1

COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT

OF THE

OFFICE OF THE

INSPECTOR GENERAL

FORTHEPERIOD ENDINGMARCH 31, 2002
u.s. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5110

Facsimile: (202) 418-5522

April 30, 2002

OFFICE OF

INSPEC10R GENERAL

TO:

FROM:

SUBJECT:

James E. Newsome

Chainnan

A. Roy Lavik 0. 12

Inspector General

Semiannual Report ofthe Office ofthe Inspector General

Attached is the Semiannual Report ofthe Office ofthe Inspector General for the period

from October 1, 2001 through March 31, 2002. This report is submitted to you in accordance

with the requirements ofSection 5· ofthe Inspector General Act of 1978, as amended.

I appreciate your continuing support ofthis office.

Attachment
OFFICE OF THE INSPECTOR GENERAL

COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT

FOR THE PERIOD FROM

October 1, 2001 THROUGH March 31, 2002

TABLE OF CONTENTS

Sillv1MARY OF OIG ACTIVITIES [including a description ofsignificant problems, abuses,

and deficiencies and a description ofOIG recommendations for corrective action

(Mandated by Section 5(a)(1) and (2) ofthe Act)] .1

AUDITS 1

IN'VESTIGATIONS 2

LEGISLATIVE AND REGULATORY REVIEWS 2

OIG RESPONSIBILITIES 3

OIG RESOlJR.CES 4

CFTC PROGRAMS AND OPERATIONS 4

COMPLETED WORK. " 4

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

significant report (Mandated by Section 5(a)(6) and (7) ofthe Act)] 4

IN'VESTIGATIONS 6

LEGISLATIVE AND REGULATORY REVIEWS 6

AUDIT REPORTS OVER SIX MONTHS OLD 7

CORRECTIVE ACTION NOT COMPLETED [including an identification of each

significant recommendation described in previous semiannual reports on which

corrective action has not been completed (Mandated by Section 5(a)(3) ofthe Act)] ........7

CORRECTIVE ACTION COMPLETED 7
MANAGEMENT DECISION NOT MADE [including a summary of each audit

report issued before the commencement ofthe reporting period for which no management

decision has been made by the end ofthe reporting period (including

the date and title of each such report), an explanation ofthe reasons such a

management decision has not been made, and statement concerning the desired timetable

for achieving a management decision on each such report (Mandated by Section 5(a)(lO)

ofthe Act)] 8

SUMMARY OF MATTERS REFERRED TO PROSECUTIVE AUTHORITIES and

the prosecutions and convictions which have resulted (Mandated by

Section 5(a)(4) ofthe Act) 8

SUMMARY OF EACH REPORT MADE TO THE AGENCY HEAD

under Section 6(b)(2) concerning infonnation or assistance unreasonably

refused or not provided (Mandated by Section 5(a)(5) ofthe Act) 8

REVISED MANAGEMENT DECISIONS [including description and explanation of

the reasons for any significant revised management decision made during the

reporting period (Mandated by Section 5(a)(11) ofthe Act)]. 8

INSPECTOR GENERAL DISAGREEMENT [including infonnation concerning any

significant management decision with which the Inspector General is in

disagreement (Mandated by Section 5(a)(12) ofthe Act)] 8

CtJRRE.NT AlJDITS 8

GAO LIAISON 13

STRATEGIC PL.AN" 14

CONTACTING THE OFFICE OF THE INSPECTOR GENERAL 19

TABLE 1 -- REPORTS ISSUED WITH QUESTIONED COSTS

(Mandated by Section 5(a)(8) ofthe Act) 20

TABLE 2 -- REPORTS ISSUED WITH RECO:M:MENDATIONS THAT FUNDS BE PUT

TO BETTER USE (Mandated by Section 5(a)(9) ofthe Act) 21

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INDEX OF IG ACT REPORTING

REQUIREMENTS

Section 5(a)(I) 1

Section 5(a)(2) 1

Section 5(a)(3) 7

Section 5(a)(4) 8

Section 5(a)(5) 8

Section 5(a)(6) 4

Section 5(a)(7) 4

Section 5(a)(8) 20

Section 5(a)(9) 21

Section 5(a)(1 0) 8

Section 5(a)(11) 8

Section 5(a)(12) 8

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SUMMARY OF OIG ACTIVITIES

AUDITS

The primary objectives ofthe Office ofthe Inspector General (OIG) ofthe Commodity

Futures Trading Conimission (Commission, CFTC) are to help promote long-term efficiency and

effectiveness in the administration and operation ofthe Commission and to protect against fraud,

waste, and abuse. This reporting period's OIG audit activities which are ·listed below reflect

these objectives.

