Securities And Exchange Commission: Review of Fiscal Year 2003
and 2004 Budget Allocations (23-JUL-04, GAO-04-818).
This report responds to a statement in the Conference Report on
the Securities and Exchange Commission's (SEC) fiscal year 2004
appropriations directing GAO to study SEC's allocation of its
increased funding for fiscal years 2003 and 2004. Historically,
SEC has faced high staff turnover rates, long stretches of
unfilled staff positions, and growing resource needs.
Additionally, the agency has faced significant needs in its
information technology area. In response to these trends and
several high-profile corporate failures and financial scandals,
Congress approved significant increases in SEC's appropriations
to help improve oversight and increase public confidence in
financial markets. This report builds on several reports GAO has
issued on these issues. GAO was asked to review SEC's (1)
allocation of its fiscal year 2003 and 2004 funds and (2) use of
its information technology funding in fiscal year 2003 and its
plan for 2004.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-818
ACCNO: A11046
TITLE: Securities And Exchange Commission: Review of Fiscal Year
2003 and 2004 Budget Allocations
DATE: 07/23/2004
SUBJECT: Allocation (Budget Act)
Appropriated funds
Budget activities
Budgeting
Federal funds
Funds management
Human resources utilization
Information technology
Internal controls
Labor force
Human capital
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GAO-04-818
United States Government Accountability Office
GAO Report to Congressional Requesters
July 2004
SECURITIES AND EXCHANGE COMMISSION
Review of Fiscal Year 2003 and 2004 Budget Allocations
a
GAO-04-818
July 2004
SECURITIES AND EXCHANGE COMMISSION
Review of Fiscal Year 2003 and 2004 Budget Allocations
Congress addressed SEC's human capital and workload challenges with a
significant increase to SEC's appropriations for fiscal year 2003. SEC
used over half of that increase to fund over 800 new positions primarily
within its financial disclosure, enforcement, and examination areas.
Although these allocations appear consistent with legislative directions,
they were made without the benefit of an updated agencywide strategic
plan, which was not approved until July 9, 2004. Although SEC received
more flexible pay and hiring authority, SEC continues to face challenges
filling critical vacancies, such as accountants. Officials cite
competition from the private sector as a major factor.
SEC's information technology (IT) budget increased from $46.6 million in
fiscal year 2002 to over $100 million in fiscal year 2003. It increased
another 20 percent to $120 million in fiscal year 2004. SEC used most of
these large increases for maintenance and infrastructure needs, compared
with new technology initiatives. Also, SEC's Office of Inspector General
(OIG) issued a report detailing its concerns, which we share, about the
decision-making process for IT capital investments. OIG made several
recommendations to improve this process, and SEC staff have begun to take
actions to address some of them.
SEC commented that our review of its activities acknowledged the progress
the agency has made and provided additional information about its
activities since March.
SEC Budget Time Line (Key Dates), Fiscal Years 2002-2004 (dollars in
millions)
Highlights of GAO-04-818, a report to congressional committees
This report responds to a statement in the Conference Report on the
Securities and Exchange Commission's (SEC) fiscal year 2004 appropriations
directing GAO to study SEC's allocation of its increased funding for
fiscal years 2003 and 2004. Historically, SEC has faced high staff
turnover rates, long stretches of unfilled staff positions, and growing
resource needs. Additionally, the agency has faced significant needs in
its information technology area. In response to these trends and several
high-profile corporate failures and financial scandals, Congress approved
significant increases in SEC's appropriations to help improve oversight
and increase public confidence in financial markets. This report builds on
several reports GAO has issued on these issues.
GAO was asked to review SEC's (1) allocation of its fiscal year 2003 and
2004 funds and (2) use of its information technology funding in fiscal
year 2003 and its plan for 2004.
Fiscal year 2002 Fiscal year 2003 Fiscal year 2004
Enacted legislation
Source: GAO.
www.gao.gov/cgi-bin/getrpt?GAO-04-818.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Orice Wiliams at (202)
512-5837 or williamso@gao.gov.
Contents
Letter
Results in Brief
Background
Budget Increases Have Funded New Staff Positions, but Many
Remain Unfilled
SEC Allocated Majority of Information Technology Budget to System
Maintenance and Infrastructure; Concerns Exist about Investment
Decision-Making Process
Observations
Agency Comments and Our Evaluation
1
2 4
7
15 20 21
Appendix I Scope and Methodology
Appendix II Comments from the Securities and Exchange Commission
Tables
Table 1: End-of-Year Obligations for Fiscal Years 2002 through 2004
by Major SEC Divisions and Offices 8 Table 2: Allocation of 842 New
Positions among Divisions/Offices 9 Table 3: Change in SEC Vacancies
between September 2003 and
March 2004 13
Figures
Figure 1: SEC Budget Time Line (Key Dates), Fiscal Years 20022004 (dollars
in millions) 7 Figure 2: SEC's Allocation of Fiscal Years 2003 and 2004
Information Technology Budget (dollars in millions) 16
Abbreviations
CCA Clinger-Cohen Act of 1996
CIO chief information officer
EDGAR Electronic Data Gathering Analysis and Retrieval
IOC Information Officers Council
IT information technology
ITCPC Information Technology Capital Planning Committee
OCA Office of Chief Accountant
OCIE Office of Compliance Inspections and Examinations
OIG Office of Inspector General
OIT Office of Information Technology
SEC Securities and Exchange Commission
This is a work of the U.S. government and is not subject to copyright
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separately.
