COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT

OF THE

OFFICE OF THE

INSPECTOR GENERAL

FORTHE PERIOD ENDING MARCH 31,2000
u.s. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5110

Facsimile: (202) 418-5522

May 31, 2000

OFFICE OF

INSPEcroR GENERAL

TO:

FROM:

SUBJECT:

William J. Rainer

Chairman

A. Roy LaVi£:r ~~~ Inspector Gene~al

Semiannual Report of the Office of the

Inspector General

Attached is the Semiannual Report of the

Office of the Inspector General for the period

from October 1, 1999 through March 31, 2000. This

report is submitted to you in accordance with the

requirements of Section 5 of the Inspector General

Act of 1978, as amended.

I appreciate your continuing support of this

office.

Attachment
OFFICE OF THE INSPECTOR GENERAL

COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT

FOR THE PERIOD FROM

October 1, 1999 THROUGH March 31, 2000

TABLE OF CONTENTS

SUMMARY OF OIG ACTIVITIES [including a description of

significant problems, abuses, and deficiencies and a

description of OIG recommendations for corrective action

(Mandated by Section 5(a)(l) and (2) of the Act)] 1

AUDITS 1

INVESTIGATIONS 2

LEGISLATIVE AND REGULATORY REVIEWS 3

OIG RESPONSIBILITIES 4

OIG RESOURCES 5

CFTC PROGRAMS AND OPERATIONS 6

COMPLETED WORK 6

AUDITS [inc!uding a list of each audit report issued and

a summary of each particularly significant report

(Mandated by Section 5(a)(6) and (7) of the Act)] 6

INVESTIGATIONS 7

LEGISLATIVE AND REGULATORY REVIEWS 9

AUDIT REPORTS OVER SIX MONTHS OLD 13

CORRECTIVE ACTION NOT COMPLETED [including an

identification of each significant recommendation

described in previous semiannual reports on which

corrective action has not been completed (Mandated by

Section 5(a)(3) of the Act)] 13

CORRECTIVE ACTION COMPLETED 13
MANAGEMENT DECISION NOT MADE [including a summary

of each audit report issued before the commencement of the

reporting period for which no management decision has been

made by the end of the reporting period (including the date and

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

management decision has not been made, and a statelllent

concerning the desired timetable for achieving a management

decision on each such report (Mandated by Section 5(a)( 10) of

the Act)] 13

SUMMARY OF MATTERS REFERRED TO .PROSECUTIVE

AUTHORITIES and the prosecutions and convictions which

have resulted (Mandated by Section 5(a)(4) of the Act) ........ 13

SUMMARY OF EACH REPORT MADE TO THE AGENCY HEAD

under Section 6(b)(2) concerning infornlation or assistance

unreasonably refused or not provided (Mandated by Section

5(a)(5) of the Act) 14

REVISED MANAGEMENT DECISIONS [including description and

ex pIa nat ion 0 f the rea son s for any s i g n i fi can t rev is e d

management decision made during the reporting period

(Mandated by Section 5(a)( 11) of the Act)] 14

INSPECTOR GENERAL DISAGREEMENT [including information

concerning any significant nlanageillent decision with which

the Inspector General is in disagreelnent

(Mandated by Section 5(a)( 12) of the Act)] 14

CURRENT AUDITS 14

GAO LIAISON 19

STRATEGIC PLAN 21

CONTACTING THE OFFICE OF THE INSPECTOR GENERAL ...... 29

TABLE 1 -- REPORTS ISSUED WITH QUESTIONED COSTS

(Mandated by Section 5(a)(8) of the Act) 30

TABLE 2 -- REPORTS ISSUED WITH RECOMMENDATIONS THAT

FUNDS BE PUT TO BETTER USE (Mandated by Section

5 (a)(9) of the Act) 31
INDEX OF IG ACT REPORTING

REQUIREMENTS

Section 5(a)(l) I

Section 5(a)(2) I

Section 5(a)(3) 13

Section 5 (a)( 4) 13

Section S(a)(5) 14

Section 5(a)(6) 6

Section 5(a)(?) 6

Section 5(a)(8) 30

Section S(a)(9) 31

Section 5(a)(10) 13

Section 5(a)(1 I) 14

Section S(a)(12) 14
SUMMARY OF OIG ACTIVITIES

AUDITS

The primary objectives of the Office of the

Inspector General (OIG) of the Commodity Futures

Trading Commission (Commission, CFTC) are to help

promote long-term efficienc~ and effectiveness in

the administration and operation of the Commission

and to protect against fraud and abuse. This

reporting period's OIG audit activities which are

listed below reflect these objectives.

Current Audits

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 14.)

Review of Enforcement Information

Reguirements. The objectives of this r.eview

are to determine what the information needs of

all levels in the Division of Enforcement are,

