At the request of Enforcement staff, the Commission may  issue a formal order of investigation, which allows the division’s staff to  compel witnesses by subpoena to testify and produce books, records, and  other documents. While  overall Enforcement resources and activities have remained relatively  level in recent years, the number of non-supervisory investigative  attorneys, who have primary responsibility for developing enforcement  cases, decreased by 11.5 percent, from a peak of 566 in fiscal year 2004 to  501 in fiscal year 2008. Nevertheless,  Enforcement management and investigative attorneys agreed that  resource challenges have affected their ability to bring enforcement  actions effectively and efficiently. Enforcement management told us that  the current level of resources has not prevented the division from  continuing to bring cases across a range of violations. More specifically, investigative  attorneys cited the low level of administrative, paralegal, and information  technology support, unavailability of specialized services and expertise,  and a burdensome system for internal case review as causing significant  delays in bringing cases, reducing the number of cases that can be  brought, and potentially undermining the quality of cases. SEC’s  strategic plan calls for targeting resources strategically, examining  whether positions are deployed effectively, and exploring how to improve  program design and organizational structure. Recently, Enforcement  management has begun efforts that seek to streamline the case review  process. Various Factors Affect the Amount of Penalties and Disgorgements Ordered, While Overall, Total Amounts Have Declined in Recent Years

Enforcement staff consider a number of factors when determining the  dollar amounts of penalties and disgorgements, which in total have  declined in recent years. To determine a penalty in an individual case,  Enforcement staff consider factors such as the nature of the violation,  egregiousness of conduct, cooperation by the defendant, remedial actions  taken, and ability to pay. The 2007 policy, now discontinued, required Enforcement staff, when  contemplating a corporate penalty, to obtain Commission approval of a  penalty range before settlement discussions could begin. Setting aside the effect of the implementation of any policy, the total  amount of penalties and disgorgement ordered on an annual basis can vary  according to the type and magnitude of cases concluded in a given period. In particular, penalties fell 84 percent, from a peak of   $1.59 billion in fiscal year 2005 to $256 million in fiscal year 2008. Disgorgements fell 68 percent, from a peak of $2.4 billion in fiscal year  2006 to $774.2 million in fiscal year 2008. Recent Corporate Penalty Policies— Adopted and Implemented with Only Limited Communication— Have Delayed Cases and Discouraged Penalties

We found that Enforcement management, investigative attorneys, and  others concurred that the 2006 and 2007 penalty policies, as applied, have  delayed cases and produced fewer and smaller corporate penalties. That the 2007 policy (Commission pre-approval of a settlement range)  could have led to less-informed decisions about corporate penalties. That the policies have reduced incentives for subjects of enforcement  actions to cooperate with the agency, because of the perception that SEC  has retreated on penalties. That it became more difficult to obtain formal orders of investigation,  which allow issuance of subpoenas to compel testimony and produce  books. Our review also showed that in adopting and implementing the 2006 and  2007 corporate 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, which is responsible  for implementing the policies, had only limited input into their  development. As a result, Enforcement attorneys say there has been frustration  and uncertainty about application of the penalty policies.
Why GAO Did This Study

In recent years, questions have been raised about the capacity of the Securities and Exchange Commission's (SEC) Division of Enforcement (Enforcement) to manage its resources and fulfill its law enforcement and investor protection responsibilities. This testimony focuses on (1) the extent to which Enforcement has an appropriate mix of resources; (2) considerations affecting penalty determinations, and recent trends in penalties and disgorgements ordered; and (3) the adoption, implementation, and effects of recent penalty policies. The testimony is based on the GAO report, Securities and Exchange Commission: Greater Attention Needed to Enhance Communication and Utilization of Resources in the Division of Enforcement ( GAO-09-358 , March 31, 2009). For this work, GAO analyzed information on resources, enforcement actions, and penalties; and interviewed current and former SEC officials and staff, and others.

What GAO Found

Recent overall Enforcement resources and activities have been relatively level, but the number of investigative attorneys decreased 11.5 percent over fiscal years 2004 and 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. A number of factors can affect the amount of a penalty or disgorgement that Enforcement staff seek in any individual enforcement action, such as nature of the violation, egregiousness of conduct, cooperation by the defendant, remedial actions taken, and ability to pay. In 2006, the Commission adopted a policy that focuses on two factors for determining corporate penalties: the economic benefit derived from wrongdoing and the effect a penalty might have on shareholders. In 2007, the Commission adopted a policy, now discontinued, that required Commission approval of penalty ranges before settlement discussions. Setting aside the effect of any policies, total penalty and disgorgement amounts can vary on an annual basis based on the mix of cases concluded in a particular period. Overall, penalties and disgorgements ordered have declined significantly since the 2005-2006 period. Total annual penalties fell 84 percent, from a peak of $1.59 billion in fiscal year 2005 to $256 million in fiscal year 2008. Disgorgements fell 68 percent, from a peak of $2.4 billion in fiscal year 2006 to $774.2 million in fiscal year 2008. Enforcement management, investigative attorneys, and others agreed that the 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.