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. 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. In March 2007, Enforcement began using a new, more centralized  approach to review and approve investigations. Moreover, the Commission’s ability  to oversee how effectively Enforcement is implementing the new  approach and generally managing its operations may be limited. 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. 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. 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. 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. Staff  must also prepare draft termination letters, which inform individuals or  companies that they are no longer under review. As of March 1, 2007, the backlog consisted of  464 investigations, according to an Enforcement official. 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. 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 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. 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). In some cases,  Enforcement details investigative attorneys to Justice to assist in the  criminal prosecution of alleged securities law violators. 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. 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. 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. 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. 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.
Why GAO Did This Study

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.

What GAO Found

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. 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, 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--Case Activity Tracking System (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 or the status of such investigations. While the Hub is designed to address many of CATS's deficiencies 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 of the office's 840 open investigations were 2 or more years old, were no longer being pursued, and had no pending enforcement actions. 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.