Securities and Exchange Commission: Additional Actions Needed to
Ensure Planned Improvements Address Limitations in Enforcement
Division Operations (15-AUG-07, GAO-07-830).						 
                                                                 
The Securities and Exchange Commission's (SEC) ability to
conduct investigations and bring enforcement actions for
violations of securities laws is critical to its mission to
protect investors and maintain fair and orderly markets. SEC's
Division of Enforcement (Enforcement) is charged with
investigating securities law violations; recommending civil
enforcement actions when appropriate, either in a federal court
or before an administrative law judge; and negotiating
settlements on behalf of the Commission. The types of sanctions
that Enforcement can seek on behalf of the Commission include
monetary penalties or fines and disgorgements of the profits
that individuals or companies may derive by having committed
securities violations. While SEC has only civil authority, it
also works with various law enforcement agencies, including the
United States Department of Justice (Justice), to bring criminal
cases when appropriate. In addition, Enforcement is responsible
for overseeing the Fair Fund program, which seeks to compensate
investors who suffer losses resulting from fraud or other
securities violations by individuals and companies. Under the
Fair Fund program, SEC can combine the proceeds of monetary
penalties and disgorgements into a single fund and then
distribute the proceeds to harmed investors. In recent years,
Enforcement has initiated high-profile actions that resulted in
record civil fines against companies and senior officers and in
some cases contributed to criminal convictions. However, the
capacity of SEC in general and Enforcement in particular to
appropriately plan and effectively manage their activities and
fulfill their critical law enforcement and investor protection
responsibilities on an ongoing basis has been criticized in the
past. Although SEC received a substantial increase in its
appropriations as a result of the Sarbanes-Oxley Act of 2002,
questions have been raised in Congress and elsewhere on the
extent to which the agency is using these resources to better
fulfill its mission. Moreover, we have reported that aspects of
Enforcement's information systems and management procedures
could limit the efficiency and effectiveness of its operations.
For example, we found in 2004 that Enforcement faced challenges
in developing the advanced information technology necessary to
facilitate the investigative process. In addition, we reported
in 2005 that the distribution of funds to harmed investors under
the Fair Fund program was limited and that Enforcement had not
developed adequate systems and data to fulfill its oversight
responsibilities. Because of congressional interest in ensuring
that SEC effectively manages its resources and helps ensure
compliance with securities laws and regulations, Congress
requested that we review key Enforcement management processes
and systems and follow up on our previous work where
appropriate. Accordingly, this report evaluates Enforcement's
(1) internal processes and information systems for planning,
tracking, and closing investigations and planned changes to
these processes and systems; (2) implementation of SEC's Fair
Fund program responsibilities; and (3) efforts to coordinate
investigative activities with other SEC divisions and federal
and state law enforcement agencies.
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-830						        
    ACCNO:   A74487						        
  TITLE:     Securities and Exchange Commission: Additional
Actions Needed to Ensure Planned Improvements Address
Limitations in Enforcement
Division Operations							 
     DATE:   08/15/2007 
  SUBJECT:   Data integrity
             Federal funds
             Financial institutions
             Funds management
             Information management
             Interagency relations
             Internal controls
             Investigations by federal agencies
             Investment companies
             Law enforcement
             Program management
             Securities
             Securities regulation				 

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GAO-07-830



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Report to the Ranking Member, Committee on Finance, U.S. Senate: 

United States Government Accountability Office: 

GAO: 

August 2007: 

Securities And Exchange Commission: 

Additional Actions Needed to Ensure Planned Improvements Address 
Limitations in Enforcement Division Operations: 

Securities and Exchange Commission: 

GAO-07-830: 

GAO Highlights: 

Highlights of GAO-07-830, a report to the Ranking Member, Committee on 
Finance, U.S. Senate. 

Why GAO Did This Study: 

The Securities and Exchange Commissionï¿½s (SEC) Division of Enforcement 
(Enforcement) plays a key role in meeting the agencyï¿½s responsibility 
to enforce securities laws and regulations. While Enforcement has 
brought a number of high-profile cases, questions have been raised over 
how effectively the division manages its operations and resources. For 
example, GAO has previously reported on challenges Enforcement faces in 
managing its investigation information systems and overseeing the Fair 
Fund program. Under this program, funds are distributed to investors 
who have suffered losses resulting from securities fraud and other 
violations. 

GAO was asked to evaluate Enforcementï¿½s (1) investigation planning and 
information systems, and (2) oversight of the Fair Fund program. 

Among other things, GAO analyzed SEC and Enforcement documents and data 
and interviewed agency officials as well as consultants involved in 
administering the Fair Fund program. 

What GAO Found: 

Enforcementï¿½s processes and systems for planning, tracking, and closing 
investigations had some significant limitations that hampered its 
ability to effectively manage operations and allocate resources. While 
SEC and Enforcement officials have begun addressing these issues, 
additional actions would ensure that limitations identified in the 
divisionï¿½s operations are fully corrected. The following summarizes key 
issues: 

* In March 2007, Enforcement established a centralized process for 
reviewing and approving new investigations. Unlike the previous 
decentralized approach, the new process is designed to better 
prioritize investigation staffing and to maintain quality control in 
the investigative process. However, Enforcement has not yet established 
written procedures and assessment criteria for reviewing and approving 
new investigations; such procedures and criteria are needed to help 
effectively manage the divisionï¿½s operations and resources. 

* By late 2007, Enforcement plans to update its current information 
system for managing investigations with a new system that could 
significantly enhance the divisionï¿½s operations. However, Enforcement 
has not taken sufficient steps to help ensure that data are entered 
into the new system on a timely and consistent basis to maximize the 
systemï¿½s usefulness as a management tool. 

* In May 2007, Enforcement announced plans to better ensure the prompt 
closure of investigations that are no longer being pursued. In the 
past, the division has not always promptly closed many such 
investigations, which may have resulted in negative consequences for 
individuals and companies no longer suspected of securities violations. 
While Enforcementï¿½s plans to address this issue are positive, they will 
not fully resolve the potentially large backlog of investigations that 
have remained open for extended periods. 

Enforcementï¿½s approach to managing the Fair Fund program may have 
contributed to delays in distributing funds to harmed investors. While 
factors such as the complexity of identifying harmed investors and tax 
issues likely contributed to some distribution delays, Enforcementï¿½s 
decentralized approach to managing the program may have created 
inefficiencies. SEC has announced plans to centralize Fair Fund 
management within a new office but has not yet defined the officeï¿½s 
roles or described its responsibilities and procedures. Therefore, it 
is too soon to assess how the new office will affect the Fair Fund 
program. 

What GAO Recommends: 

GAO makes several recommendations to strengthen Enforcementï¿½s 
management of the investigation process and the Fair Fund program. In 
written comments, SEC agreed with GAOï¿½s conclusions and 
recommendations. 

[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-830]. 

To view the full product, click on the link above. For more 
information, contact Orice Williams at (202) 512-8678 or 
[email protected]. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Enforcement Has Taken Steps to Better Manage the Investigative Process, 
but These Steps May Not Fully Address Existing Limitations: 

Enforcement's Management of Fair Funds May Have Contributed to 
Distribution Delays, and the Division Lacks Data Necessary for 
Effective Program Oversight: 

Enforcement Coordinates Its Investigative Activities Internally and 
with Other Agencies and Is in the Process of Documenting Criminal 
Referrals: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Selected Division of Enforcement Investigation and 
Personnel Data: 

Appendix III: Comments from the Securities and Exchange Commission: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Roles and Responsibilities of SEC Divisions and Offices: 

Table 2: The 10 Largest Fair Funds Ordered, as of June 2007: 

Table 3: Fair Fund Orders and Distributions, as of June 2007: 

Table 4: Ratio of Open Investigations to Staff Attorneys: 

Table 5: Ratio of All Investigative (Staff and Supervisory) Attorneys 
to Paralegals: 

Table 6: Ratio of Staff Attorneys to Supervisory Attorneys: 

Figures: 

Figure 1: Organizational Structure of SEC's Enforcement Division Home 
Office: 

Figure 2: Number of Investigative Attorneys at Fiscal Year End, 2002- 
2006: 

Figure 3: Flowchart of SEC's Investigation and Enforcement Process: 

Abbreviations: 

AIG: American International Group, Inc.: 
CATS: Case Activity Tracking System: 
ERISA: Employee Retirement Income Security Act of 1974: 
FINRA: Financial Industry Regulatory Authority: 
MUI: matter under inquiry: 
OCIE: Office of Compliance Inspections and Examinations: 
OIT: Office of Information Technology: 
OMB: Office of Management and Budget: 
OMS: Office of Market Surveillance: 
SEC: Securities and Exchange Commission: 
SRO: self- regulatory organization: 

[End of section] 

United States Government Accountability Office: 

Washington, DC 20548: 

August 15, 2007: 

The Honorable Charles E. Grassley: 
Ranking Member: 
Committee on Finance: 
United States Senate: 

Dear Senator Grassley: 

The Securities and Exchange Commission's (SEC) ability to conduct 
investigations and bring enforcement actions for violations of 
securities laws is critical to its mission to protect investors and 
maintain fair and orderly markets. SEC's Division of Enforcement 
(Enforcement) is charged with investigating securities law violations; 
recommending civil enforcement actions when appropriate, either in a 
federal court or before an administrative law judge; and negotiating 
settlements on behalf of the Commission. The types of sanctions that 
Enforcement can seek on behalf of the Commission include monetary 
penalties or fines and disgorgements of the profits that individuals or 
companies may derive by having committed securities 
violations.[Footnote 1] While SEC has only civil authority, it also 
works with various law enforcement agencies, including the United 
States Department of Justice (Justice), to bring criminal cases when 
appropriate. In addition, Enforcement is responsible for overseeing the 
Fair Fund program, which seeks to compensate investors who suffer 
losses resulting from fraud or other securities violations by 
individuals and companies.[Footnote 2] Under the Fair Fund program, SEC 
can combine the proceeds of monetary penalties and disgorgements into a 
single fund and then distribute the proceeds to harmed investors. 

In recent years, Enforcement has initiated high-profile actions that 
resulted in record civil fines against companies and senior officers 
and in some cases contributed to criminal convictions.[Footnote 3] 
However, the capacity of SEC in general and Enforcement in particular 
to appropriately plan and effectively manage their activities and 
fulfill their critical law enforcement and investor protection 
responsibilities on an ongoing basis has been criticized in the past. 
Although SEC received a substantial increase in its appropriations as a 
result of the Sarbanes-Oxley Act of 2002, questions have been raised in 
Congress and elsewhere on the extent to which the agency is using these 
resources to better fulfill its mission.[Footnote 4] Moreover, we have 
reported that aspects of Enforcement's information systems and 
management procedures could limit the efficiency and effectiveness of 
its operations.[Footnote 5] For example, we found in 2004 that 
Enforcement faced challenges in developing the advanced information 
technology necessary to facilitate the investigative process.[Footnote 
6] In addition, we reported in 2005 that the distribution of funds to 
harmed investors under the Fair Fund program was limited and that 
Enforcement had not developed adequate systems and data to fulfill its 
oversight responsibilities.[Footnote 7] 

Because of your interest in ensuring that SEC effectively manages its 
resources and helps ensure compliance with securities laws and 
regulations, you requested that we review key Enforcement management 
processes and systems and follow up on our previous work where 
appropriate. Accordingly, this report evaluates Enforcement's (1) 
internal processes and information systems for planning, tracking, and 
closing investigations and planned changes to these processes and 
systems; (2) implementation of SEC's Fair Fund program 
responsibilities; and (3) efforts to coordinate investigative 
activities with other SEC divisions and federal and state law 
enforcement agencies. 

To address all three objectives, we obtained and reviewed relevant SEC 
and Enforcement documentation and data. Specifically, we reviewed 
documentation and data relating to Enforcement's planning processes; 
its automated system for tracking investigations and enforcement 
actions--the Case Activity Tracking System (CATS)--and a planned 
successor system; the Fair Fund program; and internal and external 
coordination.[Footnote 8] We also reviewed our relevant prior reports 
and federal standards for internal controls. Further, we interviewed 
the SEC Chairman and two commissioners, senior agency and Enforcement 
officials in Washington, and officials in three SEC regional offices 
(Boston, New York, and Philadelphia) that are responsible for a 
significant share of Enforcement's investigative activity. We also 
contacted Enforcement officials in other SEC offices as appropriate. 
Additionally, we interviewed consultants that assist Enforcement in 
developing plans to distribute funds to harmed investors under the Fair 
Fund program. 

We conducted our work in Washington, D.C., Boston, Massachusetts, New 
York, New York, and Philadelphia, Pennsylvania, between November 2006 
and July 2007 in accordance with generally accepted auditing standards. 
Appendix I explains our scope and methodology in greater detail. 

