Closing inactive investigations. Improving management of the Fair Funds program. We noted that because  SEC had not yet staffed or defined the roles and responsibilities of a new  office being established to administer the Fair Fund program, it was not  possible to determine the extent to which the office may better facilitate  the distribution of funds to investors harmed by securities fraud and other  violations. Enforcement has now developed written procedures for review  and approval of new investigations, which are included in a recently  completed enforcement manual. Furthermore, our review identified questions about the efficiency and  effectiveness of a dual reporting structure established for OCD. OCD has a deputy director. Also,  the deputy director said that there has been confusion among OCD staff  reporting to her on what issues are appropriate for the attention of the  OCD director. Investigative Staffing Has Fallen and Resource Challenges Undermine the Ability to Bring Enforcement Actions

Overall Enforcement resources and case activity generally have been level  in recent years, but the number of front-line investigative staff has fallen. As turnover has decreased, the experience level of front-line attorneys has  increased. Meanwhile, Enforcement’s case backlog has declined  somewhat, as the division has made case closings a greater priority (see  fig. 5). More specifically, investigative attorneys with whom we spoke cited a  number of resource challenges that have undercut their efforts, causing  significant delays in bringing cases, reducing the number of cases that can  be brought, and potentially undermining the quality of cases. Both SEC strategic goals and GAO internal control standards call for  making efficient and effective use of resources a priority. Overall, the agency’s strategic plan calls for targeting  resources strategically, examining whether positions are deployed  effectively, and exploring how to improve program design and  organizational structure. Our review also shows that in adopting and  implementing the policies, the Commission did not act in concert with  agency strategic goals calling for broad communication with, and  involvement of, the staff. Enforcement Management, Investigative Attorneys, and Others Said That the Recent Penalty Policies have Contributed to Delays in Cases, and Fewer and Smaller Corporate Penalties

According to Enforcement management, investigative attorneys, and  others, the 2006 and 2007 corporate penalty policies, as applied, have had  a number of effects. Investigative attorneys have also  been concerned that at the same time, it became more difficult to obtain  formal orders of investigation, which compel witnesses by subpoena to  testify and produce books, records, and other documents. In particular, the Enforcement  division, which is responsible for implementing the policies, had only  limited input into their development. Also, during both the adoption and  implementation of these policies, the Commission has restricted  communication, curtailing Enforcement management and staff input and  insight into policies that management and staff are responsible for  executing. 2. As part of ongoing efforts to explore the more effective use of  resources, and to streamline internal review of cases and  investigations, expand Enforcement’s current examination of its  methods to include the level and mix of resources available to  investigative staff in the areas of administrative and paralegal  support, specialized services and expertise, and information  technology support; and include in the examination an evaluation  of the impact of the case review process on organizational culture  factors such as risk aversion and incentives to drop or narrow the  scope of cases. 3. Appendix I: Scope and Methodology

To address our first objective—evaluating the Securities and Exchange  Commission (SEC) Division of Enforcement’s (Enforcement) progress  made in implementing our August 2007 recommendations—we reviewed  relevant SEC and Enforcement documentation, including a report by the  SEC Office of Inspector General on the Hub investigation management  information system, the division’s Enforcement Manual, a user manual  created for the Hub system, the agency’s fiscal year 2009 Congressional  Justification, and documents detailing the organization and activities of  SEC’s Office of Collections and Distributions (OCD). We also reviewed  SEC’s strategic plan, federal internal control standards, and prior GAO  reports on SEC and Enforcement processes and operations, including  information technology systems and the Fair Fund program.
Why GAO Did This Study

The Securities and Exchange Commission's (SEC) Division of Enforcement (Enforcement) plays a key role in meeting the agency's mission to protect investors and maintain fair and orderly markets. In recent years, Enforcement has brought cases yielding record civil penalties, but questions have been raised about its capacity to manage its resources and fulfill its law enforcement and investor protection responsibilities. GAO was asked to evaluate, among other issues, (1) SEC's progress toward implementing GAO's 2007 recommendations; (2) the extent to which Enforcement has an appropriate mix of resources dedicated to achieving its objectives; and (3) the adoption, implementation, and effects of recent penalty policies. GAO analyzed information on resources, enforcement actions, and penalties; and interviewed current and former SEC officials and staff, and others.

What GAO Found

SEC has fully implemented three of GAO's four 2007 recommendations. GAO recommended SEC establish procedures for approving new investigations and for operating its new investigation management information system called the Hub; consider procedures for closing inactive cases; and improve management of the Fair Funds program, which returns funds to harmed investors. Enforcement has developed the procedures for new investigations and for operating the Hub, and made case closings a higher priority. SEC has also staffed a new Office of Collections and Distributions (OCD), which is responsible in part for administering the Fair Funds program. However, OCD has a dual reporting structure in which most of the staff report to Enforcement, not the OCD director. According to OCD management, this structure has slowed work and confused staff. SEC strategic goals and GAO internal control standards call for making efficient and effective use of resources a priority. SEC's strategic plan also calls for improving program design and organizational structures. Recent overall Enforcement resources and activities have been relatively level, but the number of investigative attorneys has decreased 11.5 percent over fiscal years 2004 through 2008. Enforcement management said resource levels have allowed them to continue to bring cases across a range of violations, but both management and staff said resource challenges have delayed cases, reduced the number of cases that can be brought, and potentially undermined the quality of some cases. Specifically, investigative attorneys cited the low level of administrative, paralegal, and information technology support, and unavailability of specialized services and expertise, as challenges to bringing actions. Also, Enforcement staff said a burdensome system for internal case review has slowed cases and created a risk-averse culture. SEC's strategic plan calls for targeting resources strategically, examining whether positions are deployed effectively, and improving program design and organizational structure. Enforcement management has begun examining ways to streamline case review, but the focus is process-oriented and does not give consideration to assessing organizational culture issues. Enforcement management, investigative attorneys, and others agreed that two recent corporate penalty polices--on factors for imposing penalties, and Commission pre-approval of a settlement range--have delayed cases and produced fewer, smaller penalties. GAO also identified other concerns, including the perception that SEC had "retreated" on penalties, and made it more difficult for investigative staff to obtain "formal orders of investigation," which allow issuance of subpoenas for testimony and records. Our review also showed that in adopting and implementing the penalty policies, the Commission did not act in concert with agency strategic goals calling for broad communication with, and involvement of, the staff. In particular, Enforcement had limited input into the policies the division would be responsible for implementing. As a result, Enforcement attorneys reported frustration and uncertainty in application of the penalty policies.