COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT 

OF THE 

OFFICE OF THE 

INSPECTOR GENERAL 

FOR THE PERIOD ENDING SEPTEMBER 30, 2010 
u.s. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

115521 st Street, NW, Washington, DC 20581

Telephone: (202) 418-5110

Facsimile: (202) 418-5522

www.cftc.gov

Office of the

Inspector General

November 1, 2010

TO:

FROM:

SUBJECT:

The Commission

A. Roy LavikQ Q£-

Inspector General

Semiannual Report ofthe Office of the Inspector General

Attached is the Office of the Inspector General's Semiannual Report (SAR) for the period

from April 1,2010 through September 30, 2010. This report is submitted to you in accordance

with the requirements of Section 5 of the Inspector General Act of 1978, as amended. 5 USC

App. 3 sec. 5.

The Dodd-Frank Act altered the relationship of the designated Federal entity Offices of

Inspector General with the agency head by establishing that "head" of a designated Federal entity

means "the board or commission of the designated Federal entity." P.L. 111-203, Title IX,

Subtitle I, sec. 989B, 124 Stat. 1945 (codified at 5 USC App. 3 sec. 8G(a)(4)). In accordance

with the Dodd-Frank Act, instead of reporting to the Chairman as we have in the past, we submit

this report to the Chairman and to each Commissioner.

Under section 5(b) ofthe IG Act, the SAR shall be transmitted to the appropriate

committees or subcommittees ofthe Congress within thirty days after receipt of the Semiannual

report, together with a report by the head of the establishment conforming to the requirements of

section 5(b) of the IG Act.

I appreciate your continuing support of this office.
Recipients:

Gary Gensler

Chairman

Michael Dunn

Commissioner

Jill E. Sommers

Commissioner

Attachment:

Semiannual Report for the CFTC DIG

Bart Chilton

Commissioner

Scott D. D'Malia

Commissioner
OFFICE OF THE INSPECTOR GENERAL

COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT

FOR THE PERIOD FROM

April 1, 2010 through September 30,2010

EXECUTIVE SUMMARY

This semiannual report is issued by the Office ofthe Inspector General (OIG) for the

Commodity Futures Trading Commission (CFTC) pursuant to the Inspector General Act of

1978, as amended. It summarizes OIG's activities and accomplishments for the period April 1,

2010, through September 30, 2010. During this period, OIG completed one inspection,

completed one review, completed a procurement, and began work on the Fiscal Year (FY) 2010

financial statement audit and related tasks. OIG reviewed proposed enforcement actions and

rules proposed by CFTC and by regulated entities, participated in training, monitored peer

review activities, visited CFTC field offices, and participated in Government-wide OIG

professional and cooperative meetings and training. One preliminary investigation was opened

and closed during the reporting period. No investigations were pending at the close ofthis

reporting period. No significant problems, abuses or deficiencies regarding CFTC programs and

operations were identified during the reporting period.

Highlights ofOIG's completed and ongoing audit, inspection, review, investigative and

other projects include:

• OIG completed an Inspection of CFTC's Disposal of Surplus Information Technology Equipment. The

inspection documented CFTC's disposal ofsurplus information technology equipment for FY 2009,

with one recommendation for improvement.

• OIG completed review #09-02, "The Effect ofCT Pay on Recruitment and Retention." The review

examined whether additional pay and benefits given to CFTC employees results in enhanced recruitment

and retention. The review focused on new hires starting at CFTC between 2007 and 2009. While CT

pay does assist recruitment and retention, other factors effecting recruitment and retention decisions

were identified and negative factors were also uncovered.

• OIG completed a procurement to secure an external auditor to perform the annual CFTC financial

statement audit. Allegations concerning possible misconduct relating to an earlier procurement to obtain

an external auditor (that CFTC OIG referred to the Council of Inspectors General on Integrity and

Efficiency - Integrity Committee in March 2009) were resolved with a finding of no misconduct by the

CFTC OIG.

• OIG began its work related to the FY 2010 financial statement audit. OIG also began its work for FY

2010 related to the Federal Managers' Financial Integrity Act (FMFIA) and to the Federal Information

Security Management Act (FISMA).

