United States 

Securities and Exchange 

Commission 

In Brief

Fiscal 2006

Congressional Budget

Request

February 2005
Securities and Exchange Commission 

($ in thousands) 

Fiscal Year 2005 Enacted: 

Appropriated Offsetting Collections, Current Year .............. $856,000.0 

Available Balances, Prior Year ............................. $ 57,000.0 

Sub-total Fiscal Year 2005 Spending Authority ........... $913,000.0 

Planned Unobligated Balances, End of Year. .................. -$ 25,000.0 

Total Fiscal Year 2005 Obligations .................... $888,000.0 

Fiscal Year 2006 Request: 

Appropriated Offsetting Collections, Current Year .............. $863,117.0 

Planned Available Balances, Prior Year ...................... $ 25,000.0 

Total Fiscal Year 2006 Request. ....................... $888,117.0 

Appropriations Language 

For necessary expenses for the Securities and Exchange Commission, including services as 

authorized by 5 U.S.C. 3 109, the rental of space (to include multiple year leases) in the District 

of Columbia and elsewhere, and not to exceed $3,000 for official reception and representation 

expenses, $888,117,000, to remain available until expended; of which not to exceed $10,000 

may be used toward funding a permanent secretariat for the International Organization of 

Securities Commissions; and of which not to exceed $100,000 shall be available for expenses 

for consultations and meetings hosted by the Commission with foreign governmental and other 

regulatory officials, members of their delegations, appropriate representatives and staff to 

exchange views concerning developments relating to securities matters, development and 

implementation of cooperation agreements concerning securities matters and provision of 

technical assistance for the development of foreign securities markets, such expenses to 

include necessary logistic and administrative expenses and the expenses of Commission staff 

and foreign invitees in attendance at such consultations and meetings including: (1) such 

incidental expenses as meals taken in the course of such attendance; (2) any travel and 

transportation to or from such meetings; and (3) any other related lodging or subsistence: 

Provided, That fees and charges authorized by sections 6(b) of the Securities Exchange Act of 

1933 (15 U.S.C. 77f(b)), and 13(e), 14(g) and 31 of the Securities Exchange Act of 1934 (15 

U.S.C. 78m(e), 78n(g), and 78ee), shall be credited to this account as offsetting collections: 

Provided further, That not to exceed $863,117,000 of such offsetting collections shall be 

available until expended for necessary expenses of this account: Provided further, That 

$25,000,000 shall be derived from prior year unobligated balances for funds previously 

appropriated to the Securities and Exchange Commission: Provided further, That the total 

amount appropriated under this heading from the general fund for fiscal year 2006 shall be 

reduced as such offsetting fees are received so as to result in a final total fiscal year 2006 

appropriation from the general fund estimated at not more than $0. 
Position and Cost Data for Fiscal Years 2004 - 2006 

FY 2004 Actuals FY 2005 Enacted FY 2006 Request 

FIEs Positions Cost lTEs Positions Cost FIEs Positions Cost 

Enforcement 

Headquarters 

Regions and Districts 

Total 

Compliance Inspections and Examinations 

Investment Management 

Headquarters 

Regions and Dishicts 

Subtotal 

Market Regulation 

Headquarters 

Regions and Districts 

Subtotal 

Total 

General Counsel 

Headquarters 

Regions and Districts 

Investment Management 

Chief Accountant 

Intemaiional Affairs 

Infdon Technology 

Agency Direction 

Executive Staff I SD-T~W 

Total 

External Affairs 

Legislative Affairs 

Public Affairs 

Investor Education and Assistance 

Chairman's Correspondence 

Total 

Risk Assessment 

Executive Director 

Executive Director 

Financial Management 

Administwive Services 

Human Resources 

Filings & Information ServiceslFOIA 

Total 

Equal Employment Opponunity 

Total Permanent FTE and Positions 

Headquarters Total Permanent 

Regional Office Total Permanent 

Temporary 

Staff Salaries 

Personnel Benefits 

Other Personnel Compensation 

ISub-total Cost of Salaries 

Benefits for Former Personnel 

Travel and Transportation of Persons 

Transpottation of Things 

Communications and Rental 

Printing and Reproduction 

Other Services 

Supplies and Materials 

Equipment 

Building Alterations 

I Claims and Indemnities 

ISub-total Cost of Other Expenses 

(Spending Authority 

l~nobli~atedBalance 

Obligations 

Note: FTE numbers have been updated from the President's Budget request to reflect current hiring assumptions. 
--- 

--- 

Summary of Changes 


($ in thousands) 

Spending Authority. .................... 


Planned Unobligated Balance 

Anticipated Obligations 

Full-time Equivalents. ................. 


Positions.................................. 


Explanation of Changes: 

One-time FY 2005 Adjustments 

Building alterations 

Equipment and furniture 

Information technology 

Subtotal............................... 


FY 2005 Base Changes 

Annualization of FY 2005 pay raise 

Annualization of FY 2005 positions 

FY 2006 pay raise 

Promotions 

Increased space rent & utilities 

Subtotal............................... 


Total Change.. ......................... 


FY 2005 FY 2006 Net 

Enacted Request Change 

$9 13,000.0 $888,117.0 -$24,883.0 

-$25,000.0 +$25,000.0 

$888,000.0 $888,117.0 +$ 117.0 

3,871 3,950 +79 

4,196 4,196 

Positions FTE Amount 
Narrative Explanation of Changes 

One-time Adjustments from FY2005 

Building alterations. The decrease of $16.0 million results from completion of the SEC's 

new headquarters building at Station Place, as well as the Northeast Regional Office's 

move into new space. 

Furniture and equipment. A related decrease of $5.0 million also stems from the SEC's 

move into its new headquarters building at Station Place and the one-time need to purchase 

certain items for the new facility. 

Information Technolom. The $17.0 million reduction in information technology spending 

reflects adjustments associated with the completion of the Enforcement imaging project 

backlog and the SEC's Alternate Data Center, in addition to shifts in the implementation 

timelines of several new systems. This funding level will allow the SEC to continue 

providing of an appropriate level of user support and core system maintenance. 

Base Changes for FY2006 

Annualization of 2005 pay raise. The requested $5.5 million provides for the 

annualization of the 2005 3.5 percent pay raise that became effective in January 2005. 

Annualization of FY 2005 positions. The additional 79 FTE and $11.2 million will 

provide for the fiscal 2006 annualization of the staff the SEC is hiring in fiscal 2005. 

FY 2006 pay raise. The requested $10.0 million provides funding for a 2.3 percent pay 

raise, effective January 2006. 

Promotions. The requested $6.0 million provides fimding for career ladder promotions of 

eligible staff brought on board in fiscal 2005. 

Increased space rent and utilities. The requested $5.3 million is for mandatory increases 

associated with the rental of space. These funds will cover full-year costs associated with 

the agency's move into a new headquarters at Station Place in fiscal 2005, as well as 

higher rates for space rent at other SEC facilities. 
SEC Strategic Goals 

Goal 1: Enforce Compliance With Federal Securities Laws 

The Commission seeks to detect violations quickly, publicize misconduct where appropriate to alert 

investors to possible wrongdoing, and take prompt action to halt the misconduct and its effects. SEC 

staff uncover securities violations through many sources, includeing surveillance activities, research 

and data analysis, tips and complaints from the public, the media, and the agency's examination and 

disclosure review functions. 

Goal 2: Sustain an Effective and Flexible Regulatory Environment 

Federal securities laws seek to promote fair, orderly, and competitive markets that protect investors 

from undisclosed risk while fostering innovation and market access. 

Goal 3: Encourage and Promote Informed Investment Decisionmaking 

The federal securities laws place great emphasis on ensuring that the issuers of securities provide clear, 

complete, and truthful information to the investing public because an educated investor ultimately 

provides the best defense against fraud and abuse. 

Goal 4: Maximize the Use of SEC Resources 

An efficient, well-managed, anticipatory SEC is critical to protecting investors and the markets. As 

such, the Commission concentrates on enhancing organizational effectivenss, as well as investing in 

staff, new technologies, and new internal controls. 

FY 2006 Budget Request by Strategic Goal 

($ in millions) 

Goal 4: $131M 15% 

Goal 2: $96M 11% 

Goal 1: $559M 63% 

Goal 3: $102M 11% 
2004 Accomplishments by Strategic Goal 

In August 2004, the SEC made public its new strategic plan for fiscal 2004 through 

fiscal 2009. The document presents the agency's new vision, mission, and values, and details 

the SEC's four goals for the five-year period. These goals are: to enforce compliance with the 

federal securities laws, to sustain an effective and flexible regulatory environment, to 

encourage and promote informed investment decisionmaking, and to maximize the use of SEC 

resources. 

In 2004, the SEC achieved a great deal in each of these four areas. The highlights are 

discussed below, while the full details of the agency's accomplishments are presented in the 

budget chapters that follow. 

Goal I: Enforce Compliance with the Federal Securities Laws 

As a result of the recent expansion of its staff, the Commission was able to significantly 

expand and improve its efforts to enforce compliance with the federal securities laws. For 

example, the SEC's examination program initiated the use of risk-targeted sweeps targeted at 

emerging risk areas. The agency's enforcement staff opened record numbers of investigations 

and cases. 

Examination Proaam: In 2004, the SEC significantly improved its oversight of the 

investment management industry. For example, the Office of Compliance Inspections and 

Examinations (OCIE) enlisted front-line examiners across the country to identify major and 

emerging risks throughout the industry. OCIE then addressed these risk areas in part through 

initiating risk-targeted sweep examinations, on topics such as mutual fund market timing and 

late trading, use of fair value pricing by international funds, and valuation activities by highyield municipal and small capitalization mutual funds. As a result of these risk-targeted 

sweeps, OCIE referred many egregious violations to enforcement staff and developed 

recommendations on needed regulatory improvements. The percentage of investment adviser 

and investment company exams and broker-dealer exams resulting in enforcement referrals 

approximately doubled relative to fiscal 2003 levels. OCIE also performed a record number 

of cause inspections of funds and advisers in response to investor complaints, tips, and 

industry sources that are monitored as part of the new risk assessment program. 

The broker-dealer examination staff also used the risk assessment process to identify 

major and emerging risks throughout the industry, prompting new risk-targeted sweeps. 

Among the topics covered were broker-dealer participation in mutual fund market timing and 

late trading, fixed-income mark-ups, and the misuse of non-public information from Private 

Investment in Public Equity structures and loan syndicates. OCIE's other broker-dealer 

exams in 2004 covered a wide range of topics. For example, the staff: 

Examined the internal risk management controls of large broker-dealers and firms 

that applied to be consolidated supervised entities (CSEs). 
Evaluated select firms' compliance procedures, assessing whether their brokerdealers have appropriate systems in place to identify and control compliance risks, 

communicate concerns to senior management, and promptly correct problems. 

Analyzed several large firms' risk management controls with respect to structured 

finance activities, in the wake of violations by Enron and related entities. 

Reviewed compliance with sales practices, supervision, and disclosure 

requirements in the sale of variable insurance products and issued a public report 

with the National Association of Securities Dealers (NASD) on the sales of variable 

annuities. 

Checked for excessive mark-ups in the sales of both corporate and municipal bonds, 

and reviewed the pricing of bonds by municipal bond inter-dealers. 

The self-regulatory organization (SRO) examination program dedicated substantial 

resources to examining exchanges' new electronic features, particularly with respect to 

compliance with order handling rules. After uncovering substantial "trading ahead" violations 

in one such inspection, staff initiated a risk-targeted sweep of specialists and SROs to identify, 

deter, and discipline similar conduct industry-wide. Also, OCIE launched a new initiative to 

obtain regulatory information from SROs more regularly, so OCIE can monitor their activities 

more effectively in the period between inspections. 

Enforcement Promam: The enforcement program, including its regional offices, 

increased its staffing by approximately 2 1 % over 2003 levels as a result of increased funding 

authorized by the Sarbanes-Oxley Act of 2002. With these new employees, the SEC's 

enforcement staff opened approximately 970 investigations, particularly in the mutual fund, 

investment adviser, and broker-dealer mutual fund sales practices areas. The staff instituted 

about 375 administrative proceedings and 260 civil proceedings, and prevailed in the great 

majority of the enforcement actions decided by district courts or administrative law judges. 