Current Audits

The following are the audits being conducted during the current reporting period and

continuing into the next reporting period. (For additional details, see the section on current audits

beginning on page 8.)

Review ofEnforcement Information Requirements. The objectives ofthis review are to

determine what the information needs ofall levels in the Division ofEnforcement are,

whether the infonnation needs are being met, and ifthe required information can be

created, stored, and retrieved in a more effective and efficient manner. (For additional

details, see page 9.)

Review ofAgency Compliance with GPRA. The Government Performance and Results

Act of 1993 (GPRA) requires federal agencies to develop strategic plans, prepare annual

plans setting performance goals, and report annually on actual performance comp~ed to

goals. The first report was prepared in March 2000. The objective ofthis review is to

determine how effectively the Commission is complying with GPRA's terms. This will

include an examination ofthe performance measures devised by the Commission and the

systems used for gathering the data to report on those performance measures. (For

additional details, see page 11.)

Audit ofLos Angeles Lease ofReal Estate. The objectives ofthis audit are to determine

if all payments were made in accordance with the terms ofthe lease agreement, whether

established payment procedures were followed, and ifthe agency complied with the

Prompt Payment Act. This is the first audit conducted by the Office ofInspector

General ofthe Los Angeles, California regional office lease agreement. This audit will

cover all payments for the subject lease for the period from July 1, 1993 through

December 31, 2001 for all office space leased in the building at 10900 Wilshire

Boulevard, Los Angeles, California. (For additional details, see page 12.)

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Evaluation ofthe CFTC Infonnation Security Program and Practices. GISRA. The

Government Information Security Refonn Act (GISRA) requires the Inspector General or

his designee to perfonn annual independent evaluations ofthe infonnation security

program and practices ofthe agency. (For additional details, see page 12.)

Completed Audits

The following audits have been completed during this reporting period.

Audit ofCompliance with the Federal Managers' Financial Integrity Act. In support of

01\1B Circular A-123 (Revised), the Inspector General evaluates, provides technical

assistance, and advises the agency head as to whether the agency's review and evaluation

process was conducted in accordance with the circular's requirements. (For additional

details, see page 5.)

Peer Review ofExternal Office ofthe Inspector General. Each office ofthe Inspector

General is subject to a periodic external review. The objectives ofthis peer review are to

determine whether the Office ofInspector General's internal quality control"system is

adequate, in place, and operating in compliance with auditing standards promulgated by

the Comptroller General ofthe United States; and whether established policies,

procedures and applicable auditing standards are being followed in practice. (For

additional details, see page 5.)

INVESTIGATIONS

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

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

the possible existence ofan 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. The OIG

opened three investigations and one preliminary inquiry during the reporting period and

completed one investigation. Two investigations and one preliminary inquiry remained open at

the end ofthe period. (See the section on investigations beginning on page 6.)

LEGISLATIVE AND REGULATORY REVIEWS

The OIG reviews proposed and final CFTC regulations and legislation and selected

exchange rules using the following basic criteria: whether the agency: (1) has identified

specifically the problem(s) to be addressed by the proposal; (2) has defined through case study or

data analysis a clear link between the proposed solution and the identified problem(s); (3) has

specified clearly the means to effectively and efficiently enforce the proposal; (4) has assessed

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the likely efficiency and effectiveness of alternative solutions; (5) can reasonably document that

the proposal will yield positive net benefits over the long term; and (6) has met the requirements

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.

Legislative Activities

The Inspector General continues to be heavily involved in legislative activities as a

member ofthe IG's Legislation Committee. Congressional staff and, in some instances,

members were briefed about the various IG issues.

OIG RESPONSIBILITIES

The Office ofthe Inspector General in the Commodity Futures Trading Commission was

created in accordance with the Inspector General Act of 1978 (P.L. 95-452), as amended by the

Inspector General Act Amendments of 1988 (P.L. 100-504). The OIG was established to create

an independent unit to:

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

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

programs and operations;

• Conduct and supervise audits and, where necessary, investigations relating to the'

administration ofCFTC programs and operations;

• Review existing and proposed legislation and regulations 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.