Results in Brief: 

Enforcement's processes and systems for planning, tracking, and closing 
investigations have had some significant limitations that have hampered 
the division's capacity to effectively manage its operations and 
allocate limited resources. While Enforcement and SEC officials are 
aware of these deficiencies and have recently begun addressing them, 
additional actions are necessary to help ensure that the planned 
improvements fully address limitations in the division's operations. 
The following points summarize key issues: 

* In March 2007, Enforcement said it would centrally review and approve 
all new investigations of potential securities law violations by 
individuals or companies. Under Enforcement's previous, largely 
decentralized approach (senior Enforcement attorneys in the agency's 
home and 11 regional offices could approve new investigations), the 
division was not always able to ensure the efficient allocation of 
resources or maintain quality control in the investigative process. 
While the new centralized approach was designed to help address these 
issues, Enforcement has not yet established written procedures and 
criteria for reviewing and approving new investigations. Without such 
procedures and criteria, Enforcement may face challenges in 
consistently communicating the new approach to existing and new staff. 
The lack of written procedures and criteria could also limit the 
Commission's ability to evaluate the implementation of the new approach 
and help ensure that the division is managing its operations and 
resources efficiently. 

* Recognizing that the division's current information system for 
tracking investigations and enforcement actions--CATS--is severely 
limited as a management tool, Enforcement plans to start using a new 
system (the Hub) by late 2007. The deficiencies of CATS include its 
inability to produce detailed reports on investigations of certain 
types (for example, those for hedge funds) or the status of such 
investigations.[Footnote 9] While the Hub is designed to address many 
of CATS's deficiencies--it will, for example, be able to produce 
detailed management reports on ongoing investigations--the way that the 
system is being implemented may not address all existing limitations. 
More specifically, Enforcement has not established written controls to 
help ensure that staff enter investigative data in the Hub in a timely 
and consistent manner. Without such controls, management reports 
generated by the Hub may have limited usefulness, and the system's 
capacity to assist Enforcement in better managing ongoing 
investigations will not be fully realized. 

* In May 2007, Enforcement implemented procedures to help ensure the 
prompt closure of investigations that are no longer being pursued and 
thereby better ensure the fair treatment of individuals and companies 
under review, but these procedures do not fully address the entire 
backlog of these investigations. One regional Enforcement official said 
that as of March 2007, nearly 300 (about 35 percent) of the office's 
840 open investigations were 2 or more years old, were no longer being 
pursued, and had no pending enforcement actions.[Footnote 10] 
Enforcement officials said that the failure to close such 
investigations promptly could have negative consequences for 
individuals and companies no longer suspected of having committed 
securities violations. They attributed the failure to close many 
investigations to several factors, such as time-consuming 
administrative requirements for attorneys to prepare detailed 
investigation closing memorandums that then must be routed to senior 
division officials for review and approval. To address these issues, 
Enforcement plans to inform individuals and companies more promptly 
that they are no longer under review and expedite the review and 
closure of the existing backlog of investigations for which 
administrative tasks have been completed (as of March 2007, there were 
464 such investigations). However, Enforcement's plans do not include 
clearing the potentially large backlog of investigations for which such 
administrative tasks have not been completed, which could be negatively 
impacting individuals and companies no longer actively under review. 

Enforcement's management of the Fair Fund program may have contributed 
to delays in distributing funds to harmed investors, and the division 
lacks data necessary for effective program oversight. For the 115 Fair 
Funds currently tracked by Enforcement (which were created by federal 
courts or through SEC administrative proceedings), only about $1.8 
billion (about 21 percent) of the $8.4 billion ordered since the 
program's inception in 2002 had been distributed to harmed investors as 
of June 2007, according to SEC data.[Footnote 11] Enforcement officials 
and consultants who administer Fair Fund plans have attributed the 
limited payout rate to factors such as difficulties in identifying 
harmed investors, the complexity of individual cases, and the need to 
resolve related tax issues. However, Enforcement's largely 
decentralized approach to managing the Fair Funds program may have also 
contributed to distribution delays. While senior Enforcement officials 
in Washington have a coordination and oversight role, staff attorneys 
in either the home or the regional offices that brought the related 
enforcement action are primarily responsible for overseeing consultants 
who design and execute Fair Fund distribution plans. However, this 
delegated management structure appears to have impeded the development 
of uniform Fair Fund procedures that otherwise could have facilitated 
the distribution of funds to harmed investors. In addition, Enforcement 
officials said that the management structure diverts investigative 
attorneys from their primary law enforcement mission. In response to 
these concerns, in March 2007 SEC's Chairman announced a plan to 
centralize the administration of the Fair Fund program within a new 
office. However, it is too soon to assess how this new office will 
affect the program because SEC has not yet staffed the office or 
developed written guidance to define its role, responsibilities, and 
procedures. Moreover, Enforcement does not yet systematically collect 
or analyze key Fair Fund data, such as the administrative expenses that 
consultants are incurring to design and execute Fair Fund plans, as we 
recommended in 2005.[Footnote 12] While Enforcement officials agree 
that reviewing such data would enhance their capacity to assess the 
reasonableness of Fair Fund administrative costs, an information system 
designed to collect and report such expense data for ongoing plans is 
not expected to be completed until 2008. In the meantime, Enforcement 
has not ensured that reports intended to provide expense data for 
completed Fair Fund plans contain consistent information or are 
analyzed.[Footnote 13] Without such information, Enforcement's Fair 
Fund oversight capacity is limited. 

Enforcement coordinates investigations and other activities with other 
SEC divisions and outside law enforcement authorities and is 
implementing our previous recommendation that it document referrals to 
criminal investigative authorities. According to Enforcement officials, 
they regard coordinating the division's investigative activities with 
SEC's Office of Compliance Inspections and Examinations (OCIE) as 
particularly important because OCIE staff regularly examine regulated 
entities and have a broad understanding of the extent of their 
compliance with laws and regulations. However, Enforcement officials 
historically have been concerned that OCIE referrals lacked sufficient 
information. As a result, Enforcement and OCIE have recently instituted 
a new committee process to formally review such referrals and track 
their outcome. Further, Enforcement officials said that the division 
has established working relationships with U.S. attorney offices and 
state securities regulators to leverage investigative resources. 
Enforcement also held coordination conferences attended by federal and 
state agencies. However, Enforcement is in the process of implementing 
our 2005 recommendation to document informal referrals of potential 
criminal matters, which it intends to do through the planned 
investigation and enforcement action tracking system--the Hub.[Footnote 
14] Until the system is in place, Enforcement cannot readily determine 
and verify whether staff make appropriate and prompt referrals, and the 
division lacks an institutional record of the types of matters that 
have been referred over the years. Without such information, 
Enforcement's ability to manage and oversee the referral process is 
limited. 

This report makes several recommendations designed to strengthen 
Enforcement's management of the investigation process and the Fair Fund 
program. In brief, the report recommends that the SEC Chairman direct 
Enforcement and other agency offices, as appropriate, to (1) establish 
written policies and assessment criteria for reviewing and approving 
new investigations, (2) establish controls to better ensure the 
reliability of investigative data entered into the Hub information 
system, (3) consider developing expedited procedures for closing 
investigations, and (4) establish a comprehensive plan to staff and 
identify the roles and responsibilities of the new Fair Fund program 
office and collect and analyze reports on completed Fair Fund plans. 

We provided a draft of this report to SEC, and the agency provided 
written comments that are reprinted in appendix III. In its written 
comments, SEC agreed with our conclusions and stated that it would 
implement all of our recommendations. Moreover, SEC officials noted 
that the agency has since established that the new Fair Fund office-- 
referred to as the Office of Distributions, Collections and Financial 
Management--will be located within the Division of Enforcement. SEC 
said that a senior officer and two assistant directors will lead the 
operations of the office and the agency is developing the office's 
responsibilities. SEC also provided technical comments, which we have 
incorporated as appropriate. 

Background: 

SEC is an independent agency created in 1934 to protect investors; 
maintain fair, honest, and efficient securities markets; and facilitate 
capital formation. The agency has a five-member Commission that the 
President appoints, with the advice and consent of the Senate, and that 
a Chairman designated by the President leads. The Commission oversees 
SEC's operations and provides final approval of SEC's interpretation of 
federal securities laws, proposals for new or amended rules to govern 
securities markets, and enforcement activities. Table 1 identifies 
several key SEC units and summarizes their roles and responsibilities. 

Table 1: Roles and Responsibilities of SEC Divisions and Offices: 

Division or office: Division of Enforcement; 
Roles and responsibilities: Conducts investigations of registered 
entities (such as broker-dealers and investment advisers) or 
unregistered entities (such as unregistered and fraudulent securities 
offerings over the Internet), recommends Commission action (either in a 
federal court or before an administrative law judge), negotiates 
settlements on behalf of the Commission, and works with criminal law 
enforcement agencies when warranted. 

Division or office: Division of Corporation Finance; 
Roles and responsibilities: Reviews corporate disclosures, assists 
companies in interpreting the Commission's rules, and recommends new 
rules for adoption. 

Division or office: Division of Market Regulation; 
Roles and responsibilities: Establishes and maintains standards for 
fair, orderly, and efficient markets by regulating the major securities 
market participants, including broker-dealers, self-regulatory 
organizations (SRO), transfer agents (parties that maintain records of 
stock and bond owners), and securities information processors.[A]. 

Division or office: Division of Investment Management; 
Roles and responsibilities: Regulates the investment management 
industry and administers the securities laws affecting investment 
companies and advisors. 

Division or office: Office of the Chief Accountant; 
Roles and responsibilities: Establishes and enforces accounting and 
auditing policy to enhance financial reporting and improve the 
professional performance of public company auditors. 

Division or office: Office of Compliance Inspections and Examinations; 
Roles and responsibilities: Administers a nationwide examination and 
inspection program for registered SROs, broker-dealers, transfer 
agents, clearing agencies, and investment companies and advisors to 
quickly and informally correct compliance problems. 

Division or office: Office of Economic Analysis; 
Roles and responsibilities: Serves as the chief advisor to the 
Commission and its staff on all economic issues associated with the 
SEC's regulatory activities, analyzes the likely consequences of 
proposed regulations, and engages in research to support longer term 
SEC policy initiatives and plans. 

Division or office: Office of General Counsel; 
Roles and responsibilities: Represents SEC in various proceedings, 
prepares legislative materials, and provides independent advice and 
assistance to the Commission, divisions, and offices. 

Division or office: Office of Investor Education and Assistance; 
Roles and responsibilities: Provides information to investors, seeks 
informal resolutions of complaints, and collects data on investor 
contacts to track trends in the security industry and provide 
intelligence to other SEC divisions and offices. 

Source: SEC. 

[End of table] 

[A] SROs include national securities exchanges (stock exchanges), the 
Financial Industry Regulatory Authority (FINRA), and clearing agencies, 
which facilitate trade settlements. FINRA was created in July 2007 
through the consolidation of NASD (formerly an SRO) and the member 
regulation, enforcement, and arbitration functions of the New York 
Stock Exchange; it is now the largest nongovernmental regulator for all 
securities firms doing business in the United States. 

SEC's current 2004-2009 strategic plan established four goals: (1) 
enforce compliance with the federal securities laws, (2) promote 
healthy capital markets through an effective and flexible regulatory 
environment, (3) foster informed investment decision-making, and (4) 
maximize the use of SEC resources. Enforcement and OCIE share joint 
responsibility for implementing the agency's first strategic goal. The 
Commission and the Office of the Executive Director, which develops and 
implements all the agency's management policies, are updating the 
agency's strategic plan, which is to be issued in the summer of 2007. 

Enforcement personnel are located in SEC's home office in Washington, 
D.C., as well as the agency's 11 regional offices.[Footnote 15] 
Enforcement staff located in the home office include the director and 
one of two deputy directors, five investigative groups or Offices of 
Associate Directors, as well as internal support groups, including its 
Offices of Chief Counsel and Chief Accountant (see fig. 1).[Footnote 
16] An associate director heads each Office of Associate Director and 
has one or more assistant directors. Branch chiefs report to assistant 
directors and supervise the work of investigative staff attorneys 
assigned to individual investigations, with review and support provided 
by division management. SEC regional office staff are typically divided 
between Enforcement and OCIE personnel. Enforcement units in the 
regional offices have Office of Associate Director structures similar 
to those in the home office and report to the Director of Enforcement 
in Washington, D.C. 

Figure 1: Organizational Structure of SEC's Enforcement Division Home 
Office: 

[See PDF for image] 

Source: SEC. 