whether the information needs are being met,

and if the required information can be

created, stored, and retrieved in a more

effective and efficient manner. (For

additional details, see page 15.)

Audit of CFTC's Lease of Space - Washington,

D.C. The objective of this audit is to

determine if the Commission is complying with

the requirements of the lease of space for its

office in Washington, D.C. The particular

focus will be on the appropriateness of all

base rental and escalation payments made under

the lease. The audit will cover lease
payments from the inception of the lease to

date. {For additional details, see page 18.}

Review of Agency 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 compared to goals. The

first report was due in March 2000. The

objective of this review is to determine how

effectively the Commission is complying with

GPRA's terms. This will include an

examination of the 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 18.)

Completed Audits

No audit reports were issued during this

r~porting period.

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 concerning the possible.

existence of an activity constituting a violation

of law, rules or regulations, or mismanagement,

abuse of authority, or gross waste of funds, or a

substantial and specific danger to the public

health and safety.

One investigation 'was pending as of the

beginning of the ~eporting period. The OIG opened

one investigation during the reporting period and

completed two investigations. No investigations

2
remained open at the end of the period. (See the

section on investigations beginning on page 7.)

LEGISLATIVE AND REGULATORY REVIEWS

The OIG reviews proposed and final ~FTC

regulations and legislation and selected exchange

rules using the following basic criteria: whether

the agency: (1) has identified specifically the

problem(s) to be addressed by the proposal; (2)

has defined through case study or data analysis a

clear link between the proposed solution and the

identified problem(s); (3) has specified clearly

the means to effectively and efficiently enforce

the proposal; (4) has assessed the likely

efficiency and effectiveness of alternative

solutions; (5) can reasonably document that the

proposal will yield positive net benefits over the

long term; and (6) has met the requirements of the

Regulatory Flexibility Act and the Paperwork

Reduction Act.

The Regulatory Flexibility Act requires the

agency to evaluate the impact of its regulations

on small entities. The Paperwork Reduction Act

requires the agency to manage effectively and

efficiently its information collections so that

they are the least burdensome necessary to achieve

the stipulated objectives. (For more detailed

descriptions of these reviews, see the section on

legislative and regulatory reviews beginning on

page 9.)

Regulations reviewed during this period

include:

o Proposed Amendment to CFTC Rule 1.41;

o Proposed Revisions to certain CFTC Rules

Relating to Reparationsi' and

3
o Chicago Mercantile Exchange

to Increase its Speculative

for Live Cattle.

(CME) Proposal

Contract Limit

Leqislative Activities

The Inspector General has been heavily

involved in legislative activities as a member of

the IG's Legislation Committee. The 20 th

anniversary of the IG Act occasioned many

Congressional bills such as ones enhancing

independence. Congressional staff, and, in some

instances, members were briefed about the various

proposals.

I O_I_G_R_E_S_PO_N_S_IB_I_L_I_T_IE_S _

The Office of the 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:

o Promote economy, efficiency, and

effectiveness in the administration of

CFTC programs and operations and to detect

and prevent fraud and abuse in such

programs and operations;

o Conduct and supervise audits and, where

necessary, investigations relating to the

administration of CFTC programs and

operations;

4
o Review existing and proposed legislation

and regulations and make recommendations

concerning their impact on the economy and

efficiency of CFTC programs and operations

or the prevention and detection of fraud

and abuse; and

o Keep the Chairman and Congress fully

informed about any problems or

deficiencies in the administration of CFTC

programs and operations and provide

recommendations for correction of these

problems or deficiencies.