United States Government Accountability Office Washington, DC 20548
July 23, 2004
The Honorable Judd Gregg
Chairman
The Honorable Ernest F. Hollings
Ranking Minority Member
Subcommittee on Commerce, Justice,
State, and the Judiciary
Committee on Appropriations
United States Senate
The Honorable Frank R. Wolf
Chairman
The Honorable Jose E. Serrano
Ranking Minority Member
Subcommittee on Commerce, Justice,
State, the Judiciary, and Related Agencies
Committee on Appropriations
House of Representatives
This report responds to a statement in the Conference Report on the
Securities and Exchange Commission's (SEC) fiscal year 2004
appropriations directing GAO to study SEC's allocation of funding
increases provided in its fiscal year 2003 and 2004 budgets.1 As a result
of
several high-profile corporate failures, major financial statement
accounting frauds, and mutual fund scandals, Congress increased SEC's
budget to improve SEC's oversight of financial markets to help restore
public confidence and protect investors. The Sarbanes-Oxley Act of 2002
(Sarbanes-Oxley) was enacted to protect investors by improving the
accuracy and reliability of corporate disclosures made pursuant to the
securities laws, and for other purposes.2 Sarbanes-Oxley authorized a
significant increase in SEC's fiscal year 2003 appropriations to increase
human capital resources and to improve the agency's technology. In fiscal
1H. R. Conf. Rep. No. 108-401, the Conference Report for H.R. 2673, Making
Appropriations for Agricultural, Rural Development, Food and Drug
Administration, and Related Agencies for the Fiscal Year Ending September
30, 2004, and Other Purposes.
2Pub. L. No. 107-204.
year 2003, SEC received a 45 percent increase in its appropriations, and
the act required SEC to efficiently and effectively use these funds.
Our objectives were to review (1) SEC's allocation of its fiscal year 2003
funds and its plans for allocating funds in fiscal year 2004 and (2) SEC's
use of its information technology (IT) funding in fiscal year 2003 and its
plans for IT spending in fiscal year 2004. In addressing these objectives,
we obtained and analyzed detailed information from SEC on its budget
allocations and IT decision-making process for fiscal years 2003 and 2004.
We also interviewed SEC officials to obtain their views on SEC's budget
and IT decision-making processes. We performed limited data reliability
testing of SEC's budget data by interviewing knowledgeable agency budget
officials and comparing the data with other published budget data. Based
on this analysis, we determined that they were sufficiently reliable for
the purpose of this report. Finally, we relied on relevant GAO and SEC
Office of Inspector General (OIG) reports on SEC's budget and IT
decisionmaking process. We conducted our work from February to July 2004
in accordance with generally accepted government auditing standards. A
complete description of our methodology can be found in appendix I.
In fiscal year 2003, SEC used the majority of its increased appropriations
to fund over 800 new positions, primarily in its divisions and offices
responsible for financial disclosure reviews, enforcement activities, and
examinations. In 2004, SEC continued to use this approach. Specifically,
SEC allocated 175, 194, and 275 new positions among its financial
disclosure, enforcement, and examination areas, respectively. Although
these allocations appear generally consistent with Sarbanes-Oxley
directions, they were made without the benefit of an updated strategic
plan that outlines the agency's priorities-a tool that could be used as a
guide for ensuring that SEC is deploying its resources across the agency
in the most efficient way to achieve the most effective outcomes.
Subsequently, the commission approved SEC's new strategic plan on July 9,
2004. In addition, SEC used a portion of the fiscal year 2003
appropriations to fund its new pay parity authority, which allowed the
agency to pay staff commensurate with other federal financial regulators.
According to SEC officials, this additional flexibility has helped SEC to
recruit and retain staff. However, SEC faces ongoing challenges filling
many of the newly created positions, particularly accountants, due to
competition from the private sector. According to SEC officials, operating
Results in Brief
under continuing resolutions for more than one-third of fiscal year 2003
also affected SEC's ability to fill its new positions within the fiscal
year.3 At the end of the second quarter of fiscal year 2004, many
vacancies still remain.
A notable portion of SEC's appropriations in fiscal year 2003 was used to
increase the agency's IT budget. Specifically, SEC increased its IT budget
117 percent from $46.6 million in fiscal year 2002 to approximately $100
million in fiscal year 2003. In fiscal year 2004, SEC increased its IT
budget an additional 20 percent, to $120 million. SEC continues to use
most of SEC's IT budget to fund hardware and software maintenance and
infrastructure needs.4 Specifically, in fiscal year 2003, approximately 76
percent of SEC's IT budget was used to fund these needs, and a planned 70
percent has been budgeted for these needs in fiscal year 2004. As a
result, only a small portion of SEC's IT budget is being used to fund new
technology initiatives, such as providing for the online filing of
ownership reports, or allowing securities transactions to be routed
directly from clearing brokers to SEC. Separately, in a March 2004 report,
SEC's OIG raised concerns about SEC's IT capital investment
decision-making process. Specifically, among other things, OIG was
concerned about the lack of a single agencywide IT budget-related control
process and that the process was not in full compliance with applicable
laws and regulations. In addition, OIG highlighted the agency's need to
finalize its IT strategic plan in order to establish sound criteria for
making and evaluating IT investment decisions. OIG made a number of
recommendations, including formalizing charters, roles, and
responsibilities for the councils involved in the decision-making process
and improving the strategic planning for IT investments. Based on our
previous work and review of the OIG's findings, GAO shares some of the
OIG's concerns and agrees with the recommendations. SEC staff have begun
to take steps to address some of the OIG's recommendations.
This report makes no recommendations. We received written comments on a
draft of this report that are reprinted in appendix II. SEC commented
3SEC also operated under a continuing resolution for the first quarter of
fiscal year 2004.
4In this report, we use "software and hardware maintenance" to refer to
OMB Circular A-11 terminology for "steady state," which means maintenance
and operation costs at current capability and performance level-including
costs for personnel, maintenance of existing information systems,
corrective software maintenance, voice and data communications
maintenance, and replacement of broken IT equipment. "Infrastructure
needs" refers to laptop, monitor, and server upgrades.
that our review of SEC activities acknowledged the progress the agency has
made and provided additional information about its activities since March.
The comments are discussed in greater detail at the end of this report.
