[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 
SEC STRATEGIC PLANNING--WILL ADDITIONAL RESOURCES HELP THE SEC FULFILL 
                              ITS MISSION?

=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT EFFICIENCY
                        AND FINANCIAL MANAGEMENT

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 23, 2003

                               __________

                           Serial No. 108-81

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform






                      U.S. GOVERNMENT PRINTING OFFICE

90-815                       WASHINGTON : 2003
_______________________________________________________________________
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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
DAN BURTON, Indiana                  HENRY A. WAXMAN, California
CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana              CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
DOUG OSE, California                 DENNIS J. KUCINICH, Ohio
RON LEWIS, Kentucky                  DANNY K. DAVIS, Illinois
JO ANN DAVIS, Virginia               JOHN F. TIERNEY, Massachusetts
TODD RUSSELL PLATTS, Pennsylvania    WM. LACY CLAY, Missouri
CHRIS CANNON, Utah                   DIANE E. WATSON, California
ADAM H. PUTNAM, Florida              STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia          CHRIS VAN HOLLEN, Maryland
JOHN J. DUNCAN, Jr., Tennessee       LINDA T. SANCHEZ, California
JOHN SULLIVAN, Oklahoma              C.A. ``DUTCH'' RUPPERSBERGER, 
NATHAN DEAL, Georgia                     Maryland
CANDICE S. MILLER, Michigan          ELEANOR HOLMES NORTON, District of 
TIM MURPHY, Pennsylvania                 Columbia
MICHAEL R. TURNER, Ohio              JIM COOPER, Tennessee
JOHN R. CARTER, Texas                CHRIS BELL, Texas
WILLIAM J. JANKLOW, South Dakota                 ------
MARSHA BLACKBURN, Tennessee          BERNARD SANDERS, Vermont 
                                         (Independent)

                       Peter Sirh, Staff Director
                 Melissa Wojciak, Deputy Staff Director
                      Rob Borden, Parliamentarian
                       Teresa Austin, Chief Clerk
              Philip M. Schiliro, Minority Staff Director

     Subcommittee on Government Efficiency and Financial Management

              TODD RUSSELL PLATTS, Pennsylvania, Chairman
MARSHA BLACKBURN, Tennessee          EDOLPHUS TOWNS, New York
STEVEN C. LaTOURETTE, Ohio           PAUL E. KANJORSKI, Pennsylvania
JOHN SULLIVAN, Oklahoma              MAJOR R. OWENS, New York
CANDICE S. MILLER, Michigan          CAROLYN B. MALONEY, New York
MICHAEL R. TURNER, Ohio

                               Ex Officio

TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                     Mike Hettinger, Staff Director
                 Larry Brady, Professional Staff Member
                          Amy Laudeman, Clerk
          Mark Stephenson, Minority Professional Staff Member




                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 23, 2003....................................     1
Statement of:
    Derby, Peter, Managing Executive Director for Operations, 
      Office of the Chairman, Securities and Exchange Commission, 
      accompanied by Jim McConnell, Executive Director, 
      Securities and Exchange Commission.........................    28
    Hillman, Richard, Director of Financial Markets and Community 
      Investment, U.S. General Accounting Office, accompanied by 
      Orice Williams, Assistant Director, General Accounting 
      Office.....................................................     4
Letters, statements, etc., submitted for the record by:
    Derby, Peter, Managing Executive Director for Operations, 
      Office of the Chairman, Securities and Exchange Commission, 
      prepared statement of......................................    30
    Hillman, Richard, Director of Financial Markets and Community 
      Investment, U.S. General Accounting Office, prepared 
      statement of...............................................     7
    Platts, Hon. Todd Russell, a Representative in Congress from 
      the State of Pennsylvania, prepared statement of...........     2
    Towns, Hon. Edolphus, a Representative in Congress from the 
      State of New York, prepared statement of...................    26


SEC STRATEGIC PLANNING--WILL ADDITIONAL RESOURCES HELP THE SEC FULFILL 
                              ITS MISSION?

                              ----------                              


                        WEDNESDAY, JULY 23, 2003

                  House of Representatives,
Subcommittee on Government Efficiency and Financial 
                                        Management,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 3:25 p.m., in 
room 2247, Rayburn House Office Building, Hon. Todd Platts 
(chairman of the subcommittee) presiding.
    Present: Representatives Platts, Blackburn and Towns.
    Staff present: Mike Hettinger, staff director; Dan Daly, 
counsel; Larry Brady and Kara Galles, professional staff 
members; Amy Laudeman, clerk; Mark Stephenson, minority 
professional staff member; and Jean Gosa, minority assistant 
clerk.
    Mr. Platts. We will bring this hearing of the Subcommittee 
on Government Efficiency and Financial Management to order. Our 
ranking member, Mr. Towns, will be joining us shortly, as well 
as our vice chair, the gentlelady from Tennessee, Ms. 
Blackburn.
    I am going to dispense with the reading of my more 
extensive opening statement and submit it for the record, and I 
will ask the other Members to do so also.
    [The prepared statement of Hon. Todd Russell Platts 
follows:]
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    Mr. Platts. I first want to just thank our witnesses for 
your patience. It is kind of Murphy's law--what could go wrong 
in scheduling did with a whole series of procedural votes. But 
I know how valuable your time is and do appreciate each of you 
and your patience with us today, and also your efforts in 
preparing for this testimony. I appreciate your extensive 
written testimony which has been submitted. I have had a chance 
to go through that, and I look forward to getting into your 
oral testimony here today.
    The SEC certainly has gone through some challenging years 
of late, from its workload increase to changes within the 
organization. The General Accounting Office has certainly 
helped to bring to light some of the challenges and 
recommendations for how to meet those challenges, and with the 
new team leadership at SEC, we believe we are on the right 
track and anxious to hear what the new leadership team is doing 
as part of their efforts to meet those new challenges with 
added responsibilities that Congress has given the SEC.
    I think what we will do is just swear in each of the 
witnesses and anyone else who is going to be advising witnesses 
here today, and then we will get into your opening statements 
and then questions. So if each of you could stand along with 
anyone who would be advising you.
    [Witnesses sworn.]
    Mr. Platts. The clerk will reflect that the witnesses have 
answered in the affirmative.
    We will be hearing today first from GAO, Mr. Hillman, 
beginning with you, and then followed by the SEC Mr. Derby. I 
believe you are going to give the opening statement, and then 
both Mr. McConnell and you will take questions. Mr. Hillman, if 
you would like to begin with your opening statement.

STATEMENT OF RICHARD HILLMAN, DIRECTOR OF FINANCIAL MARKETS AND 
     COMMUNITY INVESTMENT, U.S. GENERAL ACCOUNTING OFFICE, 
  ACCOMPANIED BY ORICE WILLIAMS, ASSISTANT DIRECTOR, GENERAL 
                       ACCOUNTING OFFICE

    Mr. Hillman. Thank you very much, Mr. Chairman.
    I am accompanied today by Orice Williams, who is the 
Assistant Director at GAO who has led much of our work at the 
SEC. We both are pleased to be here today to discuss SEC's 
plans for spending the significant increase in its 2003 budget 
appropriation and its 2004 budget request, as well as its 
response to our recommendations for enhancing its strategic 
planning and human capital planning processes, which are 
critical ingredients for ensuring the new appropriations are 
put to the best possible use.
    As you know, in February 2003, the Securities and Exchange 
Commission received the largest budget increase in the history 
of the agency. The increased funding was designed to better 
position SEC to address serious issues identified in the 
Sarbanes-Oxley Act and to better enable SEC to address numerous 
operational and human capital management challenges discussed 
in our March 2002 report entitled, ``SEC Operations: Increased 
Workload Creates Challenges.''
    To help ensure that SEC spends its budgetary resources in 
an efficient and effective manner, this subcommittee requested 
us to review the SEC's efforts to address the issues raised in 
our 2002 report and to report out on how SEC intends to utilize 
its new budgetary resources. Our final report on these matters 
is expected to be completed this fall. As requested, this 
testimony provides information on the status of SEC's current 
spending plan and preliminary observations on its strategic and 
human capital planning efforts.
    Regarding our first objective on SEC's budget, we found 
that SEC's 2003 appropriations of $716 million increased SEC's 
budget 45 percent over its previous year's spending level, 
giving it additional resources to address critical staffing 
shortages and information technology needs. However, SEC spent 
the first 5 months of the fiscal year operating under a 
continuing resolution and thus could not fully implement a 
spending plan based on its new budget authority.
    In addition, SEC faced difficulties in hiring accountants, 
economists and examiners, further constraining its ability to 
acquire needed expertise. Once it received its 2003 
appropriation, it determined that most of its increase would be 
used to fund new positions and to upgrade its technological 
resources, including doubling the operating budget of the 
Office of Information Technology. However, given the late 
appropriation and hiring challenges to date, SEC has filled few 
of these positions and it is unlikely that SEC will be able to 
fully utilize all of its 2003 funds.
    Regarding our second objective on SEC's strategic planning 
efforts, we found that it recognizes that it needs to develop a 
new agency-wide strategic plan and that such a plan is a vital 
component of its work force planning and human capital 
allocation processes. However, SEC has embarked on an effort to 
allocate resources and determine its needs without the benefit 
of its updated strategic plan. Instead, it has relied on views 
from its senior managers and on an internal study commissioned 
by then-Chairman Pitt that assessed the Commission's workload 
and evaluated the resources available for doing that work. This 
study, currently under review by Chairman Donaldson, has not 
been widely distributed throughout the organization.
    We commend the SEC for conducting this study. Its findings 
confirm many of the workload and resource challenges we 
discussed in our March 2002 report and it includes numerous 
recommendations for improving the agency's operations. We 
believe this study should serve as a useful framework as SEC 
develops an agency-wide strategic plan.
    We also found that SEC has also initiated a number of other 
efforts, but because all of them are grounded in SEC having a 
clear strategic direction and goals, all of them hinge on SEC 
completing a new strategic plan. Among these efforts include 
developing more outcome-oriented performance measures to gauge 
the effectiveness of its regulatory operations and for 
fulfilling its statutory mission and formalization of a 
strategic human capital plan. As our work progresses, we look 
forward to reviewing SEC's revamped strategic plan and 
determining how the agency has used this plan in allocating new 
staff and in developing new performance measures and a human 
capital plan.
    In conclusion, SEC's dynamic regulatory environment and 
tumultuous past year has made focusing on a strategic direction 
and vision for the agency difficult. Although SEC has begun to 
take a number of important steps aimed at addressing its 
operational and human capital challenges, additional work is 
needed to ensure that it has appropriately positioned itself to 
operate more efficiently and effectively.
    First, it is critical that SEC complete its strategic 
planning effort, which includes the systematic reevaluation of 
all its current approaches, efforts, goals and activities in 
light of its current environment. In this regard, we believe 
SEC would be benefited by reevaluating existing rules, 
regulations and regulatory approach and in working with the 
self-regulatory organizations and industry to ensure that it 
has accurately established priorities that reflect the current 
regulatory environment.
    A second critical step involves identifying ways to 
leverage existing resources, be it through better technology or 
regulatory processes. For example, SEC needs to fully fund and 
follow through on technology initiatives that offer the 
greatest opportunities to increase its effectiveness. SEC's 
technology evolution could perhaps be one of the most important 
aspects in improving the efficiency of SEC's operations and 
will likely require a sustained and ongoing resource 
commitment.
    Finally, aligning SEC's human capital with a strategic plan 
is an important part of strategic human capital planning. To 
date, SEC has taken important steps aimed at establishing a 
coordinated human capital management approach, but it needs to 
develop a formal plan that assures that it has the right amount 
of resources on board with the right expertise to meet its 
mission responsibilities.
    Mr. Chairman, thank you for the attention to SEC operations 
and planning processes. The leadership this subcommittee has 
shown by holding this hearing should help maintain the momentum 
needed for change at SEC.
    Mr. Chairman, this concludes my prepared statement. Orice 
and I would be pleased to answer any questions at the 
appropriate time.
    [The prepared statement of Mr. Hillman follows:]
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    Mr. Platts. Thank you, Mr. Hillman.
    Before we begin, Mr. Derby, with you, I would like to 
recognize the ranking member, Mr. Towns from New York as well 
as our vice chair, the gentlelady from Tennessee, Ms. 
Blackburn. I appreciate both of you being with us. I submitted 
my opening statement for the record, and if each of you have a 
statement perhaps you could the same, because of the patience 
of our witnesses and letting them get on with their statements.
    Mr. Towns. So agreed.
    [The prepared statement of Hon. Edolphus Towns follows:]
    [GRAPHIC] [TIFF OMITTED] 90815.003
    