Given that the CFTC does not have extensive

contracts or grant making authority, the OIG's

efforts have been focused on the review of

legislative and regulatory proposals and the

monitoring of internal CFTC operations.

OIG RESOURCES

The OIG consists of the Inspector General, two

professional staff members, and a secretary. 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 of Understanding with the Office of

General Counsel (OGC). This Memorandum details

the procedures that will be used to provide the

OIG with OGC legal services. An OGC staff member

has been assigned to provide such services to the

OIG on an as-needed basis.

5
CFTC PROGRAMS AND OPERATIONS

The CFrC was established in 1974 as an

independent agency to regulate commodity futures

and options trading in the United States. The

CFTC is headquartered in Washington, D.C., with

additional offices in Chicago, New York, Kansas

City, Los Angeles, and Minneapolis.

The basic objectives of the CFTC are to

prevent manipulation of the markets, abusive trade

practices, and fraudulent activities; to maintain

effective oversight of the markets and selfregulatory organizations; and to enforce the

Commodity Exchange Act and Commission rules

without hindering the futures markets' provision

of price discovery and risk shifting services. The

CFTC regulates the futures activities of brokerage

firms, salespersons, floor brokers, floor traders,

commodity pool operators, commodity trading

advisors, introducing brokers, and leverage

transaction merchants. In addition, the agency

ensures the effective enforcement of exchange

rules, reviews the terms and conditions of

proposed futures contracts and the registration of

firms and individuals who provide advice or handle

customer funds, and oversees the activities of the

National Futures Association.

COMPLETED WORK

AUDITS

The OIG is required to conduct,

coordinate audits of CFTC programs

6

supervise and

and operations
and to ensure that the audits are conducted in

accordance with generally accepted government

auditing standards. The OIG is also required to

recommend changes to existing and proposed CFTC

programs and operations to promote economy,

efficiency, and effectiveness and to prevent and

detect fraud and abuse.

The purpose of these audits is to ensure that:

o Funds have been expended in a

consistent with related laws,

and policies;

manner

regulations,

o Resources have been managed effectively

and efficiently;

o Stipulated program objectives have been

achieved; and

o Resource·s have been safeguarded.

No audit reports were issued during the

reporting period.

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 concerning the possible

existence of an activity constituting a violation

of law, rules or regulations, or mismanagement,

abuse of authority, or gross waste of funds, or a

substantial and specific danger to the public

health and safety.

There was one investigation pending as of the

beginning of the reporting period. The OIG opened

one investigation during the reporting period and

7
closed two investigations. No investigations

remained open at the end of the period.

In response to an allegation received from

CFTC employees that Exceeds with Distinction

ratings were held to approximately 10 percent of

total ratings in contravention of OPM regulations,

the Office of the Inspector General (OIG) opened

an investigation. As a result of that

investigation, the OIG has determined that some

rating officials interpreted the "guidance" of

approximately 10% of all ratings as a quota or cap

on the number of Exceeds with Distinction ratings

which could be awarded. This understanding

operated to deny Exceeds with Distinction ratings

to some employees who would otherwise have gotten

them. The OIG recommended that the agency make

clear in a memorandum from the Chairman to all

CFTC employees that employees will be rated

against a set of predetermined standards and that

no limitation will be placed on the numbers or

-percentages of employees in any of the rating

categories. The Chairman issued a memorandum

revoking the previous policy on February 15, 2000.

In response to a request from the Acting

Executive Director, the Office of the Inspector

General (OIG) undertook an investigation of the

theft of transit vouchers from the desk of one of

the employees distributing the vouchers. The

investigation was designed to determine what

conditions permitted the theft to take place and

what actions, if any, could be taken to avoid

future thefts. As a result of that investigation

we recommend that the orientation of the

employee's desk be changed, that the employee be

provided with written instructions on the proper

method of securing transit vouchers, and that the

employee not leave transit vouchers unsecured and

unattended on her desk.

