Securities and Exchange Commission: Preliminary Observations on  
SEC's Spending and Strategic Planning (23-JUL-03, GAO-03-969T).  
                                                                 
In February 2003, the Securities and Exchange Commission (SEC)	 
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 the GAO report  
entitled SEC Operations: Increased Workload Creates Challenges	 
(GAO-02-302). To help ensure that SEC spends its budgetary	 
resources in an efficient and effective manner, GAO was asked to 
review the SEC's efforts to address the issues raised in the 2002
report and to report on how SEC intends to utilize its new	 
budgetary resources. GAO's final report on these matters is	 
expected to be completed this Fall. This testimony provides	 
requested information on the status of SEC's current spending	 
plan and preliminary observations on SEC's strategic and human	 
capital planning efforts.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-969T					        
    ACCNO:   A07673						        
  TITLE:     Securities and Exchange Commission: Preliminary	      
Observations on SEC's Spending and Strategic Planning		 
     DATE:   07/23/2003 
  SUBJECT:   Compensation					 
	     Evaluation criteria				 
	     Evaluation methods 				 
	     Hiring policies					 
	     Human resources utilization			 
	     Management information systems			 
	     Personnel recruiting				 
	     Strategic information systems planning		 
	     Strategic planning 				 
	     Employee retention 				 

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GAO-03-969T

Testimony Before the Subcommittee on Government Efficiency and Financial
Management, Committee on Government Reform, House of Representatives

United States General Accounting Office

GAO For Release on Delivery Expected at 2: 30 p. m. EST Wednesday, July
23, 2003 SECURITIES AND

EXCHANGE COMMISSION Preliminary Observations on SEC's Spending and
Strategic Planning

Statement of Richard J. Hillman, Director, Financial Markets and Community
Investment

GAO- 03- 969T

In GAO*s 2002 operations report, GAO identified a number of operational
challenges facing SEC stemming from an increasing workload (e. g.,
filings, applications, and examinations) and staffing imbalances that
threatened to impair SEC*s ability to fulfill its mission. As illustrated
below, SEC*s workload had grown at a much higher rate than its staffing
since the mid1990s. In response to congressional concerns involving a
number of highprofile corporate failures and accounting scandals, SEC*s
funding was increased 45 percent in 2003. SEC plans to spend most of its
2003 and 2004 budget increases to fund 842 new staff positions and double
its information technology budget. However, given the late appropriation
and hiring challenges, SEC has to date filled few of these positions, and
it is unlikely that SEC will be able to utilize all of its 2003 funds.

GAO also found that SEC recognizes the need to develop a new strategic
plan and that such a plan is a vital component of its staff allocation and
human capital planning processes. A new strategic plan is also vital to
SEC*s ability to develop performance- oriented, outcome- based performance
measures. GAO found that while SEC has not updated its strategic plan, it
has begun efforts to overhaul its performance measures to make them more
outcome- oriented. This effort seems premature given its lack of a new
strategic plan. Moreover, while GAO found that SEC has completed certain
aspects of a strategic human capital plan, including development of a new
pay structure comparable to other federal financial regulators, greater
flexibility to expedite the hiring of certain critically needed
professions, plans for more training, and implementation of agencywide-
worklife programs, the lack of a new strategic plan inhibits SEC*s ability
to develop a formal human capital plan.

Percent Change in SEC Staff Years and Workload, 1991- 2004

In February 2003, the Securities and Exchange Commission (SEC) 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 the GAO
report entitled SEC Operations:

Increased Workload Creates Challenges (GAO- 02- 302). To help ensure that
SEC spends its

budgetary resources in an efficient and effective manner, GAO was asked to
review the SEC*s efforts to address the issues raised in the

2002 report and to report on how SEC intends to utilize its new budgetary
resources. GAO*s final report on these matters is expected to be completed
this Fall.