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    Mr. Platts. OK, great.
    Mr. Derby.

   STATEMENT OF PETER DERBY, MANAGING EXECUTIVE DIRECTOR FOR 
  OPERATIONS, OFFICE OF THE CHAIRMAN, SECURITIES AND EXCHANGE 
 COMMISSION, ACCOMPANIED BY JIM MCCONNELL, EXECUTIVE DIRECTOR, 
               SECURITIES AND EXCHANGE COMMISSION

    Mr. Derby. Chairman Platts, Ranking Member Towns, and 
members of the subcommittee, thank you for the opportunity to 
testify today on behalf of the chairman of the Securities 
Exchange Commission about our exciting initiatives related to 
strategic planning and operational effectiveness.
    The Commission takes seriously its need to fulfill its 
investor protection mission and to utilize taxpayer resources 
efficiently and effectively. After a short statement, Executive 
Director Jim McConnell and I look forward to addressing any 
questions that you may have.
    When Chairman Donaldson took the helm 5 months ago, the SEC 
had reached a critical juncture. Recent accounting scandals, 
earnings restatements and bankruptcies severely shook investor 
faith in the fairness of our markets. To combat the wave of 
corporate fraud, Congress approved a substantial expansion of 
the SEC's budget and work force. We knew that the ways we 
address these challenges would determine where we go not only 
tomorrow, but for years to come.
    As the chairman's managing executive for operations, I am 
excited to be here today to tell you about a few of the 
aggressive initiatives we have launched in these few short 
months that will prepare the SEC organizationally to meet these 
challenges.
    First, at the direction of Chairman Donaldson, we are in 
the process of creating within the SEC a new risk assessment 
arm. The Office of Risk Assessment as currently proposed will 
support the SEC's divisions by identifying risks that may 
affect the SEC's performance of its mission. By creating a risk 
assessment function, the chairman and the agency will be able 
to determine more quickly whether new business trends and 
industry practices warrant further SEC attention. This will 
allow us to proactively adjust operations and resources to 
address these new challenges.
    Another of the chairman's aggressive new initiatives is a 
systemic approach to program management through the use of 
dashboards that will allow senior managers to determine their 
progress in meeting budget, staffing and performance 
objectives. These management reports will provide a more 
detailed picture of the commission's operations and 
effectiveness than we have ever had before. At quarterly 
meetings, the chairman and the division directors will review 
operations and performance to identify emerging problems, 
discuss possible solutions, and hold managers accountable for 
their staff and their activity.
    We have also undertaken a new effort to redesign and expand 
our staff orientation and training program. We are developing a 
comprehensive orientation program that will welcome all our new 
employees with a solid foundation in the SEC's mission, culture 
and value. Our new SEC university will ensure not only that our 
new 842 employees learn their new responsibilities, but that 
all our staff continue to build their knowledge of the rapidly 
evolving market. Through this initiative, we will expand the 
in-house training activities of each division and office, 
launch new e-learning programs for both managers and employees, 
and develop new ways to keep staff abreast of industry 
practices.
    These steps are critical to maximize the effectiveness of 
our staff, but they also serve as an effective retention tool 
exposing staff to new career opportunities within the SEC.
    The commission is also focused on our financial system as 
we prepared audited financial statements for the first time in 
our history. We have made substantial progress to date on a 
variety of fronts, including undergoing a rigorous audit of our 
financial management system controls, selecting the GAO as our 
auditor, adding staff to work full-time on our financial 
statements, and establishing five internal task forces.
    We have formulated an aggressive plan to resolve 
outstanding issues such as verifying the selection of security 
transaction fees, replacing our system for tracking fines and 
penalties, and enhancing the security of our information 
systems. Although private companies going public generally take 
3 years to move to audited financial statements, and large 
Federal agencies were given 5 years to do so, we expect that 
our plan will obtain a clean opinion in only 18 months.
    Finally, on behalf of the chairman, I want to thank 
Congress for its strong support for added resources, pay parity 
legislation, and expected service hiring authority for which we 
owe this subcommittee a special debt of gratitude. With these 
tools in place, we can now hire the additional workers and make 
the information technology investments that are so essential to 
our success. As you will see in my written testimony, we have 
planned extensively for these moves through a comprehensive 
study of our operations and resources. Through detailed review 
of each division's budget and personnel needs with division 
directors, and through our IT capital planning committee, we 
will build on these planning efforts over the next several 
months as we develop our 2004-2009 GPRA strategic plan 
scheduled for release this coming fall.
    Strategic planning, performance measurement, better 
training, and stronger financial controls, these initiatives 
will provide a solid foundation for the commission to achieve 
its most fundamental responsibility now, to restore investor 
confidence in the integrity of our securities market. After a 
few short months, many of these initiatives are only in their 
early stages, but we are making great strides forward and we 
look forward to sharing with you the results of these labors.
    Thank you again for the opportunity to testify today.
    [The prepared statement of Mr. Derby follows:]
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    Mr. Platts. Thank you, Mr. Derby and Mr. Hillman.
    As we begin questions, we will stick roughly initially to 
the 5-minute rule to allow each committee member to begin 
questions before we get into the second or more rounds.
    I would like to begin, Mr. Derby, with you. I appreciate 
your statements and the important mission that your agency has 
in being responsible with taxpayer funds and how the agency 
spends its funds, and then also the fiduciary duty you have in 
ensuring the integrity of the markets where our citizens have 
their money invested. So it is kind of a dual responsibility to 
American citizens, whether it is how you spend their money or 
how you seek to ensure the integrity of the system in which 
they are investing their funds.
    Throughout your written testimony, and you referenced it 
here today, you talk about the draft study on operations and 
resources that is apparently playing a significant role whether 
it is your human capital management plan or your information 
technology, or the various parts of your strategic plan for the 
future. Are you referring to what has been described as the 
McKinsey report? Is that the study you are referencing?
    Mr. Derby. That is correct. It is really not the McKinsey 
report, though. That is what people have spoken about it as 
such. It is actually an internal special study performed by the 
senior managers at the Securities and Exchange Commission, with 
assistance by the authors from McKinsey to help formulate the 
processes to come up with the study.
    Mr. Platts. So the work of the McKinsey Co., that is kind 
of part of the efforts of the internal review and study that 
has been done?
    Mr. Derby. That is correct.
    Mr. Platts. And where does that study, as you refer to, the 
draft study, but apparently you are acting on that, where does 
that study stand? Is it close to being a final study that you 
are going to put forth as this is our recommendations for, in 
essence, a strategic plan, and share with the industry, with 
the regulated community, with Congress, with GAO? To seek 
additional comments from outside the agency? Or is it still in 
a draft form?
    Mr. Derby. It is still in a draft form, but actually the 
process in its drafting there was a great deal of interaction 
with outside stakeholders in work groups and roundtables, in 
direct interviews and discussions. So that study did have a lot 
of interaction to focus from the external. It is the only way 
you are really going to get good feedback and good reviews on 
it.
    Mr. Platts. That would include the regulated community, the 
stakeholders?
    Mr. Derby. Yes.
    Mr. Platts. OK.
    Mr. Derby. And it is currently in its draft form. When the 
chairman came in 5 months ago, we had to take a look at that 
study in its draft form and really use it as a basis for which 
to really do what we were focusing on, and that is what was 
going to be the strategy going forward; what is the vision for 
the agency going forward; what are our particular goals and 
objectives. So it was just the foundation from which, instead 
of continuing with that to some final conclusion, we really 
just moved on. We used it as part of our discussion with 
division directors, part of the human allocation of staff. We 
really got into the details of each of the divisions and 
formulated the priorities for them. The chairman spent quite a 
bit of time in multiple meetings, a series of meetings to 
really focus very detailed on where he was going forward. We 
did not spend time or maybe waste time to really kind of 
conclude and bring it to a publishing form. We just kind of 
moved on from that.
    Mr. Platts. The input from the stakeholders, the regulated 
community, I guess to start with. It sounds as if there were 
some from the regulated community that were asked to provide 
feedback or insights into what was being proposed. But at this 
point, you have not shared anything in a more broad public 
sense to invite comment from anyone in the regulated community. 
Is that correct?
    Mr. Derby. After those initial extensive reviews, we have 
not. But we continue to have interaction with the regulated 
community as we go forward on the policy side, on things that 
we are doing.
    Mr. Platts. How about with the General Accounting Office, 
given that their report of last spring really seemed to capture 
well some of the challenges that the SEC was facing and the 
needs of the agency. We keep giving you work, but we don't give 
you any resources and help to bring to the attention of 
Congress. It is one thing to say, hey, do this, but unless we 
are going to step up and give you the allocation of resources, 
we are not being very fair or responsible.
    Are you actively engaged in interacting with the GAO and 
saying here is what our draft study is; we welcome your 
comments on how you think it is going to meet the challenges or 
problems of the past as we go into the future.
    Mr. Derby. I think the GAO is familiar with the work on the 
study and has given us great input in just the work that they 
have been doing prior to the study, in the first report and the 
whole study process. You really found that people at the agency 
that really care and love this agency, and they were willing to 
understand that the agency had tremendous challenges coming 
before it. Instead of getting swamped and overwhelmed and 
tainted, they decided to really take a hard look.
    I think that process that was done was one that really 
benefited the agency. Certainly the new chairman and myself 
coming in to take a look at what was being thought and being 
said, and we really took that as a floor, but not to work it to 
its final conclusion in the line it was, but as the raw 
materials upon which we really go into dealing with where we 
were going to be going as new priorities for the agency, the 
different divisions there; programs as they saw them going 
forward. That report started almost a year before.
    Things have changed through that process. We had Sarbanes-
Oxley implementation, a tremendous amount of responsibility 
there. So we just moved directly into going forward.