Given that the CFTC does not have extensive contracts or grant making authority, the

GIG's efforts have been focused on the review oflegislative and regulatory proposals and the

monitoring ofinternal CFTC operations.

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OIG RESOURCES

The OIG consists ofthe Inspector General, two professional staffmembers, and a

secretary. All positions have been·filled since January 2,2000. The present Inspector General

assumed his position on October 7, 1990.

The OIG, on December 4, 1989, signed a Memorandum ofUnderstanding with the Office

ofGeneral Counsel (OGC). This Memorandum details the procedures that will be used to

provide the OIG with OGC legal services. An OGC staffmember has been assigned to provide

such services to the OIG on an as-needed basis.

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 option markets in the

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

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

President through fiscal year (FY) 2005 with the passage ofthe Commodity Futures

Modernization Act of2000 (CFMA).

The CFMA fundamentally transfonns the Commission from a front-line regulatory

agency to an oversight regulator. Although the Commission's approach to regulation will

change, the CFTC's mission remains unchanged. The CFTC continues to be 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 ofoffsetting price risks.

COMPLETED WORK

AUDITS

The OIG is required to conduct, supervise and coordinate audits ofCFTC programs and

operations and to ensure that the audits are conducted in accordance with generally accepted

government auditing standards. The OIG is also required to recommend changes to existing and

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

to prevent and detect fraud and abuse.

4

-

9
The purpose ofthese audits is to ensure that:

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

policies;

• Resources have been managed effectively and efficiently;

• Stipulated program objectives have been achieved; and

• Resources have been safeguarded.

The following audit report has been issued during the reporting period.

1. Audit of Compliance with the Federal Managers' Financial Integrity Act

Objectives.

In support ofO:MB Circular A-123 (Revised), the Inspector General evaluates, provides

technical assistance, and advises the agency head as to whether the agency's review and

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

Status.

The OrG reviewed all ofthe draft internal control reviews produced by the Commission

and provided comments to the originating divisions. The OrG reported the results ofits review

ofthe final submissions to the Chairman in its annual assurance letters. The OrG offered its

services to the CFTC Internal Control Committee as advisor and consultant on conducting and

reporting on internal control reviews.

2. Peer Review of External Office ofthe Inspector General

Objectives.

Each office ofthe Inspector General is subject to a periodic external review. The

objectives ofthis peer review are to detennine whether the Office ofInspector General's internal

quality control system is adequate, in place, and operating in compliance with auditing standards

promulgated by the Comptroller General ofthe United States; and whether established policies,

procedures and applicable auditing standards are being followed in practice.

Status.

The final report was prepared and delivered on October 30,2001 to the other agency's

Inspector General.

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INVESTIGATIONS

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

receive and investigate complaints or infonnation from the Commission's employees 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 beginnffig ofthe reporting period. The OIG

opened three investigations and one preliminary inquiry during the reporting period and

completed one investigation. Two investigations and one preliminary inquiry remained open at

the end ofthe period.

In response to an anonymous telephonic complaint alleging that a CFTC attorney was

practicing law outside ofCFTC during business hours, the Inspector General opened an

investigation. The investigation detennined that the attorney had stated clearly to all participants

in all meetings that the attorney was not representing one ofthe parties as an attorney but was

merely advising the party as a friend and that the subsequent actions were in accordance with

that declaration. Accordingly, this investigation was closed.

LEGISLATIVE AND REGULATORY REVIEWS

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

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

operations and makes recommendations regarding more effective or efficient alternatives or

protections against fraud and abuse. The OIG also reviews exchange rule proposals and changes.

The OIG has notified the responsible Division as to any concerns with draft and final

documents for the legislation, rules or investigations listed below. Fonnal comments were not

filed with the Commission. A summary ofthe principal legislation, regulations and

investigations reviewed and the OIG review results follows.

RULE REVIEWS INITIATED IN PREVIOUS REPORTING PERIODS

1. Proposed Amendments regarding Performance Data and Disclosure for Commodity

Trading Advisers (CTA).

Summary ofAction

Staffproposed amendments that would require rate ofreturn perfonnance measures used

by a CTA to be computed by dividing net perfonnance by the nominal account size. Previously

the CFTC had required that actual deposited funds be used in the denominator.

6
OIGReview

The OIG urged staffto consider using a focus group to determine the relative value of

disclosure ofthe two methods. Draft final rules have been prepared by staff.

2. Relevant Considerations for Default Judgements.

Summary ofAction

A question has been raised about the appropriate circumstances for the entry ofdefault

judgements.