Over $3.5 billion in disgorgement and penalties has thus far been designated for return to 

harmed investors using Fair Funds created under the Sarbanes-Oxley Act. In addition, the 

SEC gained seven new international partners for enforcement-related information sharing 

through the International Organization of Securities Commissions' (IOSCO) Multilateral 

Memorandum of Understanding. 

The following is a sampling of the year's significant enforcement actions: 

Mutual Fund Market Timing, Late Trading, and/or Selective Disclosure Actions. 

The Commission brought 29 enforcement actions against certain investment 

advisers of mutual funds, brokers, and related parties for market timing and late 

trading transactions. In essence, these transactions allowed certain entities to trade 

in mutual fbnds either at times when other investors were not allowed to trade or 

through rapid in-and-out transactions disallowed to other investors. Over $1 billion 

has been ordered to be paid in these cases. 
SEC v. Computer Associates International, Inc. The Commission filed seven 

separate actions against Computer Associates and seven former top executives 

alleging that the company, one of the world's largest software companies, 

prematurely recognized revenue totaling over $3 billion, and that the former 

executives obstructed the Commission's investigation. In addition to other relief, 

over $225 million was ordered to be returned to shareholders. 

SEC v. Royal Dutch Petroleum Company and the "Shell" Transport and Trading 

Co., PLC. The Commission filed enforcement proceedings against two foreignbased oil companies in connection with their overstatement of 4.47 billion barrels 

of previously reported proved hydrocarbon reserves. In settlement of the actions, 

defendants consented to, among other things, a cease and desist order and the 

payment of $1 million in disgorgements and $120 million in penalties. The SEC 

cooperated extensively with the U.K. Financial Services Authority and the 

Netherlands Authority for the Financial Markets on this matter. 

The Specialists Cases. The Commission and the NYSE found that seven specialist 

firms executed orders for their dealer accounts ahead of executable public customer or 

"agency" orders. In settling, the firms agreed to pay a total of $247 million in 

penalties and disgorgement and to improve compliance procedures. 

SEC v. Scott D. Sullivan. The Commission filed a settled action charging Sullivan, the 

former CFO of Worldcorn, Inc., with engaging in a fraudulent scheme to conceal 

WorldCom's poor financial performance. In connection with the same conduct, 

Sullivan pleaded guilty to federal criminal charges. 

SEC v. JefSrey K. SkiZZitzg and Kenneth L. Lay. The Commission amended its 

complaint, adding Jeffrey K. Skilling, Enron's former President, CEO, and COO, 

and Kenneth L. Lay, Enron's former Chairman and CEO, for their roles in the 

scheme to defraud Enron investors. The Commission's investigation is continuing. 

Goal 2: Sustain an Efective and Flexible Regulatory Environment 

In 2004, the Commission implemented an ambitious regulatory agenda that will have 

far-reaching impacts on the securities markets for years to come. Among the major topics 

covered were mutual hnd regulation, National Market System reform, securities firm 

supervision, disclosure, and accounting policy. 

Mutual Fund Regulation: Among its many major regulatory initiatives related to the 

mutual fimd industry in 2004, the Commission: 

Adopted a comprehensive package of fund governance rules that, will, among other 

things, require an independent board chairman and a board comprised of 75% 

independent directors. These rules are designed to bolster the effectiveness of 
independent directors and solidify the role of the fund board as the primary 

advocate for fund shareholders. 

Adopted rules to require that all registered investment advisers adopt codes of 

ethics, and that funds and their advisers have comprehensive compliance policies 

and procedures in place, including the appointment of a designated chief 

compliance officer. These rules are designed to reinforce the fundamental 

importance of integrity in the investment management industry. 

Enhanced mutual fund disclosure by requiring that shareholder reports include 

dollar-based expense information, improving disclosure regarding a portfolio 

manager's potential conflicts of interest with the fund, requiring improved 

disclosure of breakpoint discounts, and proposing significant amendments to the 

information that broker-dealers must provide their customers in connection with 

mutual fund transactions. 

Adopted an amendment to rule 12b-1 to prohibit the use of brokerage commissions 

to compensate broker-dealers for distribution of a fund's shares. This action will 

eliminate a practice that potentially compromises best execution of a fimd's 

portfolio trades, increases portfolio turnover, and biases broker-dealers' 

recommendations to their customers. 

Proposed a rule to require certain advisers to hedge hnds to register with the 

Commission as investment advisers. This rule is designed to provide the 

protections of the Investment Advisers Act of 1940 to hedge hnd investors and to 

enhance the Commission's ability to protect the securities markets. The 

Commission adopted this proposal in December 2004. 

Proposed to address late trading abuses by permitting same-day pricing for fund 

orders only if they are received by the fund, its designated transfer agent, or a 

registered clearing agency before the fund's designated pricing time. 

Put forth a series of initiatives to address market timing, especially so-called 

"arbitrage market timing." The initiatives include improved fair value pricing 

disclosure; enhanced disclosures related to a fund's anti-market timing policies and 

practices; and a proposal that fimds impose a mandatory 2% redemption fee when 

investors redeem their shares within five days of purchase. 

National Market System and SRO Governance: The Commission launched a major 

initiative to update and modernize the regulatory structure of the U.S. equity markets, in 

response to the rapid changes in their business practices and tightening competition. Most 

notably, the Commission proposed Regulation NMS, which would: 

Create a uniform trade-through rule for all national market centers; 
Require uniform market access; 

Establish a uniform quoting increment to address sub-penny trading and promote 

greater transparency; 

Amend the arrangements for disseminating market information; and 

Modernize and restructure the national market system rules under the Exchange 

Act. 

In addition, the staff reviewed the governance of SROs and recommended that the 

Commission propose rules to address, among other issues, the extent to which SRO 

governance practices are comparable to standards now required for listed issuers, and whether 

there is sufficient transparency regarding the operations of SROs. 

Securities Firm and Market Supervision: In fiscal 2004, the Commission approved two 

major revisions to the trading practices rules: the adoption of amendments to the safe harbor 

for issuer repurchases and the adoption of revisions to short sale regulation (Reg SHO). In 

January 2004, the Commission also proposed amendments to the penny stock rules to update 

the definition of "penny stock" in light of legal and market changes, and to modify disclosure 

requirements in light of new technology. In April 2004, the Commission adopted rule 

amendments to Exchange Act Rule 1523- 1 (the "net capital rule") that created an alternative 

capital calculation and a voluntary group-wide supervision program for broker-dealer holding 

companies that do not have a principal regulator. The Commission also implemented the 

supervised investment bank holding company provisions of the Exchange Act, which permit 

broker-dealer holding companies that do not include banks to elect Commission group-wide 

supervision. 

In 2004, the SEC participated in several major IOSCO initiatives, including the 

development of international principles related to securities analysts' conflicts of interest and 

the activities of credit rating agencies. The SEC also participated in dialogues with the 

European Union and the Committee of European Securities Regulators to explore 

opportunities to enhance market oversight and converge countries' regulatory approaches. 

Disclosure: In 2004, the Commission launched several regulatory initiatives to improve 

disclosures to investors so they can make better-informed investment decisions. For example, 

the Commission: 

Proposed rules that would, under certain circumstances, require companies to 

include security-holder nominees for election as director in their proxy materials. 

Put forth rules and forms to provide tailored disclosure requirements and guidance 

for 1933 and 1934 Act filings involving asset-backed securities. 

Proposed amendments to disclosure requirements for 1933 Act Form S-8 and 1934 

Act Form 8-K to deter fraud and abuse by reporting shell companies. 
Enacted rules to enhance disclosure regarding the operation of board of directors 

nominating committees and the means, if any, by which security-holders may 

communicate with directors. These rules will make more transparent to securityholders the operation of the boards of directors of the companies in which they 

invest. 

Proposed rules that would facilitate foreign private issuers' conversion to 

International Financial Reporting Standards. 

Accounting Policy The SEC provided extensive supervision of the Public Company 

Accounting Oversight Board's (PCAOB) regulation of the accounting profession. For 

example, the Commission approved new rules covering the PCAOB's bylaws, code of ethics, 

process for setting auditing standards, registration of auditing firms, and annual budget. In 

addition, the staff oversaw about 200 PCAOB quality reviews of accounting firms. As 

required under the Sarbanes-Oxley Act, the Commission conducted independent rulemaking 

before approving a number of auditing standards adopted by the PCAOB, including PCAOB 

Standard No. 2 which detailed the requirements for auditor reporting on internal controls over 

financial reporting. In addition, the SEC provided continued support for the work of the 

Financial Accounting Standards Board (FASB) and the International Accounting Standards 

Board (IASB) on the convergence of accounting standards around the world. 

Goal 3: Encourage and Promote Informed Investment Decisionmaking 

The Commission promotes informed decisionmaking among investors through two 

main activities: reviewing market participants' disclosures to investors in order to help make 

them more complete, accurate, and timely; and conducting investor education programs. The 

SEC made great strides forward in both of these areas in 2004, as described below. 

Disclosure Reviews: During 2004, the agency continued to improve its selective review 

program. Under the Sarbanes-Oxley Act, the SEC is required to review each reporting 

company at least once every three years and to direct resources toward those issuers, filings, or 

industries that most wamt review. While the Division of Corporation Finance was unable to 

review one-third of reporting companies during the year due to its inability to quickly hire and 

train additional staff, it did strengthen its review processes by adopting new approaches to 

selecting filings for review and focusing its resources on the review of material issues in filings. 

During 2004, a number of companies made significant quantitative and qualitative 

changes to their disclosure in response to staff comments. The following are three examples 

of such changes: 

A company revised its financial statements to reduce its net income by more than 

$65 million when the staff questioned when it recognized sales, how it estimated 

product returns, and whether its intangible assets should be impaired. 
An oil and gas company reduced its proved reserves by 30% when it included only 

those reserves supported by engineering studies and used Commission definitions in 

its calculations. 

A number of drug companies substantially expanded the disclosure in their initial 

public offering registration statements to more clearly describe the stage of 

development for each product, the status of FDA applications and approvals, and 

the results of preliminary tests and clinical trials, as well as to more clearly explain 

relationships with other affiliated and unaffiliated drug companies. 

The Sarbanes-Oxley Act also requires the SEC to review investment company issuer 

filings at least once during a three-year period. In response, the SEC increased the staff resources 

devoted to reviewing investment company financial statements. During the fiscal year, the staff 

performed about 6,100 of these reviews, representing 54% of all financial statements contained 

in annual reports to shareholders. As a result, the agency is on track to meet this Sarbanes-Oxley 

Act requirement. 

Investor Education: The Office of Investor Education and Assistance (OIEA) serves as 

the SEC's primary point of contact for the tens of thousands of investors who complain each 

year about the possible mishandling of their investments by securities professionals. The staff 

also responds to a wide range of questions from the public on how the securities industry 

works and where to find information about products, issuers, and securities professionals. 

During 2004, OIEA received about 73,500 complaints, questions, and other contacts 

from investors and closed about 73,400 pending matters. The staff closed roughly 60,700 of 

these matters, or 83% of the total, within seven days. OIEA's investor education staff 

provided policy guidance on several key rulemaking initiatives, participated in numerous 

public-private initiatives to promote financial literacy, and continuously updated the Investor 

Information section of the SEC's website. During 2004, the staff distributed about 300,500 

investor brochures through the U.S. General Services Administration's Federal Citizen 

Information Center. In addition, the SEC's investor education web pages received about 6.1 

million hits. 

Goal 4: Mmimize the Use of SEC Resources 

The agency significantly improved its operational effectiveness in 2004 through 

investments in its staff, organizational improvements, and enhancements to its information 

technology systems. The highlights of these efforts are described below. 

Risk Assessment: Since the time Chairman Donaldson was appointed, he has focused 

on finding ways for the agency to better anticipate potential problems across the securities 

industry-"looking over the hill and around the corner" for the next emerging abuse of the 

securities laws. The Chairman initiated a thorough internal review of how the agency 

identifies current problems and-equally important-future risks. As a result of this review, 
the SEC launched a new risk management program and created an Office of Risk Assessment 

(ORA), the first of its kind at the Commission. 