    Mr. Platts. I know one of the pieces of material I have 
reviewed in preparation for the hearing, I saw a quote from 
Chairman Donaldson where he referenced wanting to draw on the 
knowledge and experience of the many dedicated long-time 
staffmembers at SEC who given the leadership and given the 
resources will rise to the challenge before the SEC. I commend 
the chairman for that approach in embracing the hard-working 
public servants of the SEC and working with them.
    Before I go into additional questions for now, I am going 
to yield to the ranking member, Mr. Towns, for the purpose of 
questions.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Let me begin by apologizing for being late. I am from New 
York, and just a few minutes ago we had a shoot-out at city 
hall in New York, and one of my political allies, Councilman 
Davis, was shot and killed. So I was sort of monitoring that, 
trying to get as much information as possible on it. That is 
the reason why I was late coming. So I want to apologize for my 
lateness, but I hope you understand in terms of the situation 
we are facing in our city.
    Mr. Platts. Mr. Towns, we certainly will keep Councilman 
Davis' family in our prayers and all those involved in that 
incident.
    Mr. Towns. Right. Thank you.
    Let me also thank you for holding this hearing because I 
think that it is a very important hearing. I think it is very 
timely, given the fact that we are ending the fiscal year and I 
want to get a report as to how things are going.
    First of all, given the fierce competition for certified 
public accountants after the Sarbanes-Oxley era, what 
strategies has the SEC developed to attract these individuals? 
How will the flexibility recently granted to the SEC upon 
enactment of H.R. 638 improve your ability to meet your 
staffing needs? I can just imagine the competition must be 
really stiff out there, so how are you dealing with that?
    Mr. McConnell. If I may? You are right. The competition is 
stiff and we have an enormous challenge in front of us to hire 
a large number of accountants, CPAs. The CPAs that we need must 
have public accounting experience. We are not in a position to 
bring people in and really train them, entry level accountants. 
We need people who have actually been in public accounting, 
have been in firms, have been auditing. So that just doubles 
the challenge.
    Fortunately, the SEC has always been a great place for 
accountants to come. They enjoy the work. We attract a lot of 
very highly qualified applicants. One of the problems that we 
have had is that the process to date, until recent changes in 
the law, it has been extraordinarily difficult to obtain 
accountants. So they might apply for jobs to us, but if it 
takes 3 or 4 months to get them, during that period of time 
they become disgruntled and move on to other positions.
    So we still have the ability to attract lots of 
applications. Now with the ability of the excepted service 
hiring authority, we think we will be able to move rapidly 
enough on those applications so that we will be able to meet 
the goals that we have for bringing accountants on.
    We have also followed traditional methods of recruitment in 
terms of we are very aggressive in the industry among the 
accounting firms, at schools, to attract people. We think that 
we will be in a position over time with this new authority to 
bring on the people that we need, with the experience that is 
so essential.
    Mr. Towns. Right. Thank you.
    Mr. Derby, according to your testimony, you have allocated 
840-plus new staff slots among the various bureaus and offices 
of the SEC after exhaustive analysis, which included a draft 
plan on operations and management and interviews with division 
directors and program managers. Would it have been helpful to 
have a strategic plan in place prior to making these 
allocations? If once the plan is completed it dictates 
allocations other than currently planned, do you have the 
flexibility right now to reassign individuals and to be able to 
meet these needs?
    Mr. Derby. Certainly a strategic plan is always beneficial 
to have at the beginning. It gives you clarity of the direction 
and formalizes it. However, we proceeded and acted in such 
detail that we really were thoughtful and responsible as we 
looked at the challenges and the agenda that was being 
formulated to address them.
    So I believe that the human capital plan, which by the way 
I think our chairman used, that employees of our agency are our 
most valuable asset. As Senator Akaka had once said, if I may, 
a strong work force comes from having the right people at the 
right skills at the right place and at the right time. Only 
then will government operate in an effective, efficient and 
economic matter.
    We have worked closely with our union, and also I think 
that the president of our national union, the National Treasury 
Employees Union, had said the fact is that we all share the 
same goals. We want the Federal Government to be the employer 
of choice, to create an environment where the employees who are 
here who are dedicated and committed want to stay, and where we 
are able to hire those who are looking to enter the Federal 
service.
    I believe that the actions that we have taken in reviewing 
the internal operation, and it was done by Jim McConnell, our 
executive director, in the special study, and by the senior 
managers, really went into great detail in looking at what the 
challenges are for this agency. As we allocated, we got down to 
staff hours, how many hours it takes to review a particular 
filing, how many hours it takes to start an examination, and 
allocated those to those different divisions that consolidate 
the programs.
    Mr. Towns. Well put.
    You have 842 new slots. At the end of the fiscal year in 
September, how many of these people do you plan to have in 
place?
    Mr. Derby. Considering we started July 3 since we received 
the excepted service July 3, we started even before, since 
February's funding, to start posting for accountants, but since 
we got the excepted service just several weeks ago, we probably 
believe it will take 6 to 9 months to really fill those slots. 
We have allocated the slots among the different programs, and 
the answer to your question a little bit before, can we 
reallocate them, considering that we are managing this agency 
very, very tightly and reviewing quarterly, not only now and 
into the future, based on our dashboards, they will be able to 
reallocate staff as well as resources to address it as we go 
forward.
    So the hiring will take some time. As that is happening, we 
will monitor it to see where and how, given new challenges that 
arise, or how well it is being implemented, to adjust.
    Mr. Towns. Thank you, Mr. Chairman. I yield back.
    Mr. Platts. Thank you, Mr. Towns.
    Mr. Hillman, in my initial question with Mr. Derby about 
the draft study and the basis this McKinsey & Co. apparently 
formed a foundation for that, my understanding is GAO has not 
really seen anything in detail regarding the draft study or any 
form of strategic plan or equivalent strategic plan at this 
point. Is that accurate?
    Mr. Hillman. We have seen the draft study that was 
prepared, and we commend the SEC for undertaking this study. It 
was developed by a cross-section of over 20 staff within SEC. 
It confirmed many of the problems that we had identified in our 
March 2002 report. It also includes a host of recommendations 
for improving the efficiency and operations of SEC. However, we 
have not seen a strategic plan and do not believe that this 
study is a substitute for an agency-wide strategic plan.
    A strategic plan is really a visionary document that 
requires the agency to look out on a 5-year horizon and 
determine what the critical priorities are that the agency 
needs to address in the future. This internal study did a good 
job of defining SEC's existing challenges, but it did not look 
out on a 5-year horizon. The agency did not even have an 
opportunity to fully consider the Sarbanes-Oxley Act and the 
immense new responsibilities that were placed on them because 
of that act.
    So while we commend them for conducting the internal study, 
we still believe that an agency-wide strategic plan is going to 
be critical in establishing a vision and a direction for the 
agency in the future.
    Mr. Platts. I stand corrected, that what you are looking 
for is that visionary plan, a strategic plan. The SEC, Mr. 
Derby, the way I hear your statements today, is really moving 
forward as quickly as possible to address the immediate 
challenges, recognizing you have identified that ideally you 
would have the strategic plan up front before you moved 
forward, but I take it the necessity to get the train back on 
the track as quickly as possible, but you are looking at that 
strategic plan being developed. Is there a timeframe for when 
GAO and Congress and the regulated community, will see that 
more visionary strategic plan in place and that you will be in 
a position to share that for comment from all the shareholder 
parties?
    Mr. Derby. The agency that we envision would be organized 
around critical missions, with management keyed to its 
performance. We believe that a dynamic agency is prepared to 
meet the many multi-faceted and evolving needs that are in a 
complex marketplace. The strategic planning as we have gone 
forward currently has been one that, as you have said, dealt 
with certain specific details that we needed to address as we 
were evolving with the agenda. That did go into an in-depth 
review of the goals, the objectives of each of the divisions.
    We are required as part of the Government Performance and 
Results Act to do a strategic plan every 3 years or 5 years. 
This fall of 2003 is the update, since the last one was done in 
the fall of 2000. So that process is going forward. We have had 
senior members of the commission, senior staff members, working 
diligently on prioritizing the objectives and goal so that as 
we get into that in more detail, we will formalize that, and 
certainly by this fall be submitted to Congress and the 
administration.
    Mr. Platts. Maybe a little bit of a repetitive question, 
but as you are developing that GPRA report and 5-year plan, it 
sounds like you envision that being your strategic plan for the 
next 5 years. What are the plans of the SEC to involve the 
regulated community, GAO, in getting feedback up front while 
you are developing the plan, including and our subcommittee and 
our oversight responsibilities, rather than you putting the 
plan out there and then there will be comments for or against 
or critical or supportive after the fact? Is there a structure 
or plan in place to seek out that feedback?
    Mr. Derby. I think the agency had shown in the special 
study that it really understands that reaching out to the 
broader community to get good feedback only benefits the agency 
in understanding the trees from the forest. It also believes 
that it needs to give some parameters in which, some framework 
of a plan first. It is the responsibility of the staff and the 
executive officer, being the chairman of the commission, to put 
together, put one forward that we can all then discuss and 
debate and finalize.
    Within the development of that process, again as the 
special study showed, the agency is very much inclined to 
interact with many stakeholders in its own development of 
proposals. So I believe that will be the way it will continue 
and go forward.
    Mr. Platts. I hope that is the case, especially with the 
wealth of knowledge that the GAO personnel have in this area, 
that they are a welcomed stakeholder in the process as you 
develop that plan. I think that would serve everyone's interest 
in good fashion if that is sooner and earlier in that process 
as that occurs.
    I would like to recognize the gentlelady from Tennessee, 
Ms. Blackburn.
    Ms. Blackburn. Thank you, Mr. Chairman. I apologize to the 
committee and to the witnesses. Mr. Towns was relating the 
reasons that he has been in and out and was tardy into the 
meeting. We find ourselves with a situation where Memphis, TN, 
