioners, and program managers have
timely, useful information on the progress of CFTC\'s programs in
meeting their goals and objectives. For example, emphasis will be placed
on determining whether all managerial levels engaged in a process can
track the progress of their various programs. The tracking systems
required in many, though not all, programs will cross formal
organizational lines.

These audits will entail a cataloging and description of all of the
manual and automated systems used by an organization to gather
information on its use of resources, the results of the devotion of
those resources (including definitions of measurements of
accomplishment), and the reporting of results and associated costs to
the upper level managers in the Division and to the Chairman and the
Commissioners. Cataloging of these decision support systems will be
followed by an assessment of whether all concerned officials are timely
receiving the information they require to efficiently allocate resources
to those uses which best accomplish the priorities of the Commission. If
any elements are lacking in the information systems, they will be
identified and improvements will be recommended if they can be
implemented in a cost/beneficial manner.

If recommendations are successfully implemented, the proposed systems
should allow the Chairman, the Commissioners, and concerned program
managers to track progress of a particular program across organizational
lines and to quickly determine the effects, if any, of changes in
policy, procedure, or staffing.

The first step in accomplishing this goal will be to concentrate on
documenting, and recommending the improvement and/or development of
tracking systems in every program element throughout the Commission.

**RESOURCES REQUIRED**

The OIG estimates that approximately one and one-half staff years of
effort will be devoted over each of the next five years to the audits
described in \"Other Audits\" above. The \"Annual Audits\" are expected
to consume approximately one-half staff year per year.

**CONTACTING OFFICE OF THE INSPECTOR GENERAL**

The OIG is located in Room 4092 at 1155 21st Street N.W., Washington,
D.C**.** 20581. The telephone number is (202)418-5110. The facsimile
number is (202)418-5522. The hotline number is (202)418-5510. Regular
business hours are between 8:30 AM and 5:00 PM, Monday through Friday,
except Federal holidays.

**Table 1**

**Reports Issued with Questioned Costs**

**(October 1, 1997 - March 31, 1998)**

Dollar Value

Number (Thousands)

\-\-\-\-\-\-- \-\-\-\-\-\-\--‑‑‑‑‑‑‑‑‑‑‑‑‑ Questioned Unsupported Costs
Costs

\-\-\-\-\-\-\-\-\-- \-\-\-\-\-\-\-\-\-\--

A. For which no management decision

has been made by the commencement

of the reporting period\...\...\...\...\... 0 0 0

B. Which were issued during the

reporting period\...\...\...\...\...\...\.... 0 0 0

Subtotals (A + B)\...\...\...\...\...\...\... 0 0 0

C. For which a management decision

was made during the reporting

period\...\...\...\...\...\...\...\...\...\..... 0 0 0

\(i\) dollar value of

disallowed costs\...\...\...\...\..... 0 0

\(ii\) dollar value of

costs not disallowed\...\...\...\.... 0 0

D. For which no management decision

has been made by the end of the

reporting period\...\...\...\...\...\...\.... 0 0 0

**Table 2**

**Reports Issued with Recommendations**

**That Funds be Put to Better Use**

**(October 1, 1997 - March 31, 1998)**

Dollar Value

Number (Thousands)

‑‑‑‑‑‑ ‑‑‑‑‑‑‑‑‑‑‑‑

A. For which no management decision

has been made by the commencement

of the reporting period\...\...\...\...\... 0 0

B. Which were issued during the

reporting period\...\...\...\...\...\...\.... 0 0

Subtotals (A + B)\...\...\...\...\...\...\... 0 0

C. For which a management decision

was made during the reporting

period\...\...\...\...\...\...\...\...\...\..... 0 0

\(i\) dollar value of

recommendations that

were agreed to by

management\...\...\...\...\...\...\...\... 0 0

\(ii\) dollar value of

recommendations that

were not agreed to by

management\...\...\...\...\...\...\...\... 0 0

D. For which no management decision

has been made by the end of the

reporting period\...\...\...\...\...\...\.... 0 0

October 30, 1997

TO: Brooksley Born

Chairperson

FROM: A. Roy Lavik

Inspector General

SUBJECT: Semiannual Report of the Office of the Inspector General

Attached is the Semiannual Report of the Office of the Inspector General
for the period from April 1, 1997 through September 30, 1997. This
report is submitted to you in accordance with the requirements of
Section 5 of the Inspector General Act of 1978, as amended.

I appreciate your continuing support of this office.

Attachment