The goal of this program is twofold: to become better equipped to anticipate potential 

problems, and then to prevent these problems from affecting the markets. Toward these ends, 

the first step was to infuse the agency's various divisions and offices with a commitment to 

risk assessment in their own spheres of responsibility. Although managed from the top down, 

internal risk teams for the major program areas employed a "bottom-up" approach to mapping 

risk within each of the divisions. The SEC initiated risk-targeted sweep exams and targeted 

enforcement investigations in an effort to proactively explore identified risk areas. Such 

efforts have helped focus the SEC's operations on those areas that present the biggest risks to 

investors. At the same time, the SEC formed three multi-disciplinary risk management teams, 

covering the areas of full disclosure, investment management and market regulation, and 

infrastructure, which began an intensive dialogue on how to better orient the agency's 

planning and operations toward the goal of addressing risk. The Director of ORA, who was 

hired in mid-2004, began coordinating these internal risk teams and helping the entire agency 

anticipate potential problems across the securities industry, focusing on the early identification 

of new or resurgent forms of fraud and questionable activities. 

This structure allows for centralized agency-wide risk assessment, enhanced by 

distributed risk management. It also promotes the use of formalized systems and procedures 

to identify, measure, and monitor critical risks. Finally, the structure helps the agency 

redeploy resources as needed to address critical risks. 

Staff Recruitment, Retention, and Training: The Commission received authority from 

Congress to hire more than 840 new staff in February 2003, and in July 2003 the agency was 

allowed to expedite the hiring of accountants, economists, and examiners. These two actions 

set the stage for a tremendous wave of hiring in 2004. With the help of a significantly 

enhanced recruitment and orientation program, and without compromising quality, the agency 

increased the size of its workforce by roughly 16% in fiscal 2004 alone. 

The SEC also continued to develop several important programs to retain employees with 

valuable skills. For example, the agency restructured its compensation and benefits programs to 

reward superior or exceptional performance through its new Pay-for-Performance system. The 

Commission also expanded benefits through the student loan repayment program; health benefits 

enhancements, including dental and vision benefits; life cycle accounts to help employees 

balance their work and life responsibilities; and the childcare subsidy program. Moreover, the 

SEC worked to enhance its telework programs and create a "virtual workforce" that can perform 

duties from home or fiom other non-SEC locations. 

The Commission continued its commitment to staff training through the creation of the 

SEC University (SEC-U). The University partnered with divisions to design and implement a 

securities law curriculum that can be delivered in the field offices through videoconferencing. 

In addition, staff developed a new employee orientation program, a structured interview 

process to assist managers in the hiring process, and a training program for new supervisors. 
The SEC-U also launched an e-Learning Center that provides employee access to a wide 

variety of professional development courses. 

Separately, in addition to hiring a Director of Risk Assessment, the Chairman also 

rounded out the agency's senior management team by hiring a new Chief Accountant, new Chief 

Economist, and Chief Information Officer. 

Organizational Improvement: The SEC's 2004-2009 Strategic Plan was approved by 

the Commission and made publicly available in August 2004. The Plan presented the 

agency's new vision, mission, and values. Also detailed were the SEC's new goals, the 

specific initiatives the agency intended to undertake to accomplish those goals, and proposed 

measures for monitoring the agency's progress. Management and staff from over 16 offices 

throughout the Commission participated in preparing the plan. 

One of Chairman Donaldson's first actions upon arriving at the SEC was to reorganize 

the Chairman's Office, splitting the former Chief of Staff position into three separate roles: a 

Managing Executive for Policy and Staff, a Managing Executive for External Affairs, and a 

Managing Executive for Operations and Management. This private-sector reporting structure 

has allowed the Chairman's Office to more actively manage a broader range of high-profile 

issues and achieve ambitious initiatives within each of these critical areas. 

Separately, the SEC completed comprehensive workforce and workflow reviews of all 

SEC divisions and offices (with an emphasis on content as much as on employees and their 

activities), leading to improved and more efficient organizational structures and an improved 

alignment between agency resources, needs, and mission priorities. For example, the SEC 

split its administrative and personnel functions into two offices, the Office of Administrative 

Services and the Office of Human Resources, so these activities can be performed more 

efficiently and effectively. These reviews helped ensure that all resources, new and existing, 

were efficiently allocated on the basis of well-defined program objectives so that we have "the 

right people, in the right place, at the right time." 

Chairman Donaldson also launched the "dashboards" initiative to regularly track 

divisions' and offices' progress in achieving programmatic, operational, staffing, and 

budgetary objectives. These management reports form the basis for the Chairman and senior 

managers to gauge performance, exchange ideas on common problems, and adjust operations 

and resources as necessary. 

Audited Financial Statements: Under the Accountability of Tax Dollars Act of 2002, 

the SEC underwent its first full financial audit, performed by the U.S. Government 

Accountability Office (GAO). The SEC's audited financial statements, as well as its annual 

performance report, are being prepared for publication in the agency's first Performance and 

Accountability Report (PAR). 
Information Technoloay: The Office of Information Technology (OIT) implemented 

an aggressive agenda under the SEC's new Chief Information Officer. A few select highlights 

of the many initiatives launched in 2004 are listed below: 

The SEC launched a major new initiative to increase the usage of "tagged data" in 

SEC filings, through tools such as XBRL,. In the agency's first effort to obtain 

structured filing data, Forms 3,4, and 5 were automated using XML tagging 

formats. As a result, individuals can submit these filings conveniently through 

web-based access, and the public and SEC staff can obtain the data in a format 

useful for analysis. 

OIT continued its progress in implementing a document imaging and management 

system for the agency. The initial stages of the effort focused on the Division of 

Enforcement's large backlog of paper-based discovery documents. Concurrently, 

OIT upgraded many elements of the agency's IT infrastructure to allow it to handle 

the large-scale transmission of image files. 

The point-to-point network redesign initiated in 2003 was made fully operational by 

mid-2004, providing continuous communications between SEC sites in the event 

that a disaster forces headquarters or the operations center to close. 

In 2004, OIT implemented the initial stages of a comprehensive redesign of its 

capital planning and investment control (CPIC) processes. The initial changes 

focused on new operating budget approvals and investment approval thresholds, 

and were put into effect in fiscal 2005. 

The SEC's enterprise architecture (EA) planning improved substantially in 2004, 

with the finalization of the EA repository and an internal website to provide EA 

information to all SEC staff. As a result, all project sponsors and managers are able 

to readily access the SEC's business reference model, information resource catalog, 

and other core elements of the agency's EA in planning their projects. 

OIT also continued its initiative to certify and accredit the agency's financial and 

other major systems, and OIT launched a process to manage this activity on an 

ongoing basis. Also, the Office established plans to improve its overall IT security, 

based on the recommendations of the GAO as part of the agency's financial audit. 

The SEC worked to enhance the IT tools used by agency staff, enhancing their 

productivity and efficiency at the workplace, at home, or on travel. For example, 

OIT deployed a new generation of personal digital assistants (PDAs) for critical 

agency staff, providing wireless e-mail, telephony and information access. The 

agency also expanded its use of highly sophisticated data-mining technologies and 

deployed new computer monitors that save desk space and allow enforcement staff 

to more easily read and search electronic documents. 
Physical SecurityKontinuit~ of Operations (COOP): The SEC focused significant 

attention on the physical security of the agency and on its ability to maintain operations in the 

event of a significant disruption. In 2004, the agency hired a new chief of security and created 

a new Security Branch responsible for managing physical security for all SEC facilities, the 

agency's security contracts, and the SEC's emergency preparedness and COOP planning. One 

of the Branch's major initiatives was a formal exercise of senior SEC executives to test the 

effectiveness of the agency's COOP planning. SEC staff also participated in evacuation drills 

and shelter-in-place drills to improve their readiness during an emergency. Staff designated as 

emergency workers participated in an exercise to test the alternate work site in the 

Washington, DC area, and a second COOP site outside the area was established. Finally, the 

agency purchased an emergency communications system that will allow senior management 

to contact staff and relay messages during an emergency. 

Facilities: The SEC has renegotiated the leases on most of its offices around the 

country and has been heavily involved in negotiations for new facilities for the Northeast 

Regional Office (NERO) and the Boston District Office (BDO). A special workflow 

integration analysis was conducted for BDO and initiated for NERO, so that the new space 

will be designed to maximize the productivity of SEC staff. Construction and build-out 

continued on the SEC's Washington, DC headquarters at Station Place, with move-in 

scheduled for the spring of 2005. 
Major Environmental Issues 

Today's financial, investing, and corporate environment demands that the SEC be 

proactive and creative in how it fblfills its mission. The SEC must anticipate and 

appropriately respond to increasing industry growth and complexity, the public's increasing 

interest and participation in the securities markets, ongoing technological changes, the 

continued internationalization of the securities markets, and the development of new 

legislative proposals and statutory responsibilities. The SEC also needs to enhance its 

contingency planning activities and ensure that the securities industry is as prepared as 

feasible to continue operations in response to any unforeseen events or emergencies. 

These conditions present extraordinary challenges to the Commission. The 

Commission has been and remains dedicated to effective enforcement of the federal securities 

laws as a critical component of maintaining investor confidence in the fairness and 

transparency of our securities markets. The following list highlights particular issues that 

currently drive the environment in which the Commission operates. 

Investment Com~any and Investment Adviser Issues 

At the start of fiscal 2005, there were more than 36,800 investment company portfolios 

that were managed or sponsored by more than 980 investment company complexes. These 

investment companies managed roughly $8 trillion in assets at the start of fiscal 2005, almost 

10% more than a year earlier. This amount is nearly double the $4.5 trillion of insured deposits 

at commercial banks and equals the $8 trillion of financial assets at commercial banks. Almost 

54 million U.S. households, representing 48% of total households, own mutual funds, with 

assets under management of about $7.6 trillion, making this the largest segment of the 

investment company industry. Of this amount, stock funds account for more than half of all 

mutual fbnd assets, compared to less than one-quarter in 1990. In addition, industry observers 

estimate that approximately three-quarters of stock fund net sales come from retirement plans. 

The investment adviser industry also has undergone significant growth over the last 

several years. At the beginning of 2005, 8,535 investment advisers were registered with the 

Commission, up from 6,650 in 2000. Their assets under management totaled $24 trillion, 

compared to less than $10 trillion at the beginning of fiscal year 1995. 

The investment adviser community is extremely bifurcated, with over 50% of advisers 

having five or fewer employees and average assets under management of just $174 million. 

Typically, these small firms operate from a single office location and 70% provide advisory 

services to less than 100 clients. At the other end of the spectrum, the 100 largest advisory 

organizations account for roughly 75% of the industry's $24 trillion of assets under 

management. These 100 largest organizations are comprised of 670 individually registered 

advisers that are located worldwide and over 225 fund complexes that sponsor over 3,000 

individual portfolios. These large organizations typically have as affiliates broker-dealers and 

investment banks and other firms such as insurance companies and commercial banks. The 

presence of these affiliates increases the complexity of the organizational and business 

arrangements and also creates an environment that can give rise to many and varied conflicts 

of interest that must be addressed by the firms and the SEC. 
The SEC has implemented a risk-based approach to inspecting the activities of asset 

management firms. Risk-targeted sweep examinations allow the SEC to concentrate attention 

quickly on areas of concern or interest within a specific firm or across the industry. 

Broker-Dealer Developments 

The SEC regulates and supervises more than 5,000 registered broker-dealer firms with 

over 96,000 registered branch offices across the country. While the number of broker-dealers 

has remained relatively stable in recent years, the number of branch offices has increased 

dramatically in comparison. The identification and oversight of those branch offices that have 

the greatest potential for sales practice abuses remains one of the Commission's top 

examination activities. 

There are approximately 100 large broker-dealers, based on factors including the size 

of assets and equity, and number of customer accounts. As with investment companies and 

investment advisers, the largest broker-dealers pose the most financial risk to the financial 

system and thus require a greater amount of time and staff resources. The SEC also regulates 

and examines these entities on the basis of risk. 

Public Interest and Participation 

The increasing level of public participation in the markets continues to directly affect 

the Commission's activities. Although the volume of investor contacts tends to vary with 

market confidence and trading volumes, the Commission works diligently to ensure that it is 

responsive to all questions and complaints that the agency receives from the investing public. 

In fiscal 2004, the SEC's Office of Investor Education and Assistance received nearly 74,000 

investor complaints, questions, and other contacts. 

In addition to public inquiries, the SEC continues to receive a significant amount of 

media attention. The SEC anticipates receiving a significant number of calls and requests 

from reporters as the Commission continues undertaking several major initiatives and multiple 

high-profile enforcement actions. 