which is on the western end of my district, was hard-hit by a 
straight-line winds yesterday, with a state of emergency in the 
city. It seems like the calls from all of the county, the 
mayors of the towns in the county. It is keeping us very busy 
today. So I apologize for having to leave out of the hearing.
    I want to talk with you for just a minute, if I may, and 
Mr. Derby, I do not want you to feel like you are being picked 
on, but I think I am going to start with you.
    Mr. Derby. Sure.
    Ms. Blackburn. And talk about human capital, and addressing 
human capital. In Mr. Hillman's comments, he mentioned proper 
use and direction of human capital, and then in your comments 
you mentioned a couple of times in followup questions, you have 
mentioned the mission. I did not know if you could state for me 
what the stated written mission of the SEC is or if you have 
that before you in a document.
    I think it would be wonderful to have it as part of the 
record.
    Mr. Derby. Sure, investor protection, investor protection, 
investor protection. But in the GPRA, it has it on the first 
page. It says the mission of the Securities Exchange Commission 
is a law enforcement agency. Its mission is to administer and 
enforce the Federal securities laws in order to protect 
investors and to maintain fair, honest and efficient markets.
    The goals are four: investor protection; maintain fair, 
honest and efficient markets; facilitate capital formation; 
and, sustain and improve organizational excellence.
    Ms. Blackburn. OK, great.
    I know that it is probably fair to say, and I will ask you 
if this is a fair assessment, that there have been some 
criticisms of the SEC by employees. You say that only a few top 
officials ever receive training or guidance, and I know you are 
looking at starting the SEC university that would deal with new 
employees in your mission, your vision, your culture, and 
training on guidance. What are your plans for working with your 
existing employees to have them become your partners in 
creating a successful agency?
    Mr. Derby. Our chairman believes in partnerships, being 
from the business world that he was and the group of people 
that he started the firm with in 1959. He certainly treats 
myself and the other managing executives in the office as a 
partnership. It is something that he is very accustomed to and 
supportive of.
    We actually want to go a little broader, and the most 
important asset, as I said, is the employees at the agency. So 
if we are going to be the employer of choice, how do we attract 
the best? How to we retain the best? How do we train the best? 
Our orientation program is very important, on how to bring in 
and have a graduating class of each group that comes in, that 
also will help us in the silos, as they say, where we have so 
many.
    Ms. Blackburn. Mr. Derby, I am asking about existing 
employees. Before you bring these 800-and-something in, what 
are you going to do for those existing employees to be sure 
that they are your partners? Somebody has to be there to mentor 
new employees. Somebody has to be there to mentor out-source 
employees. So building that team that is going to carry your 
forward, and Mr. Donaldson has said there are some wonderful 
dedicated people there, how are you going to capture that human 
capital to build that in to attain?
    Mr. Derby. The existing idea put forward of the SEC 
university is really to have a comprehensive training program 
for all employees. We have started e-learning just the other 
week, which has over 2,000 courses. They can take it anytime, 
anyplace. We are putting together, we have a new training and 
development officer who has come in. We have met with all of 
the offices and divisions and specifically want training to be 
tailored to their specific areas of expertise and needs, not to 
just if we build it they will come, but actually tailor it so 
it is effective and efficient.
    We have existing training programs that we want to 
consolidate under the umbrella of the SEC university, to give 
it not a community college level, but a real university content 
level, to encourage the existing employees to take the 
challenge of increasing their knowledge and their education. We 
have pay parity which requires performance-based compensation. 
Part of that parity system could be where the managers are 
encouraging employees in their advancements, including 
educational aspects of their advancements, so it would be 
desirable.
    We view the whole area of human capital as important.
    Ms. Blackburn. OK, your plan for your SEC university, how 
long do you think it will take you to put that in place?
    Mr. Derby. Well, we have started it already. We have a 
wonderful beginning. We have met with all the divisions and 
offices and concluded that I believe last week. I think last 
week was the last meeting on that. We have several divisions 
with training directors within those divisions. We have a 
pretty strong program that we want to now consolidate within 
the university. It will help the logistics. It will help for 
providing the ability to have cross-division training.
    Ms. Blackburn. Are we talking a year, 4 years?
    Mr. Derby. We started it just about 2 months ago, the 
beginnings of it. We are moving forward fairly quickly on it.
    Ms. Blackburn. What is your goal?
    Mr. Derby. Our goal?
    Ms. Blackburn. To have it completed.
    Mr. Derby. I think education is an ever-evolving goal. We 
have put together an advisory council on curriculum to make the 
content valuable. We have put together a trustee group to make 
sure that it answers the needs of the agency, not just this 4 
or 5 or 6-month planning period that gets it up and running, 
but a consistent basis.
    So I do not have a specific timetable that we have put 
together and said we will have the university completed by, but 
we have been very actively building.
    Ms. Blackburn. When will your first class start?
    Mr. Derby. It started 2 weeks ago.
    Ms. Blackburn. OK. Great.
    Mr. Derby. That is the e-learning part.
    Ms. Blackburn. OK.
    Mr. Derby. Ongoing training has been going on. The Division 
of Enforcement has a training officer and it does training in 
the past and continues.
    Ms. Blackburn. And the price tag for this?
    Mr. Derby. Jim, do you want to say what the budget is?
    Mr. McConnell. Actually for our 2003 budget, we added $5 
million to our training account. So we have a total right now 
of $7 million associated with our training program, so we have 
been able to really take advantage of this increase in 
resources to more than redouble our efforts in the training 
arena. So we are quite optimistic.
    Mr. Derby. Just to comment on the morale and the retention, 
just to reflect on it, with pay parity coming in, we have seen 
the rates for attorneys and accountants, the turnover rate that 
was as high as 17.5 percent almost for attorneys and over 13 
percent, almost 14 percent for accountants, drop in this past 
May to 6 percent for attorneys at 3.5 percent for accounts. So 
we have seen some changes within the human capital of the 
agency for retaining. I think it has a lot to do with pay 
parity.
    Ms. Blackburn. OK, thank you. Mr. Chairman, may I?
    Mr. Platts. Yes.
    Ms. Blackburn. OK, thank you. I do have a couple of other 
questions. Out of the 840 new employees that you expect to 
hire, what portion of these new individuals will be contract 
and what will be full-time employees?
    Mr. McConnell. They are all full-time employees.
    Ms. Blackburn. They are all going to be full-time 
employees. And the reasoning?
    Mr. McConnell. The employees were distributed throughout 
our program areas to increase the number of enforcement cases 
we are doing, to increase the number of filings we are 
reviewing. All of these are only government-kinds of positions. 
In the program areas, they are attorneys, accountants and 
examiners who are critical parts of our program areas. So we 
are not contracting those out.
    Ms. Blackburn. OK. Mr. Hillman, just to you very briefly, 
you mentioned their technology needs. If you would expand on 
that for me for just a moment and address a little bit about 
their technology needs and expansion. I think they have a 
disaster recovery plan that they have been implementing, so if 
you would speak to the technology needs. I think one of the 
things that is frustrating sometimes for us is that we review 
agencies; they talk about spending hundreds of millions of 
dollars, and there is never one system talking to another 
system. Everybody goes back to square one to invent any kind of 
form and then nobody knows that somebody is retrieving 
information off of another form that another agency has.
    I am certainly no technology wizard, but I do know what 
seems to be frustration with dollars wasted. So if you would 
speak to that, I would appreciate that.
    Mr. Hillman. Yes. Even with SEC's budget shortfalls, it had 
maintained a list of its technology improvements that it needed 
to conduct once they got additional resources. Their internal 
study that they conducted, each of the program areas documented 
a wide range of problems that they thought could be solved 
through state-of-the-art technology.
    With this budget increase, SEC has now been able to double 
its budget in its information technology area and it is 
beginning to move out in very important areas. One of its most 
important areas deals with its plans to convert their Edgar 
system. This system houses regulatory filings and other 
reports, and it is currently very difficult to access and 
analyze information, to gather trends off of filings and other 
statements. SEC hopes to convert this system into a searchable 
data base that will help SEC conduct various types of trend 
analyses of industry data and filings.
    Another important initiative involves plans to implement a 
document management and image processing system. This system is 
intended to eliminate paper documents and electronically file 
the large volumes of information that are part of litigation, 
examinations, and enforcement activities. Just walking through 
the halls of the SEC, you can see boxes and boxes and boxes of 
information associated with the many enforcement and 
examination activities that they must conduct. It is very 
difficult to go through that information. It is even more 
difficult to share that information across the organization 
when it is sitting in boxes.
    Ms. Blackburn. Let me ask you this, and I hear we are going 
to have another vote, when the SEC is investigating a company, 
do they have access to the IRS filings of the individuals that 
they are investigating within that company?
    Mr. McConnell. I am not sure about that. I will have to get 
back to you. I know that we have had interactions with the IRS 
in several areas. Sometimes it has been very difficult, I know, 
to share information with them, but we have to get back to you.
    Ms. Blackburn. Do you all have access to any of the 
personal financial data of individuals at the companies that 
you are investigating?
    Mr. McConnell. Other than that which is required for our 
own disclosure, some financial information on individuals with 
companies is required under our disclosure scheme, but I don't 
think we do, but I want to make sure that we give you the right 
answers, we will get back to you.
    Ms. Blackburn. OK. Mr. Hillman, back to you to end my 
questioning. I do not want to take the chairman's time. So with 
the Edgar system, what you are saying is what you envision is 
building into this system a query mechanism that analysts can 
go in and as reports come in, and that information has been 
either electronically entered or imaged into the system. Then 
an analyst can query that to pull in the trends, to look for 
the trends.
    Mr. Hillman. That is correct. It is a data tagging process 
that will allow SEC to pull information from their filings.
    Ms. Blackburn. So you are not pulling it by company 
necessarily, to sort out that company, but you are pulling it 
for the trend?
    Mr. Hillman. Exactly.
    Ms. Blackburn. OK. Let me ask one thing to followup. As you 