• OIG received an allegation of activities by a former CFTC employee in possible violation of 18 USC

207(a). OIG examined the allegation and determined not to make any referrals to the Department of

Justice due to statute oflimitations issues.
OFFICE OF THE INSPECTOR GENERAL

COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT

FOR THE PERIOD FROM

April 1, 2010 through September 30,2010

TABLE OF CONTENTS'

EXECUTIVE SUMMARY i

INDEX OF IG ACT REPORTING REQUIREMENTS iv

INTRODUCTION 1

CFTC Programs and Operations 1

OIG Responsibilities 1

OIG Resources 3

COMPLETED AUDITS, INSPECTIONS, EVALUATIONS, REVIEWS and OTHER

PROJECTS 3

Inspection ofCFTC's Disposal of Surplus Information Technology Equipment 3

Review ofthe Effect ofthe CFTC Pay System on Recruitment and Retention 4

CURRENT AUDITS, INSPECTIONS, EVALUATIONS, REVIEWS and OTHER PROJECTS 5

Current Audits 5

Audit ofCFTC Financial Statements for Fiscal Year 2010 5

Current Inspections, Evaluations, Reviews and Other Projects 6

Review of Compliance with the Federal Managers' Financial Integrity Act, FMFIA 6

Evaluation ofthe Federal Information Security Management Act at CFTC 6

Review ofCFTC's Documentation ofMarket Surveillance Communications 7

AUDIT REPORTS and REVIEWS OVER SIX MONTHS OLD 7

Corrective Action not Completed 7

Corrective Action Completed 7

Management Decision not Made 7

INVESTIGATIONS 8

SUMMARY OF MATTERS REFERRED TO PROSECUTORIAL AUTHORITIES 8

CONGRESSIONAL INQUIRIES 9

LEGISLATIVE, REGULATORY AND RULE REVIEWS 9

Introduction and Summary 9

Rule Reviews Initiated in Previous Reporting Periods 9

Rule Reviews Initiated this Reporting Period 9

Legislative Activities 10

OTHER REVIEWS 10

ii
Peer Reviews 10

Other Reviews and Activities 10

SUMMARY OF EACH REPORT MADE TO THE AGENCY HEAD CONCERNING

REQUESTS FOR INFORMATION OR ASSISTANCE 11

REVISED MANAGEMENT DECISIONS 11

INSPECTOR GENERAL DISAGREEMENT 11

GAO LIAISON 11

STRATEGIC PLAN FOR THE OFFICE OF THE INSPECTOR GENERAL 11

Investigative Agenda 11

Legislative and Regulatory Review Agenda 12

Audit, Inspection, Evaluation and Review Agenda 13

Introduction 13

Annual Audit 13

Annual Review and Evaluation 14

Other Audits, Inspections, Evaluations, Reviews and Projects 14

Resources Required 15

CONTACTING THE OFFICE OF THE INSPECTOR GENERAL 15

Table 1 - Reports Issued with Questioned Costs 16

Table 2 - Reports Issued with Recommendations 17

111
INDEX OF IG ACT REPORTING

REQUIREMENTS

Section 4(a)(2) Review of legislation and regulations 9

Section 5(a)(I) Significant problems, abuses and deficiencies .i

Section 5(a)(2) Recommendations with respect to significant problems .i

Section 5(a)(3) Significant recommendations that have not been completed 7

Section 5(a)(4) Matters referred to prosecutorial authorities 8

Section 5(a)(5) Summary ofinstances where information was refused ll

Section 5(a)(6) Completed audit, inspection and evaluation reports 3

Section 5(a)(7) Significant reports 3

Section 5(a)(8) Statistical Table-Questioned Costs 16

Section 5(a)(9) Statistical Table-Funds Recommended for Better Use 17

Section 5(a)(1 0) Audit, inspection and evaluation reports lacking

management decision 7

Section 5(a)(11) Significant revised management decisions 11

Section 5(a)(I2) Significant management decisions where the IG disagrees 11

Section 5(a)(13) .Information described under the Federal Financial Management

Improvement Act of 1996 6

Section 6(b)(2) Summary ofreports to Chairman where assistance was refused 11

IV
OFFICE OF THE INSPECTOR GENERAL

COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT

FOR THE PERIOD FROM

April 1, 2010 - September 30, 2010

INTRODUCTION

1. CFTC Programs and Operations

Congress created the Commodity Futures Trading Commission in 1974 as an

independent agency with the mandate to regulate commodity futures and options markets in the

United States. The Commission's mandate was renewed and/or expanded in 1978, 1982, 1986,

1992 and 1995. In December 2000, the Commission was reauthorized by Congress and the

President through Fiscal Year 2005 with the passage ofthe Commodity Futures Modernization

Act of2000 (CFMA). In May of2008, Congress reauthorized the CFTC through Fiscal Year

2013. On July 21,2010, the President signed into law the Dodd-Frank Wall Street Reform and

Consumer Protection Act (Dodd-Frank Act), P.L. 111-203, which expanded CFTC'sjurisdiction

and authorities.

The CFTC is responsible for fostering the economic utility offutures markets by

encouraging their competitiveness and efficiency, ensuring their integrity and protecting market

participants against manipulation, abusive trade practices and fraud. Through effective oversight

regulation, the CFTC enables the commodity futures markets better to serve their vital function

in the nation's economy-providing a mechanism for price discovery and a means of offsetting

price risks. The new Dodd-Frank Act authorizes the CFTC to regulate swap dealers, increase

transparency and improve pricing in the derivatives marketplace, and lower risk to the American

public.