Review of Corporate Filings 

Confidence in the marketplace is founded on strict enforcement of the requirements for 

broad and timely dissemination of material information, rigorous interpretation and 

application of high quality accounting standards, and transparency, reliability, and objectivity 

in financial reporting. In the quest for innovative solutions to their financing needs, 

companies have turned to new and diverse financial instruments, such as structured notes, 

hedging transactions, and derivatives. The challenge for the filing review program is to 

encourage corporate capital formation while continuing to satisfy investors' information 

needs. 
Enforcement Challenges 

The Commission has been and remains dedicated to effective enforcement of the 

federal securities laws, a critical component of investor confidence in the fairness and 

transparency of our securities markets. Recent developments have presented extraordinary 

challenges to the Commission's law enforcement program. For example, exposure of issues 

relating to research analyst reports, investment companies, investment advisers, and brokerdealer sales practices have highlighted major problems resulting from conflicts of interest 

inherent in the financial services business. In addition, the Commission continues to respond 

to the financial and accounting failures of major corporations that have rocked our markets; in 

fiscal 2004, a significant number of filed enforcement actions involved financial disclosure 

and issuer reporting violations by major corporations, officers and directors, and auditors. 

Numerous investigations of the financial services industry and of financial disclosure also are 

underway; both of these types of investigation demand significant staff resources because they 

are fact and document intensive and include reviews of the conduct of a variety of individuals 

and entities. 

New securities products, technologies, and globalization also have created 

opportunities for fraud and abuse, and the Commission is devoting significant staff resources 

to wide-ranging investigations of these conflicts. While the Internet has become a great 

resource for both investors and the securities industry, it unfortunately remains a resource with 

the potential for fraud and abuse. The Division of Enforcement alone receives over 1,300 emails every day from Internet users reporting suspicious conduct. The Commission has 

brought more than 445 Internet-related enforcement actions to date, charging over 1,350 

individuals and entities, and coordinated its efforts with other law enforcement authorities, 

including the Department of Justice, the Federal Bureau of Investigation, the Federal Trade 

Commission, the U.S. Secret Service, and a range of other civil and criminal law enforcement 

authorities. 

Technology 

The SEC's information technology environment continues to be characterized by rapid 

changes in the securities markets and expanding technical capabilities. Externally, the 

Commission faces significant challenges regarding the regulation and supervision of the major 

securities markets, including broker-dealers' automated trading systems. In particular, the 

staff must respond to technology-driven advancements in the way securities trade, including 

the development of innovative electronic trading systems, new market entrants, and changing 

investment patterns. One of the staffs most important responsibilities is to monitor these 

changes and ensure that the U.S. regulatory structure remains current. 

There is also substantial public awareness of, and demand for, market-sensitive 

information received by the SEC. Significant regulatory changes and advances in information 

technology now present important opportunities for widespread dissemination of information to 

investors. The SEC will continue to implement creative approaches to electronic filing and 

dissemination of information that ensure investor protection and improve understanding of public 

company disclosures. In addition, the Commission will continue to focus on using new tools and 
scanning technology to assist in analyzing the large volumes of data the agency regularly 

receives in the course of investigations. 

Internationalization 

U.S. capital markets are one of the major international centers for financial commerce. 

At year end, more than 1,200 foreign companies from 55 countries were filing periodic reports 

with the Commission-representing the highest number of foreign listings of any country. 

During 2004, approximately 63 foreign companies from 2 1 countries entered U.S. securities 

markets for the first time, and the total dollar amount of securities registered for sale by 

foreign issuers exceeded $146 billion. 

U.S.-based financial institutions, such as broker-dealers, investment advisers, and 

mutual fbnd complexes, have become global in their operations. Many of these institutions 

are major participants in foreign markets. This growing internationalization has spurred 

Commission involvement in international efforts to reduce disparities between the standards 

developed by home country securities regulators, including those involving accounting and 

auditing issues. In addition, globalization continues to impact SEC's market oversight and 

enforcement program, where the SEC routinely seeks information from foreign authorities, 

and also responds to requests from its counterparts for reciprocal assistance. 

The Commission faces challenging issues related to converging international standards. 

It is addressing the increasingly complex interaction between SEC initiatives and global 

efforts to create sound governance, supervision, and legal frameworks for all market 

participants, including broker dealers, mutual funds, hedge funds, and credit rating agencies. 

To fhther its work on these issues, SEC staff will continue to be leading participants in 

international organizations such as the International Organization of Securities Commissions, 

the Financial Stability Forum, and the Council of Securities Regulators of the Americas. The 

Commission also has established a dialogue with the Council of European Securities 

Regulators, and will continue to participate in the US. delegation to the Financial Action Task 

Force on Money Laundering. 

Contingency Planning 

The securities industry, with guidance from the SEC, continues to develop a wide range 

of initiatives to improve the ability of the markets, clearing organizations, and broker-dealers 

to respond to the security threats that they face today. These initiatives include updates in 

contingency plans, expanded audits of critical systems and communications lines, and 

improvements in back-up facilities for core functions. 

The SEC also continues to enhance its own contingency planning activities. By 

conducting regular security exercises, completing build-out of both its alternative data center 

and alternative continuity of operations site, among other activities, the Commission remains 

steadfast in its efforts to ensure the safety of all SEC employees and the agency's ability to 

continue operations in the event of a major emergency or unforeseen event. Given the current 

threat environment, the Commission will continue to devote significant energy to further 

strengthening its security posture for the foreseeable future. 
2006 Request by Strategic Goal 

The SEC's 2006 request does not include funding for major new activities; the agency 

intends to reallocate resources as necessary to implement a variety of initiatives to better fulfill 

the SEC's mission and enhance operational effectiveness. 

Some of the main initiatives are highlighted below, and described in further detail 

within the chapters for each division and office that follow. 

Goal I: Enforce Compliance with the Federal Securities Laws 

In 2006, the SEC will continue to develop and expand the innovative approaches to 

enforcing compliance with the federal securities laws, through the use of risk assessment 

techniques, new technologies, and better emphasis on those entities and activities that pose the 

greatest threat to investors. These efforts are described below for the SEC's examination and 

enforcement programs. 

Examination Program: A significant new source of work for this program will exist 

after February 1,2006 when many advisers to hedge funds will be required to become 

registered with the SEC. These additional 1,000 or more advisers that manage an estimated 

7,000 hedge funds will add significantly to workload of the examination staff. 

To address this increased workload, recommendations of the Adviser Task Force 

formed in 2005 will be implemented. Among the anticipated recommendations of this Task 

Force is a surveillance program that is expected to begin during the second half of 2006. The 

surveillance program will provide information to examiners to help them identify aberrant 

patterns of fund and adviser activities and the possible existence of fraud or abusive schemes 

that require follow-up through on-site or written examinations of selected firms. 

The Office of Compliance Inspections and Examinations (OCIE) will conduct risktargeted sweep inspections focused on emerging risks in the investment company and 

investment adviser industries. In 2004, the use of such risk-targeted sweep exams contributed 

to a doubling of the percentage of exams that resulted in referrals to the Division of 

Enforcement. OCIE also will continue to implement a new initiative to deploy monitoring 

teams at the largest investment advisory groups, which manage a large percentage of the 

industry's $24 trillion in assets. 

OCIE anticipates inspecting between 40% and 50% of the funds and advisers that have 

higher risk profiles and conducting at least 500 routine inspections of randomly selected fund 

groups and advisers. During these inspections, examiners will probe and analyze the 

effectiveness of firms' compliance programs, review compliance with recently adopted rules, 

scrutinize e-mails of selected persons, and apply appropriate forensic tests. OCIE also will 

conduct cause inspections as necessary to respond to investor complaints, tips, and media 

reports. 
With respect to the broker-dealer program, OCIE will continue to build its risk 

assessment efforts and enhance its risk ranking system to focus resources on higher-risk firms 

and issues of greatest concern. OCIE will continue to oversee the largest, most complex 

brokerage firms and other financial institutions through risk management, compliance, and 

other examinations, as well as ongoing monitoring by staff. Staff also will examine the risk 

management and internal controls of the larger broker-dealers on a regular basis. 

Staff will examine consolidated supervised entities (CSEs) that use an alternative 

method to compute certain net capital charges for their broker-dealers and consent to groupwide SEC supervision. Reviewing these entities' internal risk management controls will 

require a large investment of exam resources. The staff will continue to focus on firms' 

compliance with sales practice and net capital rules. In particular, OCIE will focus on 

brokerage firms' conflicts of interests and sales practice violations such as churning, 

unauthorized trading, unsuitable investments, and failure to disclose risks. Examiners also 

will assess broker-dealer compliance with anti-money laundering rules, broker-dealer 

relationships with hedge funds, and broker-dealer follow-up on past supervisory deficiencies. 

The staff will continue to receive regular information and data from self-regulatory 

organizations (SROs) to monitor their activities outside the forrnal inspection process. OCIE 

will conduct cycle inspections of SRO surveillance, disciplinary, examination, arbitration and 

listing programs, and will conduct cause and risk-based SRO inspections as appropriate. 

Enforcement Proflam: The Commission expects the current level of demands on the 

Division of Enforcement to continue unabated. The Commission plans to continue to employ 

enforcement procedures and methods vigorously, such as trading suspensions; asset freezes; 

temporary restraining orders; coordination with criminal authorities; and focused, expedited 

investigations. The staff will continue to develop increasingly sophisticated approaches to 

organizing and gathering data from a wide range of sources, including through the assistance of 

foreign securities authorities. Mindhl of the Commission's responsibilities under the federal 

securities laws, the staff will continue to maintain a presence in all core areas of enforcement, 

including market manipulation, insider trading, and offering fraud. Conflicts in the financial 

services sector, as well as serious financial accounting frauds, promise to remain the most 

important program areas. 

Developing better ways to manage and preserve the growing volume of documents 

related to investigations will remain a high priority. In major investigations, thousands of 

documents from many different sources may be received and these documents may be used in 

taking testimony from over 100 witnesses. Document management thus consumes significant 

staff time. The SEC will continue to develop its new program to scan, image optically, and 

data code evidentiary material to inventory, control, and preserve case documents. These 

improvements are critical to remain competitive with opposing counsel, to ensure availability 

of documents in case of damage to SEC buildings, and to better use the Commission's staff 

resources. 
The staff anticipates that the number of defendants choosing to litigate or engage in 

protracted litigation prior to settlement will increase. The Commission plans to continue to 

commit resources to protracted litigation, an essential element in maintaining a credible law 

enforcement program, and to halt ongoing market manipulations and alert investors to false or 

misleading disclosures made by issuers. Litigated financial fraud cases, in particular, require 

extensive resources as they proceed through lengthy discovery, motion practice, and trial. In 

addition, litigation staff will continue to be increasingly involved in emergency court cases in 

an attempt to secure investor funds before they are lost forever, including freezes of foreign 

assets. The increasing complexity of the Commission's enforcement actions, the increase in 

emergency and subpoena enforcement actions, and the Commission's efforts to increase 

sanctions imposed on defendants all will continue to place demands on the division's litigation 

resources. 

Goal 2: Sustain an Effective and Flexible Regulatory Environment 

The SEC will continue to consider regulatory proposals that will have widespread 

effects on the securities markets, in areas such as investment management regulation, 

securities firm supervision, disclosure, and accounting policy. Some of the major highlights 

are described below. 

Investment Management Regulation: The staff will continue to develop a new 

registration system for investment advisers. Advisers currently submit Part 1 of their 

registration form on-line, creating a publicly accessible database of information about 

advisers, including their disciplinary history. A new Part 2 will give advisory clients a 

narrative picture of the advisory firm, including information about how the adviser addresses 

conflicts of interest. 

The agency anticipates launching several other initiatives with respect to the investment 

management industry. The staff expects to recommend that the Commission amend the 

requirements for the books and records that investment advisers must keep, revise the current 

rules governing advisers' payment of cash solicitation fees, propose rule amendments to 

clarify how funds with multiple managers can pay performance or incentive fees, and alter the 

conditions under which investment advisers may enter into principal transactions with their 

clients. In addition, the staff anticipates considering ways to make disclosures from mutual 

funds and other investment companies more usefbl to investors, through better use of new 

technologies, the Internet, and more reader-friendly forrnats. 

