Securities and Exchange Commission: Greater Attention Needed to Enhance Communication and Utilization of Resources in the Division of Enforcement
Published: 2009-03-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Securities and Exchange Commission's (SEC) Division of Enforcement (Enforcement) plays a key role in meeting the agency's mission to protect investors and maintain fair and orderly markets. In recent years, Enforcement has brought cases yielding record civil penalties, but questions have been raised about its capacity to manage its resources and fulfill its law enforcement and investor protection responsibilities. GAO was asked to evaluate, among other issues, (1) SEC's progress toward implementing GAO's 2007 recommendations; (2) the extent to which Enforcement has an appropriate mix of resources dedicated to achieving its objectives; and (3) the adoption, implementation, and effects of recent penalty policies. GAO analyzed information on resources, enforcement actions, and penalties; and interviewed current and former SEC officials and staff, and others.
section_title: What GAO Found
paragraphs: SEC has fully implemented three of GAO's four 2007 recommendations. GAO recommended SEC establish procedures for approving new investigations and for operating its new investigation management information system called the Hub; consider procedures for closing inactive cases; and improve management of the Fair Funds program, which returns funds to harmed investors. Enforcement has developed the procedures for new investigations and for operating the Hub, and made case closings a higher priority. SEC has also staffed a new Office of Collections and Distributions (OCD), which is responsible in part for administering the Fair Funds program. However, OCD has a dual reporting structure in which most of the staff report to Enforcement, not the OCD director. According to OCD management, this structure has slowed work and confused staff. SEC strategic goals and GAO internal control standards call for making efficient and effective use of resources a priority. SEC's strategic plan also calls for improving program design and organizational structures. Recent overall Enforcement resources and activities have been relatively level, but the number of investigative attorneys has decreased 11.5 percent over fiscal years 2004 through 2008. Enforcement management said resource levels have allowed them to continue to bring cases across a range of violations, but both management and staff said resource challenges have delayed cases, reduced the number of cases that can be brought, and potentially undermined the quality of some cases. Specifically, investigative attorneys cited the low level of administrative, paralegal, and information technology support, and unavailability of specialized services and expertise, as challenges to bringing actions. Also, Enforcement staff said a burdensome system for internal case review has slowed cases and created a risk-averse culture. SEC's strategic plan calls for targeting resources strategically, examining whether positions are deployed effectively, and improving program design and organizational structure. Enforcement management has begun examining ways to streamline case review, but the focus is process-oriented and does not give consideration to assessing organizational culture issues. Enforcement management, investigative attorneys, and others agreed that two recent corporate penalty polices--on factors for imposing penalties, and Commission pre-approval of a settlement range--have delayed cases and produced fewer, smaller penalties. GAO also identified other concerns, including the perception that SEC had "retreated" on penalties, and made it more difficult for investigative staff to obtain "formal orders of investigation," which allow issuance of subpoenas for testimony and records. Our review also showed that in adopting and implementing the penalty policies, the Commission did not act in concert with agency strategic goals calling for broad communication with, and involvement of, the staff. In particular, Enforcement had limited input into the policies the division would be responsible for implementing. As a result, Enforcement attorneys reported frustration and uncertainty in application of the penalty policies.

section_title: Letter
paragraphs: The Division of Enforcement (Enforcement) of the Securities and  Exchange Commission (SEC) plays a key role in helping the agency meet  its mission of protecting investors and maintaining fair and orderly  markets. Enforcement is charged with investigating possible securities law  violations; recommending civil enforcement actions when appropriate,  either in a federal court or before an administrative law judge; and  negotiating settlements on behalf of the Commission. The types of  remedies that Enforcement can seek on behalf of the Commission include  monetary penalties and disgorgements of the profits that individuals or  companies may derive by having committed securities violations. In 2006  and 2007, SEC adopted two policies for determining penalties in cases  involving corporate respondents.
Current economic conditions and recent turmoil in financial markets have  underscored the importance of the role Enforcement plays. In recent  years, Enforcement has initiated some high-profile actions that resulted in  record civil penalties against corporations and senior officers. However,  we and others have criticized Enforcement’s capacity to effectively  manage its activities and fulfill its critical law enforcement and investor  protection responsibilities on an ongoing basis. Some of the challenges  Enforcement faces include resource and workload imbalances,  operational inefficiencies, and limitations in information systems. More  recently, our August 2007 report noted limitations with Enforcement’s  processes and systems for planning, tracking, and closing investigations,  which have hampered the division’s capacity to effectively manage its  operations and allocate limited resources.
Because of your interest in ensuring that Enforcement effectively manages  its resources and enforces compliance with securities laws and  regulations, you requested that we review Enforcement’s resource level,  the two recently adopted penalty policies, as well as follow up on our  previous work as appropriate. Accordingly, this report (1) evaluates  Enforcement’s progress in implementing our 2007 recommendations; (2)  assesses the extent to which Enforcement has an appropriate mix of  resources dedicated to achieving its objectives, including support staff,  information technology, and access to specialized services; (3) discusses  the factors that influence the amount of penalties and disgorgements that  are ordered and the total amount of these remedies in recent years; and (4)  evaluates the adoption, implementation, and effects of the recent  corporate penalty policies.
To address our objectives, we analyzed information on trends in  resources, enforcement actions, and penalties. We obtained data from SEC  on, among other things, the level and type of Enforcement staffing over  time; the division’s budget; staff turnover and experience; number of cases  filed annually; number of investigations opened or pending; the  distribution of enforcement actions by case type; annual amounts of  penalties and disgorgements ordered; and annual number of formal orders  of investigation issued. We reviewed relevant documents on the revised  penalty policies and examined a group of cases processed since  implementation of the policies. Primarily, these cases were those resolved  under a policy on corporate penalties adopted in 2007, and our work  included a review of the facts developed, and legal basis for,  recommended enforcement actions. We also met with SEC officials,  former SEC commissioners, current and former Enforcement staff, and  outside parties knowledgeable about Enforcement practices, such as  securities defense attorneys and academics who study the securities  industry and SEC. Our work included 11 small group meetings with a total  of more than 80 front-line Enforcement staff—investigative attorneys, and  first-level supervisors, known as branch chiefs—in four SEC offices across  the country (Chicago, San Francisco, New York, and Washington, D.C.).  We also examined the agency’s strategic plan, its annual performance and  accountability reports, and its budget justification documentation.
We undertook this performance audit from August 2008 to February 2009,  in accordance with generally accepted government auditing standards.  These standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. Appendix I provides a more  detailed description of our scope and methodology.
subsections: section_title: Background
paragraphs: SEC is an independent agency created in 1934 to protect investors;  maintain fair, honest, and efficient securities markets; and facilitate capital  formation. SEC has a five-member Commission that comprises the  Chairman and four commissioners, who are appointed by the President  and confirmed by the Senate. The Commission oversees SEC’s operations  and provides final approval of SEC’s interpretation of federal securities  laws, proposals of new or amended rules to govern securities markets, and  enforcement activities.
To accomplish its mission, SEC has established four strategic goals: (1)  enforce compliance with federal securities laws, (2) promote healthy  capital markets through an effective and flexible regulatory environment,  (3) foster informed investment decision-making, and (4) maximize the use  of SEC resources. Enforcement and the agency’s Office of Compliance  Inspections and Examinations (OCIE) share responsibility for  implementing SEC’s compliance goal. According to SEC’s 2008 Annual  Report, in fiscal year 2008, more than half of SEC’s resources—a total of  2,340 full-time equivalent positions, and more than $595 million—were  dedicated to programs to enforce securities laws.
In 2002, Congress passed the Sarbanes-Oxley Act of 2002 (Sarbanes- Oxley), following high-profile corporate failures and accounting scandals,  and in response to resulting demands that public companies be held more  accountable for information reported to investors. The act, which  addressed concerns involving corporate governance, auditor  independence, and regulation and oversight of the accounting profession,  also provided additional resources to SEC. Subsequently, Congress  appropriated $716 million for SEC in fiscal year 2003, an increase of 45  percent over its fiscal year 2002 budget. SEC was directed to use this  increase both to add personnel and acquire new information technology to  increase its effectiveness.
Enforcement staff conduct investigations through informal inquiry,  interviewing witnesses, examining brokerage records, reviewing trading  data, and other methods. At the request of Enforcement staff, the  Commission may issue a “formal order of investigation,” which allows the  division’s staff to compel witnesses by subpoena to testify and produce  books, records, and other documents. Following an investigation, SEC  staff present their findings to the Commission for its review,  recommending Commission action either in a federal court or before an  administrative law judge. On finding that a defendant has violated  securities laws, the court or the administrative law judge can issue a  judgment ordering remedies, such as civil monetary penalties and  disgorgement. In many cases, the Commission and the party charged  decide to settle a matter without trial. In these instances, Enforcement  staff negotiates settlements on behalf of the Commission.
Each year, Enforcement brings hundreds of civil enforcement actions  against individuals and companies accused of violating securities laws.  The mix and types of actions vary from year to year, based upon market  conditions and changes in financial instruments being used. In general,  violations could include financial and accounting fraud, insider trading,  market manipulation, providing false or misleading information about  securities and the companies that issue them, selling securities without  proper registration, and violating the broker-dealer responsibility to treat  customers fairly.
Enforcement personnel are located in SEC’s headquarters in Washington,  D.C., and the agency’s 11 regional offices. Enforcement staff located in  headquarters include the director and two deputy directors, five  investigative groups, or Offices of Associate Directors, and internal  support groups (Office of Chief Counsel, Office of Chief Accountant, the  trial unit, Office of Collections and Distributions, market surveillance, and  Office of Internet Enforcement). An associate director heads each Office  of Associate Director and has one or more assistant directors. Branch  chiefs report to assistant directors and supervise the work of investigative  attorneys assigned to individual investigations, with review and support  provided by division management. SEC regional office staff typically are  divided between Enforcement and OCIE personnel. Enforcement units in  the regional offices have Office of Associate Director structures similar to  those in headquarters and report to the Director of Enforcement in  Washington, D.C.
section_title: SEC Has Made Progress in Addressing Our 2007 Recommendations, but to Date Has Not Fully Implemented All of Them
paragraphs: In 2007, we made four recommendations designed to strengthen  Enforcement’s management of its operations, which focused on:    Establishing written procedures for reviewing and approving new  investigations. We said that establishing such guidance would help focus  the review of investigations, reinforce the consistency of those reviews,  and assist in communicating new policies to the staff.