This testimony provides requested information on the status of SEC*s
current spending plan and preliminary observations on SEC*s strategic and
human capital planning efforts.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 969T. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact Richard J. Hillman at (202) 512- 8678 or

hillmanr@ gao. gov. Highlights of GAO- 03- 969T, a testimony to the
Chairman, Subcommittee on Government Efficiency and Financial

Management, Committee on Government Reform, House of Representatives July
2003

SECURITIES AND EXCHANGE COMMISSION

Preliminary Observations on SEC*s Spending and Strategic Planning Efforts

Page 1 GAO- 03- 969T

Mr. Chairman and Members of the Subcommittee: I am pleased to be here
today to discuss the Securities and Exchange Commission*s (SEC) plans for
spending the significant increases 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 that the new appropriations
are put to the best possible use. 1 As you know, in March 2002 we issued a
report entitled SEC Operations:

Increased Workload Creates Challenges (GAO- 02- 302), which identified
numerous resource challenges SEC faced as its workload increased in volume
and complexity. 2 We also cited other issues, including a turnover rate
among accountants, attorneys, and examiners that was almost twice as high
as the governmentwide average for comparable positions that was draining
staff from SEC and slowing its operations. To address these issues, we
recommended, among other things, that SEC broaden its strategic planning
process to systematically determine its regulatory priorities and the
resource levels needed to fulfill its mission. We also recommended that
SEC engage in a comprehensive coordinated workforce planning effort to
ensure that critical human capital goals and strategies were implemented.

In the wake of several high- profile corporate failures and accounting
scandals, in February 2003 SEC was given the largest spending increase in
its history. Given this substantial budget increase and the importance of

efficiently and effectively utilizing these gains, you requested that we
review SEC*s efforts to address the issues we raised in March 2002 and
report on how well SEC has utilized its new budgetary resources. We expect
to complete our report on these matters in the Fall. In advance of the
completion of this study, this statement provides requested information on
the status of SEC*s current spending plans for 2003 and 2004 and
preliminary observations on SEC*s strategic planning and human capital
planning efforts.

Our observations about the status of SEC*s 2003 and 2004 spending plans
and related planning activities to date are based on our review and

1 All years are fiscal years unless otherwise noted. 2 U. S. General
Accounting Office, SEC Operations: Increased Workload Creates Challenges,

GAO- 02- 302 (Washington, D. C.: Mar. 5, 2002).

Page 2 GAO- 03- 969T

independent analysis of workload, budget, and staffing data provided by
SEC officials or presented in SEC*s 2003 revised budget estimate and 2004
budget request. In addition, we solicited views from a variety of SEC
officials, collected relevant information on SEC*s strategic planning and
human capital efforts, and analyzed statistics on staff turnover. This
study was completed in accordance with generally accepted government
auditing standards.

In summary, the 2003 appropriation of $716 million in February 2003
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, among other things. 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, SEC

determined that most of its increase would be used to fund new positions
and 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. We also found that SEC recognizes that it needs to
develop a new

agencywide strategic plan and that such a plan is a vital component of its
workforce planning and human capital allocation process. However, SEC has
embarked on an effort to allocate resources and determine its needs
without the benefit of an updated strategic plan. Instead, SEC 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 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. 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 are efforts to develop more outcome- oriented
performance measures to gauge the effectiveness of its regulatory
operations in fulfilling its statutory mission and formalization of its
strategic human capital plan.

Page 3 GAO- 03- 969T

In March 2002, we reported that SEC*s workload and staffing imbalances had
challenged SEC*s ability to protect investors and maintain the integrity
of securities markets. Appendix I graphically depicts SEC*s workload and
staffing imbalance from 1990 through 2000 as reported in our 2002 report
and appendix II updates this graphic using SEC budget documents including
its 2003 and 2004 workload and staffing estimates. As reported in March
2002, we found that SEC generally managed to bridge the gap between its
workload and staff by determining which of its statutorily mandated duties
it could accomplish with existing resources or only marginally increased
resource levels. This approach, while practical, forced SEC to be largely
reactive rather than proactive. We also reported that SEC tended to
develop its annual budget request based on the previous year*s
appropriation rather than on what it would actually need to fulfill its
mission. In 2003, this practice resulted in a modest increase over the
previous year*s request. But several high- profile corporate failures and
accounting scandals, plus concerns that public companies should be held
more accountable for information they report to investors, led Congress to
pass the Sarbanes- Oxley Act of 2002 (Sarbanes- Oxley Act). 3 The act
addresses a number of concerns involving corporate governance,

auditor independence, regulation and oversight of the accounting
profession, and SEC*s resource limitations. In part because of the level
authorized in the Sarbanes- Oxley Act, SEC increased its initial 2003
budget request of $466 million to $769 million. Ultimately, Congress
appropriated