Background
Created by Congress in 1934, SEC's primary mission is to protect
investors; maintain fair, honest, and efficient securities markets; and
facilitate capital formation. To fund its operations, SEC collects fees
that are deposited into a special SEC appropriations account to be used as
offsetting collections. These fees are charged to (1) public companies for
the registration of stocks and bonds for sale to investors, (2) national
securities exchanges and national securities associations when registered
securities and security futures are sold on or off exchanges through any
member of such an association, and (3) persons filing proxy solicitations
for mergers, consolidations, acquisitions, or sales of a public company's
assets. In carrying out its mission, the agency has established four major
goals: (1) promote and enforce compliance with federal securities laws,
(2) sustain a flexible and effective regulatory environment, (3) promote
informed investment decision making, and (4) maximize its use of
resources. SEC works to achieve these goals through its various divisions
and offices. GAO has issued a number of reports and testimonies addressing
SEC's staffing and workload and certain aspects of its human capital and
budget challenges.5
Organizational Overview
As of September 30, 2003, SEC had 3,208 staff working in four divisions
and 18 offices in Washington, D.C., and in 11 regional and district
offices. Of these, approximately 44 percent were attorneys, 22 percent
were accountants or financial analysts, and 6 percent were investigators
or examiners. The remaining 28 percent included other professional,
technical, administrative, and clerical staff.
5U.S. General Accounting Office, Securities and Exchange Commission: Human
Capital Challenges Require Management Attention, GAO-01-947 (Washington,
D.C.: Sept. 17, 2001); SEC Operations: Increased Workload Creates
Challenges, GAO-02-302 (Washington, D.C.: Mar. 5, 2002); U.S. General
Accounting Office, Securities and Exchange Commission: Preliminary
Observations on SEC's Spending and Strategic Planning, GAO-03-969T
(Washington, D.C.: July 23, 2003); and U.S. General Accounting Office, SEC
Operations: Oversight of Mutual Fund Industry Presents Management
Challenges, GAO-04-584T (Washington, D.C.: Apr. 20, 2004).
SEC oversees the activities of a variety of key market participants. In
2003, SEC was responsible for overseeing 13 registered exchanges, the
over-thecounter market, approximately 70 alternative trading systems, 11
registered clearing agencies, about 6,800 registered broker-dealers
employing over 700,000 registered representatives, almost 8,000 transfer
agents, over 5,000 investment companies, and approximately 8,000
registered investment advisers. In addition, over 17,000 companies that
have issued securities filed annual reports with SEC. SEC's oversight
includes rule making, surveilling the markets, interpreting laws and
regulations, reviewing corporate filings, processing applications,
conducting inspections and examinations, and determining compliance with
federal securities laws.
SEC Staffing and Workload Issues
In our previous reports on SEC, we found that SEC faced high staff
turnover, ongoing vacancies, and increasing resource needs. Specifically,
in our September 2001 report, we noted that over 1,000 employees, or about
one-third of SEC staff, left the agency from fiscal years 1998 to 2000,
and that 280 positions remained unfilled in September 2001. In our March
2002 report, we stated that since 1996, SEC's staff resources had not
grown commensurate with its workload. We noted that SEC tended to develop
its annual budget request based on the previous year's appropriation
rather than on what it would actually need to fulfill its mission. The
result was that the modest growth in staff resources in the 1990s at SEC
was insufficient to manage its workload. In addition, we reported that
additional funding was necessary to meet SEC's IT needs. Like the rest of
the government, SEC's challenges in the area of IT continue to increase,
and SEC staff must have the necessary tools to successfully meet the
agency's increasing demands.
Changes in the securities markets contributed to the increase in SEC's
workload. U.S. capital markets have experienced substantial growth in the
last two decades. The increased volume of shares traded in the U.S. stock
market in this period and an array of new products and market participants
have led to increasing demands on SEC's regulatory capacity. The 1990s
also witnessed tremendous growth in the internationalization of the U.S.
securities market. In addition, many more individuals became investors in
the U.S. stock market through buying shares in mutual funds. This further
elevated SEC's importance as a regulator.
Congress Takes Action to Address SEC's Human Capital and Budget Challenges
SEC's staff issues and a series of corporate failures and accounting
scandals, including the bankruptcies of Enron in December 2001 and
WorldCom in July 2002, caught Congress's attention and raised significant
concern about SEC's ability to effectively carry out its mission. Congress
recognized SEC's challenges and enacted a number of legislative changes to
address them, including
o the Investor and Capital Markets Fee Relief Act,6 which rationalized
SEC's fee structure and exempted SEC from general federal pay restrictions
and
provided the agency with pay parity-the authority necessary to bring
salaries in line with those of other federal financial regulators.
o Sarbanes-Oxley, which authorized appropriations of $776 million to the
agency in the fiscal year 2003 budget. SEC increased its initial fiscal
year 2003 budget request of $466 million to $769 million in part because
of the level authorized in Sarbanes-Oxley. The Consolidated Appropriations
Resolution, 2003, in which Congress appropriated $716 million to the
agency for fiscal year 2003, directed the additional funding to be used in
certain areas. First, it directed SEC to fund pay parity, which at that
time had not yet been fully implemented. Sarbanes-Oxley also directed that
the new funding be used to fund information technology, security
enhancements, and recovery and mitigation activities in light of the
terrorist attacks of September 11, 2001. In addition, SEC was directed to
fund no fewer than 200 additional professional staff positions to
strengthen existing program areas, and to increase its oversight of
auditors and audit services. Figure 1 shows the change in SEC's budget
between fiscal years 2002 and 2004.
o the Accountant, Compliance and Enforcement Staffing Act of 2003,7
which provided SEC with relief from competitive hiring requirements for
certain
positions. The legislation was intended to enable SEC to expedite the
hiring of accountants, economists, and examiners so that the agency could
more quickly fill new positions, including those created after Sarbanes-
Oxley.
6Pub. L. No. 107-123, 115 Stat. 2390, January 16, 2002. 7Pub. L. No.
108-44, 117 Stat. 842, July 3, 2003.
Figure 1: SEC Budget Time Line (Key Dates), Fiscal Years 2002-2004 (dollars in
millions)
Fiscal year 2002 Fiscal year 2003 Fiscal year 2004
Enacted legislation
Source: GAO.
SEC used much of its fiscal year 2003 increased appropriations to fund
over 842 new staff positions.8 SEC's financial disclosure, enforcement,
and examinations areas received most of the newly funded positions. Among
the divisions receiving the largest increases were the Divisions of
Enforcement, Corporation Finance, and the Office of the Chief Accountant
(OCA), which received double-digit increases to their budgets in 2003 and
are expected to receive even greater increases in 2004. In addition, SEC
used part of its fiscal year 2003 appropriations to fund pay parity for
existing staff, which gave the agency additional flexibility to recruit
and retain staff. However, many of these newly funded positions remain
unfilled because SEC continues to face hiring challenges for certain
positions. Officials say that while certain laws have helped speed up the
hiring process, they are facing increased competition from the private
sector.