8
LEGISLATIVE AND REGULATORY REVIEWS

As specified in Section 4 (a) (2) of the

Inspector General Act of 1978, the eIG 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 eIG also reviews exchange

rule proposals and changes.

The eIG has notified the responsible Division

as to any concerns wi~h draft and final documents

for the legislation, rules or investigations

listed below. Formal comments were not filed with

the Commission. A summary of the principal

legislation, regulations and investigations

reviewed and the eIG review results follows.

RULE REVIEWS INITIATED IN PREVIOUS REPORTING PERIODS

1. Petition for exemption from Dual Trading Ban

of the Chicago Mercantile Exchange

Summary of Action

The CME sought exemption for several of its

contracts from the dual trading prohibitions.

eIG Review

The eIG asked various questions which staff

responded to and clarified. Draft orders have

been prepared by Trading and Markets staff.

9
2. Petition for exemption from Dual Trading Ban

of the Chicago Board of Trade (CBT)

Summary of Action

The CBT sought exemption for several of its

con t rae t s fro m the d u a 1 t r a din g p r ,0 h i b t ion 5 •

eIG Review

The OIG queried staff about various

which staff responded to. Draft orders

prepared by Trading and Markets staff.

issues

have been

3 . Proposed Rule's Regarding Direct Foreign Order

Transmittals by u.s. Persons (Proposed Rule

30.12) .

Summary of Action

Staff of the CFTC proposed a rule that would

allow certain foreign futures and options brokers

to receive directly foreign futures and options

orders from sophisticated u.S. customers.

eIG Review

The eIG raised questions and offered suggestions.

Staff provided clarifying answers and adopted

several suggestions. OIG expressed the value of

using relevant test groups in ascertaining the

value of disclosure, documents. Trading and Markets

staff is currently reviewing public comments.

10
4. Proposed Amendments regarding Performance Data

and Disclosure for Commodity Trading Advisers

(eTA) .

Summary of Action

Staff proposed amendments that would require

rate of return performance measures used by aCTA

to be computed by dividing net performance by the

nominal account size. Previously the CFTC had

required that actual deposited funds be used in

the denominator.

orG Review

The orG urged staff to consider using a focus

group to determine the relative values of

disclosure of the two methods. Trading and

Markets staff is currently reviewing public

comments.

RULE REVIEWS INITIATED THIS REPORTING PERIOD

1. Proposed Amendment to CFTC Rule 1.41.

Summary of Action

CFTC staff proposed an amendment to Rule 1.41

permitting contract markets to place new rules and

rule amendments into effect on the business day

following their receipt by the CFTC subject to

certain conditions.

orG Review

orG supported the staff action and recommended

approval to the Commission.

1 1
2. Proposed Revisions to certain CFTC Ru1es

Re1ating to Reparations.

Summary of Action

Staff proposed rule changes that would result

in all reparation cases befng decided by Judgement

Officers.

eIG Review

eIG recommended caution in departing from

current practice.

3. Chicago Mercantile Exchange Proposal to

Increase its Speculative Contract Limit for

Live Cattle.

Summary of Action

CME sought CFTC approval to increase its

single trader speculative trading limit during the

delivery month from 600 to 900 futures contracts.

eIG Review

eIG evaluated the proposal and expressed its

views to CFTC staff. CME withdrew the proposed

rule change after numerous negative public

comments.

Legislative Activities

The IG has been heavily involved in

legislative activities as a member of the IG's

Legislation Committee. The 20 th anniversary of the

IG Act occasioned many Congressional bills such as

ones enhancing independence. Congressional staff

and, in some instances, members were briefed about

the various proposals.

12
AUDIT REPORTS OVER SIX MONTHS OLD

CORRECTIVE ACTION NOT COMPLETED

There were no instances of audit reports over

six months old where corrective action had not

been completed.