The CFTC operating divisions are: Office ofthe Chairman, Office ofthe Executive

Director, Office ofGeneral Counsel, Division ofClearing and Intermediary Oversight, Division

ofEnforcement, Division of Market Oversight and Office ofthe ChiefEconomist. In addition to

its headquarters office in Washington, DC, the CFTC maintains offices in Chicago, Illinois;

Kansas City, Missouri; and New York, New York.

2. OIG Responsibilities

The CFTC OIG was created in 1989 in accordance with the 1988 amendments to the

Inspector General Act of 1978 (P.L. 95-452). OIG was established as an independent unit to:

• Promote economy, efficiency and effectiveness in the administration ofCFTC programs and

operations and detect and prevent fraud, waste and abuse in such programs and operations;

• Conduct and supervise audits, inspections, evaluations, reviews, projects and, where

necessary, investigations relating to the administration ofCFTC programs and operations;
• Review existing and proposed legislation, regulations and exchange rules and make

recommendations concerning their impact on the economy and efficiency ofCFTC programs

and operations or the prevention and detection offraud and abuse; and

• Keep the Chairman and Congress fully informed about any problems or deficiencies in the

administration ofCFTC programs and operations and provide recommendations for

correction ofthese problems or deficiencies.

It is the duty and responsibility ofthe DIG to conduct, supervise and coordinate audits

relating to CFTC programs and operations in accordance with generally accepted government

auditing standards. OIG is also charged with the duty and responsibility to recommend changes

to existing and proposed CFTC programs and operations to promote economy, efficiency and

effectiveness and to prevent and detect fraud and abuse.

The purpose of DIG audits, inspections, evaluations, reviews and projects generally is to

ensure that:

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

• Resources have been managed effectively and efficiently;

• Stipulated program objectives have been achieved;

• Agency operations have not been subject to improper influence or corruption; and

• Resources have been safeguarded.

OIG operates independently ofthe Agency and has not experienced any interference from

the CFTC Chairman in connection with the conduct of any investigation or audit, inspection,

evaluation, review or project, and our investigations have been pursued regardless ofthe rank or

party affiliation ofthe target. OIG has also conducted audits, inspections, evaluations, reviews

and other projects without interference where it has perceived the opportunity to recommend

improvement to futures regulation efforts, again without regard to the party affiliation of any

Chairman. l

CFTC is a designated Federal entity (DFE) under the IG Act of 1978, as amended. 5

USC App. 3 sec. 8G(a)(2). The Dodd-Frank Wall Street Reform and Consumer Protection Act

altered the relationship between the DFE Inspectors General and the agency head by clarifying

that "head" ofa DFE means "the board or commission ofthe designated Federal entity." P.L.

111-203, Title IX, Subtitle I, sec. 989B, 124 Stat. 1945 (codified at 5 USC App. 3 sec. 8G(a)(4)).

The effective date ofthis provision was July 22, 2010. The DIG has not experienced any

interference from the head ofthe CFTC in the conduct ofits official duties.

1 The Inspector General Act of 1978, as amended, states: "Neither the head ofthe establishment nor the officer next

in rank below such head shall prevent or prohibit the Inspector General from initiating, carrying out, or completing

any audit or investigation...." 5 U.S.C. App. 3 sec. 3(a).

2
3. OIG Resources

DIG consists ofthe Inspector General, the Assistant Inspector General for Audits, an

Attorney-Advisor and a secretary. The Inspector General assumed his position on October 7,

1990. The Assistant Inspector General joined the office in 1999, and the Attorney-Advisor

joined in 2007.

COMPLETED AUDITS, INSPECTIONS, EVALUATIONS,

REVIEWS and OTHER PROJECTS

1. Inspection of CFTC's Disposal of Surplus Information Technology Equipment

Objective

In FY 2009 CFTC initiated a technology refresh of all Information Technology(lT)

equipment provided to employees. In repsonse to an allegation ofmisconduct relating to othe

disposal ofsurplus IT equipment, DIG conducted an inspection ofthe CFTC's Disposal of Surplus

Information Technology Equipment. DIG undertook actual verification of each unique asset

identified as surplus. In order to achieve this objective, DIG acquired a copy ofthe agency's

inventory of all IT equipment subject to replacement during the upgrade, obtained from GSA a

listing of all equipment received from CFTC, and then verified its disposal with the ultimate

recipient of each surplused item.

We were able to account for 1184 items or 990/0 ofCFTC's surplus Information Technology

assets for FY 2009. One regional office was able to supply documentary evidence that 88 out of 88

surplused Information Technology assets that contain a data storage device were wiped clean

("sanitized") prior to its shipment to General Services Administration. However for other Information

Technology assets containing a data storage device, located in three other offices, we found that the

CFTC had no available record to confirm that those surplus assets were sanitized by agency

employees as required by CFTC disposal policy.