Establishing written procedures for entering data into the new  investigation management information system called the Hub, and  establishing a control process for assessing reliability of data in the  system. We said that without written guidance and establishment of  independent and regular reviews of the accuracy of Hub data,  Enforcement was not well-positioned to get reliable program information,  and that the system’s capacity to aid management of the investigation  process might be limited.
Closing inactive investigations. We said that leaving investigations open  indefinitely compromises management’s ability to effectively manage its  portfolio of cases, and has potentially negative consequences for  individuals and companies that are no longer under investigation.
Improving management of the Fair Funds program. We noted that because  SEC had not yet staffed or defined the roles and responsibilities of a new  office being established to administer the Fair Fund program, it was not  possible to determine the extent to which the office may better facilitate  the distribution of funds to investors harmed by securities fraud and other  violations. We also said that in the meantime, the division had not taken  other steps to allow it to develop a better perspective on reasonableness of  Fair Fund program expenses.
SEC has implemented several aspects of these recommendations, but  more work is needed for full implementation of the recommendation on  the Fair Funds program as it relates to the organizational structure of the  new Office of Collections and Distributions.
subsections: section_title: Enforcement Has Developed Procedures for Reviewing New Investigations, Implemented the Hub System, and Encouraged Closing of Inactive Investigations
paragraphs: In 2007, we reported that under a largely decentralized approach for  approving new investigations, Enforcement was not always able to ensure  efficient resource allocation or maintain quality control in the investigative  process. Enforcement has now developed written procedures for review  and approval of new investigations, which are included in a recently  completed enforcement manual. The procedures address various steps in  the investigative process, such as handling tips, referrals, and complaints;  opening a Matter Under Inquiry, which can be a preliminary step toward  opening a full investigation; and opening a full investigation. According to  the procedures, the primary consideration for opening an investigation  should be whether the inquiry has the potential to substantively and  effectively address the potentially improper conduct at issue. Other key  factors are the magnitude or nature of the violation, the size of the victim  group, and the amount of potential or actual losses to investors.
In 2007, we reported that Enforcement planned to start using the Hub  system by late in the year. An initial phase of the Hub was planned to  provide an ability to interact with the division’s system for tracking  Matters Under Inquiry, investigations, and enforcement actions—the Case  Activity Tracking System (CATS)—which contains information on these  actions. In a second phase, SEC planned to replace CATS and expected  the project to be completed in fiscal year 2009.
Enforcement management reports that the initial phase is complete. The  Hub, as currently implemented, is an interface into CATS, and is intended  to provide a management information tool for viewing information stored  in CATS. The need arises because CATS was designed to be an  information repository, not a system for querying and displaying data.  Using the Hub, Enforcement staff can now generate various reports on  enforcement activity. For example, the Hub can produce a report of an  investigative attorney’s roster of current cases, containing items such as  general case information, status, or other case information. Other reports  allow queries by case type, and searching for cases by time period. In  response to our recommendation that Enforcement provide guidance on  the use of the Hub, the division has developed a user manual, and  Enforcement management said that staff have had access to training and  various demonstrations of the Hub’s capabilities.
In connection with the Hub guidance, we recommended that the then- Chairman direct Enforcement to establish a control process for assessing  the reliability of data in the Hub system. To the extent that the Hub relies  on CATS information, there are already some processes for monitoring  entry of information, because the CATS system, which Enforcement  officials call their system of record, has controls on data entered into the  system. This includes use of case management specialists, whose specific  duties include entry of case information. According to Enforcement  management, under the current implementation of the Hub, investigative  staff are responsible for entering quarterly, narrative-style case updates  into the system. Specifically, staff attorneys are to enter this narrative data  into the Hub as part of quarterly case reviews that management conducts,  plus other Hub-only information not kept in CATS. Enforcement  management told us the formal control on entry of this data is that all staff  are aware of the management reviews and that the Hub user guide directs  that information should be updated at least quarterly.  They said that  ultimately, it is a manager’s responsibility to make sure the information  indeed gets into the Hub system. The officials said that if the narrative  case updates are not entered into the system on a timely basis as directed,  this information, which is not quantitative data used to track items such as  dollar amounts or caseload, is considered to be a low-risk area that will  not compromise overall system quality.
In 2007, we reported that Enforcement officials characterized CATS as  severely limited and virtually unusable as a management tool. In addition,  Enforcement officials said that obtaining technical support for CATS could  be difficult because the system is proprietary, and the company that  created it is no longer in business. According to Enforcement officials,  CATS’ deficiencies resulted from the fact that the system was hastily  designed to prepare for expected year 2000 technical challenges. As part  of this study, Enforcement officials told us that following the departure of  an information technology contractor on the Hub project, the division has  chosen to reevaluate the entire effort to replace CATS. They told us that  the most likely scenario for implementation of a CATS replacement is now  2011 and that availability of funding will be a key factor. The officials told  us they are considering whether to add new capabilities to the new  system, in order to allow production of information that is unavailable in  the current CATS/Hub implementation without time-consuming custom  programming. Examples of such capabilities include annual tallies of  penalties and disgorgements by type of case, and data on length of time for  cases to reach certain milestones in the enforcement action process. In  addition to information on individual cases, such aggregate information  could be useful to Enforcement as a management tool. In particular, the  officials told us they are examining the replacement project from the  standpoint of achieving efficiencies in design, development, and financial  system integration, including cost reductions related to training and  internal controls. This will improve the division’s ability to capture and  produce management information, the officials said.
Finally, we recommended in 2007 that Enforcement consider developing  expedited procedures for closing investigations that had not resulted in  enforcement actions and were no longer being actively pursued. We found  that Enforcement was not addressing inactive cases where documentation  required to close a matter had not been completed. The new Enforcement  manual encourages staff to close investigations when it becomes apparent  that no enforcement action will be recommended. According to SEC’s  fiscal year 2008 Performance and Accountability Report, the division  closed 1,355 cases in fiscal year 2008—its highest annual total, according  to Enforcement management—compared to 374 in fiscal year 2007, a 262  percent increase. Officials attributed this to the new guidance, new  quarterly reports that list investigations that are 5 or more years old, and  periodic conference calls and meetings to discuss closings and case status.
section_title: SEC Has Established an Office to Improve Fair Fund Management, but Dual Chain of Command for the Office Impedes Its Work
paragraphs: Under the Fair Fund program, SEC can combine penalties and  disgorgements ordered in an enforcement action and distribute the  proceeds to harmed investors. In 2007, we recommended implementing a  plan for improving Fair Fund management, to include: (1) staffing a new  central Fair Fund office, defining its roles and responsibilities, and  establishing written procedures; and (2) ensuring the consistency of, and  analyzing, final accounting reports on completed Fair Fund plans. We  found that Enforcement’s management of the Fair Fund program may have  contributed to delays in distributing funds to harmed investors and that  the division lacked data necessary for effective program oversight.
In February 2008, SEC announced creation of OCD, to handle  disgorgements and Fair Fund activity, plus other collection and  distribution functions, such as collection of delinquent penalties or  disgorgements that are not part of Fair Fund plans, and investment of  funds received. As of October 2008, 23 of 25 full-time positions earmarked  for OCD had been staffed. As we concluded our review, efforts were  continuing to formulate policies and procedures for the office, in areas  such as conflict-of-interest and ethics rules, as well as guidance for  selection of consultants, distribution agents, and others who assist with  distributions. OCD was envisioned as having agencywide responsibilities,  but to date, has handled collections for the headquarters office in  Washington and the Boston regional office only. For other offices, OCD  advises on collections and distributions, and Enforcement staff remain  responsible for collections and distributions in their respective offices.
Furthermore, our review identified questions about the efficiency and  effectiveness of a dual reporting structure established for OCD. According  to GAO internal control standards, optimal organizational structure  focuses on a management framework for planning, directing and  controlling operations to achieve agency objectives. The structure should  clearly define key areas of authority and responsibility, and establish  appropriate lines of reporting. Similarly, SEC’s strategic plan calls for  examining whether positions are deployed effectively, and exploring how  to improve organizational structure. According to interviews and  documentation we reviewed, the OCD director reports to SEC’s executive  director, who reports to the SEC Chairman. OCD has a deputy director.  But the deputy director—to whom all but two OCD staff ultimately  report—has a direct report relationship to both the OCD director and the  Director of Enforcement. Thus, a dual reporting arrangement has been  established: A small portion of OCD reports directly to one superior (the  OCD director), while nearly all of the office reports to a deputy whose  supervisory chain also leads to a different superior outside OCD (the  Enforcement director). This bifurcated reporting leads to a situation  where, as the OCD director said, most staff ostensibly in his office are in  fact within the organizational structure of a different division. Meanwhile,  the OCD deputy director believes that the director must seek her  permission to draw upon resources that would seem to lie under the OCD  director’s control, but in practice do not. The deputy director typically  decides when it is appropriate to advise the director on significant matters,  but takes primary direction from the Enforcement director, who has no  formal link to the OCD director.
According to a senior Enforcement manager, this structure was the  product of an arrangement between the then-Chairman and the then- Director of Enforcement. This arrangement raises questions about  potential effect on unit performance and SEC’s goal of prompt distribution  of funds to harmed investors. The result of this structure, according to  both the OCD director and deputy director, and former Enforcement  officials, has been twofold: confusion within the office and among  Enforcement staff at large about who is responsible for what duties; and  delay, as additional meetings and deliberations among a larger group of  parties are required to consider issues and reconcile viewpoints. For  example, the OCD director said that when seeking to implement ideas for  OCD, he must schedule additional rounds of meetings in order to seek  consensus among divisions. Similarly, the OCD deputy director said that  when differences of opinion have arisen on plans the OCD director wanted  to pursue, she has sought direction from Enforcement management. Also,  the deputy director said that there has been confusion among OCD staff  reporting to her on what issues are appropriate for the attention of the  OCD director. Both OCD officials, and others, told us the arrangement is  unsatisfactory.