8Information presented throughout this report on SEC's staffing,
resources, budget, and other operations relates to fiscal years, unless
otherwise noted.
Budget Increases Have Funded New Staff Positions, but Many Remain Unfilled
Budgetary Resources Were Focused on New Staff Positions for Financial
Disclosure, Enforcement, and Examination Activities
SEC used its increased appropriations between 2002 and 2004 in its
financial disclosure, enforcement, and examination areas primarily to fund
new positions. As shown in table 1, the offices and divisions showing the
largest increases in spending between 2002 and 2003 were the Divisions of
Enforcement and Corporation Finance, regional offices, OCA, and IT.9
Between 2003 and 2004, the areas expected to receive the largest increases
in spending are OCA, the Divisions of Corporation Finance and Enforcement,
regional offices, IT, and the Office of Compliance Inspections and
Examinations (OCIE).10
Table 1: End-of-Year Obligations for Fiscal Years 2002 through 2004 by Major SEC
Divisions and Offices
End-of-year Percent Projected Percent
growth end-of- growth
End-of-year obligations, between year between
2002 obligations, 2003
Division/office obligations, 2003 and 2004a and
2002 2003 2004
Chief Accountant $4,004,259 $4,998,684 25 $7,759,000
General Counsel 15,118,938 16,230,693 7 18,684,900
Corporation Finance 37,704,685 44,009,378 17 61,251,700
Enforcement 52,554,845 64,235,116 22 80,738,800
Market Regulation 17,777,002 19,362,597 9 23,029,900
Office of
Compliance
Inspections
and Examinations 11,613,439 13,289,962 14 19,589,300
Investment 20,943,172 23,418,447 12 26,042,000
Management
Information 47,644,458 88,284,822 85 132,854,400
Technology
bRegional/district 141,631,580 169,522,290 20 225,567,400
offices
Otherc 139,185,781 176,933,191 27 215,982,600
Total $488,178,159 $620,285,180 $811,500,000
Source: SEC.
aProjected end-of-year obligations as of May 2004. These figures are
subject to revision during the remainder of the year.
bThe regional and district offices provide support primarily to the
Divisions of Enforcement and OCIE.
cOther includes mission-support related functions as well as smaller SEC
offices including Administrative and Personnel Management, and Office of
Investor Education and Assistance. Other also includes salaries and
benefits for IT employees.
9Spending as determined by total dollars obligated, or the amounts
committed for spending.
10As determined by comparing end-of-year obligations for fiscal year 2003
with projected end-of-year obligations for fiscal year 2004, which are
subject to revision.
As we reported in July 2003, SEC made its allocation decisions without the
benefit of an updated strategic plan.11 In lieu of using an updated
strategic plan, it appears that a special study of SEC operations has
provided a basis for SEC in determining the need for 842 new positions in
2003. In 2002 the former Chairman directed SEC staff to conduct an
internal study of SEC's current operations, workload, resource
allocations, methods for assigning and managing work, and measures of
performance, productivity, and quality of effort. Soon after the current
Chairman joined SEC in February 2003, he asked that the division and
office heads prepare analyses to justify their staffing requests. This
included the total number of staff needed to accomplish each
division/office's objectives, the organizational changes needed to
accommodate the new staff being requested, and a breakdown of the types of
staff being requested by profession. In addition, an SEC official said
that the Chairman ultimately approved each division's and office's
justification to arrive at the final allocation for the 842 new positions.
Table 2 shows SEC's final allocation of the 842 new positions among
divisions/offices.
Table 2: Allocation of 842 New Positions among Divisions/Offices
Division/office Number of new positions
Chief Accountant 20
Corporation Finance 175
Enforcement 83
Market Regulation 34
Office of Compliance Inspections and Examinations 42
Investment Management 15
Information Technology 30
Regional/District Offices 345
Othera 98
Total 842
Source: SEC.
aOther includes mission-support-related functions as well as smaller SEC
offices, including General Counsel, Administrative and Personnel
Management, and Office of Investor Education and Assistance.
11GAO-03-969T.
Corporation Finance and OCA
SEC's staff allocations appear generally consistent with legislative
expectations and what is known about SEC's current operating environment.
However, because SEC's staff positions were allocated without the benefit
of an updated strategic plan, it will be difficult for SEC to assess the
appropriateness or effectiveness of the use of its much larger budget.
Since 2002 we have reported that although SEC had a strategic plan and had
periodically adjusted staffing to fulfill basic obligations, the agency
traditionally had not engaged in a systematic re-evaluation of its
programs and activities in light of current and emerging challenges.12 We
further noted that with a current strategic plan that identifies the
agency's key mission-related goals and outlines the agency's priorities,
SEC could better determine and deploy resources needed to fulfill its
mission. In response to our concerns and the significant budget increase
in fiscal year 2003, the current SEC chairman instructed SEC staff to
draft a new strategic plan. SEC's new strategic plan was approved by the
commission on July 9, 2004.
SEC plans to use the majority of its additional staff resources within the
Division of Corporation Finance, OCA, Division of Enforcement, and OCIE in
order to enhance its regulatory and oversight activities.
Between 2002 and 2003, Corporation Finance and OCA's spending increased 17
percent and 25 percent, respectively, and planned spending is expected to
increase by 39 percent and 55 percent in 2004. Both Corporation Finance
and OCA administer SEC's full disclosure program. These programs are
responsible for ensuring that investors are provided with material
information from reporting public companies. They also help to deter fraud
and misrepresentation in public offerings, trading, voting, and tendering
of securities. As shown in table 2, Corporation Finance, which is
responsible for reviewing corporate disclosures of public companies such
as initial stock offerings and quarterly financial statements in order to
monitor and enhance compliance with disclosure and accounting
requirements, received funding for 175 new accountants and attorneys. This
increase in the number of staff was due primarily to a Sarbanes-Oxley
requirement for SEC to conduct reviews of reporting public companies once
every three years or approximately one-third of all reporting public
companies per year. According to budget estimate documents, SEC was able
to review only 23 percent of all reporting issuers in 2003, thus falling
short of its mandated goal of 33 percent.