We recommended that CFTC confirm, document, and retain evidence that IT assets which

contain a data storage device are sanitized prior to shipment to GSA or any outside party.

Management agreed to implement the GIG recommendation.

3
2. Review ofthe Effect ofthe CFTC Pay System on Recruitment and Retention

This review evaluated the effect ofthe CFTC pay system on current recruitment and

retention. Section 10702 of Public Law 107-171, the Farm Security and Rural Investment Act of

2002 (FSRIA) authorized CFTC to create its own pay system (CT pay). Under CT Pay, CFTC

employees earn more than counterpart federal employees working at the same grade at federal

agencies operating under the GS scale, and enjoy enhanced benefits. CFTC has used the CT Pay

system since April 2003.

During the reporting period, the GIG completed the field work for this review and issued

its report on September 28, 2010. The GIG completed interviews of 89 CFTC employees

working directly with futures regulation: lawyers, auditors, economists, investigators,

paralegals, and one trade practice analyst. We interviewed employees recently coming to CFTC

from self-regulatory organizations (SROs), securities and futures exchanges, investment banks,

accounting and law firms, and other private sector entities, as well as from other government

entities. The 89 employees shared their views on whether and to what extent CT Pay influenced

their decision to apply with CFTC, to accept a job offer, and to stay employed at CFTC. We also

discussed recruitment and retention in the post CT-pay environment with 10 supervisors

involved with recent efforts since 2007 in order to obtain their impressions ofrecruitment and

retention in the post CT-Pay environment.

We concluded that CT pay has proven to be a valuable tool for recruitment, but may

prove to be a less valuable but still meaningful tool for retention. CT pay permits CFTC to offer

competitive or comparable starting salaries to new employees entering the CFTC from the public

sector, self-regulatory organizations, futures and stock exchanges, accounting firms and

academia (but may not be competitive at the highest levels in some organizations). CT pay

generally is not competitive with larger or more exclusive law firms, investment banks and

broker/dealers, especially with regard to higher level professional positions. In addition to CT

pay, CFTC's other benefits, including lifestyle benefits, are attractive to recent new hires and

influence both hiring and retention decisions. The recent economic downturn was a factor in

employment decisions for 1/3 ofthe interviewees, and we were struck by the fact that several

employees who stated they were not affected by the economic downturn told us they simply

wanted to work at CFTC, even with a substantial pay cut. Supervisors told us the economic

downturn increased both the quantity and quality of applicants for recent job listings.

The recent new hires we interviewed were uniformly superior in their qualifications, and

while we cannot state with mathematical accuracy that CT pay results in a higher quality

applicant than GS pay would, all signs seemed to point in this direction. Negative influences on

retention expressed by new hires included a perceived lack of opportunity for advancement

within the workplace, and perceived inequities among starting salaries.

4
CURRENT AUDITS, INSPECTIONS, EVALUATIONS,

REVIEWS and OTHER PROJECTS

1. Current Audits

a. Audit of CFTC Financial Statements for Fiscal Year 2010

In FY 2002, Congress passed the Accountability ofTax Dollars Act. The Act requires

the CFTC, along with numerous other Federal entities, to obtain an independent financial

statement audit each year. During the reporting period, the Inspector General selected an

independent public accountant (IPA) to render an opinion on the agency's financial statements

for Fiscal Year 2010 in accordance with generally accepted auditing standards, Government

Auditing Standards, OMB Bulletin 01-02 and OMB Circular A-136.

The specific objectives ofthis audit include determinations whether:

(1) The financial statements present fairly the financial position ofthe Commodity Futures

Trading Commission in accordance with generally accepted accounting principles as

promulgated by the Federal Accounting Standards Advisory Board. The five financial

statements, along with all corresponding notes to be audited include: (a) Balance Sheet; (b)

Statement ofNet Cost; (c) Statement ofChanges in Net Position; (d) Statement ofBudgetary

Resources; and (e) Statement ofCustodial Activity.

(2) Management's assertions about the effectiveness ofits internal controls for achieving internal

control objectives described in Statement on Auditing Standards Section 319 and the Federal

Managers Financial Integrity Act (FMFIA) are fairly stated in all material respects. The IPA

makes this determination in part by obtaining an understanding ofthe internal control policies

and procedures and assessing the level of control risk relevant to all significant cycles, classes of

transactions, and account balances. For those significant control policies and procedures that

have been properly designed and placed in operation, the IPA performs sufficient tests to provide

reasonable assurance as to whether the controls are effective and working as designed.

The IPA limits its internal control testing to those controls necessary to achieve the objectives

described in OMB Bulletin 01-02. Further, the IPA is not required to test all internal controls

relevant to operating objectives as broadly defined by the FMFIA, such as those controls relevant

to achieving efficient operations.