Finally, in response to our recommendation that SEC implement a plan for  ensuring the consistency and analysis of final accounting reports for  completed Fair Fund plans, Enforcement staff, with the assistance of the  agency’s Office of Financial Management, have created templates to  standardize reporting of final accounting for completed distributions and  Fair Fund plans. SEC uses outside consultants for Fair Fund duties, such  as identifying investors harmed in a particular case, or making payments  to investors. The nature of such duties may vary by case type. We said that  without a standardized reporting process, Enforcement could not examine  the reasonableness of Fair Fund administrative expenses. With creation of  the templates, SEC has taken a step toward collecting information to  examine administrative costs. As of our review, the new reports are not  yet integrated with Phoenix, a system that is linked manually with the  agency’s financial management system. According to Enforcement  officials, the change in information technology contractor is the chief  reason. Enforcement management recognizes the need to complete  integrating the new reports with Phoenix and is taking steps to address it.
section_title: Investigative Staffing Has Fallen and Resource Challenges Undermine the Ability to Bring Enforcement Actions
paragraphs: Overall Enforcement resources and case activity generally have been level  in recent years, but the number of front-line investigative staff has fallen.  Enforcement management and investigative attorneys told us that  resource challenges hinder the ability to bring cases. They cited  weaknesses in administrative and paralegal support, information  technology support, and specialized services and expertise; and delays in  workflow due to the division’s supervisory review of investigations.
subsections: section_title: Overall Enforcement Resources and Case Activity Generally Were Steady in Recent Years, but Investigative Staff Positions Fell by Nearly 12 Percent
paragraphs: After Sarbanes-Oxley increased SEC’s appropriations authorization,  Enforcement resources grew as well. As shown in figure 1, Enforcement  staffing increased following enactment of the legislation in 2002, before  subsequently declining. In fiscal year 2008, staffing increased, but  remained below the post-Sarbanes-Oxley peak. Total Enforcement staffing  has declined 4.4 percent, from a peak of 1,169 positions in fiscal year 2005  to 1,117 positions for fiscal year 2008.
Within Enforcement, investigative attorneys, who are the cornerstone of  SEC’s enforcement efforts, account for the largest number of positions— about 54 percent of all non-supervisory positions. They are followed by  staff accountants (10.5 percent) and trial attorneys (10.3 percent.)
Compared to the division overall, investigative staffing has experienced a  greater decline. While total Enforcement staffing is down 4.4 percent from  its peak, the number of non-supervisory investigative attorneys has  declined 11.5 percent, from a peak of 566 in fiscal year 2004 to 501 for  fiscal year 2008. Enforcement management attributed this greater decline  to several factors: staff attorneys were promoted into management during  a hiring freeze, which left their former positions vacant; investigative  positions were diverted to other functions; and non-attorney support staff  had fewer opportunities to move to other positions outside the agency.
Enforcement’s budget, as shown in table 1, has followed the same general  pattern—increasing post-Sarbanes-Oxley, then falling, and turning back  up. Adjusted for inflation, the fiscal year 2008 amount is down 8.2 percent  from the fiscal year 2005 peak.
In addition to the number of positions Enforcement has, staff turnover and  experience are also factors important to the effectiveness of division  operations. In each of these areas, Enforcement has shown improvements  in recent years. As shown in figure 2, Enforcement staff turnover has been  declining generally, and for investigative and trial attorneys in particular.
As turnover has decreased, the experience level of front-line attorneys has  increased. The majority of Enforcement’s non-supervisory attorney  workforce has 10 years of experience or less. As shown in figure 3, the  distribution of experience within this category has undergone a reversal in  recent years. The portion with 0 to less than 3 years of experience has  declined by about half, while the portion with 3 to less than 10 years of  experience has increased by about 55 percent. The segment of the  Enforcement workforce with 10 to less than 15 years worth of experience,  while small overall, has also grown recently, by about 14 percent.
Enforcement management welcomed these trends in turnover and  experience, but believed that they were the product of a weaker private  sector job market for attorneys. They felt that had market conditions been  better recently, with more job opportunities in the private sector,  departures would have been greater, which would depress the experience  level. They also said that longer tenures create a corollary problem,  because opportunities for advancement may be more limited with staff  remaining longer.
Because Enforcement pursues actions against alleged securities law  violators, and the entire population of such violators is unknown, there is  no metric, such as volume of trading or number of public company filings,  for directly measuring the division’s workload or results achieved. As a  result, Enforcement officials said they focus on two process-oriented  performance indicators to track the division’s activities: number of  investigations opened annually, and number of enforcement actions filed  annually. By these indicators, Enforcement activity has generally been  level in recent years. Meanwhile, Enforcement’s case backlog has declined  somewhat, as the division has made case closings a greater priority (see  fig. 4). Senior Enforcement officials said the staff has cleared a previous  backlog of cases ready to be closed.
Some investigative attorneys and others with whom we spoke said such  case tallies can present an incomplete view of Enforcement activity. They  said that gross tallies do not indicate the relative significance or magnitude  of cases, and are vulnerable to manipulation. For example, a major  enforcement case involving significant violations or market practices  would be reported in the statistics with the same weight as a matter more  administrative in nature, such as failure to make required filings with the  agency.
section_title: Enforcement Management and Investigative Attorneys Both Said Resource Challenges Undercut Their Ability to Bring Enforcement Actions
paragraphs: In interviews and small group meetings, Enforcement management and  investigative attorneys agreed that resource challenges have affected their  ability to bring enforcement actions. In general, Enforcement  management told us the current level of resources has not prevented the  division from addressing any major program area, as the division  continues to bring cases across a range of securities violations (see fig. 5).  This is in line with an agency goal to avoid over-concentrating in any  particular area.
However, management and staff said that more resources were desirable,  especially in the areas of professional, information technology, and  support staff. Current and former Enforcement management told us that  the division has gained new resources recently, but these new positions  generally were dedicated to specific areas, such as micro-cap fraud or  financial restatements, and particular areas within Enforcement, including  OCD, the Office of Internet Enforcement, and the PAUSE program, in  which the agency compiles information on securities solicitations by  unregistered entities. As a result, some investigative attorneys as well as  Enforcement management told us that current staffing levels mean some  worthwhile leads cannot be pursued, and some cases are closed without  action earlier than they otherwise would have been. One Enforcement  manager told us that the division did not have enough resources to pursue  many leads involving offering fraud and market manipulation and that,  once investigations began, some were closed for insufficient resources.  Too few investigative attorneys also affect the ability to pursue some  referrals from the Financial Industry Regulatory Authority (FINRA) and  OCIE. One attorney told us of closing several cases that were promising,  but which could not be pursued for lack of resources. A former  Enforcement manager told us of difficulty finding investigative staff to be  assigned to cases, including cases related to sub-prime mortgages.
More specifically, investigative attorneys with whom we spoke cited a  number of resource challenges that have undercut their efforts, causing  significant delays in bringing cases, reducing the number of cases that can  be brought, and potentially undermining the quality of cases.  Enforcement management concurred with the staff’s observations in these  areas.
subsections: section_title: Administrative and Paralegal Support
paragraphs: Investigative attorneys with whom we spoke concurred that having little  or no administrative or paralegal support causes them to spend  considerable time on non-legal duties such as copying, filing, document  scanning, preparing exhibits, making travel arrangements, soliciting bids  for court reporters, and logging and processing documents submitted by  respondents. For example, one attorney told us such duties can take from  2 to 3 hours daily. Another, who joined the agency from private practice,  said that investigative attorneys can spend up to half their time on tasks  handled by support staff in their previous position. One attorney told us of  plans to spend a day assembling document storage boxes. Because there is  insufficient in-house copying capability, confidential documents  sometimes are sent to non-secure outside copy shops. Frequent equipment  breakdowns mean attorneys must search for working copiers and  scanners, a number of attorneys told us. Because investigative attorneys  must handle incoming documents, correspondence and documents often  stack up, unprocessed. In addition, we have reported previously on the  lack of support staff.
One attorney told us that one effect of the lack of support is that  Enforcement staff must rely on representations from defense counsel in  conducting investigations, because they have not had enough resources to  undertake research independently. Similarly, a former Enforcement  manager told us that while it can be good policy to rely on companies to  produce information, resource constraints mean this reliance sometimes  reaches undesirable levels—for example, in identifying documents that are  key to a case.
section_title: Information Technology Support
paragraphs: A number of investigative attorneys said information technology support  of enforcement actions is inefficient and outdated. Enforcement’s  Concordance system for managing documents is a particular area of  concern. Some attorneys told us it takes weeks, or even months, for case  records to be sent to headquarters and loaded onto the system to become  available for use. Meanwhile, the system lacks useful functions that are  available to the private sector, such as certain search features or the  ability to reconstruct chains of e-mail communication. Some attorneys said  searches in the system fail to identify information known to be present,  probably due to poor quality scanning of documents initially. A securities  defense attorney told us it is not uncommon for Enforcement attorneys to  call, asking to be directed to information of interest in records the defense  already has produced, because the staff cannot search for the information  themselves. The defense attorney said that this could limit Enforcement’s  analysis of issues.
While downloading of information from computer hard drives has become  a basic evidentiary technique, some investigative attorneys told us there  can be lengthy delays for information technology support staff to retrieve  the contents from hard drives obtained during an investigation. For  example, one attorney told us about a case in active litigation in which  Enforcement had to seek an extension of time for discovery because after  6 months, only two of a number of hard drives had been downloaded.  Some investigative attorneys also said that the division is at a disadvantage  in testimony transcription. They said that, while systems used by private  parties allow for real-time transcription of testimony, Enforcement uses an  antiquated taping system, in which sessions are recorded and transcribed  later. The transcripts frequently come back with errors, such as  misidentified parties.