OIGReview

OIG concluded its review ofthe issue and made recommendations. Staffis currently

reviewing the issue.

RULE REVIEWS INITIATED THIS REPORTING PERIOD

The OIG has reviewed the numerous rules required by the Commodity Futures

Modernization Act of2000 ("Act"). The Act altered the relationship ofthe Commission and the

futures industry in many regards. The rules sought to reflect this change.

Legislative Activities

The IG continues to be involved in legislative activities as a member ofthe IG's

Legislative Committee. Contact has been made with congressional staffon various IG issues.

AUDIT REPORTS OVER SIX MONTHS OLD

CORRECTIVE ACTION NOT COMPLETED

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

not been completed.

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.

7
MANAGEMENT DECISION NOT MADE

There were no instances ofreports issued before the commencement ofthe reporting

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

SUMMARY OF MATTERS REFERRED TO

PROSECUTIVE AUTHORITIES

No matters were referred to prosecutive authorities during the reporting period

SUMMARY OF EACH REPORT MADE TO

THE AGENCY HEAD

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

or assistance unreasonably refused or not provided.

REVISED MANAGEMENT DECISIONS

No management decisions were revised during the reporting period.

INSPECTOR GENERAL DISAGREEMENT

The Inspector General does not disagree with any management decisions on GIG

recommendations.

CURRENT AUDITS

The audit agenda and priorities for the GIG are determined based on the following

factors:

• Statutory and regulatory requirements;

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• 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.

The audit agenda and summary ofprogress for each audit, which has not yet been

completed, is summarized below. New agenda items periodically will be added, as appropriate,

along with a description ofthe audit objective for each.

1. Review of Enforcement Information Requirements

Objectives.

The mission ofthe Division ofEnforcement is to investigate and prosecute fairly and

effectively violations ofthe Commodity Exchange Act and the Commission's regulations in

order to safeguard the integrity ofD.S. futures and options markets and to protect market

participants and futures and options customers. In the course ofits activities, the division, with

headquarters and regional components, plans and follows an often complex course to achieve its

objectives and receives and creates a huge volume ofdocuments which must be logically stored

and regularly accessed. To support the accomplishment ofthese tasks, the division is relying on

a collection ofvery old manual and automated systems to track the progress of activities and to

store and retrieve documents. The objectives ofthis review are to determine what the

information needs of all levels in the division are, whether the information needs are being met,

and ifthe required information can be created, stored, and retrieved in a more effective and

efficient manner.

Status.

The joint OIG/Enforcement team produced extensive and detailed narrative flow charts

ofthe current operational and administrative functions and processes ofthe Division of

Enforcement and delivered them to the Division ofEnforcement and the Office ofInformation

Resources Management (OIRM). These products were designed to inform the analysts in OIRM

ofthe inner workings ofthe Division ofEnforcement and to serve as the base on which the

information requirements ofthe Division ofEnforcement will be defined.

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In September 1997, in a joint meeting ofrepresentatives ofthe Division ofEnforcement,

the OIG, and OIRM, the principals made commitments ofsix staff years of effort from OIRM

and approximately three staffyears of effort from Enforcement to define the system

requirements ofEnforcement.

The Division ofEnforcement and OIRM agreed that the first priority was the

development of a system to track documents in the Division in accordance with the Division's

Enforcement Procedure Number 3. The second phase was devoted to installing a system to track

production within the Division and to report that information in the required fonnats to

management ofthe Division. Phase three will concentrate on moving the functions ofthe

attorneys and investigators from paper to computer screen and using the resulting information to

improve the tracking ofproductivity information and the sharing ofinfonnation within the

Division.

The final version ofthe first phase ofwhat is now being called "the Enforcement

Modernization Project" was delivered to the Division ofEnforcement in May 1998. This

Enforcement Procedure Number 3 System is now being used at all locations ofthe Division.

The second phase, a system which produces the monthly status reports from all parts ofthe

Division and maintains on screen data on the current status of all matters within the Division, has

been completed. Training in the use ofthis system was completed during March 1999.

Phase Three, designed to present the Enforcement Division with a case manageinent,

litigation support, and document management system, to tie together the first two systems with

this new system, and to automate as many ofthe remaining Enforcement Division processes as

possible, began with a survey ofappropriate off-the-shelfsystems and an investigation of

currently available software and hardware which may meet the bulk ofidentified needs.