With respect to internal controls related to performance measures reported in the accountability

report, the IPA obtains an understanding ofthe design ofsignificant internal controls relating to

the existence and completeness assertions, as required by OMB Bulletin 01-02. The procedures

are not required to provide assurance on internal controls over reported performance measures.

(3) The agency has complied with selected provisions oflaws and regulations identified by OMB

Bulletin 01-02 or the Inspector General, noncompliance with which could have a direct and

5
material effect on the determination offinancial statement amounts. The IPA limits its tests of

compliance to these provisions and need not test compliance with all laws and regulations

applicable to the CFTC.

In May 2010, the Inspector General selected an independent public accountant to conduct

the CFTC Financial Statement Audit. The Fiscal Year 2010 audit began in June with an entrance

conference with senior agency managers, the DIG and representatives from the IPA. Further

meetings and reviews have taken place throughout this reporting period while work on the audit

is ongoing. The final audit report is to be delivered to the Office ofthe Inspector General in

November 2010.2

2. Current Inspections, Evaluations, Reviews and Other Projects

a. Review of Compliance with the Federal Managers' Financial Integrity Act, FMFIA

The Federal Managers' Financial Integrity Act of 1982 requires federal managers to

establish a continuous process for evaluating, improving, and reporting on the internal control

and accounting systems for which they are responsible. DMB Circular A-123, revised December

2004, "Management Accountability and Control," is the implementing guidance for FMFIA.

The annual FMFIA report will be included in the Performance and Accountability Report (PAR)

issued on November 15th under the heading "Management Assurances."

Status.

The Office ofthe Inspector General is in the process ofreceiving and reviewing draft

internal control reviews produced by agency staff, and will provide comments to the originating

divisions. DIG will report its evaluation ofthe final FMFIA documents in its annual assurance

letters to the Chairman which will be included in the PAR.

b. Evaluation of the Federal Information Security Management Act at CFTC

The Federal Information Security Management Act (FISMA) was enacted on December

17, 2002. FISMA requires the Office ofthe Inspector General to perform annual independent

evaluations ofthe information security program and practices ofthe agency.

2 The IG Act and the Federal Financial Management Improvement Act of 1996 (FFMIA) require the Inspectors

General of certain agencies to report "instances and reasons" when the Agency has not met intermediate target dates

established in a remediation plan to bring the Agency's financial management system into substantial compliance

with the FFMIA. CFTC is not subject to the FFMIA; however, it voluntarily seeks to comply with its

requirements. During this reporting period, there were no events giving rise to a duty to report under FFMIA.

6
Status.

The OIG is currently completing its evaluation ofthe agency's FISMA related documents

and will submit its assessment along with the agency's documents to the Office ofManagement

and Budget by November 2010.

c. Review of CFTC's Documentation of Market Surveillance Communications

Scope and Objective

We intend to conduct an independent review ofmarket surveillance operations at CFTC,

specifically informal communications between agency staff and traders with large open positions

approaching expiration. This review is motivated by concerns voiced by agency staff as well as

the United States Government Accountability Office (GAO).

Due to staffing resource issues and other issues commanding the attention ofthe OIG,

this review has been tabled for the time being.

AUDIT REPORTS and REVIEWS OVER SIX MONTHS OLD

1. Corrective Action not Completed

There were no instances of audit reports over six months old where corrective action had

not been completed.

2. Corrective Action Completed

There were no instances ofreports issued before the commencement ofthe reporting

period for which corrective action had been completed by the end ofthe reporting period.

3. Management Decision not Made

There were no instances of a report issued before the commencement ofthe reporting

period for which a management decision had not been made by the end ofthe reporting period.

In 2006, the CFTC OIG issued a report titled "Review ofthe Need for a Western Regional Office

in Los Angeles." That report recommended, among other things, that the Commission review

the feasibility ofreestablishing the former Los Angeles field office. That recommendation was

not carried out largely due to budget constraints. In January 2008, partially in response to a

Congressional inquiry, CFTC OIG updated its analysis and on March 12, 2008, issued a followup report which reiterated the earlier recommendation. In January 2009, the Acting Chairman

7
issued a decision declining to implement the recommendation generally due to cost

considerations, but required the Agency on a yearly basis to provide to OIG an analysis of

regional case filing statistics and costs associated with cases in various regions ofthe country.

The Division ofEnforcement submitted their yearly analysis to OIG in March 2010. In light of

increased funding for FY09, FYlO and FY 11 (anticipated), corresponding anticipated staffing

increases and the enactment oflegislation that expands CFTC jurisdiction, we renew the

recommendation that the Commission consider opening additional CFTC offices on the West

Coast and possibly other locations as well.