$716 million. For 2004, SEC requested a budget of almost $842 million
reflecting a supplemental carryover, annualization of new 2003 positions,
inflation (pay and nonpay), and merit pay increases less one- time 2003
information technology costs.

3 Pub. L. 107- 204. SEC Plans to Spend

Most of Its Budgetary Increase on Staffing and Information Technology

Page 4 GAO- 03- 969T

SEC*s planned allocations appear to be consistent with the Sarbanes- Oxley
Act, which mandated that the $776 million authorization be used to:

 fund pay parity, allowing SEC to set salaries for certain staff
positions at levels comparable to those at other federal financial
regulators; 4  fund information technology, security enhancements, and
recovery and

mitigation activities in light of the terrorist attacks of September 11,
2001; and  fund no fewer than 200 additional professional staff to
increase

oversight of auditors and audit services in order to improve SEC*s
investigative and disciplinary efforts as well as additional professional
support staff necessary to strengthen existing program areas.

SEC*s allocations were also apparently influenced by its internal review
of operations and resource needs and on justifications made by each
division and office. SEC determined that most of the planned increase
would be used to hire an additional 842 staff, primarily accountants,
attorneys, and examiners, and to upgrade its technological resources over
the next few years.

Table 1 provides information on SEC*s staff allocation as of July 1, 2003,
by program area. The 2002 numbers include 125 new positions that were
authorized by a supplemental appropriation to SEC*s 2002 budget to deal
with the increasing workload from financial fraud and reporting cases, to
improve and expedite the review of periodic filings, and to deal with new

programmatic needs and policy. According to an SEC official, the current
and proposed budgets factor in the increased workload resulting from SEC*s
new responsibilities under various new laws including the SarbanesOxley
Act, Gramm- Leach- Bliley Act, and Commodity Futures Modernization Act. 5
For example, between 2002 and 2004, the full disclosure program is slated
to receive the largest percentage increase in positions 39 percent. This
program includes the Division of Corporation

4 The crisis in the thrift industry in the 1980s led Congress to pass the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA). Among other things, FIRREA authorized certain financial
regulators, such as the Federal Deposit Insurance Corporation, the
National Credit Union Association, the Office of the Comptroller of the
Currency, and the Office of Thrift Supervision to determine their own
compensation and benefits so that they could more effectively compete in
the marketplace for qualified applicants. P. L. No.

101- 73 S:1206, codified at 12 U. S. C. S:1833b. The Federal Reserve Board
of Governors also has independent authority to set the compensation of its
employees. 12 U. S. C. S:248l( l).

5 Pub. L. 107- 204, 116 Stat. 745 (2002), Pub. L. 106- 102, 113 Stat. 1338
(1999), and Pub. L. 106- 554 (H. R. 5660). A Significant Portion of

SEC*s Budget Increase Has Been Allocated to New Staff Positions

Page 5 GAO- 03- 969T

Finance and the Office of the Chief Accountant, which are responsible for
reviewing the financial statement filings for over 17,000 reporting public
companies and providing rule- making and interpretive advice. In this
area, staffing is driven in part by the Sarbanes- Oxley Act, which
requires SEC to

review the financial statements of each reporting company every 3 years.
In 2002 SEC*s average translated into a review once every 6 years. The
area slated to receive the next largest percentage increase (35 percent)
is the supervision and regulation of securities markets. This program
includes the Division of Market Regulation and part of the Office of
Compliance, Inspections and Examinations and is responsible for
establishing and maintaining policies for fair, orderly, and efficient
markets and conducting examinations and inspections of 9 registered
securities exchanges and an estimated 8,000 brokerage firms among others.
The prevention and suppression of fraud program, which includes the
Division of Enforcement, is slated to receive a 21 percent increase, which
SEC said would help with the increasing number of investigations into
possible violations of securities laws.