Some investigative attorneys suggested that Enforcement would benefit  from a divisionwide system for sharing information, such as litigation  documents or legal analyses. The attorneys with whom we spoke said that  such a system, found in private law firms, would allow attorneys  developing cases to be more productive by taking advantage of work  already done by others. Enforcement also cannot access information  maintained by OCIE. One attorney told us that OCIE information would be  useful because when investigating a company, attorneys would like to  know of results from any previous inspections.
section_title: Access to Specialized Services and Expertise
paragraphs: A number of Enforcement attorneys told us they often cannot get access  to specialized services that would aid in case development, such as  forensic accounting, and that the division lacks expertise in some subject  areas involved in recent financial markets turmoil. According to some  attorneys, while the agency has accountants on staff, demand for their  time outstrips availability. For example, one attorney told us that twice in  recent months, a request for an accountant to be assigned to cases under  investigation, including one involving sub-prime mortgages, was ignored.  Another told us of handling accounting work alone, after being unable to  obtain accounting support.
Similarly, some attorneys felt that in-house expertise in a range of areas  was inadequate. These include complex trading, government securities,  collateralized debt obligations, credit default swaps, sub-prime bonds, and  collateralized mortgage obligations. One attorney told us of a situation  where an investigation was put on hold for several months because staff  with trading expertise were unavailable.
Several attorneys said that another significant shortcoming is that the  investigative staff does not have access to real-time trading information.  Such information can be pivotal to bringing certain cases, such as “pump  and dump” schemes where promoters use high-pressure tactics to hype a  stock, before subsequently unloading their holdings. Currently, when  attorneys need such information, they manually query hundreds of broker- dealers, a process that initially produces only incomplete records. Or, they  might request data from a regulated entity such as FINRA. Attorneys told  us that it can take weeks or longer to obtain the necessary information.
section_title: Internal Case Review
paragraphs: Investigative attorneys also strongly agreed that the process for  supervisory review of enforcement cases is burdensome and unnecessarily  redundant, and thus not a good use of resources. They said that the  amount of time devoted to review significantly reduces the time available  for investigations. Under Commission procedures, enforcement actions  are undertaken after investigative staff present a matter for consideration  to the Commission. This is done by means of an “action memorandum.”  Such memorandums, which can be lengthy and detailed, provide  information including the facts and circumstances of a case, alleged  violations of securities laws, legal analysis, and recommendations. Subject  to individual circumstances, action memorandums generally go through  multiple levels of review:    Regional director (for regional offices);    Senior Enforcement management, other relevant divisions of the agency,  and Office of General Counsel; “To-be-calendared” review (for additional review by senior Enforcement  management in advance of Commission meeting); and   Pre-calendar review immediately before Commission meeting.
Investigative attorneys with whom we spoke noted that an action  memorandum can be subject to review and revision numerous times as it  moves through this process. Enforcement also requires other  memorandums, such as a 6-month status report after cases are opened, or  when an investigating attorney proposes sending a “Wells notice,” which is  a formal notice to a party that Enforcement is considering recommending,  or intends to recommend, that the Commission file an action or  proceeding against them.
Some attorneys estimated that they spend as much as a third to 40 percent  of their time on the internal review process, thus making it harder to meet  the division’s emphasis on bringing cases on a timely basis. A number of  attorneys told us that the effect of the intensive review process is to create  a culture of risk aversion, an atmosphere of fear or insecurity, or  incentives to drop cases or narrow their scope. They provided several  personal examples. In one instance, an attorney closed a case rather than  go through a review with another division. Indeed, according to a number  of attorneys, there is a perception that other divisions have become too  influential in effectively controlling Enforcement activities. In two other  cases, charges were dropped or reduced because the matters had taken so  long that people were unable to recall earlier considerations of evidence.  In another situation, it took 2-½ months to prepare a paragraph requesting  permission to send a Wells notice; in another case, staff prepared multiple  drafts of a Wells memo over 3 years before finally closing the case because  it was so old. Finally, one investigative attorney told us that a company  under investigation offered to pay whatever penalty amount Enforcement  asked; 5 months later, the matter still remained open, with an action  memorandum in its tenth draft. Some attorneys noted that such delays  may encourage violators.
The resource issues identified by Enforcement investigative attorneys and  management—including deployment of resources, adequacy of  investigative staff support, availability of expertise and specialized  services, and questions about the burden of the division’s internal review  process—stand to affect SEC’s ability to bring enforcement actions on a  timely, efficient, and effective basis. Delays in bringing enforcement  actions, for example, affect not only cases immediately at hand, but also  investigative work foregone in the meantime. Similarly, any unavailability  of specialized expertise can potentially affect the quality or scope of an  enforcement action. These resource issues reflect a combination of the  level of agency appropriations and management decisions about  deployment of available resources. For example, senior division  management told us that overall, Enforcement needs to add more than 100  professional positions in order to return to post-Sarbanes-Oxley peak  staffing, as well as an equal number of support staff positions. Under the  agency’s budgeting practice, the division is granted authority to hire to fill  a specified number of positions. Under this “slot” system, the agency has  traditionally favored allocating positions to professional staff over support  staff. Another management decision that has affected investigative  capability has been the decision to dedicate resources to specified tasks,  as opposed to general investigative duties.
Both SEC strategic goals and GAO internal control standards call for  making efficient and effective use of resources a priority. One SEC  strategic goal is for the agency to be efficient and well-managed through  investment in human capital and new technology—in particular, by  keeping pace with technological innovation—and through enhancement of  internal controls. Overall, the agency’s strategic plan calls for targeting  resources strategically, examining whether positions are deployed  effectively, and exploring how to improve program design and  organizational structure. GAO internal control standards place  effectiveness and efficiency of operations as a key objective of internal  control.
Senior Enforcement managers said that they have begun an initiative to  address some of the concerns identified above. These include study of:    The internal case review process, including reviews that take place within  Enforcement and in other divisions. Enforcement management said that  over time, as new steps have been added to the review process, it has  become unwieldy, and that this review aims to identify streamlining  measures.
The handling of incoming referrals. Investigative tips and referrals now  come from seven sources, and Enforcement is examining how to track  their assignment and ultimate outcomes.
Methods to develop and prospect for investigative leads, based on the risk  presented by a practice or situation.
Based on documentation we reviewed, this effort is focused on process.  However, as noted, our review indicated that concerns about the  burdensome review process have created organizational culture issues as  well.
section_title: Various Factors Affect the Amount of Penalties and Disgorgements Ordered, While Overall, Total Amounts Have Declined in Recent Years
paragraphs: For an individual case, a number of factors can affect the amount of a  penalty or disgorgement that Enforcement staff seek in an enforcement  action. On an annual basis, penalty and disgorgement amounts may vary  according to the mix of cases concluded in a particular period. In 2006 and  2007, the Commission adopted two corporate penalty polices that focus on  economic benefit derived through wrongdoing and the effect a penalty  might have on shareholders, as well as giving the Commission earlier  involvement in the penalty determination process. Overall, penalties and  disgorgements ordered have declined significantly since the 2005-2006  period.
subsections: section_title: For Individual Cases, Several Factors Can Affect the Amount of Penalty or Disgorgement Sought
paragraphs: Numerous factors affect penalty and disgorgement amounts, which may  vary widely from case to case. Penalties are generally punitive, and are to  have a deterrent effect. In determining a recommended penalty amount,  Enforcement staff consider such factors as the nature of the case,  egregiousness of the conduct, degree to which a respondent has  cooperated during an investigation, remedial actions taken, and ability to  pay. For example, in October 2007, Nortel Networks Corp. agreed to pay a  $35 million penalty to settle an action for accounting fraud in which the  company allegedly inflated revenues to meet performance targets. When  the sanction was announced, a Commission official said the fraud was  “long-running, intentional and pervasive.” But the Commission  acknowledged in settling the matter the company’s cooperation and  remedial efforts, which included an independent investigation that  uncovered improper accounting; replacement of senior management; and  several restatements of financial results. In another case, in June 2004,  Gemstar-TV Guide International, Inc., agreed to pay a $10 million penalty  in connection with alleged overstating of its revenues. The Commission in  assessing the penalty amount considered the severity of the misconduct,  Gemstar’s initial failure to cooperate or undertake remedial actions, as  well as later cooperation and remediation after a change in senior  management and restructuring of its corporate governance. Prior cases  have also served as a guide for determining penalties.
Disgorgement is intended to recover ill-gotten gains realized or losses  avoided through a defendant’s illegal actions. For example, in July 2008,  the former head of an Enron Corp. division agreed to pay $30 million in  disgorgement and interest, after the Commission charged him with  illegally selling Enron stock on the basis of nonpublic information. SEC  alleged the former executive avoided substantial losses by selling shares  before the company’s stock price later collapsed in the fall of 2001. In  another example, in May 2007, Morgan Stanley & Co. agreed to pay $5.9  million in disgorgement after the Commission alleged the company  recognized revenue when it improperly priced, and delayed execution of,  certain retail orders for securities.
section_title: Annual Penalty and Disgorgement Amounts May Vary According to Case Mix
paragraphs: Setting aside the effect of any policy change, the total amount of penalties  and disgorgement that the Commission seeks on an annual basis also can  vary according to the type and magnitude of cases concluded in a given  period. For example, from 2003 through 2005, when penalty amounts were  comparatively high, a small number of cases with large penalties  accounted for a disproportionate share of the total. In fiscal year 2003,  approximately $950 million in penalties were imposed. Of that amount,  nearly 80 percent came from a single case—a $750 million penalty ordered  against WorldCom, Inc., for alleged fraud. Similarly, in fiscal year 2005, the  peak year for penalties, $1.6 billion in fines were imposed, with three  alleged accounting fraud cases—Qwest Communications International,  Inc.; Time Warner, Inc.; and HealthSouth Corp.—accounting for $650  million, or about 40 percent of the total.