Securities Firm and Market Supervision: The SEC likely will face significant new 

challenges regarding the regulation and supervision of the major securities markets, including 

broker-dealer trading systems and SROs. By 2006, initiatives devoted to modernizing the 

national market system and addressing self-regulatory corporate governance and transparency 

should be in place. As necessary, staff will monitor and review the implementation of these 

significant undertakings. In addition, staff will seek to monitor and implement any new rules 

the Commission approves to improve the efficiency of the options markets and mitigate the 

conflicts of interest that may be impeding price competition in those markets. 
With respect to the Commission's recently adopted amendments to the "net capital" rule, 

the staff will modify the rules for CSEs in order to maintain consistency with the Base1 

Standards, in light of amendments to the Base1 Capital Accord. The staff also will address any 

interpretive issues that arise through the implementation of these amendments. 

In addition to the above projects, the staff expects to: 

Analyze the results of the short sale pilot and consider whether to propose 

additional amendments to the short sale rules. 

Draft rulemaking or interpretive guidance on the scope of the soft dollar safe harbor 

in the 1934 Act. 

Complete an analysis of the comments received on the straight through processing 

(STP) concept release and, as appropriate, pursue an effort to improve affirmation 

rates in institutional transactions. 

Continue active participation in international groups, such as the International 

Organization of Securities Commissions (IOSCO), the Joint Forum, and the Joint 

Group. In particular, the Joint Group expects to finalize and present to the Base1 

Committee its final recommendations relating to the treatment of positions held by 

banks and investment firms in the trading book, with SEC staff taking a lead role in 

this project. In addition, the SEC will participate in IOSCO's efforts to address 

financial fraud, including in international audits and the activities of market 

intermediaries that undertake structured financing transactions. 

Disclosure: After analyzing the comments received on the concept release related to 

tagged data and the experience gained from the voluntary tagging program, the Division of 

Corporation Finance will determine whether to recommend that the Commission propose rules 

requiring companies to tag financial data in SEC filings. Such an initiative will make firms' 

disclosures much easier for the public and SEC staff to analyze. The staff also expects to 

propose for Commission adoption amendments that would enhance disclosures related to 

executive compensation, the independence of registrants' boards of directors, related party 

transactions between executive officers and directors, and related party transactions with a 

registrant. In addition, the staff anticipates recommending that the Commission revise the 

current shareholder communications system that specifies how companies may communicate 

with the beneficial owners of their securities held in street or nominee name. 

Accounting Policy: The Office of the Chief Accountant (OCA) will continue its 

extensive oversight of the Public Company Accounting Oversight Board (PCAOB) in 

conducting its auditor regulation activities. The PCAOB is expected to conduct quality 

reviews of approximately 350 firms during the period, the same level as in 2005. The PCAOB 

also is scheduled to be heavily involved in the promulgation and interpretation of auditing 

standards, which are subject to review and approval by the Commission. 
OCA will continue its oversight of accounting standard-setting activities, such as the 

Financial Accounting Standards Board's (FASB) efforts related to revenue recognition and 

accounting for financial instruments. OCA also intends to monitor FASB's implementation of 

recommendations to move toward a more principles-based approach to setting accounting 

standards in the U.S., along with any new standards resulting from the SEC's study of offbalance sheet transactions. The SEC also will track the implementation of International 

Financial Reporting Standards, along with the ongoing effort by FASB and the International 

Accounting Standards Board (IASB) to achieve convergence among accounting standards 

around the world. 

Goal 3: Encowme and Promote Informed Investment Decisionmaking 

The Commission works to achieve this objective through two main efforts: reviewing 

the disclosure of securities market participants to make them more complete, accurate, and 

timely; and educating and assisting investors who have questions or concerns related to the 

securities markets. In 2006, the Commission expects to perform the activities listed below. 

Disclosure Reviews: The Division of Corporation Finance intends to complete roughly 

4,720 reviews of reporting companies, 4% more than in 2005. This level of review, equal to 

38% of all reporting companies, will deter fraud in public securities transactions, satisfy the 

review requirements of the Sarbanes-Oxley Act of 2002, and help ensure that investors receive 

material information about emerging and novel issues. In addition, the Division expects to 

review the filings of 780 new issuers, including IPO registration statements, new issuer 

registration statements, and Regulation A exempt offering statements. 

The Division of Corporation Finance expects to continue issuing initial comments on 

1933 and 1934 Act registration statements and transactional filings within 30 days of receipt. 

The Division will work to decrease the amount of time attributed to staff review after receiving a 

response to its initial comments on annual reports, registration statements, and other transactional 

filings. The Division expects its comments will continue to elicit significant changes in financial 

and other disclosures in the filings of new issuers and reporting companies. 

The Division anticipates implementing the recommendations of the filing and 

disclosure process review. The agency expects to make changes to the business process, 

eliminate selected filing forms, and streamline the data required from filers by using structured 

financial statements. 

The Division of Investment Management expects to review the financial statements of 

about 37% of investment company portfolios under the Sarbanes-Oxley Act. The Division also 

will review most new portfolios of open-end and closed-end funds, all new insurance contracts, 

and most portfolios of new unit investment trusts. The staff also will examine proxy statements 

and post-effective amendments that reflect material changes in disclosure or hnd operations. 

Investor Education: The Office of Investor Education and Assistance (OIEA) serves as 

the SEC's primary point of contact for the tens of thousands of investors who complain each 
year about the possible mishandling of their investments by securities professionals. The staff 

also responds to a wide range of questions from the public on how the securities industry 

works and where to find information about products, issuers, and securities professionals. The 

staff anticipates receiving approximately 72,000 new investor complaints, questions, and other 

contacts in 2006. The staff will close 72,000 open matters and will increase the percentage of 

matters closed within seven days to 84%. 

OIEA also carries out the SEC's investor education program, which includes producing 

and distributing educational materials, collaborating with state and federal agencies, creating 

public-private partnerships, participating in educational events, and consulting with other SEC 

staff on proposed rulemaking as it impacts individual investors. In 2006, the Office expects to 

continue providing policy guidance, distribute approximately 300,000 investor brochures, and 

receive approximately 7 million hits on its web pages. 

Goal 4: Maximize the Use o fSEC Resources 

In 2006, the SEC will continue to concentrate on ensuring that taxpayer dollars are 

used to maximum effect to fblfill the agency's mission. Below are listed some examples of 

the efforts to be undertaken in 2006 to enhance the SEC's operational effectiveness. 

Risk Assessment: In 2006, the Office of Risk Assessment (ORA) will continue to 

expand the depth and complexity of risk assessment activities throughout the agency. The 

Office will lead the efforts of multi-disciplinary risk teams to detect new risks and assist 

division and office efforts to mitigate and manage previously identified risks on an ongoing 

basis. 

OR4 will continue to strengthen the SEC's risk assessment infrastructure, both within 

the divisions and offices and for the agency as a whole. Working with other offices, ORA will 

identify new technologies, such as data mining systems or new databases, which can help 

agency staff detect and track risks. Outside experts will be enlisted to provide advice on 

market trends and risk assessment efforts generally. The Office also will consider ways to 

enhance risk assessment and management activities in the SEC's regions and districts. 

Staff Recruitment, Retention, and Training: The SEC expects to have achieved normal 

vacancy levels, and will focus its attention on making the agency the "employer of choice" 

within the federal government. The agency will continue to evaluate its compensation and 

benefits packages to ensure they are competitive with other financial regulators, expand 

worldlife programs where appropriate, and possibly negotiate a new Collective Bargaining 

Agreement. The Office of Human Resources (OHR) will pursue the development of a 

comprehensive human capital management information system that can assist with human 

capital planning and forecasting and provide employees with comprehensive benefits 

information. OHR also will continue to leverage information from its existing automated 

staffing system, Awe, in order to analyze staffing trends within the agency. 
OHR expects to increase the number and variety of classes offered through the SEC 

University (SEC-U). As SEC-U becomes fblly operational, the staff anticipates offering more 

classes on-site, many in partnership with local universities. Courses will include continuing 

education courses required for attorneys and accountants, securities industry training, and 

employee development and management courses. 

Organizational Improvement: The SEC expects to continue using "dashboard 

management reports to track the agency's progress on its budgetary, staffing, and operational 

objectives. The reports will be refined as necessary to gauge the success of the agency's 

evolving programs. The Chairman's Office will continue to meet with division and office 

heads to review the dashboards, identify cross-cutting problems, and adjust operations and 

resources as necessary. Moreover, the SEC will continue to conduct comprehensive 

workforce and workflow reviews of divisions and offices (with an emphasis on content as 

much as on employees and their activities), with an eye towards maintaining an alignment 

between agency resources, needs, and mission priorities. 

Also in 2006, the SEC will begin planning to revise and update its five-year strategic 

plan. Staff will continue working with contractors to implement an activity-based costing and 

performance-based budgeting solution to monitor operating costs and achieve greater cost 

efficiency. A fourth program area will undergo an evaluation by the Office of Management 

and Budget (OMB) using the Performance Assessment Rating Tool (PART), and previously 

reviewed programs will again be considered for reassessment. 

Audited Financial Statements : The Office of Financial Management (OFM) will again 

coordinate the preparation and submission of the SEC's quarterly and annual financial 

statements, along with other external and internal financial reports. OFM also will continue 

implementing changes to management systems to strengthen agency financial management, 

ensure compliance with all applicable federal financial management standards, and address 

audit findings. 

Information Technology: In 2006, the Office of Information Technology (OIT) will 

continue implementing several major initiatives from 2005 and extend them into new parts of 

the organization. In addition, several new projects will help modernize the agency's IT 

infrastructure. 

OIT will upgrade the agency Internet website and portal for the Electronic Data 

Gathering and Retrieval (EDGAR) system (www.sec.gov). In particular, the new site 

will substantially improve investors' access to filings through a new full-text search 

function and a more intuitive user interface. The redesign also will enhance the 

accessibility and searchability of information related to the SEC's rulemaking 

activities, and the website will be better integrated with the agency's internal document 

management processes. 

The redesigned case management system will be fully implemented based on work 

begun in 2005 and hlly integrated into the agency's broader suite of workflow 
management, document management, and knowledge management tools. The result 

will be a more seamless set of core business processes for enforcement activities and 

improved reporting for senior attorneys to manage the agency's caseload. This project 

will include upgrades to the penalties and disgorgements management system, which 

will be completed in 2007. 

OIT will hlly deploy the examination management system throughout headquarters 

and the field offices. As a result, all of the agency's examinations will be subject to 

uniform methodologies and audit plans, and examiners will be better able to manage 

inspection work products. 

The SEC will continue to expand its risk assessment program, with the set of tools 

piloted in 2005 being extended and fully integrated into the SEC's work processes. As 

a result, SEC staff can focus their activity on areas of highest risk, as determined by an 

initial screening performed by risk assessment groups. Also, OIT will begin the design 

of an agency-wide data warehousing strategy, which will allow risk analysts to conduct 

sophisticated queries, reports, and quantitative analyses on a combination of disclosure, 

surveillance, and market data. 

The IT security program plans to expand its intrusion detection and prevention 

capabilities, improve incident response practices, and provide specialized technical 

training. OIT also will continue to assess the security of standing applications and 

infrastructure as part of its ongoing certification and accreditation process. 

The SEC plans to continue transitioning to its "future state" enterprise architecture, 

changing business processes as necessary to better support its mission. Improvements 

will include a unified content and document management platform; a consolidated 

infrastructure for the agency's storage and application servers; agency-wide data 

warehousing, analytics, and reporting tools; and a common, agency-wide portal for 

receiving and storing disclosure and surveillance information. 

Physical Security / Continuity of erations (COOP): In 2006, the Security Branch 

within the Office of Administrative Services (OAS) expects to begin conducting annual 

security assessments of every SEC facility, and to continue its aggressive drill and training 

schedule. Additionally, the Security Branch will seek additional training for its staff and SEC 

employees to maintain the SEC's ability to manage emergency situations. 