CORRECTIVE ACTION COMPLETED

There were no instances of reports issued

before the commencement of the reporting period

for which corrective action had been completed by

the end of the reporting period.

MANAGEMENT DECISION NOT MADE

There were no instances of reports issued

before the commencement of the reporting period

for which a management decision had not been made

by the end of the reporting period.

SUMMAR·Y OF MATTERS REFERRED TO

PROSECUTIVE AUTHORITIES

No matters were referred to prosecutive

authorities during the reporting period.

13
SUMMARY OF EACH REPORT MADE TO THE

AGENCY HEAD

No reports were made to the agency head under

section 6 (b) (2) concerning information or

assistance unreasonably refused or not provided.

REVISED MANAGEMENT DECISIONS

No management decisions were revised during

the reporting period.

INSPECTOR GENERAL DISAGREEMENT

The Inspector General does not disagree with

any management decisions on OIG recommendations.

CURRENT AUDITS

The audit agenda and priorities for the OIG

are determined based on the following factors:

o Statutory and regulatory requirements;

o Adequacy of internal control systems as

indicated by vulnerability assessments and

internal control reviews recommended by

OMB Circular A-123;

o Changes in the program conditions or

particular vulnerability of the

14
organization, program, activity, or

function to problems or deficiencies;

o Current and potential dollar magnitude and

likely benefits of a review on the

efficiency or effectiveness of CFTC

programs and operations;

o Management priorities and improvements

that may be possible;

o Results of audits of CFTC programs and

operations by other Federal agencies; and

o Availability of audit

potential 'opportunity

resources and the

costs to the agency.

The audit agenda and summary of progress for

each audit which has not yet been completed is

summarized below. New agenda items periodically

will be added, as appropriate, along with a

description of the audit objective for each.

1. Review of Enforcement Information Requirements

Objectives.

The mission of the Division of Enforcement is

to investigate and prosecute fairly and

effectively violations of the Commodity Exchange

Act and the Commission's regulations in order to

safeguard the integrity of U.S. futures and

options markets and to protect market participants

and futures and options customers. In the course

of its activities, the division, with headquarters

and regional components, plans and follows an

often complex course to achieve its objectives and

receives and creates a huge volume of documents

which must be logically stored and regularly

accessed. To support the accomplishment of these

15
tasks, the division is relying on a collection of

very old manual and automated systems to track the

progress of activities and to store and retrieve

documents. The objectives of this review are to

determine what the informatoion needs of all levels

in the division are, whether the information needs

are being met, and if the required information can

be created, stored, and.retrieved in a more

effective and efficient manner.

Status.

The joint OIG/Enforcement team produced

extensive and detailed narrative flow charts of

the current operational and administrative

functions and processes of the Division of

Enforcement and delivered them to the Division of

Enforcement and the Office of Information

Resources Management (OIRM). These products were

designed to inform the analysts in OIRM of the

inner workings of the Division of Enforcement and

to serve as the base on which the information

requirements of the Division of Enforcement will

be defined.

In September 1997, in a joint meeting of

representatives of the Division of Enforc~ment,

the Office of the Inspector General, and OIRM, the

principals made commitments of six staff years of

effort from OIRM and approximately three staff

years of effort from Enforcement to define the

system requirements of Enforcement.

The Division of Enforcement 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

16
required formats to management of the Division.

Phase three will concentrate on moving the

functions of the attorneys and investigators from

paper to computer screen and using the resulting

information to improve the tracking of

productivity information and the sharing of

information within the Division.

The final version of the first phase of what

is now being called "the Enforcement Modernization

Project" was delivered to the Division of

Enforcement in May 1998. This Enforcement

Procedure Number 3 System is now being used at all

locations of the Division. The second phase, a

system which produces the monthly status reports

from all parts of the Division and maintains on

screen data on the current status of all matters

within the Division, has been completed. Training

in the use of this system was completed during

March 1999. Refinements to the monthly status

report system are expected to be completed before

the end of the calendar year.