[End of figure] 

The Sarbanes-Oxley Act of 2002 substantially increased SEC's 
appropriations, and Enforcement subsequently increased its staffing 
levels. In 2002, Enforcement had 1,012 staff and, at the end of fiscal 
year 2006, 1,273 staff.[Footnote 17] As shown in figure 2, the number 
of investigative attorneys in Enforcement increased substantially, from 
596 in 2002 to 740 in 2005.[Footnote 18] However, the number of staff 
in Enforcement, in particular its investigative attorneys, decreased 
from 2005 to 2006 because of a May 2005 hiring freeze (instituted 
across the agency in response to diminished budgetary resources) and 
subsequent attrition. Since October 2006, however, SEC has permitted 
Enforcement and other SEC divisions and offices to replace staff that 
leave the agency. However, the agency does not contemplate returning to 
early 2005 staffing levels. Appendix II provides additional information 
on Enforcement's staffing resources and workload indicators. 

Figure 2: Number of Investigative Attorneys at Fiscal Year End, 2002- 
2006: 

[See PDF for image] 

Source: GAO analysis of SEC data. 

[End of figure] 

Figure 3 provides a general overview Enforcement's investigative 
process. At the initial stage of the investigative process, attorneys 
evaluate information that may indicate the existence of past or 
imminent securities laws violations. The information can come from 
sources such as tips or complaints from the public as well as referrals 
from other SEC divisions or government agencies. If Enforcement staff 
decide to pursue the matter, they will open either a Matter Under 
Inquiry (MUI) or an investigation. Staff open a MUI when more 
information is required to determine the merits of an investigation; 
otherwise, staff may open an investigation immediately.[Footnote 19] 
Investigations can be conducted informally--without Commission 
approval--or formally, in which case the Commission must first approve 
a formal order if staff find it necessary to issue subpoenas for 
testimony or documentation. Based on the analysis of collected 
evidence, Enforcement will decide whether or not to recommend that the 
Commission pursue enforcement actions, which can be administrative or 
federal civil court actions (both of which must be authorized by the 
Commission). Enforcement has established a variety of controls over the 
enforcement action process, including reviews by senior division 
officials in Washington, D.C., and, ultimately, review and approval by 
the Commission.[Footnote 20] Enforcement has an information technology 
system--CATS--that tracks the progress of its MUIs, investigations, and 
enforcement actions. 

Figure 3: Flowchart of SEC's Investigation and Enforcement Process: 

[See PDF for image] 

Source: GAO. 

[End of figure] 

Enforcement also is responsible for implementing and overseeing the 
Sarbanes-Oxley Act's Fair Fund provision, which allows SEC to combine 
civil monetary penalties and disgorgement amounts collected in 
enforcement cases to establish funds for investors harmed by securities 
laws violations.[Footnote 21] Fair Funds may be created through either 
SEC administrative proceedings or litigation in U.S. District Court, 
and either SEC or the courts may administer the funds. However, SEC is 
responsible for general monitoring of all Fair Funds created. 
Typically, for SEC-ordered Fair Funds, the agency hires consultants to 
create Fair Fund distribution plans (independent distribution 
consultants) and oversee payments to harmed investors (fund 
administrators). However, in some cases, SEC staff will take care of 
all of the distribution responsibilities internally. The development of 
a Fair Fund plan can include estimating losses suffered by harmed 
investors. For court-ordered funds, SEC recommends a receiver or 
distributions agent, who creates a distribution plan that is presented 
for court approval. 

Enforcement Has Taken Steps to Better Manage the Investigative Process, 
but These Steps May Not Fully Address Existing Limitations: 

Enforcement's approaches for planning, tracking, and closing 
investigations have had some significant limitations that have hampered 
its ability to effectively manage its operations, allocate limited 
staff resources, and ensure the fair treatment of individuals and 
companies under investigation. While SEC and Enforcement officials are 
aware of these limitations and have begun addressing them, some of 
their actions may not fully correct identified weaknesses. 
Specifically, Enforcement has not (1) established written procedures 
and criteria for its newly centralized review and approval process for 
new investigations, which could limit its ability to ensure its 
consistent implementation and reduce the Commission's ability to 
oversee the division's operations; (2) established controls to help 
ensure the reliability of the investigative data that division 
attorneys will be required to enter into a new information system, 
which could limit the usefulness of management reports generated by the 
system; and (3) established plans and procedures to ensure that all 
investigations that are no longer being actively pursued are closed 
promptly to reduce the negative impact on individuals and companies no 
longer under review. 

Enforcement Recently Centralized the Review and Approval of New 
Investigations, but the Lack of Written Procedures and Criteria Could 
Limit the Effectiveness of its Approach: 

To establish overall investigative priorities, Enforcement officials 
said that they regularly communicate with senior SEC officials and 
their counterparts in other agency units. For example, Enforcement 
officials said that they hold weekly meetings with the SEC Chairman and 
other commissioners as appropriate. During the Chairman's tenure, he 
has identified the pursuit of securities fraud against senior citizens 
as a key investigative priority for Enforcement and other agency 
offices, including OCIE.[Footnote 22] In addition to specific 
priorities, Enforcement officials said that they seek to maintain a 
constant investigative presence across all areas of potential 
securities violations (for example, insider trading abuses) and that 
this "cover the waterfront" approach is designed to prosecute and 
possibly deter securities law offenders. While an Enforcement official 
said that the division has not established minimum quotas for different 
types of investigations and enforcement actions, it will intervene if 
any one type threatens to overwhelm the division's operations. Based on 
internal analysis of enforcement action data, Enforcement officials 
determined that if the division's pursuit of any type of securities 
enforcement action exceeded 40 percent of total enforcement actions, an 
unacceptable commitment of division resources would result.[Footnote 
23] 

While Enforcement has established planning processes for determining 
overall priorities, the division has used a largely decentralized 
approach for reviewing and approving individual new investigations, 
which may have limited the division's operational effectiveness, 
according to senior SEC and Enforcement officials. Under this 
traditional approach, associate directors in either SEC's home or 11 
regional offices approved the opening of MUIs after staff came across a 
potential violation of federal securities law.[Footnote 24] While 
Enforcement's senior leadership in the home office reviewed proposals 
for formal investigations and received weekly reports on MUIs and new 
investigations that had been approved in each office (and reviewed 
summaries of all investigations on a quarterly basis), it did not have 
formal approval responsibility for such new MUIs and investigations. 
According to Enforcement officials, staff in each office generally 
decided to open MUIs and investigations based on considerations such as 
the likelihood that they would be able to find and prove a violation of 
federal securities laws, the potential amount of investor loss, the 
gravity of the misconduct, and the potential message the case would 
deliver to the industry and public. Typically, the staff attorney who 
opened the MUI was responsible for conducting the investigation. 
According to Enforcement officials, this decentralized approach was 
generally viewed as fostering creativity in the investigative process 
and providing staff with incentives to actively seek potential 
investigations. 

However, without a centralized control mechanism for reviewing and 
approving all new MUIs and investigations, Enforcement's capacity to 
ensure the efficient use of available resources, which is one of SEC's 
four strategic goals, was limited. For example, SEC's Chairman, 
officials from his office and the Office of the Executive Director, and 
Enforcement officials said that the division has not always been able 
to prioritize or ensure an efficient allocation of limited 
investigative staff resources. Officials said that in some cases staff 
attorneys worked on investigations that were outside of their 
geographic area (for example, San Francisco staff conducting an 
investigation in the Atlanta region). Consequently, the officials said 
that the division incurred travel and other related costs that could 
have been minimized if a centralized process had been in place to 
approve all new investigations. Further, one official from the 
Chairman's office said that without a formal quality check by senior 
Enforcement officials, in some cases MUIs and investigations had been 
opened and allowed to linger for years with little likelihood of 
resulting in enforcement actions. 

In March 2007, Enforcement began using a new, more centralized approach 
to review and approve investigations. Under the new approach, two 
deputy directors, who report directly to the Director of Enforcement, 
are to review and approve all newly opened MUIs and investigations to 
ensure the appropriateness of resource allocation considerations and 
whether the MUI should be pursued. One deputy director is to review 
MUIs opened in the division's home office and another deputy director, 
based in New York, is to review MUIs opened in regional offices. In 
addition to the MUI review, after an investigation is open for 6 
months, staff will be required to prepare a memorandum with information 
on evidence gathered to date, whether an enforcement action is likely, 
resources, and estimated time frames for review by their deputy 
director. According to Enforcement officials, the goal of this new 
approach is to provide early assessments of whether an investigation 
ought to be pursued further and resources reallocated. The deputy 
directors are also expected to use this review to determine if the 
investigation is being conducted in a timely manner, if it should be 
reprioritized based on Enforcement's current caseload, or if it should 
be closed. 

While these are positive developments, Enforcement has not yet 
established comprehensive written policies specifying how the new 
approach will be carried out or the criteria that will be used to 
assess new MUIs and ongoing investigations. According to our and Office 
of Management and Budget (OMB) standards, documentation is one type of 
control activity that will help ensure that management's directives, 
such as these new procedures, are carried out.[Footnote 25] In spring 
2007, Enforcement developed and distributed divisionwide a one-page 
planning document that, among other items, identified the new 
centralized approach for reviewing and approving MUIs and 
investigations. However, without the establishment of agreed-upon and 
written procedures for carrying out the new approach and relevant 
assessment criteria, the division may face challenges in consistently 
communicating and explaining the new approach to all current and new 
staff. Moreover, the Commission's ability to oversee how effectively 
Enforcement is implementing the new approach and generally managing its 
operations may be limited. For example, the lack of a transparent and 
documented standard could limit the Commission's capacity to identify 
inconsistencies in the implementation of the new approach, determine 
whether any such inconsistencies have affected Enforcement's 
operations, and take corrective action as warranted. 

Planned Investigative Information System Has Significant Potential 
Benefits, but Enforcement Has Not Taken Sufficient Steps to Help Ensure 
Data Reliability: 

Enforcement officials have consistently stated that the division's 
current information system for tracking investigations and enforcement 
actions--CATS--is severely limited and virtually unusable as a 
management tool. In particular, the officials have said that access to 
CATS is limited and the system does not allow division management to 
generate summary reports, which could be used to help manage operations 
on an ongoing basis. Currently, the only summary reports CATS readily 
produces for management review are lists of all open MUIs, 
investigations, and enforcement actions by general violation types, 
such as violations involving broker-dealers or investment advisers. 
CATS does not allow its users to create timely reports on more specific 
topics, such as ongoing investigations involving hedge funds, which do 
not exist as classification fields in the system. As a result of the 
system's limitations, several senior Enforcement management officials 
said that they maintain their own manual lists of certain types of 
investigations (such as those for hedge funds) to assist in managing 
division activities. 

Further, to obtain customized reports and statistics on Enforcement 
operations, division officials said that they must submit requests to 
SEC's Office of Information Technology (OIT) and then wait for OIT 
staff to create and run a computer program to respond to the request. 
Enforcement officials said that OIT staff generally are responsive and 
work very hard to address these requests; however, given their heavy 
workload, one Enforcement official said that it generally takes 1-2 
days to receive the information, and more complex requests can take as 
long as a week. Further, Enforcement officials said that obtaining 
technical support for CATS can be difficult because the system is 
proprietary and the company that created it is no longer in business. 
According to Enforcement officials, CATS's deficiencies result from the 
fact that the system was hastily designed in preparation for expected 
year 2000 technical challenges. 

Having recognized CATS's limitations, SEC and Enforcement officials are 
developing a new investigation information management system, called 
the Hub, which is scheduled to be in use divisionwide by the end of 
fiscal year 2007. According to Enforcement officials, division 
officials and staff in SEC's Boston office developed a prototype of the 
Hub in 2004 because of their dissatisfaction with CATS. Subsequently, 
Enforcement, in coordination with OIT, developed an enhanced version of 
the Hub, which was then tested among home and regional office staff in 
late 2006 and early 2007. Enforcement officials said that the Hub is an 
interim system that will continue to interface with the CATS database 
until the second phase of the Hub fully replaces CATS, which is 
expected to occur in fiscal year 2009. 

Although the Hub is an interim system, Enforcement officials said that 
it will significantly enhance the division's capacity to manage the 
investigative process. In particular, the officials said that the Hub 
will facilitate the creation of a variety of management reports on the 
division's investigative activities, including detailed reports on 
ongoing investigations by certain types (for example, reports on the 
number of hedge fund investigations). The Hub will also provide more 
detailed information on the status of investigations so management can 
better track their progress and timeliness. Further, the officials said 
that the Hub is designed to be (1) generally accessible to all division 
staff, although highly sensitive investigative information will be 
restricted on a need-to-know basis; (2) user-friendly, primarily 
employing drop-down menus for data entry; (3) searchable so that staff 
can identify relevant information associated with an investigative 
matter; and (4) flexible, because new data fields can be added. We 
reviewed prototype screens for the Hub and found that they were 
consistent with the descriptions of Enforcement officials, and staff we 
contacted generally made favorable comments about the system. 