query that, then would the data that you query, the company 
that data is attached to, would they remain anonymous in that 
query?
    Mr. Hillman. Depending upon the type of query that you 
might conduct, it could be or it could follow along with the 
data.
    Ms. Blackburn. Thank you.
    Mr. Derby. Let me just follow on that one point. It is an 
important point since we are going through this process of 
evaluating. There is a lot of different formats there. EBRL is 
an example of one where there is tagging of information. 
Currently, the Edgar system is organized as it gives the 
pictures or the community and the registrants that file with 
us. It is really a scanned copy and we do not really get a 
chance to really use that data. So the idea is to try to use a 
format and have registrants tag the data that then the SEC 
could use in its own queries in any way that it sees fit. The 
banking community, the investor community, anyone else could 
use it as well. So it makes the data much more effective and 
usable for a broader sector of users. We are thinking about 
that process, that tagging process.
    Mr. Platts. Before I go to the ranking member, I would like 
to follow up on Ms. Blackburn's line of thought. In your 
written testimony, you talked about the new Office of Risk 
Assessment. I take it that one of the advantages of this 
revamping of your technology is that you can be more proactive 
in doing this trend analysis and getting ahead of the game, 
rather than just being reactive all the time. Is that a correct 
understanding of what your risk assessment office is, one of 
the intentions of that new office?
    Mr. Derby. That is just one of the intentions. I mean, we 
are really looking at trying to make the agency become 
proactive across the board, to be able to see what is coming 
over the transom, look around corners. The best way we find to 
do that is to have an office focused on that, with staff and 
others from within the different divisions and offices really 
thinking that way and being dedicated, as well as managing all 
risks, internal risks, external risks, security risks, systems 
risks, all different risks.
    Mr. Platts. I assume that this office would have staff 
management from the corporate filings, from enforcement, so 
that you break down that silo approach and have staff from all 
corners of the agency working together to look around those 
corners, look ahead?
    Mr. Derby. That is one of many ways we are attempting to 
better interaction and sharing of information, the enterprise 
architecture within systems to do that, the risk management 
area to do that, as well as other communications that we would 
like and are formulating among the different divisions and 
offices. The interaction we find to be important and it makes 
things a lot more efficient.
    Mr. Platts. I do want to yield to Mr. Towns. I believe Ms. 
Blackburn has gone over to get her vote in and then will come 
back, so then I can run over. I want to yield to Mr. Towns. 
Before I do, I would like the record to reflect that Mr. Towns 
celebrated his 29th birthday for the 40th time I believe this 
week. [Laughter.]
    So a belated happy birthday, Mr. Towns.
    Mr. Towns. Thank you very much, Mr. Chairman. You have it 
accurate. [Laughter.]
    Mr. Hillman, in your statement you indicate that GAO 
believes that the SEC would benefit by reevaluating its 
existing rules and regulations and regulatory approaches to 
ensure that they continue to reflect the realities of today's 
financial markets. Could you elaborate on that? What do you 
really mean by that? Do you have any specific examples of rules 
and regulations that may be outdated or should be changed?
    Mr. Hillman. What we have observed from our March 2002 
report is that SEC's workload is increasing at an ever-
increasing rate, Congressman. We have a graphic on our 
highlights page of our written statement which depicts a 
significant upward increase in workload at the SEC that is 
produced largely by increasing filings that are coming in, 
increasing rule reviews, increasing inspections, examinations 
and investigations. The workload that SEC is facing is being 
eclipsed by a much less increase in its resources.
    There continues to be a significant gap between its 
increasing resources and its planned increase in staff. 
Something must be done in order to reduce that gap. One of the 
many things that SEC should begin to consider doing is looking 
at its internal processes; looking at those things that are 
required by law and also those things that are required by 
their own initiative, through their rules and regulations and 
processes, and evaluate whether or not today's financial 
markets continue to require those rules and regulations to be 
in place, so that we can narrow the gap between their 
increasing workload, and the resources that they have to devote 
to that workload.
    Mr. Towns. Are you saying they might not have enough money? 
Let me make sure I understand what you are saying here.
    Mr. Hillman. As this graph that we have depicted shows, it 
provides what SEC believes its workload requirements are 
through fiscal year 2004. It also shows on the staffing side 
what is likely to happen with an increase in resources of 842 
positions in fiscal year 2004.
    Mr. Towns. Right.
    Mr. Hillman. What that graph shows is a significant 
narrowing of the gap between their workload responsibilities 
and their staffing responsibilities, but that gap is still 
there. So the SEC must do a number of things, we believe, to 
increase its efficiency. One of the main things we believe it 
needs to do is leverage its technology and look at its own 
internal rules and regulations.
    Mr. Towns. OK. Thank you very much, Mr. Chairman. I yield 
back.
    Mr. Platts. Thank you, Mr. Towns.
    Following up where we stopped there, I want to get into 
that technology issue and the importance as you are looking at 
that GPRA report, the strategic plan, your plan for investing 
in technology. I know you are doubling your budget this year, 
and you envision technology achieving some of that objective 
that GAO is talking about, closing that gap. Where do we stand 
today in your plans for technology, as opposed to manpower. We 
know we are going to have a lot of new manpower coming into 
positions, but how is technology going to play its role?
    Mr. Derby. As shown there, that gap, and in our written 
testimony we reflect on the increase in enforcement cases that 
were up by 81 percent; our staff by 21 percent. Annual filings 
increased 73 percent. Our staff increases 29 percent. That is 
reflective of what that graph has shown. To address it, we 
really need to understand the obligations and the workload put 
forth by Sarbanes-Oxley; the fact that every 3 years we need 
run through one-third of the filings. So there are certain 
things and a certain amount of that workload that is now 
legislated.
    But to give our taxpayers the best value, we believe that 
by adding a multi-faceted approach to achieving that risk 
assessment, are we looking at filings that cover 5 percent of 
market cap, 5 percent of investors? Are we looking at filings 
that protect 85 percent of our market cap and those investors? 
So risk assessment is an important part. Strategic planning, if 
you are able to take a breather and really put together a 
thoughtful strategic plan on how to address those challenges, 
the effectiveness of that process, I believe will enhance the 
performance; training of staff, the morale within the agency, 
rewarding through recognition and compensation of the staff and 
doing so.
    There are many ways that we are addressing that, but it is 
true that gap has existed, and going forward, the resources 
that we have received addresses a lot of it. We looked at those 
resources and allocation of human capital in referring to the 
human capital plan, to address the filings under the 
corporation finance division, inspections, increasing the 
number of or the time that we review the different broker-
dealers, investment advisers.
    So it is correct that workload is one that needs to be 
very, very thoughtfully addressed as we look into what our 
vision for the future of the agency is.
    Mr. Platts. My understanding is in the technology aspect of 
meeting that workload, that you are in the process of 
developing an enterprise architecture related to technology 
upgrades. Could you tell us where that enterprise architecture 
stands today, and where you see it going?
    Mr. McConnell. We have been working on a new enterprise 
architecture for about 18 months now. These new resources 
obviously give us the ability to really move that forward. The 
three critical elements of the architecture, two of them are 
really designed to improve efficiency of our operations. You 
need more people, but you also need to have those people 
working better.
    The document management one is absolutely essential. As 
Rick pointed out, we are drowning in documents, not just in our 
enforcement program, but also in our examination program. So 
this document management system over the next probably 2.5 
years will digitize all those so that we can use them much more 
effectively. So that is a major part of the stool that we are 
building for our enterprise architecture program.
    Edgar is another one. Edgar right now has been modernized 
so that its software and its hardware are very robust and can 
handle new technology quite well. It is a Web-based system so 
we can deal with all manner of new applications. The problem is 
that we need to get registrants, issuers, companies to work 
with us in a different way. So we will build that system so 
that they provide us with information in a digitized fashion so 
that we can search it and be much more efficient in our 
reviews, and the manpower that we apply to it can be more 
effectively utilized.
    The third part of the enterprise architecture system that 
we are working very quickly on will be probably ready, the 
earliest is the security and backup and recovery part of it, so 
that we will not have problems like we had in New York where we 
lost lots of documents. We will have the ability shortly by 
this fall to have a point-to-point system, rather than a hub-
and-spoke system so that we can literally back up all of our 
information throughout the country. That is another important 
part of it.
    Mr. Platts. You mentioned this fall from the security 
standpoint, that aspect being the earliest. Is there a good 
timeframe you can share with us on all three parts?
    Mr. McConnell. The Edgar one is going to take the longest. 
The technology part of Edgar is really done. We finished that 
last year. It is the working with the registrants, and I think 
it is several years to really get the registrant community to 
the point that they have adopted a whole new standard. We have 
across industry lines established new standards for filing 
documents so that the financial statements, the M&A statements 
and even maybe the narrative statements come in so that they 
are fully tagged, searchable by us and by the public, because 
everything that is filed with us is immediately public, so the 
entire investor population can look at these filings in a much 
improved may, but that is a long-term effort. Document 
management is probably 2 years, I think, before we get that 
done.
    Mr. Platts. On the timeframe from the staff side now, as 
you try to close that gap, one, I appreciate a report out in 
Bloomberg news today of the SEC stating that because of the 
lateness of us getting the money enacted with the 2003 
appropriations bill, that it looks like you are not going to be 
able to spend approximately $103 million of your total 
allocation, and that your plan is to return that, rather than 
what is unfortunately a case here where you are in a use it or 
lose it mentality. One, I commend the SEC and your leadership 
for your statements that I understand Mr. Derby you have made 
today that your intent is to return those dollars and be very 
responsible with taxpayer funds. The responsibility lies with 
Congress for our inability to get a budget passed in a timely 
fashion.
    But where are we now with the new dollars in the pipelines 