Phase Three, designed to present the

Enforcement Division with a case management,

litigation support, and document management

system, to tie together the first two systems with

this new system, and to automate as many of the

remaining Enforcement Division processes as

po s sib Ie, beg a.n wit has u r v e y 0 f a p pro p ria teo f fthe-shelf systems and an investigation of

currently available software and hardware which

may meet the bulk of identified needs.

Difficulties in maintaining contractor resource

levels led to delays in the pursuit of Phase 3. A

team consisting of staff from the Division of

Enforcement, the Office of Information Resources

Ma~agement, and contractor personnel has been

engaged in a review of available off-the-shelf

case management, litigation support, and document

17
management software since the beginning of

Calendar Year 2000. This review will produce a

comprehensive list of system requirements. This

review is expected to be completed in the next few

months and to be followed by the issuance of a

Request for Proposals and s.election of a system by

the end of the year.

2. Audit of CFTC's Lease of Space - Washington,

D.C.

Objective.

The objective of this audit is to determine if

the Commission is complying with the requirements

of the lease of space for its headquarters office

in Washington, D.C. The particular focus will be

on the appropriateness of all base rental and

escalation payments made under the lease. The

audit will cover lease payments from the inception

of the lease to date.

Status.

The OIG has begun reviewing the lease document

and developing its audit program. This audit is

expected to be completed before the close of the

next reporting period.

3. 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

performance goals, and report annually on actual

perfor~ance compa~ed to goals. The first report

was due in March 2000. The objective of this

review is to determine how effectively the

18
Commission is complying with GPRA's terms. This

will include an examination of the performance

measures devised by the Commission and the systems

used for gathering the data to report on those

performance measures.

Status.

In response to CongressLonal interest, the

Office of the Inspector General consulted with and

advised the Commission's operating divisions

concerning the GPRA requirements. The DIG

reviewed the Commission's FY 2001 Annual

Performance Plan before its submission to

Congress. In conjunction with other federal

agencies' Inspectors General, the OIG is

participating in the development of "best

practices" for adhering to requirements of GPRA.

GAO LIAISON

The OIG is charged with providing policy

direction for, and conducting, supervising, and

coordinating audits and investigations relating to

CFTC programs and operations. In addition, the

OIG is required to recommend policies for, and

conduct, supervise, and coordinate with other

Federal agencies, state and local Governmental

agencies, and nongovernmental entities, audits,

investigations, and evaluations regarding the

economy, efficiency, and effectiveness of CFTC

programs and operations.

GAO also conducts audits of CFTC activities,

and DIG plans its audits so as not to duplicate

GAO's efforts. Moreover, OIG in its audit

activities identifies the goals of each audit and

19
the methods of reac.hing the goals SQ as to

minimize the requirements placed on CFTC

resources.

20
STRATEGIC PLAN

FOR THE

OFFICE OF THE INSPECTOR GENERAL

INTRODUCTION

The Office of the Inspector General (OIG) in

the Commodity Futures Trading Commission (CFTC)

was created in accordance with the Inspector

General Act of 1978 (P. L. 95-452), as amended by

the Inspector General Act Amendments of 1988 (P.L.

100-504). The OIG was established to create an

independent unit to:

o Promote economy, efficiency, and

effectiveness in the administration of

CFTC programs and operations and to detect

and prevent fraud and abuse in such

programs and operations;

o Conduct and supervise audits and

investigations relating to the

administration of CFTC programs and

operations;

o Review existing and proposed legislation

and regulations and to make

recommendations concerning their impact on

the economy and efficiency of CFTC

programs and operations or the prevention

and detection of fraud and abuse; and

o Keep the Chairman and Congress fully

informed about any problems or

deficiencies in the administration of CFTC

programs and operations and provide

21
recommendations for correction o"f these

problems or deficiencies.

Accordingly, the OIG has established three

programs to carry out its r~sponsibilities:

audit, investigation, and legislative and

regulatory review. A summary of those p~ograms

follows.

AUDIT

The primary objectives of the OIG are to

promote long-term efficiency and effectiveness in

the administration and operation of the Commission

and to protect against fraud and abuse.