However, due to significant planned changes to Enforcement's 
traditional approach for recording investigative data, there is a risk 
that data may not be entered into the Hub on a timely and consistent 
basis, as required by federal internal control standards.[Footnote 26] 
Enforcement has traditionally required support personnel or case 
management specialists (rather than attorneys) to enter investigative 
data into CATS because of the limited access to the system and its lack 
of user friendliness. However, once the Hub is implemented in late 
2007, Enforcement officials said that they plan to require division 
attorneys to enter relevant data into the system for all investigations 
opened after that date. Further, Enforcement officials said that 
attorneys will be responsible for entering relevant data into the Hub 
for ongoing investigations that are being actively pursued but were 
initiated prior to the system's implementation.[Footnote 27] 
Enforcement officials regard the entry of such data as critical; 
otherwise, management reports generated by the Hub would only include 
information on investigations begun after the system's scheduled 
implementation in late 2007. One Enforcement official said that the 
decision to require attorneys to enter data into the Hub was based on 
the view that such attorneys have first-hand knowledge of ongoing 
investigations and thus would be able to streamline the process. 
However, another Enforcement official said that requiring attorneys to 
maintain timely, accurate, and consistent investigative data in the Hub 
would require a cultural change on the attorneys' part because they 
have become accustomed to relying on case management specialists to 
perform this task. Another Enforcement official questioned whether 
division attorneys would enter investigative data into the Hub on a 
timely and consistent basis because they may view doing so as another 
administrative requirement diverting them from their primary 
investigative responsibilities. 

While Enforcement's plans to require attorneys rather than case 
management specialists to enter data into the Hub may be appropriate, 
the division plans only a limited number of actions to ensure that data 
entered into the system are timely, consistent, and reliable. For 
example, Enforcement plans to train attorneys on the Hub as it is 
implemented and is developing a system user manual. However, 
Enforcement is not developing written guidance identifying data entry 
into the Hub as a priority for division attorneys and specifying how 
and when such data entry is to be done. Moreover, Enforcement has not 
yet established a written process that would allow division officials 
to independently review and determine the extent to which data entry 
for the Hub is performed on a timely, consistent, and reliable basis in 
accordance with federal internal control standards.[Footnote 28] 
Without doing so, the usefulness of management reports generated by the 
Hub may be limited, and the system's potential to significantly enhance 
Enforcement's capacity to better manage the investigative process may 
not be fully realized. 

Enforcement Has Planned Improvements to Its Investigation Closure 
Processes, but Plans May Not Fully Address Backlog of Cases: 

Enforcement may leave open for years many investigations that are not 
being actively pursued with potentially negative consequences for 
individuals and companies no longer under review. According to CATS 
data, about two-thirds of Enforcement's nearly 3,700 open 
investigations as of the end of 2006 were started 2 or more years 
before, one-third of investigations at least 5 years before, and 13 
percent at least 10 years before. According to an Enforcement official, 
technical limitations in CATS make it difficult to readily determine 
how many of these investigations resulted in enforcement actions and 
how many did not.[Footnote 29] Nevertheless, other data suggest that 
the number of aged investigations that did not result in an enforcement 
action may be substantial. For example, Enforcement officials at one 
SEC regional office said that as of March 2007, nearly 300 of 841 open 
investigations (about 35 percent) were more than 2 years old, had not 
resulted in an enforcement action, and were no longer being actively 
pursued. 

Enforcement officials cited several reasons for division attorneys not 
always closing investigations promptly. In particular, the officials 
said that Enforcement attorneys may view pursing potential securities 
violations as the division's highest priority and lack sufficient time, 
administrative support, and incentives to comply with established 
administrative procedures for closing investigations. For example, 
Enforcement requires attorneys to complete closing memoranda for each 
investigation that is to be closed. These memoranda must identify why 
the investigation was opened, describe the work performed, and detail 
the reasons for recommending that the investigation be closed without 
an action. Staff must also prepare draft termination letters, which 
inform individuals or companies that they are no longer under review. A 
closing memorandum is also required for investigations with associated 
enforcement actions. In these cases, the staff attorney must account 
for all ordered relief before the investigation is closed. One regional 
Enforcement official estimated that it could take as long as a month 
for a staff attorney to complete this process and submit the closing 
package to the home office, although senior division officials noted 
that attorneys typically would not spend all their time doing so. Once 
closing packages are received by the home office, Enforcement's Office 
of Chief Counsel must then approve the closing of the investigation, at 
which point final termination letters are sent to affected individuals 
and companies. 

Enforcement officials in SEC's home office said that a lack of 
resources in their office also contributed to delays in closing 
investigations. They noted that only one person in the division was 
assigned to processing closing packages for investigations. 
Consequently, the officials said there was a backlog of investigations 
for which the closing package had been completed but not reviewed. As 
of March 1, 2007, the backlog consisted of 464 investigations, 
according to an Enforcement official. 

However, Enforcement officials told us that in May 2007 they began 
eliminating the backlog of investigations with completed--but 
unreviewed--closing packages and had almost eliminated the backlog by 
mid-June 2007. The division recently added one staff person to work on 
administering closing procedures in the home office, and Enforcement 
officials have set a goal of processing new closing documentation 
within 2 weeks of receipt. 

Also in May 2007, Enforcement implemented revised procedures for 
sending termination letters for investigations that will not result in 
an enforcement action. Under the procedures, Enforcement will send the 
letters to individuals and companies at the start of the closing 
process rather than at the end. This particular effort will be 
emphasized on Enforcement's intranet--EnforceNet. Enforcement officials 
said they changed this procedure out of concerns about fairness to 
those under investigation and to reduce any negative impact an open 
investigation may have on them. For example, a company may bar an 
individual from performing certain duties until a pending SEC 
investigation is resolved. Staff are generally encouraged to close 
investigations if they know they will not be bringing any enforcement 
actions, even if all of their investigative steps have not yet been 
completed. 

While the above steps are a positive development, they do not address 
the potentially large backlog of investigations that are not likely to 
result in enforcement actions and for which closing packages have not 
been completed. As a result, the subjects of many aged and inactive 
investigations may continue to suffer adverse consequences until 
closing actions are completed. We recognize that reviewing and 
resolving this potentially large backlog of investigations and 
enforcement actions likely would impose resource challenges for 
Enforcement. Nevertheless, the failure to address this issue-- 
potentially through expedited administrative closing procedures for 
particularly aged investigations--would limit Enforcement's capacity to 
manage its operations and ensure the fair treatment of individuals and 
companies under its review. 

Enforcement's Management of Fair Funds May Have Contributed to 
Distribution Delays, and the Division Lacks Data Necessary for 
Effective Program Oversight: 

According to available SEC data, the distribution of funds to harmed 
investors under the Fair Fund program remains limited after 5 years of 
operation. Enforcement officials, as well as consultants involved in 
Fair Fund plans, have cited a variety of reasons for the slow 
distribution, including challenges in identifying harmed investors, the 
complexity of certain Fair Funds, and the need to resolve tax and other 
issues. However, the largely decentralized approach that Enforcement 
and SEC have used in managing the Fair Fund program may also have 
contributed to distribution delays. SEC has announced plans to create a 
central Fair Funds office, but it is too early to assess this proposal, 
as final determinations about its staffing, roles and responsibilities, 
and procedures have not yet been determined. Further, Enforcement does 
not yet collect key data necessary to effectively monitor the Fair Fund 
program (such as data on fund administrative expenses for ongoing 
plans) because an information system designed to capture such data is 
not expected to be implemented until 2008. In the meantime, Enforcement 
has not ensured that reports intended to provide expense data for 
completed Fair Fund plans contain consistent information or are 
analyzed. Until Enforcement clearly defines the Fair Fund office's 
oversight roles and responsibilities and officials establish procedures 
to consistently collect and analyze additional data, the division will 
not be in an optimal position to help ensure the effective management 
of the Fair Fund program. 

Fair Fund Distributions Have Been Limited: 

As of June 2007, Enforcement officials said that they were tracking 115 
Fair Funds created since the program's inception in 2002--up from the 
75 identified in our 2005 report--largely because funds were created as 
part of a series of enforcement actions against mutual fund 
companies.[Footnote 30] The Fair Fund plans vary considerably in size 
and complexity, ranging from plans for small broker-dealers with 
relatively few customers to large corporate cases, according to SEC 
data. The smallest Fair Fund plan established (measured by the amount 
of funds ordered returned to investors) was $29,300 for alleged fraud 
at a hedge fund; the largest was $800 million for alleged securities 
fraud at American International Group, Inc. (AIG). Table 2 shows the 10 
largest Fair Funds ordered through June 2007; 7 are court-created 
plans, and 3 have been established through SEC administrative 
proceedings. SEC monitors all Fair Fund plans regardless of their 
source. 

Table 2: The 10 Largest Fair Funds Ordered, as of June 2007: 

Fair Fund: AIG; 
Alleged type of activity: Improper accounting and workers' compensation 
practices; 
Source: Court; 
Judgment date: 2/17/ 2006; 
Total ordered: $800,000,000. 

Fair Fund: Worldcom; 
Alleged type of activity: Overstating income; 
Source: Court; 
Judgment date: 7/7/2003; 
Total ordered: $750,000,000. 

Fair Fund: Wall Street research analysts; 
Alleged type of activity: Research and investment banking conflicts of 
interest; 
Source: Court; 
Judgment date: 10/31/2003; 
Total ordered: $432,750,000. 

Fair Fund: Enron; 
Alleged type of activity: Earnings manipulation; 
Source: Court; 
Judgment date: 7/30/2003; 
Total ordered: $422,995,012. 

Fair Fund: Invesco/AIM; 
Alleged type of activity: Market timing trading in mutual funds; 
Source: SEC; 
Judgment date: 10/8/2004; 
Total ordered: $375,840,004. 

Fair Fund: Bank of America; 
Alleged type of activity: Market timing trading and late trading in 
mutual funds; 
Source: SEC; 
Judgment date: 2/9/2005; 
Total ordered: $375,000,000. 

Fair Fund: Fannie Mae; 
Alleged type of activity: Fraudulent accounting; 
Source: Court; 
Judgment date: 8/9/2006; 
Total ordered: $350,000,000. 

Fair Fund: Time Warner; 
Alleged type of activity: Overstating online revenue and number of 
Internet subscribers; 
Source: Court; 
Judgment date: 3/29/2005; 
Total ordered: $300,000,000. 

Fair Fund: Qwest; 
Alleged type of activity: Overstating income; 
Source: Court; 
Judgment date: 6/22/2004; 
Total ordered: $253,606,432. 

Fair Fund: Alliance; 
Alleged type of activity: Market timing trading in mutual funds; 
Source: SEC; 
Judgment date: 4/28/2005; 
Total ordered: $250,850,003. 

Source: SEC. 

[End of table] 

According to SEC data, from 2002 to 2007, federal courts and SEC 
administrative proceedings ordered individuals and entities subject to 
SEC enforcement actions to pay a total of $8.4 billion into Fair Fund 
plans, an increase of about 75 percent from the $4.8 billion total Fair 
Funds we identified in our 2005 report. As of June 2007, $1.8 billion 
of the $8.4 billion (about 21 percent) had been distributed to harmed 
investors, according to SEC data. As shown in table 3, the amount 
distributed from court-overseen plans exceeded that distributed from 
SEC-overseen plans. According to Enforcement officials, the funds were 
distributed more slowly from SEC-overseen plans largely because much of 
the money ordered through SEC proceedings involves mutual fund market 
timing matters, which, as discussed later, are among the most complex 
Fair Fund plans. 

Table 3: Fair Fund Orders and Distributions, as of June 2007: 

Number of plans; 
SEC-overseen Fair Funds: 46; 
Court-overseen Fair Funds: 69; 
All Fair Funds: 115. 

Total amount ordered (in thousands); 
SEC-overseen Fair Funds: $3,934,371; 
Court-overseen Fair Funds: $4,512,860; 
All Fair Funds: $8,447,231. 

Total amount distributed (in thousands); 
SEC-overseen Fair Funds: $644,450; 
Court-overseen Fair Funds: $1,122,351; 
All Fair Funds: $1,766,802. 

Percent distributed; 
SEC-overseen Fair Funds: 16.4; 
Court-overseen Fair Funds: 24.9; 
All Fair Funds: 20.9. 

Source: GAO analysis of SEC data. 