Facilities: The SEC also expects to complete the move of its headquarters staff into 

Station Place. The agency will adjust the configuration of staff and acquire any necessary 

equipment as necessary to increase staff productivity. Once the headquarters, Northeast 

Regional Office (NERO), and Boston District Office (BDO) moves have been completed, the 

only outstanding lease action will be the Operations Center, located in Alexandria, Virginia, 

which will be addressed in 2006. When that competition is completed, there should be no new 

leases or office moves until current leases expire in the next ten to fourteen years. 
Description of Selected Fees 

($ in millions) 

2004 2005 2006 

Source of Fees Actual Estimate Estimate 

Registration of securities under the Securities 

Act of 1933 (Section 6(b)) 

Securities transactions under the Securities 

Exchange Act of 1934 (Section 3 1) 996 1,220 1,43 5 

ActuaYTarget Offsetting Collections Amounts 

Explanation of Fee Collections 

The SEC is authorized to levy and collect certain fees under Section 6(b) of the 

Securities Act of 1933 and Sections 13(e), 14(g) and 3 1 under the Securities Exchange Act of 

1934. Within the Federal Budget, these feeds are classified as offsetting collections. 

SEC fee rates are established periodically as required by the "Investor and Capital 

Markets Fee Relief Act" (P.L. 107-123) ("Fee Relief Act"), in accordance with methodologies 

developed in conjunction with the Congressional Budget Office and the Office of 

Management and Budget. Specifically, Section 3 1 and Section 6(b) fee rates are adjusted 

periodically so that the total collections for each fee equal target amounts established in the 

"Fee ~elief ~ct."' In the event that the Commission does not have a regular appropriation at 

the start of its fiscal year, each fee rate is required to remain at its prior year's rate until the 

regular appropriation is enacted. The Commission will publish the fee rates for fiscal 2006 in 

the Federal Register no later than April 30,2005. 

Fiscal 2004 

In 2004, the SEC collected $375 million in Section 6(b) registration fees. This amount 

was approximately 20 percent below the $467 million target collection amount established the 

"Fee Relief Act." From October 1,2003 through January 27,2004, the Section 6(b) fee rate 

was $80.90 per million, due to the Commission's operating under a continuing resolution. 

The "Fee Relief Act" does not contain a target offsetting collections amount for fees collected 

pursuant to Sections 13(e) and 14(g) of the Securities Exchange Act of 1934. The rates for these fees 

are changed on an annual basis so as to keep them at the same uniform rate applicable to Section 6(b) 

registration fees. This harmonization of rates is designed to remove any ambiguity with respect to the 

fees applicable when a registration of new securities is made in connection with the repurchase of 

stack or as part of a merger. The SEC collected approximately $22 million in Section 31 (e) and 14(g) 

fees in 2004. 
From January 28 through September 30, 2004, the end of the Commission's fiscal year, the fee 

rate was $126.70 per million. 

The Commission also collected $996 million in Section 31 transaction fees, 

approximately3 percent below the transaction fee target collection amount of $1.03 billion. 

From October 1,2003 through February 20,2004 the Section 31 transaction fee was set at 

$46.80 per million, because the Commission was operating under a continuing resolution. 

From February 2 1 through March 3 1,2004 the fee rate was $39.00 per million, the rate 

previously announced by the Commission for 2004. The "Fee Relief Act" annually requires 

the Commission to determine whether a mid-year adjustment of the Section 31 fee rate is 

required based on whether actual and projected collections for the year as of March 1, 2004 

are estimated to be within ten percent of the target collections amount for the entire year. 

Based on the Commission's calculation, the SEC was required to perform a downward midyear adjustment of the Section 3 1 fee rate from $39.00 per million to $23.40 per million rate 

effective April 1,2004. This fee rate remained in effect through the end of the fiscal year. 

Fiscal 2005 

The Commission began 2005 under a continuing resolution that fbnded agency 

operations from October 1,2004 through December 8,2004. During this period, the fees paid 

under Section 6(b) of the Securities Act of 1933 remained at the prior year's rate of $126.70 

per million. In addition, transaction fees paid under Section 31 of the Securities Exchange Act 

of 1934 remained at the prior year's rate of $23.40 per million. 

Five days after enactment of the Commission's regular appropriation, the fee rate under 

Section 6(b) of the Securities Act of 1933 was decreased from $126.70 per million to $11 7.70 

per million. Thirty days after enactment of the Commission's regular appropriation, the 

Section 3 1 fee rate was increased from $23 "40 per million to $32.90 per million. 

As required by the "Fee Relief Act," the Commission will make a determination of 

whether a mid-year adjustment of the Section 31 fee rate is necessary no later than March 1, 

2005. This determination, which will be published in the Federal Register, is based on 

whether the Commission's actual and estimated collections for 2005 fall within ten percent of 

the target collections amount for 2005. If a mid-year Section 3 1 fee rate is required, it will 

become effective on April 1,2005 and remain effective through the remainder of the fiscal 

year. 

Fiscal 2006 

The target collections amount for Section 6(b) registration fees in 2006 is $689 million, 

while the target amount for Section 3 1 transaction fees is $1.43 5 billion. Taken together, we 

anticipate these two fees will generate $2,124 billion. The Commission will publish the fee 

rates for fiscal 2006 in the Federal Register by no later than April 30,2005. 
Division of Enforcement 


Executive Summary 

2004 2005 2006 

Actual Enacted Request 

FTEs: Headquarters 

Regions and Districts 

Total 

Cost: Salaries and Benefits ($000) $168,806.8 $20 1,259.9 $209,168.7 

Non-Personnel Expenses ($000) 66,578.3 93.622.4 77,923.4 

Total Direct Costs ($000) $235,385.1 $294,882.3 $287,092.1 

2006 Request: Applicability of SEC Strategic Goals 

Goal 1 Goal 2 Goal 3 Goal 4 

Enforce Sustain an Effective Encourage and Maximize the 

Compliance and Flexible Promote Informed Use of SEC 

With Federal Regulatory Investment Resources 

Securities Laws Environment Decisionmaking 

J 

The Commission's Division of Enforcement prosecutes violations of the federal securities 

laws and works closely with the Department of Justice and U.S. Attorneys offices to coordinate 

and assist in criminal prosecutions. The Commission is creatively meeting its responsibilities for 

investor protection and is now drawing upon the additional resources previously made available 

to support these challenges. 

Intelligence Analysis: The staff expects to receive and handle a combined total of 

400,000 investor complaints, tips, and forwarded e-mail spams, and to open about 1,375 MUIS. 

Investigations: The division will continue to maintain a presence in all core areas of 

enforcement, including market manipulation, insider trading, and offering fiaud. Conflicts of 

interest in the financial services sector, as well as serious financial accounting frauds, promise to 

remain the most important program areas. The staff will continue to institute and pursue 

investigations based on the Commission's continued risk-based assessment initiative. The 

Commission also expects to detail staff to the Department of Justice to support criminal 

prosecution of securities fiaud. We plan to open roughly 990 investigations. 

Proceedings: The Commission will continue to commit resources to protracted litigation, 

an essential element in maintaining a credible law enforcement program, and to seek emergency 

relief to freeze assets, halt ongoing market manipulations, and alert investors to false or 

misleading disclosures made by issuers. The increasing complexity of the Commission's 

enforcement actions, the increase in emergency and subpoena enforcement actions, and the 

Commission's efforts to increase sanctions imposed on defendants will all tax the division's 

litigation resources. We plan to open about 3 85 administrative proceedings and to institute 

approximately 275 civil proceedings. 
I 526 

Division of Corporation Finance 

Executive Summary 

2004 2005 2006 

Actual Estimate Request 

FTEs: Headquarters 403 509 

Cost: Salaries and Benefits ($000) $57,701.7 $77,041.7 $81,510.0 

Non-Personnel Expenses ($000) $14,793.8 $25,073.4 $19,272.1 

Total Direct Costs ($000) $72,495.5 $102,115.1 $100,782.1 

of SEC Strategic Goals 

Goal 1 Goal 2 Goal 3 Goal 4 

I Ensure Sustain an Effective Encourage and Maximize the 

Compliance and Flexible Promote Informed Use of SEC 

with Federal Regulatory Investment Resources 

I Securities Laws Environment Decisionmaking 

The Division of Corporation Finance establishes disclosure requirements and monitors 

disclosure to provide investors with information necessary to make investment decisions and to 

help prevent fiaud and misrepresentation in securities transactions. The program is operating in 

a time of significant change in the United States securities markets. Corporate management 

abuses and apparent failures of checks and balances performed by auditors and audit committees 

have resulted in significant restatements of financial statements and numerous ongoing civil, 

regulatory, and criminal proceedings. 

Review of Filings: In 2006, the division will complete 4,720 reporting company 

reviews, 4% more than in 2005. These reviews will satisfy requirements of the SarbanesOxley Act, should deter fraud in public securities transactions, and should ensure that 

investors receive materially accurate and complete information about emerging and novel 

issues. 
Division of Market Regulation 

Executive Summary 

2004 2005 2006 

Actual Estimate Request

I FTEs: Headquarters 157 174 

180 1

Cost: Salaries and Benefits ($000) $23,225.9 $27,491.8 $29,133.6 

Non-Personnel Expenses ($000) 6,339.9 9,093.4 6,994.1 

Total Direct Costs ($000) $29,565.8 $36,585.2 $36,127.7 

2006 Request: Applicability of SEC Strategic Goals 

Goal 1 Goal 3 Goal 4 I - I -

Enforce Sustain an Effective Encourage and Maximize the 

Compliance and Flexible Promote Informed Use of SEC 

With Federal Regulatory Investment Resources 

Securities Laws Environment Decisionmaking 

J J 

The Division of Market Regulation's mission is to maintain fair, honest, and efficient 

securities markets. This is accomplished primarily by supervising and regulating the major 

market participants - 13 registered exchanges, 2 national securities associations, brokerdealers, clearing agencies, transfer agents, the Municipal Securities Rulemaking Board, and 

securities information processors. As envisioned by the Securities Exchange Act of 1934, the 

Commission relies on the self-regulation of the securities industry as the primary method of 

ensuring fair dealing and investor protection. The Commission also directly regulates the 

markets where Commission rulemaking is more effective than self-regulation. 

Securities Firm Supervision: The staff expects to analyze the short sale pilot and to 

consider whether to propose additional amendments to the short sale rule; monitor selfregulatory organization (SRO) rules governing initial public offerings (IPOs) and research 

analysts; draft rulemaking or interpretive guidance on the scope of the soft dollar safe harbor 

provisions in the 1934 Act; and continue assisting in market-related enforcement activities and 

addressing issues relating to foreign and domestic transfer agents. In addition, the staff will 

address interpretive issues that may arise &om the Commission's recent amendments to the 

agency's "net capital rules ." 

Market Supervision: The staff will monitor and review, as necessary, the 

Commission's recent initiatives devoted to modernizing the national market system and 

addressing self-regulatory corporate governance and transparency. Staff also will continue to 

spend considerable time responding to efficiency and competitiveness issues in the options 

markets and will utilize a new electronic filing system designed to expedite the agency's 

review and approval of proposed SRO rule changes. 
Division of Investment Management 

Executive Summary 

2004 2005 2006 

Actual Estimate Request 

FTEs : Headquarters 173 184 190 

Cost: Salaries and Benefits ($000) $26,837.8 $31,177.6 $33,013.6 

Non-Personnel Expenses ($000) $6,618.8 $8,03 1.9 $10,074.5 

Total Direct Costs ($000) $33,456.6 $39,209.5 $43,088.1 

FY 2006 Request: Applicability of SEC Strategic Goals 

The Division of Investment Management regulates investment companies and 

investment advisers under two companion statutes, the Investment Company Act of 1940 

(Investment Company Act) and the Investment Advisers Act of 1940 (Investment Advisers 

Act). The program also administers the Public Utility Holding Company Act of 193 5 

(PUHCA). The Division seeks to protect investors from fraud, mismanagement, self-dealing, 

and inadequate disclosures by investment companies and investment advisers, without 

imposing unnecessary burdens on regulated entities. 

Enforce 

Compliance 

With Federal 

Securities Laws 

The Division's top strategic priorities for 2006 are to: 

Goal 4 

Revamp the mutual fbnd disclosure regime: The staff aims to make mutual funds' 

and other investment companies' disclosures more useful to investors. The staff 

intends to explore more reader-friendly disclosure formats and the better use of new 

technologies and the Internet. 

Goal 1 Goal 3 

Sustain an Effective 

and Flexible 

Regulatory 

Environment 

Complete a new registration system for investment advisers: Advisers currently 

submit Part 1 of their registration form on-line, creating a publicly accessible 

database of information about advisers, including their disciplinary history. A new 

Part 2 will give advisory clients a narrative picture of the advisory firm, including 

information about how the adviser addresses conflicts of interest. 

Goal 2 

Modernize forms and rules under the PUHCA: The staff plans to review and update 

the forms used to implement the law's reporting requirements. The goals of this 

process are to eliminate unnecessary burdens on reporting entities and to ensure that 

the SEC obtains information needed to satisfy the law's regulatory objectives. 