this fiscal year and the coming fiscal year in bringing all 
those new staffmembers on board? We know you have new hiring 
abilities, new incentives because of pay parity, and a whole 
new attitude at the SEC and SEC university and things that will 
help to attract people, but how quickly do you envision getting 
everybody in place from a manpower standpoint?
    Mr. Derby. You are correct to say I understand it is quite 
unusual for someone to return funds not utilized the way they 
were intended to be utilized.
    Mr. Platts. We hope others in the government are watching 
and taking good notes.
    Mr. Derby. It would be great if this committee made it its 
mantra that use or lose it ends as of today in the government. 
Personally as a taxpayer I am personally shocked that is the 
way things get done around here. But anyway that being said, we 
have our values, our virtues, our values set and we decided 
that the funds allocated to the staffing that were not utilized 
were appropriately returned. Those funds still would be needed 
because we are going to staff up the 842 individuals, and we do 
believe, thanks to the excepted service legislation, that 
within 6 to 9 months we will be able to be fully staffed and 
the funds that we had requested for 2004 fiscal year would be 
ones that are quite close to what our actual needs are, without 
the lag, and we are really moving on that.
    Mr. Platts. And from your previous statements, the changing 
approach with the continuing education aspect and with existing 
employees, with new employees, and getting everyone the same, 
your belief is that the changes you are or have made or are in 
the process of making will allow you to even if the economy 
picks up, there are a lot more people out there in the 
workplace maybe looking for positions today, but if we return 
to the tight markets we had in the 1990's, that you will be 
able to retain those new employees because of the new 
structure, new employee aspects that you have in place. Is that 
a fair assumption?
    Mr. Derby. It is a fair desire. I would certainly hope that 
others share the fact that the SEC is at a very critical 
juncture in its future. Sarbanes-Oxley does not come around 
every 10, 20 or 30 years. This is an institution that is the 
place to be when it comes to the securities industry, and if we 
get it right, as we hope to do, it will really reflect on many, 
many years. So we would hope that the accounting profession, 
the securities legal profession, would certainly respond and 
come to the SEC and help to create its future which is so 
important.
    Clearly, there will be competition. We have the PCOB that 
is staffing up as well. So there will be some of that, but I do 
believe we are positioned well. Pay parity is something new at 
the agency this year. The first performance evaluations are 
coming out this year, so I think there will be a little bit of 
a learning aspect to that. But we understand and I repeat again 
that the most valuable asset that we have are our employees, 
our people existing and in the future, and we want to be 
comprehensive in how we address that.
    Mr. Platts. The good news here I think is with this 
administration and the President's management agenda, a greatly 
heightened focus on outcomes and financial responsibility and 
how we spend the taxpayer funds. I think the agency is setting 
a good example in this fiscal year returning dollars that will 
not be spent. The challenge of that good news is that you are 
one of many entities that are looking for similar type of 
professionals. We had DOD in recently as they are trying to 
clean up their books over the next 6, 8, 10 years.
    One of the challenges is going to be having enough staff 
accountants and auditors and others in the financial field 
available to them to meet their needs. You are all going to be 
competing out there. So hopefully we can be successful in 
getting people, not to say that there is some pay parity and 
some other good benefits, but also inspire them to want to be 
part of your efforts and DOD's and others from a public service 
standpoint as well.
    I would like to yield again to the gentlelady from 
Tennessee, Ms. Blackburn.
    Ms. Blackburn. Thank you, Mr. Chairman. Are you going to 
need to head to vote?
    Mr. Platts. I think we are going to have to skip that vote 
and continue here.
    Ms. Blackburn. You are going to skip that one? Well, I tell 
you what, it was a nice fast run over there. [Laughter.]
    Mr. Platts. I appreciate your making the effort, but one, I 
have a feeling I would not be fast enough, and rather than 
break the hearing here.
    Ms. Blackburn. Sure.
    Looking again at hiring practices in a post-Sarbanes-Oxley 
environment, I guess that we can say that traditionally the SEC 
has hired attorneys more than accountants, but you are shifting 
that and you are going to be hiring accountants to fill more of 
those spots. It sounds as if you are changing your recruiting 
strategies to do more in attracting CPAs. Is there anything 
additional other than the comment you just gave to the chairman 
that you are doing to change your recruiting strategies or to 
encourage those that are current employees who may be in the 
accounting department, but are not CPAs, to further their 
education, other than SEC university?
    Mr. McConnell. We are looking at our overall hiring and 
staffing makeup. We have moved dramatically, as we stated 
earlier, into hiring more accountants and lawyers. In some 
program areas, the 142 will be used predominantly to hire 
accountants. The other major area that we are going into is in 
the examination program. We intend to change the nature of the 
work force, too, if we can.
    Typically for the examination program, we have hired people 
pretty much right out of school, and we have our own multi-year 
training program that we put them through. We have decided now 
that we really need to try and focus more on people with back-
room experience, people who have been in the industry longer.
    Ms. Blackburn. OK, when you say ``back-room,`` you are 
talking about accounting back-room experience, is that correct?
    Mr. McConnell. Experience in the back rooms of brokers and 
dealers, investment advisers, investment companies, so that 
they know the capital situation of those companies well, and 
they have seen it first-hand. So we are going to undertake an 
effort to raise the level of experience for the examination 
program we will bring people in for, so that we will have a 
combination. We will still bring those entry-level people in 
and train them, but we want to have the ability from working 
with people that have more seasoned experience. That is sort of 
the major new area.
    Ms. Blackburn. OK. And the average tenure of an attorney at 
the SEC has been what?
    Mr. McConnell. The tenure has changed pretty significantly 
the last couple of years. Right now, the average tenure for an 
attorney is 7 years, 8 months. You have to put that into 
perspective. Sixty-one percent of our attorneys, though, have 
been here less than 5 years. So while the average does not look 
too bad, there are an awful lot of people still at the early 
stages. That, of course, is going to be compounded because with 
these 842, there are going to be an awful lot of people who 
have only been here 1 month.
    Ms. Blackburn. OK. And the CPAs, your accountants, what is 
the average tenure?
    Mr. McConnell. The average right now is 11 years, 6 months. 
Again, 34 percent of our accountants have been here less than 5 
years.
    Ms. Blackburn. And how long does your training program 
last?
    Mr. McConnell. For accountants?
    Ms. Blackburn. Accountants.
    Mr. McConnell. When we hire accountants, we hire trained 
public accountants who have been in the industry for years. 
Then we have an orientation that is a fairly, more of a work on 
the job, learning on the job for accountants. Now, examiners we 
bring in, we put them through an extensive multi-year training 
program, where each year they must go through various learning 
components. But accountants, we hire experienced accountants 
who have already been in public accounting long enough so that 
they can come in and start dealing with filings immediately.
    Ms. Blackburn. OK. Mr. Hillman, is the GAO comfortable with 
the SEC's staff allocations and the shift in the focus in their 
hiring?
    Mr. Hillman. The 842 positions that they have allocated to 
their divisions and offices seems very consistent with the 
requirements in the Sarbanes-Oxley Act. The allocations also 
seem very consistent with the internal study that SEC conducted 
of its own operations identifying critical needs in the 
examination, enforcement and corporate filings areas, all of 
which the increases in staff is intended to go toward.
    We are not, however, able to fully certify that these 
resources are being put in the most appropriate places until 
the organization has developed its agency-wide strategic plan 
that determines what its missions, goals, priorities and 
strategies are for the future. Hopefully with that in place, we 
will have an opportunity to ensure that those resources are in 
the right place.
    Ms. Blackburn. OK. Thank you. May I ask one more? OK.
    I want to go back to this question where I was when we took 
the break, regarding the Edgar system and the query mechanism 
that you all are looking at establishing. I had asked you about 
anonymity as you are searching those trends. We talk a lot 
about privacy issues and the need for privacy. As we all know 
there is a tremendous difference in what is confidential and 
what is anonymous. I think that it would be very important as 
your analysts are looking at trends that they allow anonymity 
to tax filers if you all are pulling IRS information that there 
be anonymity.
    Mr. Hillman, this would be directed to you. Should we have 
the SEC submit their software to you all or to us, to submit 
this new system and its software capabilities to us so that can 
be reviewed, the financial management of that could be reviewed 
prior to its implementation? And should the security measures 
of the firewalls be submitted and be reviewed so we can allow 
people to know that we are allowing them to retain their 
privacy?
    Mr. Hillman. I think you are raising a very important 
issue, and an issue that I am sure the SEC is concerned about 
as well. I am not sure that it would be appropriate necessarily 
to submit those requirements to us, but I suspect that as part 
of developing those requirements and implementing the system 
that the SEC would be coordinating with their public companies 
that will be providing information in these public files to 
provide them assurances that the systems that are being 
developed are going to be robust enough to meet their security 
needs.
    Ms. Blackburn. And you do consider them public files?
    Mr. Hillman. Yes, they are.
    Ms. Blackburn. Mr. Derby.
    Mr. Derby. I think you might be raising the question that 
our software is going to reach out and go into their----
    Ms. Blackburn. No, sir. I am not expecting that at all. I 
am not expecting that your software would query the companies. 
I will go back to as we started this discussion, my 
understanding of what the Edgar system would be. It would be a 
system where what the reach-out portion from you on your back-
end work of your technical system, your reach-out portion would 
be that a company could come into your system, grab a form, 
electronically complete that form, and submit that by 
electronic transfer into your system. Then, there would be some 
companies who would submit manually completed forms. Those 
would be imaged. Am I on the right track here on my 
understanding with you? Those would be imaged and inserted into 
that electronic system. I am still understanding this 
correctly? You are nodding yes.
    Mr. Derby. Yes.
    Ms. Blackburn. OK. Thank you. Then, there would be analysts 
and accountants who are searching for trends and for movement 
in the industry. They would query this in search of those 
trends. Am I still following this? OK, we are nodding yes. 
Then, what I am seeking is, there needs to be some firewalls 