[End of table] 

Fair Fund Distribution Delays Have Been Attributed to Difficulties in 
Identification of Harmed Investors, the Complexity of Certain Cases, 
and Tax Issues: 

According to Enforcement officials and consultants who work on Fair 
Funds, a key reason for the slow distribution of Fair Funds has been 
the difficulty of identifying harmed investors in certain cases. Unlike 
typical securities class action lawsuits, Fair Funds may not rely on a 
claims-based process in which injured parties identify themselves by 
filing claims with trustees or other administrators. For example, in 
Fair Fund cases involving mutual fund market timing abuses, which 
account for many funds ordered into Fair Fund plans, Enforcement 
attorneys and plan administrators have assumed responsibility for 
identifying harmed investors. This step was taken because with the 
large number of affected investors and the nature of market timing 
violations, many such investors may not even have been aware that their 
accounts experienced losses.[Footnote 31] One Fair Fund plan consultant 
said that many harmed investors already had redeemed their shares in 
the affected mutual fund companies in prior years. Tracking down such 
former customers can be challenging because they may have changed their 
addresses several times, the consultant said. Several consultants and 
Enforcement officials also said that tracking down customers can be 
hard because securities brokers, through whom individuals may purchase 
mutual funds, may maintain customer account information rather than the 
mutual fund company itself.[Footnote 32] As a result, a Fair Fund 
administrator might need to contact and obtain the cooperation of 
relevant broker-dealers to obtain customer account information and make 
related distributions. 

The complexity of some cases can also impede the timely distribution of 
Fair Funds. For example, in mutual fund market timing cases, 
sophisticated analysis might be required to first identify trades that 
benefited from improper activity and then to calculate profits earned 
from those transactions and associated losses to investors, which may 
be spread across many such customers.[Footnote 33] According to a Fair 
Fund plan consultant and Enforcement officials, another significant 
challenge to the Fair Fund distribution involves retirement plans and 
the Employee Retirement Income Security Act of 1974 (ERISA), the 
federal law setting minimum standards for pension plans in private 
industry.[Footnote 34] Retirement plans hold assets on behalf of their 
beneficiaries, and it is not unusual for those assets to be invested 
with entities that become subject to Fair Fund enforcement actions. 
Thus, ERISA-covered retirement plans will be entitled to Fair Fund 
proceeds by virtue of such investments. But depending on circumstances, 
a Fair Fund distribution consultant may need to make determinations on 
a variety of complex issues before funds can be distributed, such as 
determining when such distributions become plan assets under 
ERISA.[Footnote 35] One Fair Fund consultant told us he spent a year 
waiting for Department of Labor clarification of relevant ERISA issues. 

Finally, determining the tax treatment of funds may also slow the 
distribution process. According to Fair Fund consultants, tax 
information must accompany Fair Fund distributions to investors so that 
recipients have some idea of how to treat their payments for tax 
purposes. Consultants and Enforcement officials told us that 
determining appropriate tax treatment has been time-consuming as they 
had no precedents upon which to draw. Depending on circumstances, an 
investor's recovery of disgorged profits can constitute ordinary income 
or a capital gain--which can be taxed at different rates--or not 
represent taxable income at all. SEC ultimately hired a consulting firm 
to handle tax issues. One Fair Fund consultant told us that obtaining 
tax guidance from the Internal Revenue Service delayed the plan's 
distribution by about 1 year. 

Enforcement's Approach to Managing Fair Funds May Also Have Slowed 
Distributions, and SEC Has Not Defined Responsibilities of a New Office 
to Administer the Program: 

In addition to the factors discussed above, Enforcement's largely 
decentralized approach to managing the process may also have 
contributed to delays in the distribution of Fair Funds. Currently, 
Enforcement staff attorneys in either SEC's home office or 1 of its 11 
regional offices who are pursuing individual enforcement cases take a 
lead role in the Fair Funds process, overseeing much of the work 
necessary to establish and maintain a fund. This includes supervising 
cases directly, overseeing consultants who design or administer 
distribution plans, and advising or petitioning courts presiding over 
Fair Fund plans. Enforcement officials said that the approach made 
sense from a Fair Fund administration standpoint because division 
attorneys have substantial knowledge of the regulated entity involved 
and the relevant enforcement action. Enforcement officials also said 
that senior officials in the home office have always played an 
important role in the oversight of the program. Their responsibilities 
have included providing guidance on selecting consultants, leading 
information-sharing and problem-solving efforts (for example, leading 
regular conference calls among fund consultants, parties involved in 
Fair Fund enforcement actions, their legal counsel, and SEC staff in 
Enforcement and elsewhere), and reviewing proposed Fair Fund 
distribution plans and recommending modifications as necessary. 

Outside consultants hired to design and implement Fair Fund plans told 
us that Enforcement staff attorneys assigned to their cases were 
dedicated and responsive and that the agency appears to be making a 
good faith effort to implement and oversee the Fair Funds provision. 
However, they also said that Enforcement's delegated approach has 
resulted in delays, higher costs, and unnecessary repetition of effort. 
With different Enforcement staff handling different Fair Fund cases, 
the consultants said that Enforcement forgoes the opportunity to build 
institutional expertise and efficiencies. For example, one consultant 
said that Enforcement's delegated management of the Fair Fund program 
has resulted in inefficiencies in key administrative aspects of the 
program, such as the development of standardized means of communicating 
with investors (for example, form letters) and the mechanics for 
distributing funds to them. Consequently, the consultant said that the 
Fair Fund program incurs a substantial amount of unnecessary 
administrative costs. Further, the consultants generally agreed that it 
would make sense for SEC to consider centralizing at least some aspects 
of the administration of Fair Fund plans to improve the efficiency of 
the distribution process. 

While Enforcement officials have cited benefits associated with the 
current management of the program, both SEC and division officials also 
acknowledged that it has created challenges. An official within the 
Chairman's office said that the slow distribution of funds to harmed 
investors is of significant concern to the agency and that the lack of 
a centralized management approach has limited the development of 
standardized policies and controls necessary to facilitate 
disbursements. Further, Enforcement officials said that while Fair Fund 
work is important, it can divert investigative attorneys from pursuing 
other cases. The officials said that the Fair Fund workload on any 
particular case varies over time, but during peak periods it can 
consume about 50 to 75 percent of a staff attorney's time. At one SEC 
regional office, Enforcement officials said that administering the Fair 
Fund program has resulted in a significant commitment of attorneys' 
time, especially because the office lost almost 25 percent of its 
investigative staff due to attrition in the past year or so. 

In response to concerns about the slow distribution of Fair Fund 
proceeds to harmed investors, SEC's Chairman took two actions in 2007. 
First, he established an internal agency committee to examine the 
program's operation. The committee--which includes representatives from 
Enforcement, General Counsel, the Office of the Secretary, and the 
Office of the Executive Director--is assessing lessons learned in 
program implementation, the agency's selection of consultants to 
administer the plans, and SEC's policies and procedures for managing 
the program. An Enforcement official said that the committee is 
expected to complete its analysis by September 30, 2007. Second, in 
March 2007, the Chairman announced plans to create a centralized Fair 
Fund office.[Footnote 36] The Chairman stated that the purpose of the 
new office is to develop consistent fund distribution policies and 
dedicate full-time trained staff to ensure the prompt return of funds 
to harmed investors. 

While creating a central office within SEC could facilitate the 
distribution of Fair Funds, it was not yet possible to assess the 
planned office's potential impact at the time of our review. For 
example, SEC had not announced which SEC unit the office would report 
to, although one official said that the office probably would be 
located within Enforcement. Further, SEC had not staffed the new Fair 
Fund office and had not established the roles and responsibilities of 
the new office or written relevant policies and procedures.[Footnote 
37] For example, SEC had not determined the extent to which the new 
office might assume complete responsibility for managing at least some 
Fair Fund plans, although it is expected the office will continue to 
provide support to division attorneys who currently manage such plans. 
Until such issues are resolved, the new office's potential efficiency 
in more quickly distributing Fair Fund proceeds to harmed investors 
will not be realized. 

Enforcement Does Not Yet Collect Key Data Necessary to Effectively 
Oversee the Fair Funds Program: 

Enforcement does not collect key data, as we recommended in 2005, to 
aid in division oversight of the Fair Fund program.[Footnote 38] In 
particular, Enforcement does not systematically collect data on 
administrative expenses for all ongoing Fair Fund plans. These costs 
range from fees and expenses that Fair Fund administrators and 
consultants charged to the costs of identifying harmed investors and 
sending checks to them. Approximately two-thirds of individual Fair 
Funds pay for administrative costs from fund proceeds, so that the 
greater the administrative expenses, the less money is available for 
distribution to harmed investors, according to our analysis of SEC Fair 
Fund information.[Footnote 39] However, without data on administrative 
expenses charged, Enforcement cannot judge the reasonableness of such 
fees and take actions as necessary to minimize them. 

Enforcement officials generally attributed SEC's inability to implement 
our 2005 recommendation to changes in priorities for the development of 
the agency's information systems. After we issued our 2005 report, 
Enforcement officials said they began working to modify the CATS system 
so that it could better track Fair Fund administrative expenses and 
other data. However, SEC ultimately decided to accelerate the 
development of a new financial management system for the division, 
called Phoenix. SEC and Enforcement officials said that the agency 
implemented the first phase of Phoenix in February 2007. The first 
phase includes limited information relevant to the Fair Fund program 
(the amount of money ordered in penalties and disgorgement and the 
amount paid to the agency), but it does not include data on such items 
as fund administrative expenses. Enforcement officials told us that a 
second phase of the Phoenix system will contain additional features for 
more complete management and monitoring of Fair Fund activity, 
consistent with our 2005 recommendation. According to Enforcement 
officials, Phoenix II has been funded and is expected to be in place in 
2008. Until Phoenix II is implemented and tested, Enforcement officials 
will continue to lack information necessary for effective Fair Fund 
management and oversight. 

We also note that in the meantime, Enforcement has not leveraged 
reports that could enhance the division's understanding of Fair Fund 
expenses, including administrative expenses. SEC rules generally 
require that final accounting reports be prepared when SEC-overseen 
Fair Funds are fully distributed and officially closed.[Footnote 40] We 
reviewed four such reports and found that three of them were 
inconsistent in data reported and did not include comprehensive 
accounting information. For example, two of the accounting reports did 
not include complete data on the expenses incurred to administer the 
Fair Fund plan. Further, senior Enforcement officials said that the 
division could improve its analysis of information contained in the 
reports. As a result, Enforcement cannot evaluate the reasonableness of 
administrative expenses for individual Fair Fund plans or potentially 
gain a broader understanding of the reasonableness of such expenses 
among a variety of plans. 

Enforcement Coordinates Its Investigative Activities Internally and 
with Other Agencies and Is in the Process of Documenting Criminal 
Referrals: 

Enforcement has established a variety of processes to coordinate its 
investigative and law enforcement activities with other SEC offices. 
Further, Enforcement has established processes to coordinate its 
investigative activities with other law enforcement agencies, including 
Justice. However, Enforcement and SEC have not yet implemented our 2005 
recommendation that they document referrals of potential criminal 
activity to other agencies, although plans to do so have been 
established as part of the division's new investigation management 
information system (the Hub).[Footnote 41] Until Enforcement completes 
this process, its capacity to effectively manage the referral process 
is limited. 

Enforcement Coordinates with Other SEC Units through Regular Meetings 
and a Referral Process: 

Enforcement officials said that they hold a variety of meetings 
periodically to coordinate investigative and other activities within 
SEC. As discussed previously, senior Enforcement officials said they 
meet regularly with the SEC Chairman and commissioners to establish 
investigative priorities. According to the Director of Enforcement, she 
meets weekly with the heads of other SEC divisions, and other senior 
division officials said that they meet periodically with their 
counterparts in other agency units. Enforcement officials cited their 
coordination with other SEC units on investigations of the backdating 
of stock options as an example of the agency's successful collaborative 
efforts.[Footnote 42] One Enforcement official said that division staff 
worked closely with the Office of Economic Analysis to analyze 
financial data and trends related to options backdating, which allowed 
them to identify patterns used to target companies for further 
investigation. This official said that Enforcement also collaborated 
with the Office of the Chief Accountant, the Division of Corporation 
Finance, and the Office of the General Counsel throughout this effort. 

Enforcement officials also said that coordinating their activities with 
OCIE is particularly important and that the division places a high 
value on referrals it receives from OCIE regarding potentially illegal 
conduct. Enforcement officials said that because OCIE staff regularly 
examine broker-dealers, investment advisers, and other registered 
entities, they have a broad perspective on compliance with securities 
laws and regulations. Enforcement officials in SEC's Philadelphia 
regional office estimated that about 30 or 35 percent of the 
enforcement actions the Philadelphia office initiates are based on 
referrals from OCIE staff. They cited one notable recent insider 
trading case--involving broker-dealer Friedman, Billings, Ramsey & Co., 
Inc., and which was among the first cases of its kind since the 1980s-
-as stemming from a referral from an OCIE examination.[Footnote 43] 

However, other Enforcement officials said that historically they have 
had some concerns about limitations in information contained in OCIE 
referrals. These concerns centered on how clearly OCIE identifies 
potentially improper conduct in its referrals and how much evidence it 
provides in support of such matters. As a result, in November 2006, 
OCIE and Enforcement instituted a process that would provide a more 
formal review of the nature and quality of OCIE referrals. According to 
OCIE and Enforcement officials, the new procedures expand and formalize 
a preexisting committee process for reviewing OCIE referrals to 
Enforcement and communicating the ultimate outcome of those referrals 
to OCIE. The officials said the revised procedures were instituted to 
(1) help identify the types of OCIE referrals that were likely (or not) 
to result in enforcement actions and (2) provide better information to 
OCIE on the ultimate disposition of its referrals. 