Table 1: SEC Staff Allocations from 2002 to 2004 Program Positions

2002 Actual

2004 Request Change in

Allocation Percentage Change

Full disclosure 508 704 +196 39 percent Prevention and suppression of
fraud 1,037 1,255 +218 21

Supervision and regulation of securities markets 465 627 +162 35

Investment management regulation 593 790 +197 33

Legal and economic services 175 194 +19 11 Program direction 387 437 +50
13

Total 3,165 4,007 +842 Source: SEC. Notes: GAO did not verify the
reliability of SEC*s budget data. SEC*s 2003 budget estimate is omitted
because these numbers were unavailable at the time of the hearing. The
2004 figures are estimates subject to revision.

SEC*s staff allocations appear consistent with legislative requirements
and what is currently known about its operating environment. However,
because SEC*s staff positions were allocated without the benefit of a
strategic plan, we are unable to fully assess the appropriateness or
effectiveness of this use of its budget increase.

Page 6 GAO- 03- 969T

Given that staff salaries and benefits average about 70 percent of SEC*s
budget, we would expect the spending allocations to roughly correlate to
its staffing allocations. However, SEC was unable to provide us

information to analyze SEC*s budgetary allocation across each program
area. At the time of this study, SEC was in the process of completing its
2005 budget request for OMB, which will include its allocation of its
budgetary resources for its 2004 budget estimate by program area. SEC
expects to have these estimates completed by sometime in late August or
early September.

In 2002, we reported the difficulty SEC faced in hiring accountants for
the 125 positions authorized by its 2002 supplemental appropriation. 6 SEC
had identified the existing competitive service hiring requirements as

hampering its ability to fill these and other positions because of the
length of time involved. SEC subsequently asked for and received relief
from competitive hiring requirements under the Accountant, Compliance and
Enforcement Staffing Act of 2003, which was enacted in July 2003. This new
legislation is designed to enable SEC to expedite the hiring of
accountants, economists, and examiners so that the agency can more quickly
fill the 842 positions created. As of July 1, 2003, SEC has only filled a
few of the vacancies for the allocated positions but is now better
positioned to hire under its new authority. It is too soon to determine
whether this new authority will enable SEC to quickly fill the hundreds of
vacancies it needs to fill by the end of 2004.

Information technology was another area identified in our 2002 report as
having funding gaps that had contributed to existing inefficiencies. Like
the rest of the government, SEC*s needs in the area of information
technology continue to increase, and SEC staff must have the necessary
tools to successfully meet the agency*s increasing demands. SEC maintains
a list of technology improvement projects that have not been funded due to
budgetary constraints, which SEC officials said include applications to
improve the manipulation and connectivity of various SEC data systems and
computerized reports. The budget increase has allowed SEC to begin
improving its information technology capabilities. SEC*s Office of
Information Technology, which supports the agency*s

6 U. S. General Accounting Office, Financial Statement Restatements:
Trends, Markets Impacts, Regulatory Responses, and Remaining Challenges,
GAO- 03- 138 (Washington, D. C.: Oct. 4, 2003). Information Technology

Will Also Receive a Significant Increase

Page 7 GAO- 03- 969T

information systems and computer users, received an increase in its 2003
operating budget of more than 100 percent, from around $44 million to $100
million. Our understanding is that SEC plans to undertake a few small
projects each year such as system upgrades and software purchases, to
enhance its systems and will implement larger long- term projects over
time. SEC began developing an enterprise architecture a strategic approach
to information technology planning in 2001. This architecture is designed
to allow SEC to fund and develop information technology

initiatives based on agencywide needs by strategically identifying and
organizing technology projects. In 2002, SEC continued to develop its
enterprise architecture in order to identify and document relationships
between agency business functions and supporting technologies. SEC
management also began incorporating the enterprise architecture into its
information technology capital planning process. Although most of SEC*s
long- term projects are in the developmental stages, we are cautiously
optimistic that, if properly implemented, they can improve SEC*s
operational efficiencies. Some of these longer- term projects include

 Converting SEC*s Electronic Data Gathering Analysis and Retrieval
(EDGAR) system into a searchable database that would help SEC conduct
various types of industry and trend analyses. EDGAR is the database system
that public companies use to file registration statements, periodic
reports, and other forms electronically. Currently, EDGAR receives and
archives data, but staff cannot immediately and easily analyze it. The
goal is to create filings that will allow anyone to extract relevant data.