The key to effectively and efficiently

managing the Commodity Futures Trading Commission

is information. Top level managers and decision

makers require a steady stream of organized data

on the effects of their policy decisions and

resource allocations on the operations of the

Commission. Once having made the decision to

change resource levels or policy, managers must

receive accurate and timely reports of the

operational effects of their decision so they can

determine if the change is in the direction and of

the magnitude predicted. In the absence of such

information, top level managers cannot adequately

perform their jobs.

A number of obstacles to acquiring and

transmitting the desired information to decision

makers may exist in some programs. Principal

among them is the Commission's apparent difficulty

in many instances in tracking the progress of a

particular action across organizational lines

within the Commission.

22
A simple example is the Reparations Program

prior to the installation of an DIG recommended

unified, Commission-wide tracking system.

Complaints are received and processed and hearings

are held in the Office of Proceedings; appeals of

initial decisions in reparations cases are

transmitted to the Office of General Counsel where

proposed Commission opinions are drafted; and

appeals are decided by the Commission with the

paperwork being handled by the Office of the

Secretariat. Each office involved in the process

had a separate tracking system without ties to the

tracking systems in the offices preceding them or

following them in the process. Each office

treated the case as if it were brand 'new to the

Commission when they received it. As a result,

there was no provision for tracking information

across organizational lines. If the Chairman

wanted to know how much time was spent. on the

average reparations case of a particular

description at each stage in the process, that

information was· unavailable without an extensive

expenditure of manual labor.

A related problem is the difficulty the

Commission has in associating resources devoted to

an activity with the results of that activity.

The Commission does a good job of tracking

resources expended. It can determine how much

staff time and material at what cost was spent in

a particular activity. Some Commission

organizations can even associate costs with

particular projects. What a program manager may

have great difficulty doing, however, is telling a

decision maker that for a specific level of

increase in resources, the program manager will

deliver a specific level of increased output.

Without this information from all programs

competing for limited resources, decision makers

cannot make reasoned resource allocation

23
judgments. Decision makers are forced to rely on

intuition and anecdotal evidence.

To increase the efficiency and the

effectiveness of the management of CFTC programs

and operations, the OIG wil·l, in addition to the

conduct of mandatory audits, concentrate its audit

resources on the identification of information

voids and the lack of continuity in the flow of

information across organizational lines from the

beginning of a process until its conclusion. The

OIG will recommend the implementation of any

system improvements where the benefits of

implementing the changes exceed the costs.

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 of measures and systems

of measurement 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.

INVESTIGATION

The Inspector General Act of 1978, as amended,

provides that the Inspector General may receive

and investigate complaints or information from the

Commission's employees concerning the possible

existence of an activity constituting a violation

of law, rules or regulations, or mismanagement,

gross waste of funds, abuse of authority or a

substantial and specific danger to the public

health and safety.

24
The OIG has to date conducted only a reactive

investigative program chiefly relying on

unsolicited employee complaints as the source of

investigative leads. This reactive program has

resulted in only a handful of investigations per

year. This strategy was followed because the OIG

believed that an independent regulatory agency

such as CFTC without grant money or substantial

contracts to award was not likely to generate a

substantial investigative workload.

To insure that employee complaints could

easily reach the OIG, a 24 hour hotline was

established in February 1993 to receive

complaints. The hotline's existence ·is publicized

on the back cover of the agency-wide telephone

book and in this semiannual report.

Because of the reactive nature of the OIG's

investigative program, no investigative agenda has

been established.

LEGISLATIVE AND REGULATORY REVIEW

Because of the importance of this activity in

an economic regulatory agency, the OIG reviews

proposed and final CFTC regulations and

legislation and selected exchange rules using five

basic criteria: Whether the agency: (1) has

identified specifically the problem(s) to be

addressed by the proposal; (2) has defined through

case study or data analysis a clear link between

the proposed solution and the identified

problem(s); (3) has specified clearly the means to

effectively and efficiently enforce the proposal;

(4) has assessed the likely efficiency and

effectiveness of alternative solutions; (5) can

reasonably document that the proposal will yield

positive net benefits over the long term; and (6)

25
has met the requirements of the Regulatory

Flexibility Act and the Paperwo~k Reduction Act.