INVESTIGATIONS

The Inspector General Act of 1978, as amended, provides that the Inspector General may

receive and investigate complaints or information from the Commission's employees and other

sources concerning the possible existence of an activity constituting a violation oflaw, rules or

regulations, or mismanagement, abuse of authority, or gross waste offunds, or a substantial and

specific danger to the public health and safety.

No investigations were pending as ofthe beginning ofthe reporting period. No

investigations were opened during this period. One preliminary inquiry was closed without

formal investigation due to the failure ofthe submitter to provide any evidence of violative

activity during the applicable statute oflimitations. The allegation involved possible criminal

activity in violation of 18 USC 207(a)(I), which criminalizes certain post-employment activities.

The allegations did not involve any activity that took place within the applicable statute of

limitations; consequently this preliminary inquiry was closed without investigation. An

allegation ofpossible misconduct in connection with the disposal ofsurplus IT equipment

received during the most recent reporting period was addressed through an inspection ofthe

agency's disposal of all IT equipment in FY 2009 (see page 3).

SUMMARY OF MATTERS REFERRED TO

PROSECUTORIAL AUTHORITIES

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

Allegations concerning possible misconduct relating to an earlier procurement to obtain an

external auditor (that CFTC OIG referred to the Council ofInspectors General on Integrity and

Efficiency Integrity Committee in March 2009) were resolved with a finding of no misconduct

by the CFTC OIG.

8
CONGRESSIONAL INQUIRIES

The Inspector General continues to be involved in legislative activities pertaining to both

the CFTC and the IG community. The IG serves on the legislation committee for the Council of

Inspectors General on Integrity and Efficiency, which discusses and provides guidance on

pending legislation affecting the IG community. During this reporting period, the OIG

communicated with Congressional staff as necessary to address issues regarding proposed

legislation.

LEGISLATIVE, REGULATORY AND RULE REVIEWS

1. Introduction and Summary

As specified in Section 4(a)(2) ofthe Inspector General Act of 1978, OIG reviews the

impact of existing and proposed legislation and regulations on CFTC programs and operations

and makes recommendations regarding more effective or efficient alternatives or protections

against fraud and abuse. OIG also reviews exchange rule proposals circulated to senior staff at

CFTC.

OIG notifies the responsible Divisions as to any concerns with draft and final documents

relating to legislation, rules (including exchange rules) or investigations. Initial discussions are

usually informal. The OIG actively monitors the proposed rules and regulations under

development as a result of Dodd-Frank Act. Formal comments were not submitted to the

Commission during this reporting period.

2. Rule Reviews Initiated in Previous Reporting Periods

There were no rule reviews initiated in previous reporting periods which were continued

into this reporting period.

3. Rule Reviews Initiated this Reporting Period

No rule reviews were initiated during this reporting period.

9
4. Legislative Activities

OIG tracked legislation impacting programs and operations ofthe CFTC and ofthe

Office ofInspector General, and made contact with Congressional staff concerning various

agency and IG issues as appropriate. The IG served on the legislation committee for the Council

ofInspectors General on Integrity and Efficiency, which comments on proposed amendments to

the IG Act and other legislation affecting the IG community.

OTHER REVIEWS

1. Peer Reviews

An important function in each Agency DIG is the peer review process. The Inspector .

General community's annual report, A Progress Report to the President, Fiscal Year 2007,3

described the processes for audits and investigative peer reviews as follows:

Government Auditing Standards require that audit organizations conducting audits

of Federal agencies undergo peer reviews every 3 years. The IG community has

implemented a process to meet this requirement. The purpose ofthe peer review

is to determine whether the reviewed audit organization's internal quality control

systems are adequate and provide reasonable assurance that applicable auditing

standards, policies and procedures are met.

Similarly, investigative peer reviews are conducted to ensure compliance with the

requirements ofthe Quality Standardsfor Investigations and determine whether

adequate internal safeguards and management procedures exist to ensure that law

enforcement powers are properly exercised.4

During this reporting period, DIG began a peer review ofthe audit function at the Farm

Credit Administration Office ofInspector General (FCA DIG). In addition, OIG submitted to a

peer review ofits own audit function by the Federal Election Commission Office ofInspector

General (FEC OIG). Both our peer review of FCA DIG and the peer review ofCFTC OIG by

FEC OIG were ongoing at the end ofthis reporting period.

2. Other Reviews and Activities

No other review activity took place during this reporting period.

3 http://www.ignet.gov/randp/fy07apr.pdf.

4 Id. at p.19.

10
SUMMARY OF EACH REPORT MADE TO

THE AGENCY HEAD CONCERNING REQUESTS FOR

INFORMATION OR ASSISTANCE

No reports were made to the Agency head under section 6(b)(2) concerning information

or assistance unreasonably refused or not provided (mandated under section 5(a)(5) ofthe Act).

REVISED MANAGEMENT DECISIONS

No management decisions were revised during the reporting period.