and some assurances, understanding that there is a broad 
difference between confidentiality and anonymity, that there 
needs to be an allowance for individuals and for companies to 
know that individuals who are searching this are not looking at 
that company and that information if they are just looking for 
trends, that we have a privacy component that is built into 
that, not you going out into those companies, but the 
information that is being entered.
    Mr. Derby. The information that comes is public 
information.
    Ms. Blackburn. OK.
    Mr. Derby. So everything that was submitted is for public 
use and our view is to really assess individual companies when 
we review them, and do more number crunching and more analysis, 
as well as across industries.
    Ms. Blackburn. OK. Thank you, Mr. Chairman.
    Mr. Platts. The technology aspect is something that 
certainly will have a dramatic impact as you move forward 
first, on the security. The security we talked about earlier 
was really the security of keeping your files, and if there was 
another incident of attack, as in September 11, that you are 
prepared for that, a different issue than Ms. Blackburn was 
raising.
    Maybe to help me understand the security of the 
information, are there parts of what is filed with you that is 
not public information but is part of what would be accessible, 
that is in the same electronic entity that can be accessed by 
the public? Or is that, when you get that information, the part 
that is not to be public is actually in some other file? Or is 
it possibly in the same one, but you just allow access to one 
part of that file, but not another?
    Mr. McConnell. Each company has the ability to submit 
requests for confidential treatment of certain information that 
they submit as filings. We separate that. It is not available 
to the public. It is not public information at all.
    Mr. Platts. So that would not be in the Edgar system that 
the public could go into?
    Mr. McConnell. Our staff can see it as they need to, but it 
is not part of the public information data base that would be 
available through any public queries.
    Mr. Platts. Ensuring the security of those confidential 
files.
    Mr. McConnell. We have tested those systems. We have tested 
our firewalls. We have had NIST and test our firewalls. 
Information security is a huge issue for us right now, as it is 
for everybody because of the certification requirements. But in 
terms of testing firewalls and penetration possibilities, we 
are highly confident that information is protected.
    Mr. Platts. OK, thank you. On the workload aspect and 
whether the technology being put in place to help with workload 
or the new staff positions, when I look at some of the numbers 
from 1980 to 2000, 30 times higher volume of shares traded; 50 
times higher the number if IPOs issued in 2000 versus 1980. 
Clearly, the graphs that you are talking about are dramatic 
including the increased workload. Sarbanes-Oxley adds more to 
that with the 3-year review requirement. What is a realistic 
assessment of your ability in the short term to meet that 3-
year review requirement with the additional resources you are 
being given?
    Mr. Derby. Our whole staff allocation process, as I said, 
was very detailed and evolved, asking for the objectives and 
the goals of each of the divisions to meet Sarbanes-Oxley 
requirements, what their vision for that area is, took into 
account the allocation of staff to meet the 3-year filing 
reviews, and also to meet the enhanced enforcement proceedings, 
as well as a timely basis for completion of those enforcement 
proceedings; to review based on risk assessment in the 
investment management and brokerage areas. So a lot of the 
Sarbanes-Oxley not only does it, but the spirit in which we try 
to address it. We have allocated a detailed analysis to meet 
those requirements.
    Mr. Platts. So it is your assessment at this point in time 
that Congress has it fairly right in the amount of resources we 
have given you for new staff, and for technology?
    Mr. Derby. Our assessment has been that we have in an 
effective, efficient way allocated it very much tight. There is 
not a lot of room for error, as well as there are other issues 
that are being currently reviewed, hedge funds, other questions 
with regard to the regulations of possible other entities that 
might be given to us. So these would all be additional things 
that we might have to think about how we can address.
    But under the current agenda and the current items that we 
have under Sarbanes-Oxley, it is tight, but we have been 
allocated to meet those objectives, understanding that there 
will be efficiencies from technology, from risk assessment, 
from statistical analysis on how we formulate the reliability 
of the different inspections, the kind of way we approach it. 
So we think that will enhance the efficiencies.
    Mr. Platts. And that is all going to carry over into the 
enforcement issue as well? My understanding is that there is an 
estimated 5-year backlog of enforcement examination actions. In 
that strategic review of allocation of your new resources, is 
that going to help cut into that backlog in a dramatic fashion?
    Mr. Derby. You probably mean the Office of Inspections, 
Examinations and Compliance. They have been on a 5-year cycle. 
We are going to cut into that on a 2-year cycle based on risk, 
the larger, more significant institutions; the others on a 4 to 
a 5-year cycle. A 5-year cycle, we do not want to lose, for 
that to go to 6, for sure. We will try to cut that down if it 
possible, 5 down to 4, but at least out of that 5-year cycle, 
take a look on a risk-assessment basis down to a 2-year cycle.
    Mr. Platts. And the largest impact?
    Mr. Derby. The largest, most important, best managers 
there. So we are cleaning out the backlog of other cases from 
enforcement quite a bit this year, and I hope that by the end 
of this calendar year to really have that under control as 
well. So a lot has been going on in the last 6 months to a 
year. I must say when we got there, there was a tremendous 
amount of accomplishment. It is not just that it was a period 
that stopped and changed. I am really here to talk about the 
accomplishments of the past and our vision and opportunity and 
the future.
    Mr. Platts. Mr. Hillman, what is GAO's assessment from 
allocation resources standpoint on what Congress has done, more 
manpower, more technology. Do you think we are still asking too 
much of SEC with the resources that they have? Or are we at 
about the right level for the demands we are placing on the 
agency?
    Mr. Hillman. Based on the results of our study in March 
2002 and in then the serious corporate and accounting scandals 
that have occurred in the markets leading to the Sarbanes-Oxley 
Act, it was very clear that the SEC needed additional resources 
to meet its mission responsibilities. This 842 staff years is 
the largest increase in the agency's history. Its challenge 
right now, Mr. Chairman, is to bring in the best talent it can 
as quickly as it can.
    You had mentioned that the corporate filings area was an 
important topic in the Sarbanes-Oxley Act, requiring SEC to 
review every filing on a 3-year cycle. With the resources that 
they had in place, they have only been able to review those 
filings on about a 6-year cycle. So they need to double up in 
order to review the filings within the required 3-year cycle.
    In discussions with the division heads in that division, 
they tell us that today they are still triple-digit behind in 
hiring the necessary accountants that they need in order to 
meet that threshold of a 3-year cycle. They have been seriously 
constrained in their ability to hire accountants. The new 
legislation that Congress has passed should help alleviate that 
process. The Division of Corporate Finance tells us that in the 
past they have only been able to bring in about four additional 
accountants per month. With this new legislation, they are 
hoping that this is going to free up the ability for applicants 
to apply more easily, for them to review and interview 
applicants more easily so that they can increase the number of 
accountants that they bring in in a more expeditious fashion. 
Whether that is done in a 6 to 9-month period of time, I 
currently feel that is an ambitious target.
    Mr. Platts. The four accountants per month, how recent is 
that data? I mean, when is that saying it was?
    Mr. Hillman. That would be from about the beginning of this 
year, as they are beginning to gear themselves up. That is 
about the level of resources that they are able to get in under 
their old process.
    Mr. Platts. Where is SEC today? In the last month, how many 
new accountants have you been able to get on hand?
    Mr. McConnell. We are still right now operating under the 
old, well, we have not had a chance to move to the new hiring 
regimen. We have only had it in place for a couple of weeks. We 
have built systems. We spent 2 weeks working on the procedures 
that we will follow to really kick it up. We have plenty of 
applications so that we know that it is possible to get there. 
But the GAO findings are absolutely correct. We have had an 
enormous problem hiring accountants in the past. We received, 
and this is public knowledge, the ability to hire 54 
accountants, I believe it was, last August. We still have not 
hired them all. I think we have hired 48 of them. So that is 
the kind of process we were going through at that time.
    We now have to hire about, it is triple-digits. It is 150 
to 190 new accountants with these new resources we have been 
given. I think it is optimistic that we will do it.
    Mr. Platts. Your human resource department over the next 6 
to 9 months should not plan on taking any vacations. They are 
going to be busy processing a lot of people.
    Mr. McConnell. Right.
    Mr. Platts. We hope they are going to be busy processing a 
lot of people. I think that goes to Mr. Hillman's comment that 
he hopes you are accurate in that ability, and successful, but 
it is a pretty daunting task ahead, but it is a necessary task 
to be fulfilled if we are really going to meet the requirements 
of Sarbanes-Oxley and the broader mission of the SEC.
    I have some other questions. Ms. Blackburn, did you have 
others?
    Ms. Blackburn. No. I am fine.
    Mr. Platts. OK. And to follow-on on the resource issue and 
the budgeting process. In the past, it was more of an output-
based, kind of a more traditional government, here is what we 
did with the money, the number of reviews conducted or 
examinations done or enforcement actions, as opposed to what 
are the true outcomes in fulfilling the mission of protecting 
investors.
    My understanding is that is dramatically changed, again 
with the leadership of the White House and the President and 
the broad management agenda. At the SEC are you really looking 
at outcomes in how you have set your 2004 budget request and 
looking to the future. Can you expand on that a little bit?
    Mr. Derby. That is hugely important. Just to focus on 
output does not really solve the problem. Even filling out GPRA 
requirements and just sending it in is not such a great thing 
until you can convert into dashboards and other things, and use 
it as a great management tool internally so that we are in sync 
between what Congress thinks we are doing and what the managers 
are really doing, and we can actually manage that.
    Part of the administration's program called PART, which is 
the Program Assessment Rating Tool, we are really focused on 
what the outcome of each of these programs are, and what the 
costs of that outcome is as well. Once you are able to shine a 
spotlight on things, people take it more seriously and actually 
get efficiency and effectiveness in those different areas.
    So clearly, outcomes is a very important thinking approach 
on how to deal with the challenges that we have, and we are 
pleased that everyone is focused on that across this 
administration. You know, the red, yellow and green components, 
those are important, and I wish this administration by July of 
next year really get to yellow.