The Regulatory Flexibility Act requires the

agency to evaluate the impact of its regulations

on small entities. The Paperwork Reduction Act

requires the agency to manage effectively and

efficiently its information collections so that

they ar~ the least burdensome necessary to achieve

the stipulated objectives.

Because the OIG does not initiate legislation

or, generally, regulations, the OIG legislative

and regulatory review program is reactive to the

legislative and regulatory proposals developed by

others. Accordingly, no independent legislative

and regulatory review agenda has been established.

AUDIT AGENDA

ANNUAL AUDITS

The following audit is performed on an annual

basis.

Audit of Compliance with the Federal Managers'

Financial Integrity Act

In support of OMB Circular A-123 (Revised),

the Inspector General will evaluate, provide

technical assistance, and advise the agency head

a-s t-o wh e the r the age n c y 's rev i e wan d e val u a t ion

process was conducted in accordance with the

circular's requirements.

OTHER AUDITS

The OIG intends to focus the balance of its

audit resources on insuring that the Chairperson,

the Commissioners, and program managers have

26
timely, useful information on the progress of

CFTC's programs in meeting their goals and

objectives. For example, emphasis will be placed

on determining whether all managerial levels

engaged in a process can track the progress of

their various programs. The tracking systems

required in many, though not all, programs will

cross formal organizational lines.

These audits will entail a cataloging and

description of all of the manual and automated

systems used by an organization to gather

information on its use of resources, the results

of the devotion of those resources (including

definitions of measurements of accomplishment),

and the reporting of results and associated costs

to the upper level managers in the Division and to

the Chairman and the Commissioners. Cataloging of

these decision support systems will be followed by

an assessment of whether all concerned officials

are timely receiving the information they require

to efficiently allocate resources to those uses

which best accomplish the priorities of the

Commission. If any elements are lacking in the

information systems, they will be identified and

improvements will be recommended if they can be

implemented in a cost/beneficial manner.

If recommendations are successfully

implemented, the proposed systems should allow the

Chairman, the Commissioners, and concerned program

managers to track progress of a particular program

across organizational lines and to quickly

determine the effects, if any, of changes in

policy, procedure, or staffing.

The first step in accomplishing this goal will

be to concentrate on documenting, and recommending

the improvement and/or development of tracking

27
systems in every program element throughout the

Commission.

RESOURCES REQUIRED

The OIG estimates that approximately one and

nine-tenths staff years of effort will be devoted

over each of the next five years to the audits

described in "Other Audits" above; The "Annual

Audits" are expected to consume approximately onetenth staff year per year.

28
CONTACTING THE OFFICE OF THE

INSPECTOR GENERAL

The eIG 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.

29
Table 1

Reports Issued with Questioned Costs

(October 1,1999 - March 31, 2000)

Number

Dollar Value

(Thousands)

Questioned Unsupported

A. For which no management decision

has been made by the

commencement of the 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

disallowed costs

(ii) dollar value of

costs not disallowed

D. For which no management decision

has been made by the end of the

reporting period

30

o

o

·0

o

o

o

o

o

o

o

o

o

o

o

o·

o

o

o

o
Table 2

Reports Issued \vith Recommendations

That Funds be Put to Better Use

(October 1,1999 - March 31, 2000)

Dollar Value

Number (Thousands)

A. For which no management decision

has been made by the

commencement of the reporting

period 0 0

B. Which were issued during the

reporting period 0 0

Subtotals (A + B) 0 0

c. For which a management decision

was made during the reporting

period 0 0

(i) dollar value of

recommendations that

were agreed to by management 0 0

(ii) dollar value of

recommendations that

were not agreed to by

management 0 0

D. For which no management decision

has been made by the end of the

reporting period 0 0

3 1
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 "