INSPECTOR GENERAL DISAGREEMENT

The Inspector General did not disagree with any management decisions on OIG

recommendations during the reporting period.

GAO LIAISON

OIG is charged with providing policy direction for, and conducting, supervising, and

coordinating audits and investigations relating to CFTC programs and operations. In addition,

OIG is required to recommend policies for, and conduct, supervise, and coordinate with other

Federal agencies, state and local governmental agencies, and nongovernmental entities, audits,

investigations, reviews and evaluations regarding the economy, efficiency, and effectiveness of

CFTC programs and operations.

GAO also conducts audits ofCFTC activities, and OIG plans its audits so as not to

duplicate GAO's efforts. Moreover, OIG in its audit, review and inspection activities identifies

the goals of each endeavor and the methods ofreaching the goals so as to minimize the

requirements placed on CFTC resources.

STRATEGIC PLAN FOR THE

OFFICE OF THE INSPECTOR GENERAL

1. Investigative Agenda

The Inspector General Act of 1978, as amended, provides that the Inspector General may

receive and investigate complaints or information from the Commission's employees concerning

the possible existence of an activity constituting a violation oflaw, rules or regulations, or

11
mismanagement, gross waste offunds, abuse of authority or a substantial and specific danger to

the public health and safety.

OIG has to date conducted only a reactive investigative program chiefly relying on

unsolicited employee complaints as the source of investigative leads. However, allegations and

complaints are also received from the general public and Congress. This reactive program has

resulted in only a handful ofinvestigations per year. This strategy was followed because OIG

believed that an independent regulatory agency such as the CFTC, without grant money or

substantial contracts to award, was not likely to generate a substantial investigative workload.

To insure that employee complaints could easily reach OIG, a 24-hour hotline was

established in February 1993 to receive complaints. The hotline phone number is (202)418-

5510.

Because ofthe necessarily reactive nature ofOIG's investigative program, no

investigative agenda has been established.

2. Legislative and Regulatory Review Agenda

In accordance with the IG Act, OIG generally reviews existing and proposed legislation

and regulations relating to programs and operations ofthe Agency. The OIG evaluates the

impact ofsuch legislation or regulations on the economy and efficiency in the administration of

programs and operations administered or financed by the Agency or the prevention and detection

offraud and abuse in such programs and operations. OIG makes recommendations in the

semiannual reports as necessary.

Because ofthe importance ofthis activity in a financial and economic regulatory agency,

OIG may review selected proposed and final CFTC regulations and selected exchange rules

using six basic criteria: Whether the agency: (1) has identified specifically the problem(s) to be

addressed by the proposal; (2) has defined through case study or data analysis a clear link

between the proposed solution and the identified problem(s); (3) has specified clearly the means

to effectively and efficiently enforce the proposal; (4) has assessed the likely efficiency and

effectiveness of alternative solutions; (5) can reasonably document that the proposal will yield

positive net benefits over the long term; and (6) has adequately addressed the requirements ofthe

Regulatory Flexibility Act and the Paperwork Reduction Act.

The Regulatory Flexibility Act requires the agency to evaluate the impact ofits

regulations on small entities. The Paperwork Reduction Act requires the agency to manage

effectively and efficiently its information collections so that they are the least burdensome

necessary to achieve the stipulated objectives.

Because OIG does not initiate legislation or, generally, regulations, the OIG legislative

and regulatory review program is reactive to the legislative and regulatory proposals developed

by others. Accordingly, no independent legislative and regulatory review agenda has been

established. OIG is aware ofthe immense regulatory undertaking required under the Dodd-Frank

12
Act, and during this reporting period reviewed the new legislation as well as regulatory efforts

taken thus far by agency staff, and established contact with other affected Offices ofInspector

General as appropriate, including activities related to the creation ofthe Council of Inspectors

General on Financial Oversight.

3. Audit, Inspection, Evaluation and Review Agenda

a. Introduction

The primary objectives ofthe OIG audit, inspection, evaluation and review agenda is to

promote long-term efficiency and effectiveness in the administration and operation ofthe

Commission and to protect against fraud and abuse. The audit, review and inspection agenda

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

• Adequacy ofinternal control systems as indicated by vulnerability assessments and

internal control reviews recommended by OMB Circular A-123;

• Changes in the program conditions or particular vulnerability ofthe organization,

program, activity, or function to problems or deficiencies;

• Current and potential dollar magnitude and likely benefits of a review on the

efficiency or effectiveness ofCFTC programs and operations;

• Management priorities and improvements that may be possible;

• Results of audits ofCFTC programs and operations by other Federal agencies; and

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

b. Annual Audit

The following required audit is performed on an annual basis.