Encourage and 

Promote Informed 

Investment 

Decisionmaking 

Maximize the 

Use of SEC 

Resources 
Office of Compliance Inspections and Examinations 

Executive Summary 

2004 2005 2006 

Actual Estimate Request 

FTEs: Investment CompanyIAdviser 

(IC/IA) Program 

Headquarters 55 68 70

Regions and Districts -

422 430 -

43 1 

Subtotal 477 498 50 1 

Broker-DealerISelf-Regulatory 

Organization (BDISRO) Program 

Headquarters 71 90 94 

Regions and Districts -

277 282 283 

Subtotal 348 372 377 

Total 825 870 878 

Cost: Salaries and Benefits ($000) $1 17,792.2 $135,306.2 $139,722.5 

Non-Personnel Expenses ($000) $38,523.0 $42,882.3 $36,064.1 

Total Direct Costs ($000) $156,315.2 $178,188.5 $175,786.6 

I 2006 Request: Applicability of SEC Strategic Goals 

I Goal 1 I Goal 2 I Goal 3 I Goal 4 

Enforce Sustain an Effective Encourage and Maximize the 

Compliance and Flexible Promote Informed Use of SEC 

With Federal Regulatory Investment Resources 

Securities Laws Environment Decisionmaking 

J 

The Office of Compliance Inspections and Examinations (OCIE) conducts an 

examination program to detect violations of the federal securities laws and evaluate internal 

compliance controls. There are about 8,5 35 investment advisers, 982 fbnd complexes, over 

5,900 broker-dealers, 12 SROs, and over 400 transfer agents subject to SEC exams. 

IC/IA Promam: OCIE expects to continue enhancing its methodologies for identifying 

firms that pose high levels of compliance risk. OCIE will conduct risk-targeted sweeps of 

emerging risk areas and report findings to enforcement and regulatory offices for further 

action. OCIE also will begin implementation of a long-term program to monitor the largest 

advisory firms. Under the adviser surveillance program, staff will analyze data from advisers 

and funds to identify trends warranting full exams. OCIE will conduct routine exams of 

higher-risk funds and advisers and random exams of other firms. 

BDISRO Program: OCIE will continue to use risk assessment techniques to focus 

examinations. OCIE also will continue to conduct risk-targeted sweeps of broker-dealers to 

examine emerging risk areas and report findings to the Commission and regulatory staff. 

Finally, OCIE's expanded oversight of SROs will evaluate their regulation and oversight over 

their members. 
Office of the General Counsel 

Executive Summary 

2004 

Actual 

FTEs : Headquarters 114 

Regions and Districts - 13 

Total 127 

Cost: Salaries and Benefits ($000) $20,13 8.4 

Non-Personnel Expenses ($000) $5,136.0 

Total Direct Costs ($000) $25,274.4 

2005 

Enacted 

123 

- 13 

136 

$23,361.3 

$6,874.1 

$30.235.4 

2006 

Request 

128 

- 13 

141 

$24,83 8.9 

$5,329.8 

$30,168.7 

Goal 1 

Enforce 

Compliance 

With Federal 

Securities Laws 

Sustain an Effective 

and Flexible 

Regulatory 

Environment I 

r of SEC Strategic Goals I 

Investment Resources 

The Office of the General Counsel (OGC): 

Serves as counsel to the Commission on all initiatives by the Chairman and the 

agency's divisions and offices; 

Defends the Commission in federal district courts; 

Represents the Commission in all appellate matters and amicus curiae filings; 

Advises the Commission and prepares opinions on adjudications; 

Counsels the Commission and its staff on ethics matters; and 

Represents the Commission in administrative, real estate, labor law, and similar 

legal matters. 

In 2006, OGC expects to continue managing the agency's appellate litigation, including 

appeals related to complex enforcement and other legal matters. An estimated 360 litigation 

cases will be opened and 380 closed. OGC expects to receive and review appeals to the 

Commission from registered accounting firms as a result of Public Company Accounting 

Oversight Board (PCAOB) actions and assist in the prosecution of violations of attorney 

ethics rules under the Sarbanes-Oxley Act of 2002. An estimated 70 adjudicatory matters will 

be completed, about the same as in 2005, and many of these matters will resolve novel legal 

questions under the major statutes administered by the Commission. In addition, OGC 

anticipates reviewing about 200 and commenting on roughly 140 disclosure statements of 

publicly held debtors, and the Office expects to handle an estimated 3,200 ethics-related 

inquiries and 180 procurement matters. 
Agency Direction 

Executive Summary 

2004 2005 2006 

Actual Estimate Request 

FTEs: 

Executive Staff 

Office of the Secretary 

Total 

Cost: Salaries and Ben efits ($000) $6,809.9 $7,560.0 $8,025.1 

Non-Personnel Expenses ($000) 2,023.2 2,7 16.1 2,089.0 

Total Direct Costs ($000) $8,833.1 $10,276.1 $10,114.1 

2006 Request: Applicability of SEC Strategic Goals 

Goal 1 Goal 2 Goal 3 Goal 4 

Enforce Sustain an Effective Encourage and Maximize the 

Compliance and Flexible Promote Informed Use of SEC 

With Federal Regulatory Investment Resources 

Securities Laws Environment Decisionmaking 

J J J J 

Agency Direction is comprised of the Chairman and Commissioners and their staff, as 

well as the Office of the Secretary. The Chairman's and Commissioners' offices develop overall 

agency policy and provide advice on the wide array of legal, financial, managerial, legislative, 

and economic issues encountered in the administration of the federal securities laws. The Office 

of the Secretary schedules Commission meetings, prepares and maintains records of Commission 

actions, and reviews documents submitted to the Commission for action. 

In 2006, the Commission anticipates holding an estimated 65 meetings and considering 

about 740 calendar items and 500 seriatim actions, including enforcement actions, rule proposals, 

and other items related to the administration of the federal securities laws. These actions will 

implement the Commission's mission to protect investors, sustain an effective and flexible 

regulatory environment, and facilitate capital formation. 

The Managing Executive for Policy will assist the Chairman with the initiation, review, 

and approval of all policy matters. The Managing Executive for External Affairs will manage 

relations with Members of Congress, the media, and the public. Finally, the Managing Executive 

for Operations and Management will oversee all efforts to enhance agency productivity, retain 

qualified SEC staff, manage agency resources effectively and efficiently, control costs, and 

deploy new technologies. 
Office of External Affairs 


Executive Summary 

2004 2005 2006 

Actual Estimate Request 

FTEs: 

Office of Legislative Affairs 7 8 

Office of Public Affairs 7 9 

Office of Investor Education & Assistance 34 37 

Chairman's Correspondence Unit -3 -3 

Total 51 57 

Cost: Salaries and Benefits ($000) $6,541.8 $7,885.5 $8,071 .O 

Non-Personnel Expenses ($000) 2,261.7 2,916.5 2,987.2 

Total Direct Costs ($000) $8,803.5 $10,802.0 $11,058.2 

2006 Request: Applicability of SEC Strategic Goals 

Goal 1 Goal 2 Goal 3 Goal 4 

Enforce Sustain an Effective Encourage and Maximize the 

Compliance and Flexible Promote Informed Use of SEC 

With Federal Regulatory Investment Resources 

Securities Laws Environment Decisionmaking 

J J 

The Managing Executive for External Affairs has primary responsibility for the Office 

of External Affairs (OExA), which encompasses: the Office of Public Affairs (OPA), the 

Office of Legislative Affairs (OLA), the Office of Investor Education and Assistance (OIEA), 

and the Chairman's Correspondence Unit. 

Office of Legislative Affairs: OLA staff expects to coordinate the development of 

materials and to prepare the Chairman or SEC staff witnesses for 25 congressional hearings. 

The staff expects to handle approximately 10,400 telephone and e-mail inquiries from 

congressional staff, coordinate 500 briefings and telephone conferences with congressional 

staff and SEC staff on various topics, and respond to 700 pieces of congressional 

correspondence. 

Office of Public Affairs: OPA staff anticipates that they will receive 45,000 combined 

media inquiries, draft and distribute roughly 260 news releases, organize and supervise about 

200 press briefings and news conferences, and host 600 foreign visitors. 

Investor Assistance: OIEA staff anticipates that they will receive approximately 

72,000 new investor complaints, questions, and other contacts. The staff will close 72,000 

open matters and will increase the percentage of matters closed within 7 days to 84%. 

Investor Education: OIEA staff will continue to provide policy guidance and carry out 

the agency's investor education programs. The staff anticipates distributing about 300,000 

investor brochures. In addition, the SEC's investor education web pages will receive 

approximately 7 million hits. 
Office of the Executive Director 


Executive Summary 

2004 2005 2006 

Actual Estimate Request 

FTEs: Headquarters 

Office of the Executive Director 

Office of Financial Management 

Office of Administrative Services 

Office of Human Resources 

Office of Filing and Info. Services 

Total 

Cost: Salaries and Benefits ($000) 

Non-Personnel Expenses ($000) 

Total Direct Costs ($000) 

2006 Request: Applicability of SEC Strategic Goals 

I Goal 2 Goal 3 Goal 4 

Enforce Sustain an Effective Encourage and Maximize the 

Compliance and Flexible Promote Informed Use of SEC 

With Federal Regulatory Investment Resources 

Securities Laws Environment Decisionmaking 

J J 

The Managing Executive for Operations and Management, in coordination with the 

Office of the Executive Director (OED), has primary responsibility for the Office of Financial 

Management (OFM), the Office of Administrative Services (OAS), the Office of Human 

Resources (OHR), and the Office of Filings and Information Services (OFIS). 

Financial Management: OFM staff will coordinate the agency's preparation and 

submission of quarterly and annual audited financial statements and continue to implement 

changes to management systems to ensure compliance with current accounting standards and 

Federal financial reporting requirements. Staff will also continue working with contractors on 

implementing a performance-based budgeting/activity-based costing solution to monitor 

operating costs and achieve greater cost efficiency. 

Administrative Services: OAS staff will coordinate the SEC's move into Building Two 

of Station Place. In addition, the Security Branch will continue to manage physical security at 

all Washington, DC area facilities, advise the regional offices on their plans, and coordinate 

the SEC's Continuity of Operations (COOP) related activities. 

Human Resources: The SEC will expand the services of the SEC University (SEC-U), 

which coordinates and oversees all professional development at the SEC. Staff will introduce 

activities for our senior executives and expand current offerings such as the executive 

coaching program. 
I 

Office of Risk Assessment 

Executive Summary 

2004 2005 2006 

Actual Enacted Request 

FTEs: Headquarters 0 7 13 

Cost: Salaries and Benefits ($000) $88.7 $1,252.3 $2,333.6 

Non-Personnel Expenses ($000) 0.0 561.3 684.5 

Total Direct Costs ($000) $88=1 $1,813.6 $3,018.1 

2006 Request: Applicability of SEC Strategic Goals 

Goal 1 Goal 2 Goal 3 Goal 4 

Enforce Sustain an Effective Encourage and Maximize the 

Compliance I and Flexible I Promote Informed Use of SEC

with Federal 1 Regulatory I Investment I Resources 

Securities Laws Environment Decisionmaking 

J J J J 

The Office of Risk Assessment (ORA) was formed in fiscal 2004 by Chairman 

Donaldson to lead the Commission's initiative to anticipate, identify, and manage risks. These 

efforts will enhance the agency's ability to fulfill its mission. This initiative is improving the 

agency's ability to anticipate potential problem areas across the securities industry, focusing 

on early identification of new or resurgent forms of fraud and illegal or questionable activities. 

As a result, senior managers will be able to make better decisions and actively adjust 

operations, resources, and methods of oversight to address new challenges and prevent new 

problems. The initiative also is helping foster better communication, coordination, and crossfertilization among the Commission's divisions and offices. 

In fiscal 2006, ORA will continue to lead and coordinate risk teams across the agency, 

using a "bottom-up" approach for identifying risks within each program area. These teams 

will continue to map risks that cross divisional lines and serve as a resource for the risk 

management activities conducted by the divisions and offices. 