 Implementing a document management and imaging initiative, intended to
eventually eliminate paper documents and allow SEC staff to review and
electronically file the large volumes of information that are part of
litigation, examination, and enforcement activities. Staff told us that
the planned system will provide an agencywide electronic capture, search,
and retrieval mechanism for all investigative and examination materials.

 Implementing a disaster recovery program that is being designed to store
and move large amounts of data among regional or district offices without
first going through Washington, D. C. The current project, when completed,
will allow the agency to back up critical information and data on a daily

basis at multiple locations.

Page 8 GAO- 03- 969T

In 2002, we found that SEC had not engaged in a comprehensive agencywide
strategic planning process and little has changed in this regard in 2003.
As we have previously reported in earlier reports, high- performing
organizations identify their current and future human capital needs*
including the appropriate number of employees, the key competencies
needed, and plans for deploying staff across the organization* and then
create strategies to fill any gaps. 7 Given the SEC*s role in the
securities industry*s self- regulatory structure, a critical element of
SEC*s strategic planning process is an evaluation of the external
environment in which the agency operates. SEC*s budget increase has
heightened the need for strategic planning and the significance of the
process, as SEC*s spending plan will have to withstand considerable
scrutiny. SEC*s lack of a current strategic plan may also affect other
aspects of SEC*s operations as strategic plans are the starting point for
each agency*s performance measurement efforts and should provide the basis
for strategic human capital planning.

In 2002, SEC took a critical step toward developing a strategic plan when
it conducted an internal study of SEC*s current operations, workload,
resource allocations, methods for assigning and managing work, and
measures of performance, productivity and quality of effort. The study,
which was facilitated by a consulting firm (McKinsey & Company) and
includes discussions of staffing and resource allocation issues, appears
to have been a factor in SEC*s allocation of many of the 842 new
positions.

But this confidential study has not been widely distributed within SEC,
and it is unclear whether it will be in the near future. This study serves
as a useful framework for SEC as it begins developing a dynamic
comprehensive strategic plan that will better enable it to identify its
mission and staffing needs. More immediately, such an effort is vital as
it determines how best to use its additional resources. We acknowledge
that

over the past year and a half, SEC has had to deal with a considerable
amount of change, which has limited its ability to focus on a new
strategic plan. SEC has had to acclimate itself to two new chairmen and
adjust to new management teams, manage a 45 percent budget increase,
negotiate its first agreement with its newly organized union, implement
and manage a new fee rate structure, prepare for its first financial
statement audit, and 7 U. S. General Accounting Office, Securities and
Exchange Commission: Human Capital

Challenges Require Management Attention, GAO- 01- 947 (Washington, D. C.,
Sept. 17, 2001). SEC Has An Outdated

Strategic Plan and An Incomplete Human Capital Plan

SEC*s Internal Study Provides a Framework for Strategic Planning

Page 9 GAO- 03- 969T

respond to dozens of new requirements under the Sarbanes- Oxley Act.
However, since SEC issued its existing plan in September 2000, the
financial world has changed significantly.

Although SEC*s Government Performance and Results Act (GPRA) annual
reports attempt to provide a tactical focus, a new long- range planning
effort is long overdo. As stated in SEC*s 2000 plan, *Our strategic plan
is a living document, one that must be continually reexamined and modified
to assure it remains responsive and relevant in an ever- changing
environment.* In addition to the changing external environment, a number
of internal processes and organizational efforts within SEC hinge on SEC
completing a new strategic plan, including developing more outcomeoriented
performance measures to gauge the effectiveness of its regulatory
operations in fulfilling its statutory mission and formalizing its
strategic human capital plan. Rather than measuring outputs, SEC is
working to develop measures for how effectively its actions achieve its
goals and fulfill its mission. SEC is also beginning to take steps that
will improve its ability to leverage its technological capabilities.

