Created by Congress in 1934, SEC’s primary mission is to protect investors; maintain fair, honest, and efficient securities markets; and facilitate capital formation. To fund its operations, SEC collects fees that are deposited into a special SEC appropriations account to be used as offsetting collections. These fees are charged to (1) public companies for the registration of stocks and bonds for sale to investors, (2) national securities exchanges and national securities associations when registered securities and security futures are sold on or off exchanges through any member of such an association, and (3) persons filing proxy solicitations for mergers, consolidations, acquisitions, or sales of a public company’s assets. In carrying out its mission, the agency has established four major goals: (1) promote and enforce compliance with federal securities laws, (2) sustain a flexible and effective regulatory environment, (3) promote informed investment decision making, and (4) maximize its use of resources. SEC works to achieve these goals through its various divisions and offices. GAO has issued a number of reports and testimonies addressing SEC’s staffing and workload and certain aspects of its human capital and budget challenges. As of September 30, 2003, SEC had 3,208 staff working in four divisions and 18 offices in Washington, D.C., and in 11 regional and district offices. Of these, approximately 44 percent were attorneys, 22 percent were accountants or financial analysts, and 6 percent were investigators or examiners. The remaining 28 percent included other professional, technical, administrative, and clerical staff. SEC oversees the activities of a variety of key market participants. In 2003, SEC was responsible for overseeing 13 registered exchanges, the over-the- counter market, approximately 70 alternative trading systems, 11 registered clearing agencies, about 6,800 registered broker-dealers employing over 700,000 registered representatives, almost 8,000 transfer agents, over 5,000 investment companies, and approximately 8,000 registered investment advisers. In addition, over 17,000 companies that have issued securities filed annual reports with SEC. SEC’s oversight includes rule making, surveilling the markets, interpreting laws and regulations, reviewing corporate filings, processing applications, conducting inspections and examinations, and determining compliance with federal securities laws. In our previous reports on SEC, we found that SEC faced high staff turnover, ongoing vacancies, and increasing resource needs. Specifically, in our September 2001 report, we noted that over 1,000 employees, or about one-third of SEC staff, left the agency from fiscal years 1998 to 2000, and that 280 positions remained unfilled in September 2001. In our March 2002 report, we stated that since 1996, SEC’s staff resources had not grown commensurate with its workload. We noted that SEC tended to develop its annual budget request based on the previous year’s appropriation rather than on what it would actually need to fulfill its mission. The result was that the modest growth in staff resources in the 1990s at SEC was insufficient to manage its workload. In addition, we reported that additional funding was necessary to meet SEC’s IT needs. Like the rest of the government, SEC’s challenges in the area of IT continue to increase, and SEC staff must have the necessary tools to successfully meet the agency’s increasing demands. Changes in the securities markets contributed to the increase in SEC’s workload. U.S. capital markets have experienced substantial growth in the last two decades. The increased volume of shares traded in the U.S. stock market in this period and an array of new products and market participants have led to increasing demands on SEC’s regulatory capacity. The 1990s also witnessed tremendous growth in the internationalization of the U.S. securities market. In addition, many more individuals became investors in the U.S. stock market through buying shares in mutual funds. This further elevated SEC’s importance as a regulator. SEC’s staff issues and a series of corporate failures and accounting scandals, including the bankruptcies of Enron in December 2001 and WorldCom in July 2002, caught Congress’s attention and raised significant concern about SEC’s ability to effectively carry out its mission. Congress recognized SEC’s challenges and enacted a number of legislative changes to address them, including the Investor and Capital Markets Fee Relief Act, which rationalized SEC’s fee structure and exempted SEC from general federal pay restrictions and provided the agency with pay parity—the authority necessary to bring salaries in line with those of other federal financial regulators. Sarbanes-Oxley, which authorized appropriations of $776 million to the agency in the fiscal year 2003 budget. SEC increased its initial fiscal year 2003 budget request of $466 million to $769 million in part because of the level authorized in Sarbanes-Oxley. The Consolidated Appropriations Resolution, 2003, in which Congress appropriated $716 million to the agency for fiscal year 2003, directed the additional funding to be used in certain areas. First, it directed SEC to fund pay parity, which at that time had not yet been fully implemented. Sarbanes-Oxley also directed that the new funding