Audit ofCFTC Financial Statements

In FY 2002, Congress passed the Accountability ofTax Dollars Act. The Act requires

the CFTC, along with numerous other Federal entities, to have its financial statements audited

annually. To this end, OIG has engaged a contractor to provide the audit effort required to

enable the contractor to render an opinion on the agency's financial statements for each fiscal

year in accordance with generally accepted auditing standards, Government Auditing Standards

and OMB Bulletin 07-04.

13
c. Annual Review and Evaluation

The following review and evaluation are performed on an annual basis.

Review ofCompliance with the Federal Managers' Financial Integrity Act, FMFIA

In support ofOMB Circular A-123 (Revised), the Inspector General will evaluate,

provide technical assistance and advise the agency head as to whether the agency's review and

evaluation process was conducted in accordance with the circular's requirements.

Evaluation ofthe CFTC Information Security Management Act. FISMA

The Federal Information Security Management Act requires the Inspector General or his

designee to perform annual independent evaluations ofthe information security program and

practices ofthe agency.

d. Other Audits, Inspections, Evaluations, Reviews and Projects

Looking to the long term, the OIG intends to focus the balance ofits audit resources on

the review ofthe management and operation ofthe agency and compliance with Congressional

mandates. OIG intends to focus its efforts with a view to auditing or reviewing activities relating

to the most serious management challenges facing the CFTC.

OIG issues an assessment ofthe most serious management challenges each year for

publication in the CFTC Performance and Accountability Report. In the past four years, OIG

has identified as management challenges the following areas of concern:

• Efficient Acquisition and Integration of Skilled Human Capital

• Modernization of Electronic Market Surveillance

• Expansion ofCFTC Oversight into New Markets

• Industry Consolidations

• Exchange Trading Revolutions (Growth ofDerivative Trading)

• Efficient Acquisition and Integration of Skilled Human Capital

In addition, OIG is aware ofthe immense regulatory undertaking required under the Dodd-Frank

Act. OIG will seek to identify issues and to conduct audits and reviews relating to these

management and regulatory challenges. Finally, OIG will stand ready to respond to issues and

requests as they are received from Congress, the Agency and members ofthe public or any other

source.

At the close ofthe last reporting period, OIG had begun initial planning for a review intended to

examine communications between CFTC staff and large traders. Due to our workload during

this reporting period, this review has been tabled for the time being.

14
e. Resources Required

DIG estimates that approximately one-halfstaff year of effort will be devoted over each

ofthe next five years to the "Annual Audits" described above. All other audits, inspections,

evaluations, review and other projects will consume up to two and a halfstaff years. Because

DIG resources can be diverted at any time to an investigation or audit, inspection, evaluation,

review or project that responds to current concerns or allegations, and must be completed in a

timely fashion in order to be of assistance to the Agency or Congress, it is impossible to forecast

with complete accuracy how resources will be utilized from year to year.

CONTACTING THE OFFICE OF THE

INSPECTOR GENERAL

DIG is located at 1155 21st Street, N.W., Washington, D.C. 20581. The telephone

number is (202)418-5110. The facsimile number is (202)418-5522. The hotline number is

(202)418-5510. The DIG web page is located at:

http://www.cftc.gov/About/DfficeoftheInspectorGeneral/index.htm.

Regular business hours are between 8:30 AM and 5:00 PM, Monday through Friday,

except Federal holidays.

15
Table 1

Reports Issued with Questioned Costs

(April 1, 2010 - September 30,2010)

Number

Dollar Value

Thousands

Questioned Unsupported

A. For which no management decision has

been made by the commencement ofthe

reporting period

B. Which were issued during the reporting

period

Subtotals (A + B)

c. For which a management decision was

made during the reporting period

o

o

o

o

o

o

o

o

o

o

o

o

( I )

(ii)

dollar value of

disallowed costs

dollar value of costs not

disallowed

o

o

o

o

o

o

D. For which no management decision

has been made by the end ofthe

reporting period

16

o o o
Table 2

Reports Issued with Recommendations

That Funds be Put to Better Use

(April 1, 2010 - September 30,2010)

A. For which no management decision has

been made by the commencement ofthe

reporting period

B. Which were issued during the reporting

period

Subtotals (A + B)

C. For which a management decision was

made during the reporting period

( i ) dollar value of

recommendations that

were agreed to by management

Number

o

o

o

o

o

Dollar Value

Thousands

o

o

o

o

o

(ii) dollar value of

recommendations that

were not agreed to by

management o o

D. For which no management decision

has been made by the end ofthe

reporting period

17

o o
THE INSPECTOR GENERAL 

 NEEDS YOUR HELP TO 

 ASSURE THE INTEGRITY OF 

 CFTC’S PROGRAMS

 

 Report FRAUD, WASTE

Or ABUSE to the 

INSPECTOR GENERAL 

ANONYMOUSLY

HOTLINE 

(202) 418-5510 

Office of the Inspector General 

Commodity Futures Trading Commission 

1155 21ST Street, N.W. 

Washington, D.C. 20581