12GAO-02-302, GAO-03-969T, and GAO-04-584T.
Division of Enforcement
Office of Compliance Inspections and Examinations
OCA received funding for 20 new positions. OCA is responsible for
establishing and enforcing accounting and auditing policy in order to
enhance transparency, relevance, and reliability of financial reporting
and to improve the professional performance of public company auditors.
According to an SEC official, these new positions would assist with OCA's
increased responsibility to oversee activities associated with the newly
created Public Company Accounting Oversight Board, which is expected to be
heavily involved in the quality review process and development and
interpretation of auditing standards, among other things.
Division of Enforcement spending increased 22 percent in 2003 and is
projected to increase an additional 26 percent in 2004. The division
analyzes information from diverse sources that may indicate past or
immediate violations of federal securities laws, investigates possible
violations of federal securities laws, recommends SEC action when
appropriate in federal court or before an administrative law judge, and
negotiates settlements on behalf of SEC. Of the SEC's 842 new positions,
the division was authorized to hire 83 staff in Washington, D.C., and 111
positions in SEC's regional and district offices. According to SEC budget
documentation, staffing will increase in the division by approximately 19
percent over 2003 levels in order to help implement Sarbanes-Oxley. The
additional positions will add to the program's accounting and litigation
efforts, as well as investigative and surveillance activities. Division of
Enforcement officials told us that the division has reorganized staff in
its Office of Chief Counsel by functional lines rather than by
geographical location. The functional lines include investment adviser and
mutual funds, broker-dealers and markets, and corporate accounting. The
intent of this reorganization is to increase the staff's subject matter
expertise and better detect emerging issues.
Between 2003 and 2004 OCIE's spending is expected to increase by 47
percent. OCIE is responsible for administering SEC's nationwide
examination and inspection program for self-regulatory organizations,
broker-dealers, transfer agents, investment companies, and investment
advisers. Similar to the Division of Enforcement, OCIE staff is primarily
located in Washington, D.C., and SEC's 11 regional and district offices.
OCIE was allocated 42 new positions for Washington, D.C., and
approximately 233 new positions among SEC's 11 regional and district
offices, for a total of 275 new positions. According to information
provided by SEC, the additional staff would allow SEC to implement a new
riskbased inspection program of the riskiest investment advisers and to
allow SEC to have more frequent oversight of internal controls of large
broker-
dealers, a greater on-site presence, and more frequent inspections of
selfregulatory organization surveillance and disciplinary systems.
Budgetary Resources Were Also Used to Fund Pay Parity
In addition to funding new positions, SEC used part of its increased
appropriations to fund pay parity. Sarbanes-Oxley authorized $102.7
million for increases associated with pay parity. However, SEC officials
said they could not provide the specific amounts that were allocated to
fund pay parity in 2003 for two reasons.13 First, in May 2002, acting on
its new compensation authority, SEC implemented a new system that
established a pay structure more comparable with other federal financial
regulators. This new pay structure increased base pay for attorneys,
accountants, and examiners to levels similar to those of other federal
financial services regulators. More specifically, the structure of this
new system consists of 20 grade levels, some with 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. Second, a large number of employees came on board in 2003 under
the new pay structure that had already incorporated pay parity. As a
result, SEC officials said it would be difficult to segregate the funding
amounts associated with the new pay structure and salaries for new
employees from the actual amounts used to fund pay parity.
SEC Continues to Face Challenges in Hiring for Certain Positions
SEC continues to face agencywide challenges in hiring and retaining
sufficient numbers of quality staff to achieve its mission. As shown in
table 3, between September 2003 and March 2004, SEC filled 328 of 782
vacancies, which amounted to a 42 percent decrease in the number of
vacancies within that time. The regional/district offices made the most
progress in hiring, decreasing their vacancies 72 percent by filling 210
out of 294 vacant positions. The Division of Corporation Finance appears
to face the most difficulty in filling its vacancies, filling only 56 out
of the 193 vacant positions between September 2003 and March 2004.
According to an SEC official, Corporation Finance has continued to focus
on its hiring efforts and as of March 31, 2004, the division had 41
pending hires scheduled to come on board by August 2004, of which 29 were
accountants and the remaining 12 were attorneys. Further, the official
said the division's goal is to hire as many qualified certified public
accountants
13SEC officials said that in order to implement pay parity in May 2002,
they used $24.8 million in reprogrammed funds from 2001 carryover
balances.
as soon as possible, with a goal of having 250 accountants within the
division. The remaining staff will be attorneys and legal staff for
support in providing information to the public, and other functions not
requiring an attorney.
Table 3: Change in SEC Vacancies between September 2003 and March 2004
Vacancies Percent
Division/office September 2003 March 2004 filled change
Enforcement 73 58 15
Corporation Finance 193 137 56
Market Regulation 31 31 0
Investment
Management 23 17 6
OCIE 44 20 24
Chief Accountant 28 19 9
Information
Technology 34 32 2
Regions/districts 294 84 210
Other 62 56 6
Total 782 454 328
Source: GAO Analysis of SEC data.
Note: The data do not reflect any pending hires and exclude unallocated
positions held by the Chairman's office.
As we reported in July 2003, SEC was able to expedite hiring under the
Accountant, Compliance and Enforcement Staffing Act of 2003. SEC staff
told us that bypassing competitive processes has helped them hire
individuals for accountant, compliance examiner, and economist positions
more quickly. However, officials in the Corporation Finance, Investment
Management, and Enforcement divisions said they still face considerable
difficulty in hiring accountants. This is due to competition from the
private sector-resulting from public companies needing to comply with
Sarbanes-Oxley requirements-as well as from competition with the Public
Company Accounting Oversight Board. An official from the Division of
Corporation Finance told us that they had retained the services of a
national recruiting firm in order to recruit accountants.