be used to fund information technology, security enhancements, and recovery and mitigation activities in light of the terrorist attacks of September 11, 2001. In addition, SEC was directed to fund no fewer than 200 additional professional staff positions to strengthen existing program areas, and to increase its oversight of auditors and audit services. Figure 1 shows the change in SEC’s budget between fiscal years 2002 and 2004. the Accountant, Compliance and Enforcement Staffing Act of 2003, which provided SEC with relief from competitive hiring requirements for certain positions. The legislation was intended to enable SEC to expedite the hiring of accountants, economists, and examiners so that the agency could more quickly fill new positions, including those created after Sarbanes- Oxley. SEC used much of its fiscal year 2003 increased appropriations to fund over 842 new staff positions. SEC’s financial disclosure, enforcement, and examinations areas received most of the newly funded positions. Among the divisions receiving the largest increases were the Divisions of Enforcement, Corporation Finance, and the Office of the Chief Accountant (OCA), which received double-digit increases to their budgets in 2003 and are expected to receive even greater increases in 2004. In addition, SEC used part of its fiscal year 2003 appropriations to fund pay parity for existing staff, which gave the agency additional flexibility to recruit and retain staff. However, many of these newly funded positions remain unfilled because SEC continues to face hiring challenges for certain positions. Officials say that while certain laws have helped speed up the hiring process, they are facing increased competition from the private sector. SEC used its increased appropriations between 2002 and 2004 in its financial disclosure, enforcement, and examination areas primarily to fund new positions. As shown in table 1, the offices and divisions showing the largest increases in spending between 2002 and 2003 were the Divisions of Enforcement and Corporation Finance, regional offices, OCA, and IT. Between 2003 and 2004, the areas expected to receive the largest increases in spending are OCA, the Divisions of Corporation Finance and Enforcement, regional offices, IT, and the Office of Compliance Inspections and Examinations (OCIE). As we reported in July 2003, SEC made its allocation decisions without the benefit of an updated strategic plan. In lieu of using an updated strategic plan, it appears that a special study of SEC operations has provided a basis for SEC in determining the need for 842 new positions in 2003. In 2002 the former Chairman directed SEC staff to conduct an internal study of SEC’s current operations, workload, resource allocations, methods for assigning and managing work, and measures of performance, productivity, and quality of effort. Soon after the current Chairman joined SEC in February 2003, he asked that the division and office heads prepare analyses to justify their staffing requests. This included the total number of staff needed to accomplish each division/office’s objectives, the organizational changes needed to accommodate the new staff being requested, and a breakdown of the types of staff being requested by profession. In addition, an SEC official said that the Chairman ultimately approved each division’s and office’s justification to arrive at the final allocation for the 842 new positions. Table 2 shows SEC’s final allocation of the 842 new positions among divisions/offices. SEC’s staff allocations appear generally consistent with legislative expectations and what is known about SEC’s current operating environment. However, because SEC’s staff positions were allocated without the benefit of an updated strategic plan, it will be difficult for SEC to assess the appropriateness or effectiveness of the use of its much larger budget. Since 2002 we have reported that although SEC had a strategic plan and had periodically adjusted staffing to fulfill basic obligations, the agency traditionally had not engaged in a systematic re-evaluation of its programs and activities in light of current and emerging challenges. We further noted that with a current strategic plan that identifies the agency’s key mission-related goals and outlines the agency’s priorities, SEC could better determine and deploy resources needed to fulfill its mission. In response to our concerns and the significant budget increase in fiscal year 2003, the current SEC chairman instructed SEC staff to draft a new strategic plan. SEC’s new strategic plan was approved by the commission on July 9, 2004. SEC plans to use the majority of its additional staff resources within the Division of Corporation Finance, OCA, Division of Enforcement, and OCIE in order to enhance its regulatory and oversight activities. Between 2002 and 2003, Corporation Finance and OCA’s spending increased 17 percent and 25 percent, respectively, and planned spending is expected to increase by 39 percent and 55 percent in 2004. Both Corporation Finance and OCA administer SEC’s full disclosure program. These programs are responsible for ensuring that investors are provided with material information from reporting public companies. They also help to deter fraud and misrepresentation in public offerings, trading, voting, and tendering of securities.