Additionally, certain types of cases are more or less likely to produce  penalties or disgorgements. As an example, Enforcement management  cited financial fraud cases, which comprised nearly one-third of  Enforcement’s cases brought in fiscal year 2007, as actions less likely to  result in disgorgement orders. According to the officials, if a company  experiences a large loss in the market value of its stock as a result of a  financial fraud, this does not amount to an ill-gotten gain in the traditional  sense. In addition, even if disgorgement was to be based on such a loss in  market value, the amounts involved in financial fraud cases could be so  large—reaching billions of dollars—as to be prohibitive. Another example  where amounts have been constrained is penalties for stock options  backdating, where the Commission effectively set a ceiling on such cases,  Enforcement management told us. According to senior Enforcement  officials and former commissioners , the Commission agreed that stock  options backdating provides a benefit to a corporation, but views differed  on quantifying the size of the benefit. The effective ceiling was established  after one company was judged to have committed the worst violation, and  its penalty became the upper bound for assessing penalties in other  backdating cases.
Because penalty and disgorgement amounts can vary in these ways, a  number of observers, including current and former Enforcement staff,  cautioned against relying on penalties levied in a single year, or year-to- year changes, as conclusive measures of the division’s performance or  attitude toward enforcement actions.
section_title: Two Recently Adopted Policies Have Provided the Context for Determining the Appropriateness and Size of Corporate Penalties
paragraphs: Two recently adopted policies have provided overall guidance for  determining the appropriateness and size of corporate penalties for  individual enforcement actions. Below, we describe the features and basis  of these policies. In the next section, we address the effects of the policies.
subsections: section_title: January 2006 Policy
paragraphs: The Commission announced its January 2006 policy in conjunction with  the settlement of two corporate enforcement actions. The Commission  said the policy stems from “the fundamental principle that corporate  penalties are an essential part of an aggressive and comprehensive  program to enforce the federal securities laws, and that the availability of  a corporate penalty, as one of a range of remedies, contributes to the  Commission’s ability to achieve an appropriate level of deterrence through  its decision in a particular case.”
The policy established nine factors for evaluating imposition of corporate  penalties, but said two were of primary importance:   Direct benefit to the corporation. The Commission said that if a  corporation has received a direct and material benefit from the offense,  such as through reduced expenses or increased revenues, a corporate  penalty is more appropriate. The weakest case for a corporate penalty is  when shareholders are the principal victims of the securities law violation.
Additional harm to shareholders. The Commission said a corporate  penalty risks hurting shareholders who have committed no violation but  may bear the burden of the penalty. Thus, the ability to use a penalty to  compensate injured shareholders supports a corporate penalty, but if the  penalty will unfairly injure investors, the corporation, or others, that  weighs against the penalty.
In announcing the policy, the Commission emphasized what it said was a  need to provide “clarity, consistency, and predictability” when exercising  its penalty authority. The Commission acknowledged differing views  among commissioners on when a corporate penalty was appropriate, but  said that the commissioners had approved the policy unanimously, in  particular the two primary factors.
The first of the two primary factors—direct benefit to the corporation— focuses attention on economic analysis to determine what benefit, if any, a  company may have obtained from its conduct. According to management  of SEC’s Office of Economic Analysis (OEA), the facts and circumstances  of a particular situation generally dictate the analytical approach used to  consider corporate benefit. One widely used technique that OEA employs  is an “event study,” which considers changes in stock price upon  disclosure of violations and subsequent corrective events. The event study  method, which addresses both materiality and magnitude of the potential  inflation in securities prices, is generally accepted and considered to be  robust because it uses marketplace reaction to gauge the significance of  information. Overall, the officials told us that estimating benefit is not a  precise process. Therefore, for a given case, OEA communicates any  additional factors that should be considered in calculating an issuer  benefit. Sometimes, OEA considers submissions from defendants as part  of its analyses when defendants provide analysis of issuer benefit. The  nature of a corporate benefit can vary. For example, a company can  benefit if a fraud, such as overstatement of earnings, results in an inflated  stock price, and the company then either issues stock or makes an  acquisition using stock. In such cases, the corporation realizes a benefit  because it realizes a higher price in issuing the stock, or it makes the  acquisition using stock with a fraudulently inflated value.
The second of the two primary factors—additional harm to shareholders— addresses whether shareholders who were harmed by a drop in stock  price after initial disclosure of a violation effectively would be penalized  again through a corporate penalty, according to some former  commissioners. One key element of analysis of this issue involves  shareholder turnover over time. According to Enforcement management,  turnover and impact of penalties can be considered in different ways. They  explained that ordinary turnover means that a company’s collection of  shareholders at the time a violation is committed or disclosed likely will  not be the same group at the time any penalty is subsequently assessed. If  there is little turnover, the shareholder population when a penalty is levied  will be close to what the population was at the time a violation was  disclosed. But if there is a great deal of turnover, then to the extent a  penalty hurts shareholders, the impact is diminished because many  current shareholders would not have held stock at the time the violation  was disclosed. On the other hand, more recent shareholders would not  have received any benefit from the initial fraud.
OEA officials told us they approach the shareholder harm analysis by  considering current shareholders, and trying to estimate how many might  have benefited from the company’s fraud and how many did not. OEA  officials said that although attaining precise results is difficult, the office  uses data on shares held by institutions to conduct its analysis. For  shareholders who bought after a fraud, or SEC investigation, was  disclosed, a complicating factor is the degree to which that information is  priced into the cost of shares. OEA believes that expected penalties are  reflected in stock prices; therefore, those buying after such disclosures are  purchasing at a lower price. OEA officials told us that the precision of the  analysis could be improved by considering holdings of non-institutional  shareholders, but that would be costly and time-consuming. OEA  estimates that doing so for a single case would require four people  working 6 months. Given the effort, this would provide only a marginal  benefit of questionable cost.
section_title: April 2007 Policy (“Pilot Program”)
paragraphs: The then-Chairman announced the April 2007 policy, also known as the  “pilot program,” in a speech at a conference. The policy, now  discontinued, required Enforcement staff, when contemplating a corporate  penalty, to obtain Commission approval of a penalty range before  settlement discussions could begin. Cases that subsequently were settled  within the range specified by the Commission were eligible for approval  on an expedited basis. At the same time the Commission provided the  settlement range, it also granted Enforcement staff authority to sue.  According to Enforcement management, there was no written  documentation for this policy beyond the text of the Chairman’s speech.  As announced by the Chairman, the policy applied to any corporate  penalty case; however, as put into practice by Enforcement, it was applied  to a subset of corporate penalty cases, namely financial fraud cases only.
According to Enforcement staff and former commissioners with whom we  spoke, and as stated in the Chairman’s speech, the purpose of the pilot  program was to:    Provide earlier Commission involvement in the penalty process.
Previously, Enforcement staff would present to the Commission a  proposed settlement that already had been fully negotiated with a  respondent. Some commissioners, facing a choice of accepting a  settlement as presented or rejecting it and forcing the staff to go back to  the defendant, wanted to have more involvement earlier in the process.
Strengthen Enforcement staff’s negotiating position. Obtaining pre- approval of a penalty range would put Enforcement staff in the “strongest  negotiating position” because the Commission had reviewed outcomes  before settlement offers were made. In addition, the staff’s position in  settlement negotiations would be strengthened by the authority to sue that  accompanied approval of the settlement range.
Maintain consistency, accountability, and due process. The  Commission’s review would ensure consistency and fairness in applying  the January 2006 policy on corporate penalties. The policy provides  accountability because it is the commissioners who are responsible for the  decisions, and it offered due process protection to defendants by  providing Commission review of evidence of alleged misconduct.
At the time of our review, eight cases had been settled in accordance with  the policy. Our comparison of the penalty range recommended by  Enforcement staff with the range approved by the Commission showed  that those ranges were similar in most cases. Specifically,  In five of the eight cases, the Commission approved the staff’s  recommended penalty range, and the staff obtained settlements within  those ranges.
In two cases, the Commission approved a range that overlapped with, but  was lower than, the range recommended by the staff. The penalty  ultimately obtained was within the staff’s original recommended range.
In one case, the Commission approved a penalty range that was lower than  that requested by the staff. The Commission approved a lower bound of  the range that was 10 percent of the staff’s recommended amount, and an  upper bound that was 25 percent of the staff’s recommendation. The staff  then obtained a settlement within the lower, Commission-approved range.
This summary reflects ultimate dispositions and does not necessarily  reflect actions or discussions that may have taken place prior to final  consideration. For example, in one case involving a technology defendant,  the Commission, in adopting a settlement range, concurred with a staff  recommendation. But an earlier staff recommendation for a settlement  range had an upper limit about 40 percent higher than that eventually  approved.
In February 2009, the current Chairman announced that this policy was  being discontinued. The Chairman said that the change was designed to  expedite enforcement efforts and that at a time when SEC needs to be  deterring corporate wrongdoing, the policy sent the wrong message. She  said that according to Enforcement staff, the policy caused significant  delays, discouraged staff from arguing for penalties in cases that might  deserve a penalty, and sometimes resulted in reductions in the size of  penalties imposed. (A full discussion of the effects of the 2006 and 2007  corporate penalty policies appears in the following section.)
section_title: Penalty and Disgorgement Amounts Have Declined Since Fiscal Years 2005 and 2006
paragraphs: Since fiscal years 2005 and 2006, total annual penalty and disgorgement  amounts have declined, as shown in figure 6. While both penalties and  disgorgements have fallen in recent years, penalties have been declining at  an accelerating rate, falling 39 percent in fiscal year 2006, another 48  percent in fiscal year 2007, and then 49 percent in fiscal year 2008. Also,  penalties have declined in the aggregate by a greater amount than  disgorgements. In particular, penalties have fallen 84 percent, from a peak  of $1.59 billion in fiscal year 2005 to $256 million in fiscal year 2008.  Disgorgements fell 68 percent, from a fiscal year 2006 peak of $2.4 billion  to $774.2 million in fiscal year 2008.