Difficulties in maintaining contractor resource levels led to delays in the pursuit ofPhase 3. A

team consisting ofstafffrom the Division ofEnforcement, OIRM, and contractor personnel was

engaged in a review of available off-the-shelfcase management, litigation support, and

document management software from the beginning ofCalendar Year 2000.

As a result ofthis review of available off-the-shelfsoftware, the Division ofEnforcement

and OIRM developed a list ofrequirements. A Request for Proposals reflecting those

requirements was issued on July 19,2000. None ofthe responses received fully met the

requirements specified in the Request for Proposals.

In FY 2001, the agency's Executive Management Council (EMC) fonned an Integrated

Project Team (IPT) to define the systems requirements ofthe Enforcement Division, examine

alternative methods for meeting the requirements and recommend a solution. The solution

defined by the IPT assumed the availability of$3.7 million to fund the purchase and maintenance

of all elements ofthe proposed solution over a number offiscal years.

A total of$1.15 million ofFY 2001 money was set aside for the implementation ofthe e-Iaw

project defined by the IPT. Congress added $2.6 million to the e-Iaw project to insure the

availability ofEnforcement records in the event of a repeat ofthe September 11, 2001 terrorist

10
act. With the full $3.7 million now available for implementation, the agency expects to move

forward expeditiously with the purchase of all ofthe elements ofthe e-Iaw system.

2. Review of Agency Compliance with GPRA

Objective.

The Government Performance and Results Act of 1993 requires federal agencies to

develop strategic plans, prepare annual plans setting perfonnance goals, and report annually on

actual performance compared to goals. The first report was prepared in March 2000. The

objective ofthis review is to determine how effectively the Commission is complying with

GPRA's terms. This will include an examination ofthe perfonnance measures devised by the

Commission and the systems used for gathering the data to report on those performance

measures.

Status.

In response to Congressional interest, the Office ofInspector General consulted with and

advised the Commission's operating divisions concerning GPRA requirements. The Office of

Inspector General reviewed the Commission's FY 2001, FY 2002 and FY 2003 Annual

Performance Plan before each was submitted to Congress. Subsequently, we selectively

reviewed the FY 1999, FY 2000 and FY 2001 Annual Perfonnance Reports after they were

submitted to Congress. We concluded that the agency had made improvements in defining its

goals and identifying measures for reaching its stated goals.

However, in the current fiscal year, the Commodity Futures Modernization Act was

enacted. This Act fundamentally changed the regulatory structure for the commodity futures

markets. The Commission is now adopting new rules and procedures consistent with the

regulatory refonns presented in that Act. This wholesale change in approach will challenge each

operating division to redefine its service goals under GRPA. The agency is also in the process

ofimplementing a reorganization that will allow the Commission to more effectively respond to

the new Act.

To assist in this process, the Office ofthe Inspector General has participated in a number

ofdiscussions on how to best reflect the agency's new regulatory paradigm in structuring future

goals and measures under GPRA. In conjunction with other federal agencies' Inspectors

General, the Office ofthe Inspector General is participating in the development ofbest practices

for measuring compliance with the requirements ofGPRA. Once the entire set ofsenior

managers is in place in the Commission's new organization, the OIG will assist in the

implementation ofthese best practices.

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3. Audit ofLos Angeles Lease ofReal Estate

Objectives.

The objectives ofthis audit are to determine ifall payments were made in accordance

with the terms ofthe lease agreement, whether established payment procedures were followed,

and ifthe agency complied with the Prompt Payment Act. This is the first audit conducted by

the Office ofInspector General ofthe Los Angeles, California regional office lease agreement.

This audit will cover all payments for the subject lease for the period from July 1, 1993 through

December 31, 2001 for all office space leased in the building at 10900 Wilshire Boulevard, Los

Angeles, California.

Status.

The OIG has completed the review and analysis of all invoices from September 1993

through December 2001. The data gathering and analysis portions ofthis audit are completed.

A draft report is now being prepared for distribution to the program officials for comment. A

final report is expected by the end ofMay 2002.

4. Evaluation ofthe CFTC Information Security Program and Practices, GISRA

Objectives.

The Government Information Security Reform Act (GISRA) requires the Inspector

General or his designee to perform annual independent evaluations ofthe information security

program and practices ofthe agency.

Status.