Enforcement officials noted that the division receives many more 
referrals from OCIE than from any other SEC division or office; 
therefore, developing a formal committee and tracking process for other 
internal referrals has not been viewed as warranted. SEC also receives 
referrals from self-regulatory organizations (SRO)--such as what is now 
the Financial Industry Regulatory Authority (FINRA)--often involving 
allegations of insider trading, which are received by Enforcement's 
Office of Market Surveillance (OMS).[Footnote 44] In a forthcoming 
report, we assess OMS's and Enforcement's processes for reviewing and 
prioritizing these SRO referrals. 

Enforcement Coordinates with Law Enforcement and Other Regulators and 
Plans to Document Criminal Referrals in New Information Management 
System: 

Enforcement officials also said that division staff have established 
processes to coordinate their investigative activities and working 
relationships with other law enforcement and regulatory agencies. For 
example, Enforcement officials in SEC's regional offices said they have 
established effective working relationships with U.S. attorney offices 
to prosecute alleged criminal violations of the securities laws. In our 
2005 report, we discussed how Enforcement worked with Justice and state 
attorneys general to prosecute investment advisers that allegedly 
violated criminal statutes related to market timing and late 
trading.[Footnote 45] In some cases, Enforcement details investigative 
attorneys to Justice to assist in the criminal prosecution of alleged 
securities law violators. Other outside organizations with which SEC 
and Enforcement coordinate investigative activities include the Federal 
Bureau of Investigation, federal banking regulators, the Commodity 
Futures Trading Commission, state securities regulators, and local 
police. Enforcement also participates in interagency investigative task 
forces, such as the Corporate Fraud Task Force, the Bank Fraud 
Enforcement Working Group, and the Securities and Commodities Fraud 
Working Group.[Footnote 46] 

Additionally, in March 2007, Enforcement held its annual conference at 
SEC's Washington headquarters on securities law enforcement, which 
federal and state regulators and law enforcement personnel attended. 
Topics covered included coordination of SEC investigations with 
criminal law enforcement agencies and advice on trying a securities 
case. SEC also conducted sessions on market manipulation, insider 
trading, financial fraud, stock options backdating, and executive 
compensation. In September 2007, Enforcement will join other SEC units 
in hosting the Commission's second Seniors Summit, at which SEC, other 
regulators, and law enforcement agencies will discuss how to work 
together to address the growing problem of fraud targeting the nation's 
senior citizens. 

Although Enforcement officials say they are planning to do so, they 
have not yet fully implemented our 2005 recommendation to document 
Enforcement's referrals of potential criminal matters--and the reasons 
for making them--to other law enforcement agencies.[Footnote 47] As 
discussed in that report, SEC has established a policy under which 
Enforcement attorneys may make referrals on an informal basis to 
Justice and other agencies with authority to prosecute criminal 
violations. That is, Enforcement attorneys may alert other agencies to 
potential criminal activity through phone calls or meetings, and such 
referrals need not be formally approved by the division or the 
Commission. We noted that such an informal referral process may have 
benefits, such as fostering effective working relationships between SEC 
and other agencies, but also found that Enforcement did not require 
staff to document such referrals. Appropriate documentation of decision-
making is an important management tool. Without such documentation, 
Enforcement and the Commission cannot readily determine whether staff 
make appropriate and prompt referrals. Also, the division does not have 
an institutional record of the types of cases that have been referred 
over the years. However, Enforcement officials told us that the 
forthcoming Hub system will include data fields that indicate when 
informal referrals of potential criminal activity have been made. 

Conclusions: 

In recent years, SEC's Enforcement division and investigative attorneys 
have initiated a variety of high-profile enforcement actions that 
resulted in record fines and other civil penalties for alleged serious 
securities violations and contributed to criminal convictions for the 
most egregious offenses. While Enforcement has demonstrated 
considerable success in carrying out its law enforcement mission, some 
significant limitations in the division's management processes and 
information systems have hampered its capacity to operate at maximum 
effectiveness and use limited resources efficiently. One key reason for 
these limitations appears to have been Enforcement's management 
approach, which emphasized a broad delegation of key functions with 
limited centralized management review and oversight, particularly in 
the approval and review of new investigations and the administration of 
the Fair Fund program. Delegation of authority is an important 
management principle that can foster creativity at the local level and, 
in the case of Enforcement, likely had some benefits for the 
investigative process and the administration of the Fair Fund program. 
However, without well-defined management processes to exercise some 
control over delegated functions, inefficient program implementation 
and resource allocation can also occur. 

Officials from Enforcement and the Offices of the Chairman and 
Executive Director have recognized limitations in the division's 
operations and taken important steps to establish more centralized 
oversight procedures. In particular, they have centralized the review 
and approval of new investigations, moved forward to upgrade or replace 
information systems key to division operations and management, and 
announced the creation of a new Fair Fund office. However, as described 
below, these plans require additional actions to fully address 
identified limitations and maximize the division's operational 
effectiveness. 

* Enforcement has not developed written procedures and criteria for 
reviewing and approving new investigations. Establishing such guidance 
would help focus the review of investigations and reinforce the 
consistency of reviews, as intended by the centralization of this 
function, and assist in communicating the new policies to all current 
and new staff. Further, developing written procedures and criteria 
would establish a transparent and agreed-upon standard for the review 
and approval of new investigations and thereby facilitate the 
Commission's ability to oversee and evaluate the division's operations 
and resource allocation. 

* Enforcement has not developed written controls to help ensure the 
timely and consistent entry of investigative data in the Hub 
information system, which could increase the risk of misleading or 
inaccurate management reports being generated by the system. Without 
written guidance and the establishment of independent and regular 
reviews of the accuracy of Hub data by division officials, Enforcement 
is not well positioned to help ensure that it is receiving reliable 
program information. Further, the lack of guidance and controls may 
limit the new system's capacity to better manage the investigation 
process. 

* Enforcement's potentially large backlog of investigations for which 
closing memoranda and other required administrative procedures have not 
been completed requires division management's attention. We recognize 
that clearing this potentially large backlog could pose challenges to 
Enforcement given the resource commitment that would be required to do 
so. Nevertheless, leaving such investigations open indefinitely 
continues to compromise management's ability to effectively manage its 
ongoing portfolio of cases. Moreover, it has potentially negative 
consequences for individuals and companies that are no longer under 
investigation. 

* SEC has not yet staffed or defined the roles and responsibilities of 
the new office that is being established to administer the Fair Fund 
program. Therefore, it is not possible to determine the extent to which 
the office may better facilitate the distribution of funds to investors 
harmed by securities frauds and other violations. While Enforcement 
awaits the development and implementation of a new information system 
that would collect comprehensive information on Fair Fund expenses for 
ongoing plans (for example, administrative expenses), the division has 
not taken other steps that would, in the meantime, allow it to develop 
a better perspective on the reasonableness of such expenses. That is, 
Enforcement has not ensured the consistency of information contained in 
reports on completed Fair Fund plans or sufficiently analyzed such 
reports, compromising its capacity to monitor the program. 

Given SEC and Enforcement's critical law enforcement mission, it is 
important that senior officials ensure that weaknesses in their planned 
improvements be addressed and implementation monitored. Without a full 
resolution of existing limitations, a significant opportunity to 
further enhance the division's effectiveness may be missed. 

Recommendations for Executive Action: 

To strengthen Enforcement's management processes and systems and help 
ensure compliance with securities laws, we recommend that the Chairman 
of the Securities and Exchange Commission direct the Division of 
Enforcement and other agency offices, such as the Office of Information 
Technology or Office of the Executive Director, as appropriate, to take 
the following four actions: 

* establish written procedures and criteria on which to base the review 
and approval of new investigations; 

* establish written procedures that reinforce the importance of 
attorneys entering investigative data into the Hub, provide guidance on 
how to do so in a timely and consistent way, and establish a control 
process by which other division officials can independently assess the 
reliability of investigative data maintained in the system; 

* consider developing expedited administrative and review procedures 
for closing investigations that have not resulted in enforcement 
actions and are no longer being actively pursued; and: 

* establish and implement a comprehensive plan for improving the 
management of the Fair Fund program, to include (1) staffing the new 
central Fair Fund office, defining its roles and responsibilities, and 
establishing relevant written procedures and (2) ensuring the 
consistency of and analyzing final accounting reports on completed Fair 
Fund plans. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Chairman of SEC for comment, 
and he and the Director of the Division of Enforcement provided written 
comments that are reprinted in appendix III. In its written comments, 
SEC agreed with our conclusions and stated it would implement all of 
our recommendations. Moreover, SEC officials noted that the agency has 
since established that the new Fair Fund office--referred to as the 
Office of Distributions, Collections and Financial Management--will be 
located within the Division of Enforcement. SEC officials said that a 
senior officer and two assistant directors will lead the operations of 
the office and the agency is developing the office's responsibilities. 
SEC also provided technical comments, which we have incorporated as 
appropriate. 

As agreed with your office, unless you publicly announce the contents 
of this report earlier, we plan no further distribution of this report 
until 30 days from the report date. At that time, we will provide 
copies to the Chairman of the Senate Committee on Finance; the Chairman 
and Ranking Member of the Senate Committee on Banking, Housing, and 
Urban Affairs; the Chairman and Ranking Member of the House Committee 
on Financial Services; and other interested committees. We are also 
sending a copy of this report to the Chairman of the Securities and 
Exchange Commission. We will make copies available to others upon 
request. In addition, the report will be available at no charge on our 
Web site at [hyperlink, http://www.gao.gov]. Contact points for our 
Offices of Congressional: 

Relations and Public Affairs may be found on the last page of this 
report. If you or your staff have any questions about this report, 
please contact me at (202) 512-8678 or [email protected]. Key 
contributors are acknowledged in appendix IV. 

Sincerely yours, 

Signed by: 

Orice M. Williams: 
Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I: Scope and Methodology: 

To address our first objective--evaluating the Securities and Exchange 
Commission (SEC) Division of Enforcement's (Enforcement) internal 
processes and information systems for planning, tracking, and closing 
investigations and planned changes to these processes and systems--we 
reviewed relevant SEC and Enforcement documentation and data, including 
the agency's strategic plan, annual performance reports, performance 
measurement data, investigation and enforcement action data from the 
Case Activity Tracking System (CATS), and Enforcement personnel data. 
We also reviewed guidance on Enforcement's intranet--EnforceNet--to 
determine internal procedures for conducting and managing the 
investigation process and obtained documentation and attended 
demonstrations for the first phase of Enforcement's new planned 
successor system for CATS (the Hub) and for the base model system for 
the Hub (M&M).[Footnote 48] We also reviewed prior GAO reports on SEC 
and Enforcement processes and information technology systems, as well 
as federal internal control standards.[Footnote 49] Further, we 
interviewed the SEC Chairman, two commissioners, officials from SEC's 
Offices of the Executive Director and General Counsel, and Enforcement 
officials in Washington and the agency's New York, Boston, and 
Philadelphia regional offices. 

To address our second objective--evaluating the implementation of SEC's 
Fair Fund responsibilities--we reviewed a 2005 GAO report that 
discussed SEC's Fair Fund process, as well as relevant 
legislation.[Footnote 50] We also obtained and analyzed summary Fair 
Fund statistics and documentation and data on individual funds, as 
provided by Enforcement.[Footnote 51] However, Enforcement did not 
provide data on 24 Fair Fund plans that were identified in our 2005 
report. Among the reasons Enforcement officials cited for the omissions 
were that some of the 24 funds had been fully distributed and thus were 
not included in an information system established in 2006 that was 
designed to track only ongoing plans. However, these 24 Fair Fund plans 
are generally smaller (accounting for about $118 million or 1 percent 
of total Fair Funds), and their exclusion does not change our overall 
conclusion that distributions have been limited. 

In addition to Fair Fund data, we reviewed SEC guidance on Fair Funds, 
including rules on distribution plans, tax treatment, selection of 
consultants, and distribution procedures. We also reviewed Fair Fund 
guidance from the U.S. Department of Labor. In addition to discussing 
the Fair Fund program with relevant SEC and Enforcement officials, we 
interviewed six consultants hired to design and implement Fair Fund 
plans, attorneys, consumer advocates, an academic expert, and a 
representative of a trade group for a retirement plan service provider 
trade group. 