Compared to fiscal year 2006, SEC brought more corporate penalty cases  in fiscal 2007, but for smaller amounts. In 2007, SEC brought 10 cases,  compared to 6 in 2006. Four of the six cases in 2006 resulted in penalties of  $50 million or more, with the two largest, AIG and Fannie Mae, totaling  $100 million and $400 million, respectively. By contrast, in the fiscal year  2007 cases, only two issuers, MBIA, Inc., and Freddie Mac, were assessed  penalties of at least $50 million.
In addition to corporate penalties, enforcement actions also can result in  penalties against individuals. For example, in April 2007, Apple, Inc.’s  former chief financial officer was ordered to pay a $150,000 penalty for  failure to ensure accurate reporting of executive compensation, in a case  stemming from stock options backdating. Also in 2007, two individuals  agreed to pay $175,000 in penalties for an alleged scheme that defrauded a  number of savings banks and their depositors in connection with the  banks’ conversion from mutual to stock ownership.
While there has been some variation, the distribution of enforcement  actions by type of case has generally been consistent in recent years.  Enforcement management said that the division has met its goal that a  single category of cases not account for more than 40 percent of all  actions.
section_title: Recent Corporate Penalty Policies— Adopted and Implemented with Only Limited Communication— Have Delayed Cases and Discouraged Penalties
paragraphs: Enforcement management, investigative attorneys, and others concurred  that the 2006 and 2007 policies on corporate penalties, as applied, have  had the effect of significantly delaying cases, and producing fewer and  smaller corporate penalties. Our review also shows that in adopting and  implementing the policies, the Commission did not act in concert with  agency strategic goals calling for broad communication with, and  involvement of, the staff.
subsections: section_title: Enforcement Management, Investigative Attorneys, and Others Said That the Recent Penalty Policies have Contributed to Delays in Cases, and Fewer and Smaller Corporate Penalties
paragraphs: According to Enforcement management, investigative attorneys, and  others, the 2006 and 2007 corporate penalty policies, as applied, have had  a number of effects. They have led to less vigorous pursuit of corporate  penalties, may have made penalties less punitive in nature, and could have  compromised the quality of settlements. Investigative attorneys have also  been concerned that at the same time, it became more difficult to obtain  formal orders of investigation, which compel witnesses by subpoena to  testify and produce books, records, and other documents. We queried six  other commission-style federal regulatory agencies and found only one  with a policy similar to the Commission’s 2007 policy on pre-approval of  settlement ranges.
section_title: Policies Believed to Have Resulted in Less Vigorous Pursuit of Corporate Penalties
paragraphs: On their face, the 2006 and 2007 penalty policies are neutral, in that they  neither encourage nor discourage corporate penalties. However,  Enforcement management and many investigative attorneys and others  said that Commission handling of cases under the policies both  transmitted a message that corporate penalties were highly disfavored and  caused there to be fewer and smaller corporate penalties.
Case delay was one of two major factors accounting for the belief many  expressed that corporate penalties have been disfavored. Under the 2006  policy, to recommend a corporate penalty, investigative attorneys conduct  an analysis based on the policy’s nine factors. A number of attorneys told  us that this can be time-consuming, especially when evaluating a corporate  benefit, as required under one of the two main factors. In such cases, as  described above, OEA becomes involved, and this can add months to the  process. Meanwhile, attorneys said that under the 2007 policy, the process  of bringing a case could come to a halt for long periods, when investigative  attorneys were required to seek Commission approval of a settlement  range, before undertaking settlement negotiations.
Furthermore, the time between recommendations for penalties reaching  the Commission and the Commission acting upon them could be lengthy.  According to a former commissioner, many cases involving corporate  penalties stalled because of different views among commissioners. For  example, an attorney told us that a company confessed and was willing to  pay the penalty sought, but it still took more than 6 months to complete  the settlement because the commissioners lacked consensus. Another  attorney told us that a company agreed to a settlement, announced it  publicly, and escrowed money for the payment, but the matter took a year  to win Commission approval. One attorney cited a case that went on and  off the Commission’s meeting agenda eight times. A former commissioner  said that even when Enforcement staff tried to make recommendations  according to the terms of the policies, there were lengthy delays when  cases reached the Commission. In addition to delay, the attorneys also  cited perceived Commission antipathy toward such penalties as  contributing to their belief that corporate penalties have been disfavored.  For example, several Enforcement attorneys told us that even when they  presented cases in which a corporation had agreed to pay a penalty, the  Commission might lower or eliminate the amount. One attorney described  a case in which a company proposed a settlement with a higher penalty  than was approved by the Commission, which required the attorney to  return to the company and explain that the Commission wanted a lower  amount. Another described a case in which the Commission halved a  proposed penalty. Yet another described having conducted the required  nine-factor analysis, and arriving at a proposed penalty range of $10  million to $35 million, but having the Commission reduce it to $5 million to  $15 million. We did not independently review details of these cases.
According to a number of Enforcement attorneys and division managers,  experiences like these caused an anti-penalty message to be transmitted,  with the result that investigative attorneys began avoiding  recommendations for corporate penalties. For example, a former  Enforcement manager told us that some investigative attorneys concluded  it was not worth seeking a corporate penalty and that the Commission did  not follow terms of its own policy. A current Enforcement manager  characterized the situation as investigative attorneys “following the path of  least resistance” and not recommending penalties.
Some investigative staff with whom we spoke said that in principle, the  policies made sense. For example, one Enforcement manager told us that  in the abstract, the factors announced in the 2006 policy were reasonable.  One investigative attorney said that having guidelines is useful and another  commented that the 2006 policy was a laudable effort to bring consensus  to a philosophically divided commission. But as applied, according to  Enforcement management and a strong consensus of investigative  attorneys with whom we spoke, the ultimate outcome of the polices has  been fewer and smaller corporate penalties. For example, when the  question of whether to seek a corporate penalty is a close one, the staff  will default to avoiding the penalty. Or, if investigative staff decides to  seek a penalty, they will change their focus from pursuing what they  otherwise would recommend as most appropriate to tailoring  recommendations to what they believe the Commission will find  acceptable. As described by one attorney, investigative staff sought to  identify the “maximum minimum amount” the Commission will approve.
In one case, an attorney told us that a company offered to pay $1 million to  settle a case, but the attorney chose to recommend no penalty because  they did not believe the Commission would approve the company offer.  Likewise, an Enforcement manager described having encouraged dropping  penalties from a case for fear the matter would not otherwise be cleared  for consideration by the Commission.
For these reasons, according to many investigative attorneys, the penalty  policies contributed to an adversarial relationship between Enforcement  and the Commission, where some investigative attorneys came to see the  Commission as less of an ally in bringing enforcement actions, and more  of a barrier. For example, one attorney told us that it was widely felt that  Enforcement was barred from doing its job. Another said the policies  represented Commission attempts to make it more difficult for  Enforcement to do its job. Others told us the Commission was an obstacle  or not supportive.
Moreover, according to an Enforcement manager, the factor in the 2006  penalty policy that anchors penalties to benefits derived by the  corporation serves to bar a corporate penalty in a significant number of  cases, or likewise limit the scope of many cases. For instance, if a  company committed fraud to inflate its stock price, that, by itself, would  not qualify for a penalty, because the company would have derived no  calculable benefit. Yet, the manager said, companies benefit in several  ways from having a higher stock price—such as by having a better  reputation, being in a better position to offer stock option compensation  to executives, and being able to obtain financing at lower cost.  Enforcement officials told us that given the effects of the penalty policies,  a $10 million penalty today might have been $50 million to $60 million  before adoption of the policies.
In discussing how the Commission considers corporate penalty  recommendations by the investigative staff, Enforcement management and  some staff cited one case to us as providing what they characterized as a  striking example of the Commission reducing a proposed penalty of  significant size to zero, which went as follows: In initial settlement  discussions, a corporate penalty of several tens of millions of dollars was  considered against a financial institution defendant. The case was the first  of its type, involving several billion dollars in investor losses. After further  discussion, the case was presented to the Commission, with the defendant  offering to settle by paying a penalty one-half the amount initially  discussed, plus disgorgement of several million dollars. In justifying the  proposed remedies, Enforcement staff said the defendant ignored  repeated, highly suspicious signs of fraud and that a lack of previous cases  in this area underscored need for action. Next, the Commission rejected  the settlement as agreed by Enforcement staff and the corporate  defendant. Although rejecting the settlement, the Commission authorized  the staff to negotiate further with the defendant, but under different legal  reasoning. Under this different approach, a corporate penalty was  precluded. Enforcement staff resubmitted the matter to the Commission  and the settlement ultimately won approval, but with no penalty and a  reduction of about 80 percent in the disgorgement amount. We did not  independently review the complete details of this case or the  appropriateness of the actions of either the staff or the Commission.
Enforcement management told us they concurred in these observations  about the effect of the application of the penalty policies. Although the  Commission never directed that there be fewer, or smaller, penalties, the  officials said that has been the practical effect because Commission  handling of cases made obtaining corporate penalties more difficult. Over  time, the officials said they struggled with implementation and were  unable to provide guidance to the staff, because they saw the  Commission’s application of the penalty factors as inconsistent.  Furthermore, the widely held view within Enforcement was that the  unstated purpose of the 2006 policy was to scale back corporate penalties.
On the contrary, a former commissioner said that the 2006 and 2007  policies have not accounted for declining amounts of penalties and  disgorgement, nor for less vigorous pursuit of corporate penalties. Instead,  the former commissioner said the issue facing Enforcement has been  quality of management. The former commissioner added that Enforcement  staff has not been properly managed to bring a sufficient range of cases on  a timely basis. In addition, Commission actions have not discouraged the  staff from seeking corporate penalties. To the extent penalties are down, it  may be due to the staff electing on its own to retreat from penalties.  Another former commissioner said that, although some Commission  actions may have caused Enforcement to feel constrained or that its  authority was diminished, it was nevertheless important to understand  that the division worked at the direction of the Commission, not as an  independent entity.