Consistent with the findings in our March 2002 report, SEC*s subsequent
GPRA 2002 annual performance report continued to use measures of outputs
rather than outcomes. 8 For example, under the goal of protecting
investors by improving public awareness and educating investors, SEC
tracks the number of investor education events organized by senior
Commission staff in a given year. Within the goal of maintaining fair,
honest, and efficient markets SEC uses the number self- regulatory
organization rule changes reviewed as a measure of performance. As we
reported, performance measures can help to provide detailed information
SEC needs to make informed workforce decisions, including (1) the
relationship between its budget request for full- time equivalent staff
years and the agency*s plans and ability to meet individual strategic
goals and (2) any excesses or shortages in needed competencies.

In late June, SEC began to take steps to transform its annual plan into a
management tool aimed at helping SEC move to a more outcome- oriented
approach to measuring the performance of its regulatory activities* an
important part of strategic planning. To achieve this end, each program

8 In 2003, as directed by OMB, SEC is merging its GPRA annual plan with
its annual budget document. SEC Has Embarked on an

Effort to Develop Outcome- Oriented Performance Measures

Page 10 GAO- 03- 969T

area is to develop a *performance dashboard** a collection of measures
identifying those key performance measures that will allow each program
area manager to track performance. This movement to a performance
dashboard, also involves managing the budget at the program level with
each division head being held accountable for managing its individual
budgetary resources.

While this outcome- oriented approach is promising, we are concerned that
SEC is developing new performance measures before it has completed or even
started its new agencywide strategic plan. By identifying performance
measures before it develops a new strategic plan, SEC runs the risk of
having to redo any measures that are inconsistent with its newly defined
strategic vision or allowing the existing measures to constrain its
planning so that the new plan is consistent with them. We see this
approach as analogous to a commuter rail company exploring the most
efficient way to expand rail service to a new location before deciding
whether that location is the best place for the new line.

We are also reviewing the status of SEC*s strategic human capital
planning. As you may recall, in our September 2001 report, we examined
SEC*s strategies for managing its human capital and found that its human
capital practices were driven by its need to confront its growing staffing
crisis. This crisis was evidenced in a turnover rate that was almost twice
the government average for attorneys, accountants, and examiners; hundreds
of vacant positions; and the average tenure for examiners and attorneys
had fallen below 3 years. We found that to counter its compensation
challenge, SEC* more than the rest of the government* was aggressively
using special pay rates and retention allowances to improve staff
compensation. However, such actions were not stemming their turnover
problems. We also identified a number of nonpay issues that threatened to
impair SEC*s ability to carry out its mission and thus warranted SEC
management*s attention.

As we have reported, strategic planning is a key part of human capital
management. Strategic human capital planning focuses on developing long-
term strategies for acquiring, developing, and retaining an organization*s
employees and for implementing human capital approaches that are clearly
linked to achieving programmatic goals. 9 In our 2001

9 GAO- 01- 947. An Agencywide Strategic

Plan is Vital to a Strategic Human Capital Plan

Page 11 GAO- 03- 969T

human capital report, we found that SEC had begun to take key steps toward
developing a strategic human capital plan but lacked adequate succession
planning because of its high turnover rate. Moreover, we found that SEC
had not articulated the details of its plans for carrying out its
recruiting and retention efforts. SEC also lacked any formal mechanism to
evaluate the effectiveness of its recruiting efforts and ways to gauge the
effectiveness of its worklife programs. We also found that SEC had not
created a culture that ensured ongoing attention to human capital issues,
that human capital management was still focused on traditional personnel
functions, and that it was not a priority for senior management in
decisionmaking. We made a number of recommendations to SEC aimed at
improving its human capital management, including a recommendation that it
expand its annual performance plan into a comprehensive human capital plan
that includes all program areas.