To address the third objective--evaluating Enforcement's efforts to 
coordinate investigative activities with other SEC divisions and 
federal and state law enforcement agencies--we reviewed previous GAO 
reports on mutual fund trading abuses and Enforcement's coordination 
efforts with law enforcement.[Footnote 52] We also reviewed relevant 
SEC documentation, including internal referral policies, and guidance 
regarding coordination between Enforcement and outside law enforcement 
authorities. We also attended SEC's annual securities coordination 
conference held in Washington in March 2007, which was attended 
primarily by federal and state regulators and law enforcement 
personnel. Further, we discussed Enforcement's coordination efforts 
with relevant SEC and division officials. 

We conducted our work in Washington, D.C; Boston, Massachusetts; 
Philadelphia, Pennsylvania; and New York, New York, between November 
2006 and July 2007 in accordance with generally accepted government 
auditing standards. 

[End of section] 

Appendix II: Selected Division of Enforcement Investigation and 
Personnel Data: 

We collected data from the Securities and Exchange Commission (SEC) on 
the Division of Enforcement's (Enforcement) investigative caseload and 
other personnel information (see tables 4-6 below). As shown in table 
4, the ratio of ongoing Enforcement investigations to staff attorneys 
increased substantially from about five investigations per attorney in 
2002 to eight per attorney in 2006, according to SEC data. However, 
these SEC data should be interpreted with caution and may significantly 
overestimate the number of investigations per Enforcement attorney. The 
reported number of investigations includes all open investigations at 
the end of each year, even investigations that have been open for many 
years. As discussed in this report, Enforcement has not promptly closed 
many investigations that have not resulted in enforcement actions and 
are likely no longer being actively pursued. Accordingly, we requested 
that SEC provide data on the number of ongoing investigations in 
Enforcement that as of year-end 2006 had been initiated within the 
previous 2 years. When pending investigations that were more than 2 
years old are excluded, the investigation-to-staff-attorney ratio drops 
to 2.54.[Footnote 53] While this ratio may provide a more accurate 
assessment of Enforcement attorneys' active workloads, individual 
investigations more than 2 years old could continue to be actively 
pursued while some individual investigations less than 2 years old may 
no longer be actively pursued. Enforcement officials estimated that 
staff attorneys generally can be working on from 3 to 5 investigations 
at one time, including administering individual Fair Fund plans. 

Table 4: Ratio of Open Investigations to Staff Attorneys: 

2002: 5.07; 
2003: 5.43; 
2004: 6.57; 
2005: 7.20; 
2006: 8.06. 

Source: GAO analysis of SEC data. 

Note: Open investigations refer to the number of investigations pending 
as of the end of each fiscal year according to SEC's annual reports. 
Staff attorneys do not include trial attorneys and accountants. 

[End of table] 

Table 5 shows that the ratio of Enforcement investigative attorneys to 
paralegals, who provide support to the investigative process, generally 
declined from 2003 to 2006. Our review of SEC data indicates that the 
number of Enforcement paralegals increased substantially from 2003 to 
2005 (from 58 to 98, or 69 percent) and remained stable in 2006 at 94 
(a decline of just over 4 percent). While the number of Enforcement 
staff and supervisory attorneys also increased from 2003 to 2005 (from 
596 to 740, or 24 percent), the rate of increase was not nearly as high 
as for paralegals. In addition, the number of Enforcement investigative 
attorneys declined from 740 in 2005 to 684 in 2006, or 8 percent. The 
relatively slower pace of attorney hiring from 2003 to 2005 and 
relatively higher rate of attrition in 2006 helps explain why the ratio 
of attorneys to paralegals has declined in recent years. Other SEC data 
that we reviewed also indicated a decline in the ratio of investigative 
attorneys to various types of administrative support staff, such as 
research specialists, during this period. 

Table 5: Ratio of All Investigative (Staff and Supervisory) Attorneys 
to Paralegals: 

2002: 10.28; 
2003: 11.88; 
2004: 9.00; 
2005: 7.55; 
2006: 7.28. 

Source: GAO analysis of SEC data. 

Note: All investigative attorneys include staff and supervisory 
attorneys in the Enforcement division. Supervisory attorneys refer to 
positions that SEC personnel data label as "(supervisory) general 
attorneys." This does not include (supervisory) trial attorneys and 
(supervisory) accountants. SEC personnel data label paralegals as 
"paralegal specialists." 

[End of table] 

Table 6 shows that the ratio of investigative staff attorneys to 
supervisory attorneys has remained relatively constant. Supervisory 
attorneys are branch chiefs and assistant directors and do not include 
attorneys at the associate director level and above. 

Table 6: Ratio of Staff Attorneys to Supervisory Attorneys: 

2002: 3.20; 
2003: 3.59; 
2004: 3.50; 
2005: 3.30; 
2006: 3.02. 

Source: GAO analysis of SEC data. 

[End of table] 

[End of section] 

Appendix III: Comments from the Securities and Exchange Commission: 

Christopher Cox: 
Chairman: 
Headquarters: 
100 F Street, NE: 
Washington, DC 20549: 

Regional Offices: 
Atlanta, Boston, Chicago: 
Denver, Fort Worth: 
Los Angeles. Miami, New York: 
Philadelphia, Salt Lake City: 
San Francisco, United States: 
Securities And Exchange Commission: 

July 24, 2007: 

Ms. Orice M. Williams: 
Director: 
Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
441 G Street, N.W.: 
Washington, DC 20548: 

Dear Ms. Williams:

I appreciate having the opportunity to respond to the GAO's draft 
report "Additional Actions Needed to Ensure Planned Improvements to 
Address Limitation in Enforcement Division Operations" (GAO-07-830). 
The report identifies a number of weaknesses in the Division of 
Enforcement's processes and systems for planning, tracking, and closing 
investigations and for managing and distributing Fair Funds to injured 
investors. 

We concur with the GAO's conclusions and with its recommendations for 
improving the effectiveness of the Commission's enforcement program. We 
agree with the GAO that improved procedures and systems will allow the 
Division to more capably manage its operations, to better allocate 
resources to priority investigations, and to more effectively oversee 
the prompt distribution of Fair Funds to injured investors. The agency 
is committed to moving with alacrity to implement each of the GAO's 
recommendations, as is described in greater detail in the attached 
letter from the Director of the Division of Enforcement. 

Because the senior management of the Division of Enforcement and I both 
place the highest priority on implementing the GAO's recommendations, I 
am pleased to report that, two weeks ago, we hosted a meeting of the 
agency's senior Enforcement management, including the heads of all 11 
of the agency's regional offices. We were briefed by the GAO on its 
findings, and we discussed our commitment to, and our plans for, 
implementing the GAO's recommended reforms. As we work to implement 
these recommendations, I would appreciate being able to continue to 
draw on the GAO's expertise. Again, thank you, and your staff, for the 
work you have done on this report, and for your commitment to improving 
the operations of the Securities and Exchange Commission. 

Sincerely, 

Signed by: 

Christopher Cox: 
Chairman: 

Enclosure: 

United States: 
Securities And Exchange Commission: 
Washington, D.C. 20549: 

Division of Enforcement: 

July 24, 2007  

Linda Chatman Thomsen: 
Director: 
(202) 551-4894: 
(202) 772-9279 (fax): 
thomsenl@a,sec.gov: 

Ms. Orice M. Williams: 
Director: 
Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
441 G Street, N.W.: 
Washington, DC 20548: 

Re: SEC Enforcement Division Operations: 

Dear Ms. Williams: 

Thank you for the opportunity to review and comment on the draft report 
concerning the Securities and Exchange Commission's Division of 
Enforcement's ("Enforcement") processes and systems for conducting 
investigations and managing the Fair Fund program. The report discusses 
how Enforcement has taken many positive steps in improving these 
processes and systems. In addition, the report recommends how we can 
most effectively manage operations and allocate resources while 
continuing to meet the goal of deterring securities law violations and 
returning funds to harmed investors. 

I appreciate the collegiality your staff exhibited in preparing the 
report and in discussing its findings and recommendations with us. We 
agree with your findings and recommendations and are working with 
alacrity to implement them. 

Our specific comments are as follows: 

I. Establish Written Procedures and Criteria Relating to New 
Investigations: 

The draft report notes the important steps Enforcement has recently 
taken to improve the management of its operations by centralizing the 
review and approval process of new investigations under the two deputy 
directors' review. This ensures all newly opened MUIs and 
investigations are an appropriate allocation of resources. The draft 
report recommends that further action should be taken by Enforcement in 
the form of establishing written procedures and assessment criteria for 
reviewing and approving new investigations. We agree with this 
recommendation and are in the process of developing written procedures 
and criteria to focus this review and assure that it is consistently 
applied. 

II. Establish Controls to Ensure Reliability of Hub: 

Your draft report notes that Enforcement has a new investigation 
information management system, the Hub, which is an interim system 
designed to aid in the management of Enforcement's investigative 
process. The report recommends that written procedures be established 
reinforcing the importance of staff entering investigative data into 
the Hub in a timely and consistent basis and reviewing the system for 
reliability. We agree with these findings and recommendations and are 
working diligently to develop these written procedures.  

III. Consider Developing Expedited Procedures for Closing 
Investigations:   

Your draft report notes that in the spring, Enforcement began 
eliminating the backlog of investigations with completed, but 
unreviewed, closing packages. At this time, Enforcement has 
successfully eliminated this backlog and developed new procedures to 
prevent such a backlog from occurring in the future. In addition, your 
draft report suggests that Enforcement consider developing expedited 
procedures in another area -- closing investigations that are not 
likely to result in enforcement actions and for which closing packages 
have not been completed. We agree that promptly closing investigations 
that are not actively being pursued can improve the management of the 
Division and ensure the fair treatment of individuals and companies 
under its review. Thus, Enforcement plans to actively review these 
"aged" pending investigations to determine which should be closed and 
to review our closing process to determine how it can be streamlined.  

IV. Establish Comprehensive Plan for Fair Fund Office:  

The draft report notes that we recently announced our plan to establish 
a centralized Fair Fund Office and recommends that we implement a plan 
to staff this new office and develop written procedures to improve the 
management of the Fair Fund Program. We agree with this recommendation 
and have determined that this new office will be within the Division of 
Enforcement and be called the Office of Distributions, Collections and 
Financial Management. It will be led by a Senior Officer (SO) and two 
Assistant Directors (SK-17s). The new office will be divided into two 
groups, each of which will be headed by one of the Assistant Directors 
ï¿½ 1) the Fair Fund Distributions and Collections Unit and 2) the 
Financial Information Management Unit. We are in the process of fully 
developing the responsibilities of this office to assure the improved 
distribution of funds to investors.  

The draft report also notes that the SEC has developed a system called 
Phoenix to manage financial information and that Phoenix will be built-
out to include features to manage and monitor Fair Fund activity, 
including expenses. The second phase of Phoenix will become operational 
in 2008. The report also recommends that the division take other steps 
in the meantime that will allow it to develop a better perspective on 
Fair Fund expenses, including administrative expenses. We agree with 
this recommendation and will work to standardize the collection of Fair 
Fund expense data so that it may be analyzed when the system becomes 
fully operational and will work on developing interim procedures for 
the staff to review such expenses. When the management of the new 
Office of Fair Fund Distributions, Collections and 3
Financial Management is in place, which is presently anticipated to 
occur in October 2007, we will make sure that there is appropriate 
internal reporting on the status of Fair Fund distributions.  

We appreciate the care that is evident in the draft report and its 
recommendations. If we can be of any further assistance, please contact 
me at (202) 551-4894 or Joan McKown at (202) 551-4933.

Yours truly, 

Signed by: 

Linda Chatman Thomsen: 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Orice M. Williams (202) 512-8678 or [email protected]: 

Acknowledgments: 

In addition to the contact named above, Wesley M. Phillips, Assistant 
Director; Allison Abrams; Christopher Forys; Marc Molino; Carl Ramirez; 
Linda Rego; Barbara Roesmann; and Christopher Schmitt made significant 
contributions to this report. 

[End of section] 

Footnotes: 

[1] Disgorgement deprives securities law violators of ill-gotten gains 
linked to their wrongdoing. 

[2] 15 U.S.C. ï¿½ 7246. 

[3] See GAO, Mutual Fund Trading Abuses: SEC Consistently Applied 
Procedures in Setting Penalties, but Could Strengthen Internal 
Controls, GAO-05-385 (Washington, D.C.: May 16, 2005). This report 
generally addressed SEC enforcement actions pertaining to market timing 
and late trading violations. Market timing typically involves the 
frequent buying and selling of mutual fund shares by sophisticated 
investors who seek opportunities to make profits on the difference in 
prices between overseas and U.S. markets. Late trading is illegal and 
occurs when investors place orders to buy or sell mutual fund shares 
after the mutual fund has calculated the price of its shares but still 
receive that day's fund share price. As of February 2005, Enforcement 
had initiated 24 enforcement actions that resulted in fines of almost 
$2 billion against mutual fund companies and officers for market timing 
and late trading violations. 