ORA also will work to develop further the agency's risk assessment infrastructure. For 

example, the Office will propose and adopt new technological tools, enhance the internal risk 

teams, cultivate external partners, formalize the governance of the SEC's risk assessment 

efforts, and consider ways to build upon risk assessment activities in the regions and districts. 
Office of Information Technology 

Executive Summary 

2004 2005 2006 

Actual Estimate Reqyest 

FTEs: Headquarters 97 113 117 

Cost: Salaries and Benefits ($000) $11,943.4 $15,770.1 $16,702.2 

Non-Personnel Expenses ($000) $110,621.0 $117,616.4 $99,515.5 

Total Direct Costs ($000) $122,564.4 $133,386.5 $1 16,217.7 

FY 2006 Request: Applicability of SEC Strategic Goals 

Goal 1 Goal 2 Goal 3 Goal 4 

Enforce Compliance Sustain an Effective Encourage and Maximize the Use 

With Federal and Flexible Promote Informed of SEC Resources 

Securities Laws Regulatory Investment 

Environment Decisionmaking 

J 

The Office of Information Technology (OIT) will undertake several significant projects 

in 2006. These projects, a few of which are highlighted below, will modernize existing 

processes or implement new tools and technology to support SEC staff in their work. 

Electronic Data Gathering and Retrieval (EDGAR) and Disclosure Review: The 

current EDGAR contract will expire in June 2006. OIT staff will support the recompetition of 

this contract and ensure that the vendors who bid are able to meet the agency's strict 

requirements and high performance standards. Simultaneously, OIT and program offices will 

perform a comprehensive review of EDGAR'S design and capabilities, beginning a multiyear 

modernization effort. 

Enforcement and Examination Management: OIT will implement a redesigned case 

management system and a new examination management system in 2006. Staff also will 

employ new risk assessment tools in examinations and investigations. 

Information Security and Disaster Recovery The IT Security program will expand its 

intrusion detection and prevention capabilities. File servers and other servers from the field 

offices will be moved to the SEC7s alternate data center and its facility in Alexandria, VA, so 

that the agency's information will be hlly recoverable in case of disaster. 
Office of Chief Accountant 


Executive Summary 

2004 2005 2006 

Actual Estimate Request 

I FTEs: Headquarters 47 57 59 

Cost: Salaries and Benefits ($000) $7,893.1 $10,153.2 $10,751.1 

Non-Personnel Expenses ($000) $1,959.3 $3,207.5 $2,462.0 

Total Direct Costs ($000) $9,852.4 $13,360.7 $13,213.1 

2006 Request: Applicability of SEC Strategic Goals 

Goal 1- Goal 2 Goal 3 Goal 4 

Enforce Sustain an Effective Encourage and Maximize the 

Compliance and Flexible Promote Informed Use of SEC 

with Federal Regulatory Investment Resources 

Securities Laws Environment Decisionmaking 

J J J J 

The Office of Chief Accountant (OCA) is responsible for establishing and enforcing 

accounting and auditing policy to enhance the transparency and relevancy of financial 

reporting, and for improving the professional performance of public company auditors in 

order to ensure that financial statements used for investment decisions are presented fairly and 

have credibility. Concerns about the adequacy of accounting standards and the quality of 

independent audits have led to significant SEC and congressional actions, including passage 

of the Sarbanes-Oxley Act. 

In 2006, OCA will continue its oversight of accounting standard-setting activities, 

including major ongoing Financial Accounting Standards Board (FASB) projects on revenue 

recognition and accounting for financial instruments. OCA also intends to monitor the 

FASB's implementation of recommendations directed at moving toward a more principlesbased approach to setting accounting standards, along with the implications on accounting 

standard-setting resulting from its study on off-balance sheet transactions. 

The staff will continue to coordinate efforts with the Division of Corporation Finance 

in the review and comment process for agency filings. In addition, OCA intends to review the 

expected influx of filings prepared on the basis of international accounting standards by 

foreign private issuers. 

Finally, OCA will continue its extensive oversight of the Public Company Accounting 

Oversight Board (PCAOB), which is scheduled conduct quality reviews of approximately 350 

firms, the same level as in 2005. 
Office of Economic Analysis 

Executive Summary 

2004 2005 2006 

Actual Estimate Request 

FTEs: Headquarters 22 26 26 

Cost: Salaries and Benefits ($000) $4,314.8 $5,645.5 $5,755.9 

Non-Personnel Expenses ($000) 1,030.2 1,550.6 1,773.7 

Total Direct Costs ($000) $5,345.0 $7,196.1 $7,529.6 

2006 Request: Applicability of SEC Strategic Goals 

Goal 1 Goal 2 Goal 3 Goal 4 

Enforce Sustain an Effective Encourage and Maximize the 

Compliance and Flexible Promote Informed Use of SEC 

With Federal Regulatory Investment Resources 

Securities Laws Environment Decisionmaking 

J J J 

The Office of Economic Analysis (OEA) is the chief advisor to the Commission and its 

staff on all economic and empirical issues associated with the SEC's regulatory activities. 

OEA aspires to produce high quality analyses that address the economic issues associated with 

the regulation of our financial markets, and to convey that knowledge clearly and responsibly 

to those making policy decisions. In 2006, OEA will support the following top priorities. 

Support of Rulemaking: OEA expects rulemaking initiatives to continue at the same 

pace as in 2005, as will the demand for assistance in Enforcement and Office of Compliance 

Inspections and Examination issues. OEA expects to review 100 SEC and SRO rules and 

conduct 85 regulatory flexibility analyses. The staff also will produce 225 memoranda and 

reports and provide economic advice on 900 regulatory and enforcement issues. 

Risk Management: OEA will support the Commission's efforts in the area of risk 

management by providing empirical analyses and related expertise to the Office of Risk 

Assessment. 

Data: OEA will continue to work with the Division of Corporation Finance in 

identifying and implementing risk assessment measures, including the use of XBRZ. 

technology that will tag financial data as it is reported and allow for more effective validation 

of the information. 
Office of International Affairs 

Executive Summary 

2004 2005 2006 

Actual Estimate Request 

FTEs: Headquarters 21 23 24 

Cost: Salaries and Benefits ($000) $2,963.8 $3,714.0 $3,968.5 

Non-Personnel Expenses ($000) $1,022.6 $1,176.5 $1,409.7 

Total Direct Costs ($000) $3,968.4 $4,890.5 $5,378.2 

Goal 1 Goal 2 Goal 3 Goal 4 

Enforce Sustain an Effective Encourage and Maximize the 

Compliance and Flexible Promote Informed Use of SEC 

With Federal Regulatory Investment Resources 

Securities Laws Environment Decisionmaking 

J J 

To protect U.S. investors, the SEC works with foreign regulators to improve crossborder enforcement cooperation, advance global transparency and disclosure, supervise 

globally-active U.S. firms, and promote high regulatory standards around the world. The 

Office of International Affairs (OIA) works to achieve these objectives by negotiating and 

implementing information-sharing arrangements for enforcement cooperation, formulating 

regulatory policy for cross-border securities activities, and providing technical assistance to 

emerging markets. 

In 2006, OIA will: 

Assist the Division of Enforcement with international cases and participate in 

international initiatives related to the supervision of the global securities markets. 

Make approximately 440 requests to foreign authorities for enforcement assistance, 

and handle approximately 430 requests from foreign authorities for enforcement 

assistance, reflecting 5% increases from 2005 levels. 

Participate in about 190 international initiatives to promote high regulatory 

standards and strengthen the global marketplace, up 6% relative to 2005 levels. 

Respond to approximately 300 technical assistance requests from foreign 

authorities, an increase of about 5% over 2005 levels. 
Office of Equal Employment Opportunity 

Executive Summary 

2004 2005 2006 

Actual Estimate Request 

FTEs: Headquarters 9 10 

Cost: Salaries and Benefits ($000) $1,212.3 $1,440.8 

Non-Personnel Expenses ($000) 545.6 61 1.8 

) Total Direct Costs ($000) $1,757.9 $2,052.6 

2006 Request: Applicability of SEC Strategic Goals 

Goal 1 Goal 2 Goal 3 Goal 4 

Enforce Sustain an Effective Encourage and Maximize the 

Compliance With and Flexible Promote Informed Use of SEC 

Federal Regulatory Investment Resources 

Securities Laws Environment Decisionmaking 

J 

Proactive prevention programs will remain a top priority for the Office of Equal 

Employment Opportunity (EEO) in 2006. EEO training modules to be offered to SEC 

managers and employees will include: Preventing Harassment, Training for National Treasury 

Employees Union (NTEU) Stewards, Overview Training for SEC Employees, Disability Law 

and Policy for SEC Managers and NTEU Stewards, and New Employee Orientation. The 

EEO Office will strengthen its mediation program to promote early resolution of disputes and 

improve outcomes for individuals involved in EEO conflicts. The strategic plan developed 

through the Diversity Initiative will position the SEC to become the Employer of Choice. 
Office of the Inspector General 

Executive Summary 

2004 2005 2006 

Actual Estimate Request 

FTEs: Headquarters 

Cost: Salaries and Benefits ($000) 

Non-Personnel Expenses ($000) 

Total Direct Costs ($000) 

2006 Request: Applicability of SEC Strategic Goals 

Goal 1 Goal 2 Goal 3 Goal 4 

Enforce Sustain an Effective Encourage and Maximize the I Compliance With and Flexible I Promote Informed I Federal Securities I Regulatory I Investment I Resources 

Laws Environment Decisionmaking 

J 

The work of the Office of Inspector General is being driven by the rapid pace of 

significant internal and external changes affecting the Commission. Unprecedented budget 

growth, new hiring authorities, staff pay parity, a new performance appraisal system, 

unionization of its staff, and an upcoming move to a new headquarters building have had, or will 

have, a major impact on Commission operations. Moreover, after a period of unprecedented 

growth, the securities industry is now undergoing significant changes involving accounting, 

corporate governance issues, globalization, the impact of information technology on markets, 

and numerous other pressures. The Office continues to assess and mitigate impediments to the 

achievement of Commission goals and objectives. 

Audits and Investigations: Although independent, the Office of Inspector General (OIG) 

supports the Commission and Congress in achieving their objectives in the oversight of the 

securities industry. Through audits, investigations, and inspections, the OIG helps improve the 

performance and accountability of Commission programs. 

Rapid changes due to government initiatives and developments in the securities industry 

continue to pose operational risks to the Commission. The Office of Inspector General will use 

proposed staffing increases to conduct audits of the Commission's financial management and to 

handle an increased investigations workload. It plans to continue focusing on information 

technology and other operational risks, using an enhanced risk assessment process. 
I 11 

Office of the Administrative Law Judges 

Executive Summary 

2004 2005 2006 

Actual Estimate Request 

FTEs: Headquarters 11 11 

Cost: Salaries and Benefits ($000) $1,408.8 $1,600.1 $1,639.4 

Non-Personnel Expenses ($000) 439.4 492.7 594.5 

Total Direct Costs ($000) $1,848.2 $2,092.8 $2,233.9 

FY 2006 Request: Applicability of SEC Strategic Goals 

I I I 

Goal Goal 3 Goal 4 1 Goal 2 I -

Enforce Sustain an Effective Encourage and Maximize the 

Compliance and Flexible Promote Informed Use of SEC 

With Federal Regulatory Investment Resources 

Securities Laws Environment Decisionmaking 

J 

Pursuant to the Administrative Procedure Act and the federal securities laws, 

administrative law judges preside at evidentiary hearings where the Commission has 

determined that public hearings are appropriate, in the public interest, and compatible with the 

protection of investors. The hearings are conducted in a manner similar to non-jury trials in 

the federal district courts. 

In 2006, the administrative law judges plan to dispose of about 68 proceedings, issuing 

23 initial decisions. The number of proceedings pending will be around 58. 

Amendments to the Rules of Practice, effective July 17,2003, were aimed at improving 

the timeliness of administrative proceedings. All orders instituting proceedings (OIP) now 

specify that the initial decision shall be filed with the Comrnission7s Secretary either 120,210, 

or 300 days from the date the OIP is served on the respondent. To accomplish this objective, 

the rules require submission of a signed settlement offer to the Commission by the respondent 

within 15 business days from when a stay is granted based on the parties' representation that 

they have reached an agreement in principle to settle, and submission of the signed offer of 

settlement and accompanying recommendation by the Commission staff within the next 20 

business days. The amended rules announced a Commission policy strongly disfavoring 

requests for extensions, postponements, and adjournments. On April 19, 2004, the 

Commission amended the Rules of Practice fbrther to provide that the time limits are tolled 

where a stay is granted at the request of a government official because of a pending criminal 

action arising out of the same or similar facts.