We are looking into SEC*s progress in the above identified areas. However,
we have found that SEC has not yet developed a formal strategic human
capital plan that articulates how it intends to align its human capital
approaches with its organizational goals. While it has yet to do this, we
have found that SEC continues to take important steps to improve its
strategic human capital management. First, as previously discussed, SEC
has taken steps to improve its recruiting/ hiring process. Second, SEC has
begun to take steps to develop its people and has announced plans for an
agencywide training program. One key training component that is currently
in the early stages of development is targeted training for supervisors*
which was an area identified in our 2001 human capital report as
warranting management*s attention. However, it is too soon to

determine the effectiveness of this new training effort. Third, SEC has
taken actions to retain its human capital and address its staffing crisis.
Most significantly, SEC has negotiated an agreement with the union, which
outlines a uniform program for various worklife programs, such as
flextime, flexiplace, and tuition reimbursement, among others, and has
standardized various of these human capital policies. Historically, many
of these programs have varied by division and office. SEC has just begun
to review the use and effectiveness of these programs, therefore, it is
too soon to determine what effect, if any, they will have on employee
retention and morale.

Page 12 GAO- 03- 969T

In our 2001 report we found that the single largest retention issue among
attorneys, accountants, and examiners involved compensation. To enhance
SEC*s ability to adequately compensate its employees, Congress enacted
legislation that allows SEC to create a new pay system. 10 In May 2002,
acting on its new compensation authority, SEC implemented a new system,
which established a pay structure more comparable with other federal
financial regulators. This new pay structure increased base pay for
attorneys, accountants, and examiners similar to that of other federal

financial services regulators. More specifically, this new system
structure consists of 20 grade levels, some with up to 31 steps. This new
system has also provided additional compensation based on performance and
has established new pay categories to compensate staff in supervisory
positions. In conjunction with this new merit- based compensation system,
SEC has also implemented a new performance management system, which is
also an important part of the human capital planning process.

Since our 2001 human capital report, we found that at least one symptom of
SEC*s staffing crisis has improved. SEC*s turnover rate for attorneys,
accountants, and examiners has decreased from 9 percent in 2001 to 6
percent on average in 2002, which in part may be attributed to pay parity.
To date SEC reports that its average turnover rate is about 4 percent.
However, the declining turnover rate may also reflect the state of the
economy and resulting changes in the job market.

SEC*s dynamic regulatory environment and tumultuous past year has made
focusing on a strategic direction and vision for the agency difficult.
Moreover, because SEC operated under its 2002 allocation for five months

of the year, and had difficulty hiring needed expertise, it has been
unable to fully implement its 2003 spending plan. 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 in the 21st century. First, it is critical that SEC complete
its strategic planning effort, which includes the systematic reevaluation
of all of its current approaches, efforts, goals and activities in light
of its current regulatory environment. An important part of any such
effort would include working with the industry to ensure that SEC has
accurately established priorities that reflect the current environment.
For example,

10 P. L. 107- 123 Observations

Page 13 GAO- 03- 969T

SEC would be benefited by reevaluating its existing rules, regulations,
and regulatory approaches to ensure that they continue to reflect the
realities of today*s financial markets and are consistent with the mission
and goals established by SEC. Second, a 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. SEC could also reevaluate its historical focus in areas such
as small businesses and initial public offerings to ensure that it
continues to meet the needs of the securities markets. Finally, aligning
SEC*s human capital with its 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 still lacks a formal plan. Thank you
for your attention to SEC*s operations and planning processes. The
leadership this subcommittee has shown, by holding this hearing should
help to maintain the momentum needed for change at SEC. Mr. Chairman, this
concludes my prepared statement. I would be pleased to answer any
questions you or other members of the subcommittee may have at this time.

For further information regarding this testimony, please contact Orice M.
Williams at (202) 512- 8678. Individuals making key contributions to this
testimony include Toayoa Aldridge, Joe E. Hunter, Jose Martinez- Fabre,
and David Tarosky. Contacts and

Acknowledgements

Page 14 GAO- 03- 969T

Appendix I: Percent growth in SEC staff years and workload, 1991 - 2000

Page 15 GAO- 03- 969T

Appendix II: Percent growth in SEC staff years and workload, 1991 - 2004

(250155)

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