[4] Pub. L. No. 107-204 ï¿½ 601, 116 Stat. 745 (July 30, 2002). Amelia 
Gruber, "SEC Urged to Flesh Out Performance Goals," 
GovernmentExecutive.Com (Washington, D.C.: Sept. 28, 2004). 

[5] GAO, SEC Operations: Oversight of Mutual Fund Industry Presents 
Management Challenges, GAO-04-584T (Washington, D.C.: Apr. 20, 2004). 

[6] GAO-04-584T. 

[7] Section 308(a) of the Sarbanes-Oxley Act of 2002, entitled "Fair 
Fund for Investors," allowed SEC to combine civil monetary penalties 
and disgorgement amounts collected in enforcement cases to establish 
funds for the benefit of victims (investors) of securities law 
violations. 15 U.S.C. ï¿½ 7246. See also GAO, SEC and CFTC Penalties: 
Progress Made in Collection Efforts, but Greater SEC Management 
Attention Is Needed, GAO-05-670 (Washington, D.C.: August 2005). 

[8] CATS contains information on ongoing investigations and enforcement 
actions, such as the general nature of the potential violation (for 
example, insider trading) and the date an investigation was opened. 

[9] A hedge fund is generally an entity that holds a pool of securities 
and other assets, is not required to register its securities offerings, 
and is excluded from the definition of an investment company. 

[10] Due to deficiencies in CATS, Enforcement cannot readily provide 
data on the number of ongoing investigations that have not resulted in 
enforcement actions. 

[11] These 115 Fair Funds are tracked in Enforcement's distribution 
management system. CATS tracks all Fair Fund distributions that have 
occurred but by defendant, not by fund. When a Fair Fund is created 
through an SEC administrative action, SEC oversees the case directly. 
When a fund is created through court action, SEC is a party to the 
court proceeding, but the court retains ultimate authority to supervise 
the plan. In either an administrative or court proceeding, an 
individual or company is ordered or agrees to pay an amount of money 
into a Fair Fund plan. The Fair Fund data discussed in this report do 
not include 24 cases that SEC had previously identified as Fair Funds. 
These 24 cases generally are smaller (accounting for about $118 million 
or 1 percent of total Fair Funds), and their exclusion does not change 
the overall conclusion that distributions have been limited. 
Enforcement did not include some of the 24 plans because they were 
fully distributed to harmed investors and the division's information 
system only tracks Fair Fund plans that were ongoing at the time this 
system was established in 2006. 

[12] GAO-05-670. 

[13] Section 201.1105(f) of title 17 of the Code of Federal 
Regulations, SEC's Rules of Practice regarding Fair Fund and 
Disgorgement Plans, generally provides, inter alia, that "a final 
accounting shall be submitted for approval of the Commission or hearing 
officer prior to discharge of the administrator and cancellation of the 
administrator's bond, if any." SEC also seeks to track activity and 
expenses of court-overseen Fair Funds. 

[14] GAO-05-385. In this report, "referrals" are Enforcement's 
interactions and consultations with law enforcement agencies on 
specific cases rather than the formal referral process mentioned in our 
2005 report, which Enforcement no longer uses. 

[15] SEC used to utilize regional offices to oversee district offices, 
but as of March 2007, all 11 offices were designated regional offices. 

[16] Both deputy directors used to be located in the home office, but 
in April 2007, one relocated to the New York regional office. 

[17] Regional offices comprise positions that (1) belong exclusively to 
Enforcement, (2) are shared by Enforcement and other teams, and (3) do 
not belong to Enforcement at all. For the purposes of computing the 
total Enforcement staff numbers, we counted only those positions that 
belonged exclusively to Enforcement. Pub. L. No. 107-204, tit. VI, ï¿½ 
601, 116 Stat. 745 (July 30, 2002); 
15 U.S.C. ï¿½ 78kk. 

[18] The investigative attorney numbers include Enforcement staff with 
position titles of general attorney or supervisory general attorney, 
which do not include attorneys above an assistant director level. 
Examples of position titles not included in these numbers, but included 
in the numbers of total Enforcement staff, are case management 
specialist, law clerk, legal technician, paralegal specialist, research 
specialist, secretary, staff accountant, and trial attorney. 

[19] After being open for more than 60 days, an MUI automatically 
becomes an investigation. 

[20] GAO-05-385. 

[21] 15 U.S.C. ï¿½ 7246. 

[22] The Chairman stated that millions of individuals are expected to 
retire in the coming decade, meaning they will need to actively manage 
their investment accounts, and many individuals and companies may seek 
to take advantage of this increased investment activity and defraud 
them of their savings. Testimony of SEC Chairman Cox before the U.S. 
House Subcommittee on Financial Services and General Government, 
Committee on Appropriations, 110th Congress, 1st session, March 27, 
2007. 

[23] An Enforcement official told us that the 40 percent limit was 
established based on analysis of 20 years of enforcement action data. 

[24] This process does not apply to MUIs that are opened based on 
referrals from SROs. Referrals from SROs are sent directly to 
Enforcement's Office of Market Surveillance in the home office, which 
then reviews the referral, decides whether or not to open a MUI, and, 
if one is opened, sends the MUI to the appropriate office for action. 

[25] See GAO, Standards for Internal Control in the Federal Government, 
GAO/AIMD-00.21.3.1 (Washington, D.C.: November 1999) and Office of 
Management and Budget, Management's Responsibility for Internal 
Control, OMB Circular No. A-123 Revised, Appendix A, "Internal Control 
Over Financial Reporting" (Washington, D.C.: December 2004). 

[26] GAO/AIMD-00.21.3.1. 

[27] Enforcement officials said that ongoing investigation data 
maintained in CATS will be electronically transferred to the Hub when 
the system is implemented. However, division attorneys will be 
responsible for entering relevant data into the Hub for ongoing 
investigations that are not maintained in CATS, such as detailed 
information on the type of investigation (e.g., whether it is a hedge 
fund investigation). 

[28] In addition to directing federal agencies to establish written 
controls, GAO/AIMD-00.21.3.1 and OMB Circular A-123 call for the 
establishment of controls to ensure the reliability of data maintained 
in information systems. 

[29] We requested that SEC provide data on the number of investigations 
open for 2 or more years that have outstanding enforcement actions. To 
respond to this request, an Enforcement official said that OIT would 
have had to spend a great deal of time creating complex programs. Due 
to other demands on OIT's resources and our ability to obtain related 
data from an SEC regional office, we decided not to request that OIT 
provide this information. 

[30] GAO-05-670. The Fair Fund data do not include 24 cases that SEC 
had previously identified as Fair Funds. These 24 cases generally are 
smaller (accounting for about $118 million or 1 percent of total Fair 
Funds), and their exclusion does not change the overall conclusion that 
distributions have been limited. Enforcement did not include some of 
the 24 plans because they were fully distributed to harmed investors 
and the division's information system tracks only Fair Fund plans that 
were ongoing at the time this system was established in 2006. 

[31] Market timing losses generally were distributed across many 
individual mutual fund customers. The losses were often small and 
investors may not even have realized that their account balances were 
experiencing dilution for extended periods. They also may have redeemed 
their shares in the mutual fund company while market timing violations 
were occurring. 

[32] Broker-dealers may maintain such customer account information on 
an aggregated basis in what are known as omnibus accounts, and the 
mutual fund would not have direct access to this information. 

[33] Market timing is said to dilute the value of mutual fund shares, 
as a market timer buys, sells, or exchanges shares rapidly and 
repeatedly to take advantage of favorable prices. In addition, market 
timing increases transaction costs for mutual funds. To take account of 
investor losses due to dilution, a Fair Fund distribution plan might 
attempt to estimate, on a daily basis, the extent to which a fund's net 
asset value (analogous to share price) would have been more or less 
than the actual net asset value had market timing not occurred. The 
difference, where positive, is the estimate of dilution and harm to 
investors. The sum of daily increments (both positive and negative) 
represents aggregate harm to a fund's shareholders over the period in 
which market timing occurred. 

[34] Pub. L. No. 93-406, 88 Stat. 829 (Sept. 2, 1974). 

[35] In some cases, retirement plans will be shareholders of record and 
receive Fair Fund distributions directly. In other cases, an 
intermediary--such as a broker-dealer, underwriter, or record-keeper-- 
will be the shareholder of record, and retirement plans will receive 
Fair Fund distributions based on their interest in an account operated 
by the intermediary. 

[36] See testimony of SEC Chairman Cox before the U.S. House 
Subcommittee on Financial Services and General Government, Committee on 
Appropriations, 110th Congress, 1st session, March 27, 2007. 

[37] GAO/AIMD-00.21.3.1 and OMB Circular A-123. 

[38] GAO-05-670. 

[39] According to information that SEC provided us, 81 of 115 Fair 
Funds, or 70 percent, have provisions whereby fund proceeds are used to 
pay administrative expenses. In the remaining 34 cases, the individual 
or entity sued in the relevant enforcement action, such as a mutual 
fund company, pay Fair Fund expenses. 

[40] Section 201.1105(f) of title 17 of the Code of Federal 
Regulations. SEC's Rules of Practice regarding Fair Fund and 
Disgorgement Plans generally provides, inter alia, that "a final 
accounting shall be submitted for approval of the Commission or hearing 
officer prior to discharge of the administrator and cancellation of the 
administrator's bond, if any." SEC also seeks to track activity of 
court-overseen Fair Funds. 

[41] GAO-05-385. 

[42] In a typical case, companies misrepresent the date on which stock 
options were granted (using a date on which the price was lower). When 
the holders exercise their options, they can realize larger gains 
because their exercise prices are based on the lower, misrepresented 
grant date; 
the company meanwhile doesn't report the larger gains as greater 
compensation. The practice violates SEC's disclosure and accounting 
rules, and tax laws. 

[43] SEC v. Friedman, Billings, Ramsey & Co., Inc. No. 06-cv-02160 
(D.D.C. 2006), SEC Litigation Release No. 19950 (December 20, 2006). 
According to SEC Release No. 19950, Friedman, Billings, Ramsey, & Co., 
Inc. agreed to settle the matter without admitting to or denying the 
allegations. 

[44] FINRA was created in July 2007 through the consolidation of NASD 
(formerly an SRO) and the member regulation, enforcement, and 
arbitration functions of the New York Stock Exchange; 
it is now the largest nongovernmental regulator for all securities 
firms doing business in the U.S. 

[45] GAO-05-385. 

[46] The Corporate Fraud Task Force includes a Department of Justice 
group that focuses on enhancing criminal enforcement internally and an 
interagency group that focuses on cooperation and joint federal 
regulatory and enforcement efforts. The Bank Fraud Enforcement Working 
Group promotes coordination and communication among financial 
institution regulators and federal law enforcement authorities. The 
Securities and Commodities Fraud Working Group provides a forum for 
federal law enforcement authorities to exchange information with 
securities and commodities regulators, securities SROs, and the Public 
Company Accounting Oversight Board. 

[47] GAO-05-385. 

[48] In 2004, the Boston regional office tasked one of its staff 
members and an outside consultant to design a new case tracking system 
for the office. This new database was implemented in 2005 and also 
piloted in the Los Angeles and Chicago regional offices. When beginning 
to develop the Hub in 2006, SEC decided to use Boston's system as the 
base model for the Hub because of the amount of user input M&M already 
had received. 

[49] GAO, Mutual Fund Trading Abuses: SEC Consistently Applied 
Procedures in Setting Penalties, but Could Strengthen Internal 
Controls, GAO-05-385 (Washington, D.C.: May 16, 2005) and Standards for 
Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 
(Washington, D.C.: Nov. 1999). 

[50] GAO, SEC and CFTC Penalties: Continued Progress Made in Collection 
Efforts, but Greater SEC Management Attention Is Needed, GAO-05-670 
(Washington, D.C.: Aug. 31, 2005). 

[51] Individual Fair Fund data obtained included information on the 
type of enforcement action that produced the Fair Fund, type of 
adjudication, amounts ordered placed into a Fair Fund and amounts 
distributed, dates of issuance of Fair Fund orders, and whether parties 
involved were responsible for paying the expenses of their respective 
Fair Fund plan. 

[52] GAO-05-385 and GAO, U.S. Attorneys: Performance-Based Initiatives 
are Evolving, GAO-04-422 (Washington, D.C.: May 28, 2004). 

[53] We computed this ratio by dividing the number of investigations 
with a status of "active" in Enforcement's information system (CATS) 
that had been open for less than 2 years as of December 31, 2006-- 
1,305--by the number of "staff attorneys" (nonsupervisory investigative 
attorney positions that SEC personnel data label as "general 
attorneys") as of September 31, 2006--514. 

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