In addition, SEC officials explained that operating under a continuing
resolution in fiscal year 2003 and the timing of SEC's new hiring
authority did not allow much time for recruiting activities before the end
of the year. Given the late appropriation and hiring challenges in 2003,
SEC had
difficulties filling its new positions and was unable to spend $120
million of its increased appropriations during 2003. In the fiscal year
2004 appropriations act, this unobligated balance was appropriated to SEC
for use in 2004. Similarly, SEC budget documents reported that $20 million
would carry over from 2004 into the 2005 budget. According to an SEC
official, the $20 million carryover included in the 2005 budget represents
106 new positions requested for 2005, in anticipation of bringing those
new employees on board in 2005 or subsequent years.
As of June 2004, SEC has yet to staff its new Office of Global Security
Risk. In the Conference Report on the 2004 appropriations legislation, SEC
was directed to establish an Office of Global Security Risk within the
Division of Corporation Finance. This was due in part to concerns that
American investors may be unknowingly investing in companies with ties to
countries that sponsor terrorism and countries linked to human rights
violations. According to language in the Conference Report, a company's
association with sponsors of terrorism and human rights abuses, no matter
how large or small, can have a material adverse effect on a public
company's operations, financial condition, earnings, and stock prices. As
a means of protecting American investors' savings and to disclose these
business relationships to investors, this office is required, among other
things, to (1) establish a process by which the SEC identifies all
companies on U.S. exchanges operating in State Department-designated
terroristsponsoring states, (2) ensure that all companies sold on U.S.
exchanges operating in State Department-designated terrorist-sponsoring
states are disclosing such activities to investors, and (3) coordinate
with other government agencies to ensure the sharing of relevant
information across the federal government. In addition, SEC was directed
to provide Congress with quarterly reports on the activities of the Office
of Global Security Risk. According to an SEC official, in May 2004 SEC
filled the Chief position for the office. The next steps will be for the
Chief to begin the process of developing plans for the office, including
staffing needs. According to SEC, it plans to provide its first report to
the Subcommittee on Commerce, Justice, State, the Judiciary, and Related
Agencies, House Committee on Appropriations, by late July.
SEC Allocated Majority of Information Technology Budget to System Maintenance
and Infrastructure; Concerns Exist about Investment Decision-Making Process
Sarbanes-Oxley directed SEC to provide additional funding for IT in 2003,
with the general goal of improving operational efficiency. SEC continued
to use most of the additional funding to address hardware and software
maintenance and technology infrastructure needs. The remaining portion of
the agency's IT resources was used to fund new mission-related
initiatives. With regard to SEC's decision-making process for IT capital
investment, SEC's OIG has recently issued a report stating that while SEC
has made progress in establishing an IT investment process that complies
with applicable laws and regulations, and incorporates best practices from
the public and private sectors, the process is not in full compliance with
applicable laws and regulations. Further, the OIG report pointed out that
SEC has not finalized its IT strategic plan.
SEC Continues to Allocate the Majority of Its Information Technology
Budget to Hardware and Software Maintenance and Technology Infrastructure
Needs
We reported in March 2002 that SEC's IT systems and funding gaps were
contributing to inefficiencies at the agency.14 SEC officials at the time
stated that SEC's 2002 IT budget of $46.6 million had been used primarily
for hardware and software maintenance and technology infrastructure needs,
and that additional funding was needed for capital improvements such as a
nationwide network to support the examination and inspection functions.
Similarly, in 2004 officials said they needed to spend most of the funding
to upgrade SEC's IT infrastructure to support new mission-related IT
programs. Sarbanes-Oxley highlighted the importance of improving SEC's
technological capabilities by authorizing SEC to increase its IT budget.
As a result, SEC's 2003 IT budget was increased by over 100 percent, to
$100.9 million. In 2004, SEC's IT budget was increased again to $120.5
million, or another 20 percent.
SEC's IT budget is under the purview of both its Office of Information
Technology (OIT) and a separate council of senior staff from the major
program divisions and offices. OIT is responsible for managing costs
associated with ongoing operations and maintenance, application and
infrastructure upgrades, and enhancements to existing systems. SEC's
Information Officers Council (IOC) and the Information Technology Capital
Planning Committee (ITCPC) manage the remainder of its IT budget, which
consists of new technology initiatives requested by SEC's program offices.
14GAO-02-302.
With a significant increase in its IT budget, SEC continues to allocate
the majority of these resources to fund hardware and software maintenance
and infrastructure needs. As shown in figure 2, in 2003, about 76 percent,
or $68.2 million, of SEC's IT budget went to hardware and software
maintenance and infrastructure needs, and a planned 70 percent, or $84.1
million, is budgeted for the same needs in 2004. Approximately 24 percent,
or $21.4 million, of SEC's IT budget in 2003 was used to fund new IT
initiativesprojects that have the potential to improve the
efficiency of SEC's operationsand a planned 30 percent, or $36.4
million, is planned for 2004. In addition, figure 2 also shows that while
most of the funding for new technology initiatives went to mission
officessuch as the Division of Enforcement and OCIE-a notable
amount of funding also went to mission-support offices, such as the Office
of Economic Analysis and the Office of Filings and Information Services.
Specifically, in 2003 approximately $14 million went to fund projects in
mission offices, and $7.3 million was used to fund projects in
mission-support offices.
Figure 2: SEC's Allocation of Fiscal Years 2003 and 2004 Information
Technology Budget (dollars in millions) Fiscal year 2003 Fiscal year 2004
Total IT Total IT funding $89.6 funding $120.5
Source: GAO analysis of SEC data.
Of the $21.4 million of SEC's IT budget allocated to new technology
initiatives in 2003, SEC funded 40 separate IT projects. As of May 2004,
SEC is scheduled to fund six additional IT projects. A number of these new
initiatives provide for the electronic filing of reports, documents, and
information, which had previously been paper-based. For example, one
project provides for the electronic filing of ownership reports through
the EDGAR (Electronic Data Gathering Analysis and Retrieval) system, a
specific requirement of Sarbanes-Oxley.15 Other projects provide for the
electronic filing of materials from transfer agents, self-regulatory
organizations, alternative trading systems, and broker-dealers. In
addition, some of the projects are designed to improve SEC's ability to
review and analyze large amounts of data. For example, one project would
establish an improved framework for the gathering, formatting, and
analyzing of information collected by OCIE. Currently, the gathering and
analysis of information in OCIE is burdened by data collection in a
variety of formats. This makes it difficult and time consuming to combine
the data sets into one in order to conduct analysis.