In response to GISRA, the Commission has implemented a security policy and developed

risk assessments, security plans and security procedures for its three mission-critical systems:

Market Surveillance, Exchange Database and I-FR systems. The Commission is in the process

of developing risk assessments, security plans and security procedures for its financial

management systems and payroll and personnel systems. The Office ofInformation Resources

Management (OIRM) is planning to hire a full time security person this fiscal year.

To provide a comprehensive review ofthe Commission's security program, OIRM and

DIG will jointly engage a contractor. The statement ofwork for this contract has been drafted.

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GAO LIAISON

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

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

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

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

investigations, and evaluations regarding the economy, efficiency, and effectiveness ofCFTC

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 audits activities identifies the goals of each audit

and the methods ofreaching the goals so as to minimize the requirements placed on CFTC

resources.

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STRATEGIC PLAN

FOR THE

OFFICE OF THE INSPECTOR GENERAL

INTRODUCTION

The Office ofthe Inspector General (DIG) in the Commodity Futures Trading

Commission (CFTC) was created in accordance with the Inspector General Act of 1978 (p.L. 95-

452), as amended by the Inspector General Act Amendments of 1988 (p.L. 100-504). The OIG

was established to create an independent unit to:

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

programs and operat~ons and to detect and prevent fraud, waste, and abuse in such

programs and operations;

• Conduct and supervise audits and investigations relating to the administration of

CFTC programs and operations;

• Review existing and proposed legislation and regulations and to make

recommendations concerning their impact on the economy and efficiency ofCFTC

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

• Keep the Chainnan and Congress fully infonned about any problems or deficiencies

in the administration ofCFTC programs and operations and provide

recommendations for correction ofthese problems or deficiencies.

Accordingly, the DIG has established three programs to carry out its responsibilities:

audit, investigation, and legislative and regulatory review. A summary ofthose programs

follows.

AUDIT

The primary objectives ofthe DIG are to promote long-tenn efficiency and effectiveness

in the administration and operation ofthe Commission and to protect against fraud and abuse.

The key to effectively and efficiently managing the CFTC is infonnation. Top level

managers and decision makers require a steady stream oforganized data on the effects oftheir

policy decisions and resource allocations on the operations ofthe Commission. Once having

made the decision to change resource levels or policy, managers must receive accurate and

timely reports ofthe operational effects oftheir decision so they can detennine ifthe change is in

the direction and ofthe magnitude predicted. In the absence ofsuch infonnation, top level

managers cannot adequately perfonn theirjobs.

14

,
A number ofobstacles to acquiring and transmitting the desired information to decision

makers may exist in some programs. Principal among them is the Commission's apparent .

difficulty in many instances in tracking the progress of a particular action across oIganiz~tional

lines within the Commission.

A simple example is the Reparations Program prior to the installation of an OIG

recommended unified, Commission-wide tracking system. Complaints are received and

processed and hearings are held in the Office ofProceedings; appeals ofinitial decisions in

reparations cases are transmitted to the Office ofGeneral Counsel where proposed Commission

opinions are drafted; and appeals are decided by the Commission with the paperwork being

handled by the Office ofthe Secretariat. Each office involved in the process had a separate

tracking system without ties to the tracking systems in the offices preceding them or following

them in the process. Each office treated the case as ifit were brand new to the Commission when

they received it. As a result, there was no provision for tracking information across

organizational lines. Ifthe Chairman wanted to know how much time was spent on the average

reparations case of a particular description at each stage in the process, that information was

unavailable without an extensive expenditure ofmanual labor.

A related problem is the difficulty the Commission has in associating resources devoted

to an activity with the results ofthat activity. The Commission does a good job oftracking

resources expended. It can detennine how much stafftime and material at what cost was spent

in a particular activity. Some Commission organizations can even associate costs with particular

projects. What a program manager may have great difficulty doing, however, is telling a

decision maker that for a specific level or increase in resources, the program manager will

deliver a specific level ofincreased output. Without this information from all programs

competing for limited resources, decision makers cannot make reasoned resource allocation

judgements. Decision makers are forced to rely on intuition and anecdotal evidence.

To increase the efficiency and the effectiveness ofthe management ofCFTC programs

and operations, the OIG will, in addition to the conduct ofmandatory audits, concentrate its audit

resources on the identification ofinformation voids and the lack of continuity in the flow of

information across organizational lines from the beginning of a process until its conclusion. The

OIG will recommend the implementation of any system improvements where the benefits of

implementing the change exceed the costs.