Furthermore, a number of investigative attorneys and others told us that  the policies, as applied, also have discouraged pursuit of more  complicated cases, those based on novel legal reasoning, or those with  industrywide implications, in favor of those seen as more routine or more  likely to win Commission approval. For example, one attorney said there  has been relatively more focus on modest cases like small Ponzi schemes,  insider trading, and day trading, because such cases were thought to stand  a better chance of winning Commission approval, compared to more  difficult and time-consuming cases like financial fraud. Likewise, one  Enforcement manager said that the Commission signaled that it did not  favor cases involving industrywide practices. The manager added that the  preferred approach for handling industrywide issues was not through  enforcement actions, but instead through the rule-making process.
section_title: Policies Believed to Have Affected the Nature of Penalties and the Quality of Settlements
paragraphs: Current and former Enforcement management and a number of  investigative attorneys and others expressed concern that the penalty  policies may have the effect of changing the nature of penalties, as well as  potentially compromising the quality of settlements. As noted earlier,  penalties punish violators and are intended to deter misconduct. But  according to current and former Enforcement management and some  investigative attorneys, by conditioning corporate penalties in significant  part on whether a corporation has benefited from improper practices,  penalties effectively become less punitive and more like disgorgement. In  relying on corporate benefit, the penalty policies have the effect of  disconnecting penalties from egregiousness of conduct, one Enforcement  manager told us. For example, one investigative attorney described a case  in which a respondent, based on conduct at issue, would have paid two or  three times the amount ultimately levied. But it was not possible to  recommend such a sanction, the attorney said, because a benefit could not  be quantified in support of the amount. A former Enforcement manager  emphasized that the purpose of a penalty is not to recover wrongful gains,  but instead to deter conduct. Thus, corporate benefit should not matter in  determining a penalty. Yet under the current approach, Enforcement  officials acknowledged that there could be flagrant misconduct, but no  penalty, if corporate benefit cannot be identified through economic  analysis.
One issue with quality of settlement involves the now-discontinued 2007  policy that required pre-approval of a settlement range, and whether the  Commission, when setting the range, made fully informed decisions.  Several current and former officials told us that the question arises  because settlement discussions themselves often reveal relevant  information about conduct at issue. However, under the 2007 policy, the  Commission set the penalty range before the settlement negotiations took  place. Thus, those officials noted, the Commission acted without the  benefit of information that would surface in the settlement talks; the  settlement range set by the Commission would not reflect what would be  learned later, after settlement discussions had taken place.
Another quality-of-settlement issue stems from what several investigative  attorneys said has been an additional outcome of the corporate penalty  policies: Reduced cooperation by the subjects of enforcement  investigations. For instance, one attorney told us that a company said it  would not settle a matter because it did not believe the Commission would  approve a penalty. Another said they believed defense counsels less often  recommended that companies approach the agency voluntarily if they  suspected securities law violations may have occurred. Similarly, another  said that corporations have been less willing to turn over individuals for  sanction. A number of investigative attorneys told us that because the  policies, as applied, created a perception that SEC has retreated on  penalties, defendants or potential violators have become more confident  or emboldened. Enforcement concludes most of its cases by settlement, so  to the extent incentives for cooperation are reduced, settlements could be  affected.
section_title: Policies Believed to Have Resulted in Increasing Difficulty in Obtaining Formal Orders of Investigation
paragraphs: At the same time the penalty policies were being implemented, it also  became more difficult to obtain orders formally authorizing investigations,  a number of attorneys said. Some of Enforcement’s case investigations  take place with subjects providing information on a voluntary basis.  However, formal orders of investigation compel witnesses by subpoena to  testify and produce books, records, and other documents. The  Commission must approve such orders. The previous Chairman recently  highlighted the significance of these orders, saying that, in the Madoff  investor fraud matter, investigative staff never sought a formal order of  investigation, and that such an order would have facilitated a more  probing investigation.
Investigative attorneys with whom we spoke said that obtaining approval  of a formal order, once routine, lately had become more difficult and time- consuming, which delayed investigations. They said that it could take  months to obtain Commission approval. One attorney said it took about 5  months and several rounds of comments on a supporting memorandum  before a request seeking a formal order in a Ponzi scheme investigation  was set for Commission consideration. As shown in table 2, SEC statistics  show fewer formal orders have been approved in recent years, with the  number down 14 percent since fiscal year 2005.
In February 2009, the new Chairman announced policy changes designed  to expedite issuance of formal orders. She said that she had directed a  return to a previous policy, where commissioners can approve formal  orders one after another in sequence, without a meeting; or, where  appropriate, a single Commissioner acting as a duty officer can approve an  order.
subsections: section_title: Other Federal Regulatory Agencies’ Enforcement Policies
paragraphs: As part of our review, we queried six other commission-style federal  regulatory agencies, to determine whether they have policies similar to the  former 2007 policy on pre-approval of a settlement range. These agencies  were the Federal Communications Commission, the Nuclear Regulatory  Commission, the Federal Energy Regulatory Commission, the Consumer  Product Safety Commission, the Commodity Futures Trading Commission  and the Equal Employment Opportunity Commission. Only one, the  Federal Energy Regulatory Commission, reported having a similar policy.  Under that agency’s procedures, in seeking to resolve a case, the staff  requests settlement authority from the commission, and in that request,  seeks authority to negotiate within a range of potential penalties or  disgorgement. The policy is new, having been issued in May 2008, and has  not been reviewed since then.
section_title: In Adopting and Implementing the Recent Penalty Policies, Communication between the Commission and Enforcement Staff Was Limited
paragraphs: Our review identified questions about the effectiveness of communication  between the Commission and Enforcement in adopting and implementing  the recent corporate penalty policies. In particular, the Enforcement  division, which is responsible for implementing the policies, had only  limited input into their development. Furthermore, questions and  confusion arose about the policies after they were enacted. According to  Enforcement management, the broad Enforcement staff had no input into  creation of either the 2006 or 2007 penalty policies. Senior division  management did have input into the 2006 policy, but no input into the 2007  policy.
Enforcement management said that the process for creating the 2006  policy was designed to be closed and without broad staff input. Using  consideration of two pending enforcement actions as a vehicle for  discussion, commissioners, the agency general counsel, and the  Enforcement director met in a series of executive sessions over several  months in late 2005. Senior management told us their understanding was  the Commission’s desire for a closed process reflected several factors,  including a contentious topic, concern that anxiety over the issue could be  directed at staff if they participated, or concern that commissioners might  be less than candid with staff present or might posture for their benefit.
In the case of the 2007 policy, the Commission presented a completed  policy to Enforcement without division input, according to Enforcement  management. The genesis of the policy came when the then-Chairman  raised the issue of establishing penalty ranges for cases. Following that,  Enforcement management suggested using an upcoming case as a trial run  for setting a penalty range. But according to Enforcement management,  for reasons unknown, no such trial (as Enforcement understood it; i.e., a  one-case trial run) took place, and the Commission then summarily  presented the policy to the division. In addition, although the 2007 policy,  with its pre-approval requirement, had a material effect on the process by  which enforcement actions are brought, there was no written guidance or  documentation for its implementation. Also, although the policy was set  up as a pilot program, there was no scheduled conclusion date or any  identified process for evaluating its effectiveness.
According to agency records, the Commission has increasingly met in  executive session when considering division recommendations for  enforcement actions. Commission meetings to approve enforcement  actions are closed to the public, but ordinarily, any division staff may  attend. At executive sessions, however, the Commission restricts  attendance in two ways: (1) to only those involved in a case; or (2) even  further, to only the Director of Enforcement, and the agency general  counsel and secretary, thus excluding staff who worked on a case. Agency  records show that of the days the Commission met to vote on enforcement  actions in 2008, it held an executive session 40 percent of the time—a rate  that has tripled since 2005. However, that 40 percent is roughly equal to  the frequency at which executive sessions were held in 2003 and 2004.
Similarly, investigative attorneys and current and former Enforcement  management told us that the Commission increasingly made a practice of  removing enforcement cases scheduled for consideration from its meeting  calendar with little or no notice, and often only a short time before  meetings were scheduled. Enforcement management’s understanding of  this practice is that the then-Chairman removed cases for which he  believed there was insufficient support for a recommended action. We  were unable to examine the nature of removed cases because  Enforcement does not compile such data. But Enforcement management  said that such cases generally included those considered controversial.
Both SEC strategic goals and GAO internal control standards emphasize  the importance of communication and its link to organizational  effectiveness. SEC’s strategic plan states that success requires a team  approach and commitment to the “highest standards” of trust,  cooperation, and communication throughout the agency, and that an  agency goal is to formulate and communicate policy proactively. GAO  internal control standards provide that effective communication should  occur in a broad sense, with information flowing down, across, and up an  organization. Similarly, a best practices approach for policy development  includes incorporating the first-hand knowledge and insights of  employees, and making employees stakeholders in developing strategies  for achieving organizational success. Employee involvement likewise  creates an opportunity to increase employees’ understanding and  acceptance of organizational goals and objectives, and gain buy-in for new  polices and procedures.
The limited organizational communication in the adoption and  implementation of the penalty policies is not in accord with these  standards. According to Enforcement management and many investigative  attorneys and others, all these developments and their effect on  communication among significant constituencies within the agency  created frustration and confusion. One senior division manager noted that  the closed process of policy development angered people and  handicapped the staff’s subsequent efforts to apply the policies. Indeed,  several investigative attorneys cited uncertainty about when to apply the  policies. Likewise, some commented that the inability of the staff to see  Commission deliberation of cases hindered the staff’s ability to understand  how to implement the policies. For example, some attorneys told us that  investigative staff struggled to understand and apply the 2006 policy,  because its nine factors could be interpreted in different ways, and even in  contradiction to one another. At the same time, a former commissioner  questioned whether the policy was sufficiently explained to the staff, and  whether the staff was properly applying the factors for analysis.
section_title: Conclusions
paragraphs: SEC has implemented aspects of a number of our 2007 recommendations.  Among other actions, Enforcement management has developed  procedures for using the Hub system, and the Hub can now produce  various management reports. Our review did, however, identify concerns  that OCD’s organizational structure could affect its efficiency and  effectiveness. SEC has identified prompt distribution of Fair Funds to  harmed investors as a goal, which was a key reason OCD was established.  SEC has partially addressed our previous recommendation by initially  staffing the office and beginning to create policies and procedures. Dual  reporting relationships are not unusual. However, the division of authority  within OCD has raised questions about the effect the office’s structure  may have on its performance. As noted earlier, neither of the two principal  officials believe the current structure is optimal. The problems cited— confusion about duties and delays in progressing toward objectives— stand to affect the agency goal of prompt distribution of funds to harmed  investors. Furthermore, any ineffectiveness or inefficiency within OCD  stands to affect enforcement efforts in general, because OCD is intended  to assume greater responsibility across the agency for execution of Fair  Fund plans created as part of enforcement actions. To the extent that  investigative staff are responsible for a smaller portion of Fair Fund plan  execution, because OCD has assumed those duties, the staff will be more  able to concentrate on their primary tasks of investigating violations and  bringing enforcement actions.