In addition, SEC continued to fund a number of its multiyear IT
initiatives, including
o Electronic Document Management System. Officials stated that the
document management and imaging initiative is currently being piloted in
Division of Enforcement offices in Washington, D.C., Boston, Philadelphia,
New York, and Chicago and that electronic imaging has been completed for
approximately 50 percent of all documents in Washington and 25 percent of
all documents in New York. They stated that for the remaining pilot
offices, documents would continue to be reviewed to determine what should
be imaged. The officials noted that the pilot should be completed by the
early fall of 2004.
o EDGAR Modernization. SEC has taken a first step toward making EDGAR a
database with more analytical capabilities for end users. SEC officials
stated that within the last year, SEC established the capability for EDGAR
to accept certain data from users in a structured format. According to SEC
officials, SEC's Chairman established a task force to look into data
15EDGAR is a database system through which public companies electronically
file registration statements, periodic reports, and other forms to SEC.
Sarbanes-Oxley now requires directors, executive officers, and
shareholders who own 10 percent or more of a public company to report to
SEC their holdings and transactions in the securities of their companies.
These filings are referred to as ownership reports.
tagging, which would allow users to retrieve information from EDGAR in
order to conduct trend analysis. The task force is expected to report by
the end of July 2004 on how to proceed.
o Disaster Recovery. SEC officials stated they have made progress in
addressing business continuity planning efforts related to disaster
recovery. Officials stated they have established alternative data centers
and continuity planning sites, have upgraded the network to prevent the
possibility of a single point of failure in the network, and are currently
building a facility to allow senior staff to move off site in the event of
a disaster.
o Telecommuting. SEC officials stated that SEC's capacity for
telecommuting continues to improve across the agency. These officials
stated that due to improved dial-up and wireless connection access, SEC
employees' remote access to certain software applications has improved
with the deployment of new laptops in the Division of Enforcement offices.
SEC's Office of Inspector General Raised Concerns about SEC's Information
Technology Capital Investment Decision-Making Process
In the summer of 2001, SEC began revising its IT capital investment
decision-making process. The revisions were based on recommendations in an
audit report issued by SEC's OIG in August 2001 that reviewed SEC's IT
capital investment decision-making process in order to improve
communication between OIT and SEC staff.16 Beginning in 2002, SEC
developed a new decision-making process for IT investments, with SEC's IOC
and ITCPC responsible for managing the portion of SEC's IT budget related
to new technology initiatives. Specifically, IOC, which includes program
office senior staff familiar with both the business and IT needs within
their programs, receives and evaluates specific IT investment proposals
submitted by SEC's divisions and program offices. Based on their review,
IOC makes recommendations regarding which projects should be approved for
funding. These recommendations are forwarded to ITCPC, a more senior
council of division directors and program office heads, for final funding
decisions.
Although SEC has taken steps to develop a formal decision-making process
for IT investments, in a 2004 follow-up report, OIG raised
16SEC Office of Inspector General, Information Technology Decision-Making
Process, Report No. 334, (Washington, D.C., Aug. 28, 2001).
concerns about the current state of this process.17 According to the OIG
report, OIG evaluated SEC's compliance with the Clinger-Cohen Act of 1996
(CCA) by applying GAO's IT Investment Management Framework for Assessing
and Improving Process Maturity (IT IM Maturity Model).18 In general, GAO's
framework includes standards for the selection, control, and evaluation of
federal information technology investments, in accordance with the
fundamental IT governance mandates of the CCA.19 OIG found that SEC has
made progress in establishing an IT investment process that complies with
applicable laws and regulations and incorporates best practices from the
public and private sectors. However, OIG also identified some concerns.
For example, OIG found that SEC's process still did not meet the minimum
criteria of GAO's IT IM Maturity Model because SEC had not assigned
specific responsibility or delegated appropriate authority for
establishing a compliant and effective decisionmaking process in order to
strengthen the governance over the process. Based on this review, OIG
concluded, and we generally agree, that the lack of clearly defined and
formally approved IT governance policies, criteria, and procedures
resulted in an undisciplined IT investment decisionmaking process subject
to broad interpretation by SEC management, which lacked auditable and
enforceable standards and controls.
OIG made a number of recommendations to address SEC's IT investment
decision-making governance issues, including (1) the development of a work
plan for implementing the OIG's recommendations; (2) formalizing charters,
roles, and responsibilities for the Chief Information Officer (CIO), IOC,
ITCPC, and other relevant IT governance bodies, including delegating to
the CIO sufficient authority to effectively administer, control,
implement, and enforce the IT capital planning responsibilities; (3)
revising the project funding process and associated investment thresholds
and criteria; (4) improving the strategic planning for IT investments,
which includes finalizing an IT specific strategic plan that establishes
the strategic direction for IT capital planning and tactical operations
within SEC and establishing a single agencywide IT control process and
structure
17SEC Office of Inspector General, Information Technology Capital
Investment Decision-Making Follow-up. Audit No. 365, (Washington D.C.,
Mar. 29, 2004).
18See http://www.gao.gov/special.pubs/ai10123.pdf.
19The Clinger-Cohen Act of 1996 was enacted to address federal information
technology management. It requires federal agencies to focus on the
results achieved through information technology investments while also
streamlining the information technology acquisition process.
for the entire IT budget to select, prioritize, and fund all IT
investments to be managed by IOC and ITCPC; (5) linking IT project
planning with SEC's enterprise architecture; (6) improving the tracking of
IT projects in progress; and (7) supporting IOC and ITCPC with adequate
staff.20
SEC has taken steps to implement some of the recommendations contained in
the OIG's report. According to SEC officials, staff are in the process of
formalizing the charters, roles, and responsibilities for the CIO, IOC,
ITCPC, and other relevant governance bodies by reviewing the pertinent
legislation, Office of Management and Budget requirements, and other
relevant guidance. Further, the SEC Chairman recently delegated to the CIO
the necessary authority to issue and enforce agencywide IT policy and
regulations, and to implement the recommendations in the OIG report. In
addition, SEC officials stated that starting with the 2004 IT budget, SEC
will establish a single agencywide IT control process and structure for
the entire IT budget, managed by IOC and ITCPC, to select, prioritize, and
fund all IT investments.