In addition to our efforts to bring technology to bear on the information requirements of

the Commission, the OIG has been following the Commission's development ofmeasures and

systems ofmeasurement in response to the Government Performance and Results Act (GPRA).

As the Commission implements GPRA, the OIG will devote significant resources to monitoring

agency performance to insure that the data is accurately gathered and that the measures reported

are the best available for demonstrating program performance.

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 conceJ;11ing

15
the possible existence ofan activity constituting a violation oflaw, rules or regulations, or

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

the public health and safety.

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

unsolicited employee complaints as the source ofinvestigative leads. This reactive program has

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

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

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

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

established in February 1993 to receive complaints. The hotline's existence is publicized in the

agency-wide telephone book and in this semiannual report.

Because ofthe reactive nature ofthe DIG's investigative program, no investigative

agenda has been established.

LEGISLATIVE AND REGULATORY REVIEW

B~cause ofthe importance ofthis activity in an economic regulatory agency, the OIG

reviews proposed and final CFTC regulations and legislation and selected exchange rules using

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

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

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

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

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

positive net benefits over the long tenn; and (6) has met 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 the DIG does not initiate legislation or, generally, regulations, the DIG

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.

16
AUDIT AGENDA

ANNUAL AUDITS

The following audit is performed on an annual basis.

Audit of Compliance with the Federal Managers' Financial Integrity Act

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.

OTHER AUDITS

The OIG intends to focus the balance ofits audit resources on insuring that the Chainnan,

the Commissioners, and program managers have timely, useful infonnation on the progress of

CFTC's programs in meeting their goals and objectives. For example, emphasis will be placed

on determining whether all managerial levels engaged in a process can track the progress oftheir

various programs. The tracking systems required in many, though not all, programs will cross

fonnal organizational lines.

These audits will entail a cataloging and description of all ofthe manual and automated

systems used by an organization to gather infonnation on its use ofresources, the results ofthe

devotion ofthose resources (including definitions ofmeasurements of accomplishment), and the

reporting ofresults and associated costs to the upper level managers in the Division and to the

Chainnan and the Commissioners. Cataloging ofthese decision support systems will be

followed by an assessment ofwhether all concerned officials are timely receiving the

infonnation they require to efficiently allocate resources to those uses which best accomplish the

priorities ofthe Commission. Ifany elements are lacking in the infonnation systems, they will

be identified and improvements will be recommended ifthey can be implemented in a

cost/beneficial manner.

Ifrecommendations are successfully implemented, the proposed systems should allow

the Chainnan, the Commissioners, and concerned program managers to track progress of a

particular program across organizational lines and to quickly determine the effects, if any, of

changes in policy, procedure, or staffing.

The first step in accomplishing this goal will be to concentrate on documenting, and

recommending the improvement and/or development oftracking systems in every program

element throughout the Commission.

In addition to our focus on facilitating the development of an efficient flow of

infonnation throughout the agency, the OIG will devote resources to the audit ofcompliance

with the tenns of agency contracts (such as, leases ofspace in New York, Chicago, Los Angeles,

and Washington, D.C.), the collection offunds (such as, compliance with the terms ofthe Debt

Collection Improvement Act of 1996 and the resultant Memorandum ofUnderstanding wi~

17
Treasury), and agency compliance with Congressional mandates (such as, the Government

Performance and Results Act and the Government Information Security Reform Act).

RESOURCESREQumED

The OIG estimates that approximately one staff year of effort will be devoted over each

ofthe next five years to the development of an efficient flow ofinformation throughout the

agency. Nine-tenths staffyears of effort will be devoted over each ofthe next five years to the

compliance audits described above. The"Annual Audits" are expected to consume

approximately one-tenth staff year per year.

18
CONTACTING THE OFFICE OF THE

INSPECTOR GENERAL

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

Friday, except Federal holidays.

19
Table 1

Reports Issued with Questioned Costs

(October 1, 2001 - March 31, 2002)

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

20

o o o

,
Table 2

Reports Issued with Recommendations

That Funds be Put to Better Use

(October 1, 2001-March 31,2002)

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

21

o o
The InspectorGeneral

needsyourhelpto

assurethe integrityof

CFTC's programs.

Report FRAUD, WASTE

or ABUSE to the

INSPECTOR GENERAL

HOTLINE

(202)418-5510

Office of the Inspector General

Commodity Futures Trading Commission

1155 21ST Street, N.W.

Washington, D.C. 20581