In recent years, Enforcement has experienced a decline in investigative  staff, but continues to face an open-ended mandate to protect investors  and enforce the federal securities laws. Its ability to deploy resources  efficiently and effectively is thus of critical importance to accomplishing  SEC’s mission, especially in today’s environment of economic and  financial market turmoil and volatility. Our review has identified two key  resource challenges that could hamper Enforcement’s ability to bring  cases: the level of administrative and technical support provided to  investigative attorneys, and the process for division review and approval  of enforcement actions against alleged violators. Inadequate  administrative and paralegal services, specialized services and subject  matter expertise, and information technology support can delay the  completion of a case or affect its quality and scope. Similarly, although  Enforcement should take due care in exercising its authority and  discretion in bringing an enforcement action, a burdensome internal  review process can undermine efficient use of investigative resources. As  noted in SEC’s strategic plan, making effective and efficient use of  resources is a priority. While Enforcement management has moved to  address some of these resource concerns, the effort may benefit from a  focus that includes both process and organizational culture issues.
The Commission adopted two corporate penalty policies in 2006 and 2007  that, respectively, affirmed corporate penalties as an essential part of an  “aggressive and comprehensive program” to enforce the federal securities  laws, and attempted to provide earlier Commission involvement in the  settling of cases. Yet these policies, as applied, appear to have had a  number of effects at odds with SEC goals or objectives. In particular,  investigative attorneys reported that they have not sought corporate  penalties because of perceived difficulties in winning Commission  approval of such sanctions. Also, during both the adoption and  implementation of these policies, the Commission has restricted  communication, curtailing Enforcement management and staff input and  insight into policies that management and staff are responsible for  executing. Furthermore, while SEC goals call for the “highest standards”  of trust and cooperation, a number of investigative attorneys told us the  policies have caused them to see the Commission in an adversarial light.  To the extent that communication has been a factor in the post-adoption  effects cited by Enforcement management, investigative attorneys, and  others, the Commission has forgone an opportunity to improve  organizational effectiveness. Enforcement cannot detect and prosecute all  violations. Thus, its success in enforcing the securities laws, deterring  violations, and protecting investors rests on its ability to create and  implement the most effective policies. For these reasons, the division and  its enforcement efforts could benefit from better communication with the  staff affected by policy changes.
section_title: Recommendations for Executive Action
paragraphs: To help ensure that SEC is effectively and efficiently using its resources in  bringing enforcement actions, and that its enforcement policies are  working effectively, we recommend that the SEC Chairman take the  following four actions:   1.  To help ensure effective and efficient operation of the Office of  Collections and Distributions, consider an alternative  organizational structure and reporting relationship for the office, to  address the organizational concerns identified.  2.  As part of ongoing efforts to explore the more effective use of  resources, and to streamline internal review of cases and  investigations, expand Enforcement’s current examination of its  methods to include the level and mix of resources available to  investigative staff in the areas of administrative and paralegal  support, specialized services and expertise, and information  technology support; and include in the examination an evaluation  of the impact of the case review process on organizational culture  factors such as risk aversion and incentives to drop or narrow the  scope of cases.  3.  Examine the effects of the 2006 corporate penalty policy to  determine whether the policy is achieving its stated goals and any  other effects the policy may have had in adoption or  implementation.  4.  In light of the effects we have reported involving adoption and  implementation of the 2006 and 2007 corporate penalty policies,  take steps to ensure that the Commission, in creating, monitoring,  and evaluating its policies, follows the agency strategic goal and  other best practices for communication with, and involvement of,  the staff affected by such changes.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Chairman of SEC for her review  and comment, and we received written comments that are reprinted in  appendix II. In these comments, the Chairman agreed with our  recommendations and said officials are taking steps to implement them.  The Chairman said senior officials will immediately evaluate alternative  organizational structures for the Office of Collections and Distributions, in  order to effectively collect ill-gotten gains and penalties and to distribute  funds to harmed investors. Also, the Chairman said SEC’s new  Enforcement director will conduct a comprehensive review of  Enforcement’s investigation processes and its organizational culture. She  said the review will focus on ways to make more effective use of current  resources and to identify the best use of any additional funding. Further,  the Chairman said senior officials will review whether the Commission’s  2006 corporate penalty policy is achieving its intended goals, and will  report back to her with findings and recommendations. Finally, the  Chairman agreed that SEC should take steps to ensure that the  Commission better involve, and communicate with, Enforcement staff in  managing the enforcement program. She said no improvement to SEC’s  enforcement program can be successful without deep involvement of  Enforcement staff and clear communication to the staff of the  Commission’s goals and expectations. SEC also provided technical  comments, which we have incorporated as appropriate.
As agreed with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after its  date. At that time, we will send copies of this report to interested  congressional committees, the Ranking Member of the Senate Committee  on Banking, Housing, and Urban Affairs, the Ranking Member of the  Senate Subcommittee on Securities, Insurance, and Investment, and  others. We will also send a copy to the Chairman of the SEC. The report  will be available at no charge on the GAO Web site at www.gao.gov.
If you or your staff have any questions regarding this report, please  contact me at (202) 512-8678 or williamso@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report. Key contributors to this report are listed in  appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: To address our first objective—evaluating the Securities and Exchange  Commission (SEC) Division of Enforcement’s (Enforcement) progress  made in implementing our August 2007 recommendations—we reviewed  relevant SEC and Enforcement documentation, including a report by the  SEC Office of Inspector General on the Hub investigation management  information system, the division’s Enforcement Manual, a user manual  created for the Hub system, the agency’s fiscal year 2009 Congressional  Justification, and documents detailing the organization and activities of  SEC’s Office of Collections and Distributions (OCD). We also reviewed  SEC’s strategic plan, federal internal control standards, and prior GAO  reports on SEC and Enforcement processes and operations, including  information technology systems and the Fair Fund program. We  interviewed Enforcement management, former Enforcement management,  the principal managers of OCD, and Office of Inspector General personnel.
To address our second objective—the extent to which Enforcement has an  appropriate mix of resources—we obtained data from SEC on  Enforcement personnel and staffing levels, the division’s budget, number  of enforcement cases opened annually, number of enforcement actions  brought annually, case backlog, and distribution of types of enforcement  actions filed. We also reviewed SEC’s strategic plan, its fiscal year 2009  Congressional Justification, annual Performance and Accountability  reports, the division’s Enforcement Manual, annual Select SEC and Market  Data reports, federal internal control standards, prior GAO work on SEC  human capital issues, the Sarbanes-Oxley Act of 2002, and other  Enforcement program documentation. We interviewed Enforcement  management, former Enforcement management, former SEC  commissioners and chairmen, private sector securities attorneys,  academics, and others. We conducted 11 small group meetings with  approximately 80 Enforcement investigative attorneys and branch chiefs  in three regional offices of varying size—Chicago, San Francisco, and New  York—plus SEC headquarters in Washington, D.C. Using agency data, we  identified and invited participants to these meetings by random selection,  and a GAO research contractor assisted us in conducting the sessions.  While we spoke to a variety of Enforcement staff in small group meetings,  the comments we received are not necessarily representative of the beliefs  of all staff.
To address our third objective—factors influencing the amount of  penalties and disgorgements, and the total amount of these remedies in  recent years—we obtained data from SEC on total annual amounts  ordered in penalties and disgorgements, and corporate penalties ordered  in individual cases. We also reviewed SEC news and litigation releases on  enforcement actions filed, annual Performance and Accountability reports,  and terms of the corporate penalty policies implemented in 2006 and 2007.  Our focus was application of the policies, not the reasonableness or scope  of their terms. For the 2007 policy, we reviewed penalty history for a  number of cases: corporate penalty amounts as initially proposed by  Enforcement staff; penalty ranges as approved by the Commission; and  penalty amounts as cases were ultimately resolved. We also interviewed  sources as indicated for our second objective, plus officials from SEC’s  Office of Economic Analysis.
To address our fourth objective—the adoption, implementation, and  effects of the recent corporate penalty policies—we reviewed decision  memorandums, in draft and final form, for a number of enforcement  actions involving corporate penalties. We reviewed these memorandums  for such matters as facts of a case, violations alleged, and penalties  proposed and approved, but did not examine them in order to determine  appropriateness of any particular action by either Enforcement staff or the  Commission. We obtained SEC statistics on formal orders of investigation  granted, and data on Commission consideration of enforcement actions in  executive session. We reviewed terms of the 2006 and 2007 corporate  penalty policies, SEC’s strategic plan, federal internal control standards,  and previous GAO work detailing best practices for policy development.  We queried a number of other commission-style federal regulatory  agencies: the Federal Communications Commission, the Nuclear  Regulatory Commission, the Federal Energy Regulatory Commission, the  Consumer Product Safety Commission, the Commodity Futures Trading  Commission, and the Equal Employment Opportunity Commission. We  also interviewed sources as indicated for our third objective.
We undertook this performance audit from August 2008 to February 2009,  in accordance with generally accepted government auditing standards.  These standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusion based on our audit objectives. We believe that the  evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Securities and Exchange Commission
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Karen Tremba, Assistant Director;  Anthony Paras; Carl Ramirez; Linda Rego; Barbara Roesmann; and  Christopher Schmitt made significant contributions to this report.