    Mr. Platts. I agree. Your points are well taken on GPRA. 
Just complying is not really what we are after. It is that 
compliance leads to benefits to the entity and therefore to the 
American taxpayers ultimately, and that PART does help to focus 
attention and shine the light on what actually is being done 
and what are the results. That translates to the issue of your 
internal financial management. You are undertaking your 
internal audit and GAO's doing it for the initial year because 
of the challenge in a quick time fashion for you to go out into 
the marketplace and find somebody who would not have a conflict 
to do this audit for you.
    In the past 6 months, what we have heard and what we have 
seen is entities that have gotten clean audits, but because of 
a heroic effort at the end of the year. So the output is a 
clean audit, but the outcome again is different, that it is not 
something we want to be doing every year. The agencies really 
have not changed their financial management processes.
    Where do we stand at SEC so that we do not just get a clean 
audit, but that we have in place those internal controls, that 
it will be year to year, month to month that you can look at 
your internal financials and say, here is where we stand, here 
is what we are spending, here is what our finances look like.
    Mr. Derby. About the audit process?
    Mr. Platts. In that it is truly a long-lasting plan you are 
putting in place so that your annual auditing is not going to 
require a heroic effort every year, that you drop everything 
just to fulfill this requirement, but that it is more of a 
natural result of the processes you have in place.
    Mr. Derby. Clearly, putting in the proper systems and 
controls and manuals and really designing it so it is forever 
lasting is very important.
    Mr. Platts. Right.
    Mr. Derby. We put together a pretty aggressive plan on 
trying to complete the 2004 audit, attaining a clean opinion on 
that. We submitted that to the Office of Management and Budget. 
We hope that they endorse our plan and how we are going to go 
forward. It has been one with many milestones already. Just in 
November of last year, the act was passed in November 2002, it 
was the Accountability of Tax Dollars Act of 2002. So since 
that time, we have put together a pretty aggressive plan. We 
have contracted with the GAO, since we are not allowed to 
contract with anybody else in the accounting profession. It is 
a conflict of interest. We have had internal controls 
assessment done and put together five task forces to address 
the areas that were found there to need addressing, and some of 
those are going to be done very, very shortly.
    I think going forward as we have addressed the agency's 
financial management, we have enhanced the system. We have had 
a system I believe this past July, this month or June, that was 
additionally integrated into our budgeting process. So I think 
everything that we are doing to complete it is actually 
something that is not to just review and then change. We are in 
the process of making long-term changes so that the audit when 
it is done is really going to be the basis, and effective use 
of resources that the government wanted, and the GAO wanted, 
and does review it, as a basis for many years to come. We are 
addressing a lot of those issues in this process.
    Mr. Platts. Mr. McConnell.
    Mr. McConnell. Just quickly. Our financial management 
system is new as of 2002. So that is a system that will allow 
us to have a repeatable process for this going forward. That 
will be certified in January 2004 for audited financial 
statements. The work of those task forces is critical. Those 
task forces are changing the systems in place. That is their 
mission. They each have a certain system that they are working 
on, and the intent is to have that system changed prior to the 
initiation of the first balance sheet.
    Mr. Platts. I want to ask GAO's assessment of where you are 
and where you are going. One of the issues that has come to my 
attention with GAO doing your 2004 audit is that they have 
agreed to do that in the short term, but do not want to be long 
term your auditor. What are your plans for the long term 
regarding your financial audits?
    Mr. Derby. That is a good question. As best as I could 
answer that in my brief discussions with our IG, inspector 
general, they clearly do not have the resources right now to be 
able to do that. If we have several years of perfect audit and 
internal procedures and controls in place, then possibly it 
could be the IG in the future. I think it is by statute that 
they have that opportunity.
    Mr. McConnell. That is their responsibility.
    Mr. Derby. It is their responsibility to do it.
    Mr. Platts. Your IG office is nine attorneys. It is pretty 
small.
    Mr. McConnell. Let's kick them up to 10.
    Mr. Platts. OK, an 11 percent increase. [Laughter.]
    Mr. Derby. But I think in the near future, it is GAO, and 
after really having good audit documents, it is possibly the 
IG. I think the intent would be to ultimately do that.
    Mr. Platts. Mr. Hillman, your thoughts on the permanent 
changes that are taking place, so we do not have those heroic 
efforts. Are we getting there? And on the role of GAO regarding 
the annual audit process?
    Mr. Hillman. Mr. Chairman, GAO agrees with you that it does 
not make a lot of sense to conduct a heroic effort at the end 
of a fiscal year in order to produce financial statements, and 
that we would support more of a rational approach to fixing the 
systems and processes in place to produce the right numbers 
from the beginning. That is exactly what we believe the SEC is 
attempting to do. They have outlined system improvements that 
they believe will get them over the hurdle so that they will 
have a capability to produce repeatable results in a fashion 
that will allow us to audit those financial statements. At this 
time, we feel that the steps that they are taking should allow 
us to begin to look at their fiscal year 2004 financial 
statements, their opening balances beginning the first part of 
the year.
    Mr. Platts. And as to GAO's sentiments long term as being 
the auditor?
    Mr. Hillman. We acknowledge that the SEC has a conflict of 
interest in that it regulates the accounting profession in a 
material way, and have agreed to provide resources to their 
efforts at least in the short term. We would, however, 
encourage the Securities and Exchange Commission to beef up 
their inspector general's operations in order to be able to do 
what other IG's do across government, and that is review the 
financial statements of their own internal units.
    Mr. Platts. Well, if we have an 11 percent increase, we 
will see where that leads to. But I hope that we are on the 
right track there so that we do have that annual review become 
just the natural product of the changes you are making.
    Ms. Blackburn, did you have any other questions or a 
closing statement before I begin to wrap up?
    Ms. Blackburn. No. One other question that I think follows 
up on what you were saying about their financial management. 
Mr. Derby had mentioned PART and some other different 
management initiatives.
    Mr. Hillman, for you, is your current assessment that the 
SEC would be compliant with the provisions from FFMIA? That 
they are doing all they can in their financial management?
    Mr. Hillman. There are a number of issues that the SEC is 
working on in order to develop systems and processes that can 
provide repeatable results. FFMIA weaknesses are among those, 
as well as other internal control weaknesses that were 
identified as part of an external study that was conducted 
earlier this year.
    We believe from discussions that we have had with the SEC 
that it is developing a rational approach to deal with the 
issues that it has identified. We are hoping that we will be 
able to review their statements next year.
    Ms. Blackburn. Thank you. Thank you to all of you for your 
patience. I appreciate it.
    Thank you, Mr. Chairman.
    Mr. Platts. Thank you, Ms. Blackburn.
    Before I make a general closing statement, I would hope 
that the discussions as we look for your GPRA 5-year plan, what 
you are kind of describing will be your strategic plan, that 
you do embrace GAO in developing that plan, and that they are 
an active partner in your efforts. We certainly rely on GAO as 
a committee and as a Congress in total, and we will be looking 
to them and their assessment of what you are doing. If they are 
able to be a part of that, then certainly I think we will all 
get to a better end result later this year.
    I also will tell you in doing a lot of reading in 
preparations for the hearing, an article earlier this year, I 
believe April in Government Executive, regarding where SEC was, 
is and is going. The president of the Treasury employees' union 
local at SEC was pretty critical of SEC in being very reactive, 
not proactive; no incentive to get into some of the more 
challenging reviews because it was a straight quote. It did not 
matter how important a review was, it was just how many you 
did. His comments were pretty frank and pretty hard-hitting.
    When I read, Mr. Derby, your statement last night, you said 
all the things that I was hoping to hear and I would think he 
would like to hear about the changes that are occurring and 
where Chairman Donaldson and your leadership team want to see 
the SEC 6 months from now, a year from now. If all this comes 
to fruition, I think we will hopefully hear different 
statements from this gentleman regarding the manner in which 
the SEC is fulfilling its mission and in which the employers 
are being empowered to do their jobs in the most efficient, 
responsible and effective manner possible.
    My hope is that the goals you have laid out in your written 
testimony and orally today do come to fruition, and that we do 
get the SEC back to where it plays a critical role in restoring 
investor confidence across the Nation.
    That really goes to my final comment, which is how 
important your work is. The marketplace is so different today. 
My mom is 70 years old and one who never in her life cared 
about the stock market. But as a retiree, she talks to me about 
the stock market all the time because my late father invested 
his retirement in an investment plan is something that is 
critical in how the market is doing and various aspects of the 
market.
    If Babs Platts is actually looking at what the market is 
doing and how it impacts her daily life, that tells us that it 
is truly the norm out there and the numbers reflect that. The 
percentage I think is 52 percent or so now from where we were. 
That just goes to how critical your work is, and that we do not 
repeat the Enrons and the debacles of the past. Your mission is 
all about not allowing that to happen.
    So I do wish you and all the employees, top to bottom at 
the SEC, success in your efforts. We look forward to continuing 
to work with you and your colleagues at the agency, and with 
GAO. I tell you, some think of GAO as out there to just 
critique and criticize. I see them out there to analyze and 
assist. I hope that your agency will embrace them in that 
fashion and embrace our efforts, if there is something we need 
to do legislatively. I wish we were the Appropriations 
Committee. We are not, but we certainly could advocate. But if 
there is something you need from Congress, we want to be of 
assistance, too. Oversight does not mean that we are looking to 
just create problems. We are looking to help fulfill that 
mission as we all want to do right by our fellow citizens.
    So I wish you well. We thank you again for your testimony, 
all of you here today; your work in preparing for this 
testimony, and certainly your patience with our voting schedule 
today as you sat and waited and waited.
    With that, I will tell you we will leave the record open 
for 2 weeks for any documents that will be submitted after the 
hearing. This hearing stands adjourned.
    [Whereupon, at 5:13 p.m. the subcommittee was adjourned, to 
reconvene at the call of the Chair.]

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