SEC officials have articulated a preliminary plan to respond to the
remaining OIG recommendations. SEC officials stated that their ability to
respond to the OIG's recommendation depends on how quickly they can hire
the staff responsible for managing the capital planning process. Most
importantly, the Senior Program Manager position for the project
management/capital planning groupwho will be responsible for
seeing that the OIG's recommendations are responded tois currently
vacant. Therefore, officials stated that they would most likely be able to
address 25 percent to 33 percent of the OIG's recommendations by the end
of fiscal year 2004.
Since Congress increased SEC's budget to improve the agency's oversight of
financial markets in fiscal year 2003, SEC has made significant progress
in hiring staff and is continuing its efforts to fill the remaining
vacancies. The number of vacancies appears reasonable, given that SEC had
to contend with competition from the private sector and a continuing
resolution that limited the time SEC had for recruiting. SEC has also
taken steps to improve its information technology by using the increased
funding
20GAO describes enterprise architecture as an organization's operations in
both interrelated business processes and business rules, information needs
and flows, and work location and users as well as hardware, software,
data, communications, and security attributes and performance standards.
Observations
Agency Comments
and Our Evaluation
to augment its budget for technologyand, in turn, upgrade its
infrastructureand by continuing to address the OIG's concerns
about the agency's decision-making process on IT spending. Although SEC's
staff allocations appear to be consistent with Sarbanes-Oxley, these
allocations were made without the benefit of a strategic plan. As we have
previously noted and the SEC Chairman has agreed, a comprehensive
strategic plan could provide SEC management with a basis for determining
whether SEC's resource level and allocations, as well as its processes and
organizational structure, are tied to the mission and goals of the agency.
Subsequently, SEC completed updating its strategic plan on July 9, 2004.
SEC provided written comments on a draft of this report that are reprinted
in appendix II. SEC commented that while more work remains, our review of
SEC activities acknowledged the progress the agency has made within a
constrained time frame. As discussed in its letter, the SEC has taken a
number of actions to address some of the issues raised in our report.
First, since March, SEC has made additional progress hiring about 130 new
employees, and approximately 130 others have committed to start with SEC
before the end of the fiscal year. SEC anticipates that by the end of the
fiscal year, it will be able to reduce the vacancy level to its normal
attrition.
Second, we are pleased that the Commission has recently approved the
agency's strategic plan for fiscal years 2004-2009. This strategic plan
could serve as a basis to guide SEC in using its additional resources
effectively and for its congressional overseers to evaluate SEC's progress
in fulfilling its mission and meeting its goals. We look forward to
reviewing and commenting on this updated strategic plan as part of our
ongoing review of SEC's operations.
Third, SEC noted that in the past few months, it has imaged, and made
available electronically, investigatory materials formerly available only
in paper throughout headquarters and regional and district offices. SEC
also acknowledged it is "keenly aware" of the need to respond promptly and
comprehensively to concerns raised by the SEC OIG and GAO and to ensure
that its IT resources are used wisely and effectively. We continue to
believe that leveraging information technology will effectively support
SEC's activities, and we are encouraged by the agency's ongoing efforts.
Finally, SEC reiterated the steps it has taken in launching the Office of
Global Security Risk. SEC noted that it plans to provide the first
quarterly report to the Subcommittee on Commerce, Justice, State, the
Judiciary,
and Related Agencies, House Committee on Appropriations, by late July. SEC
officials also provided us with some technical comments, which we
incorporated as appropriate.
We are sending copies of this report to the Chairman and Ranking
Minority Member of the Senate Committee on Governmental Affairs; the
Chairman and Ranking Minority Member of the House Committee on
Government Reform; and the Chairman and Ranking Minority Member of
the Subcommittee on Government Efficiency and Financial Management,
House Committee on Government Reform. We are also sending copies to
the Chairman of SEC and will make copies available to others upon
request. The report is also available at no charge on the GAO Web site at
http://www.gao.gov.
Please contact me or Karen C. Tremba at (202) 512-8678 if you or your
staff have any questions concerning this report. Toayoa D. Aldridge, James
Lawrence, David Pittman, and Marc Molino made key contributions to this
report.
Orice M. Williams, Acting Director
Financial Markets and Community Investment
Appendix I: Scope and Methodology
To describe budget and staff allocations, we collected budgetary data for
the major Securities and Exchange Commission (SEC) divisions and offices
from SEC's Office of the Controller and staffing data for the major
offices and divisions from the SEC payroll system. We also obtained
information from SEC's annual budget request and internal memos regarding
staff allocations. We interviewed Office of the Executive Director
officials to obtain information on SEC's process for distributing
positions and corroborated this information using existing GAO work,
including interviews with officials from various SEC divisions and
offices. We performed limited data reliability testing of SEC budget data
by interviewing knowledgeable agency budget officials and comparing the
data with other published budget data. Based on this analysis, we
determined that the data were sufficiently reliable for the purpose of
this report.
To describe SEC's allocation of funding for information technology (IT),
we analyzed documents from the Information Officers Council/Information
Technology Capital Planning Committee (IOC/ITCPC) proceedings. The various
documents included project requests from program offices, meeting minutes,
project approval memoranda (including funding amounts), and Office of
Information Technology (OIT) budget documents. We verified IOC/ITCPC
information by interviewing OIT officials in order to corroborate our
findings. We relied on SEC's Office of Inspector General (OIG) to describe
the process for making IT investments and the related problems identified
within this process. In addition, we reviewed the SEC OIG's evaluation of
SEC's IT capital investment decision-making process using GAO's IT
Investment Management Framework. We also relied on previous GAO work on
SEC's IT systems.
We conducted our work from February 2004 to July 2004 in accordance with
generally accepted government auditing standards.
Appendix II: Comments from the Securities and Exchange Commission
Appendix II: Comments from the Securities and Exchange Commission
Appendix II: Comments from the Securities and Exchange Commission
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