	State Authorities Were First to Uncover Mutual Fund Trading Abuses but SEC Has Since Acted Swiftly to Address Problems

State authorities uncovered various abusive practices in the mutual fund  industry in 2003, but since then SEC has taken swift action designed to  punish wrongdoers and better prevent or detect abusive practices in the  future. SEC did not identify these abusive practices involving mutual funds for  various reasons. Also, according to testimony by the head of the SEC  office that conducts mutual fund examinations, SEC examiners did not  reveal these practices because their examinations focused primarily on the  operations of the mutual fund and trading of the fund’s portfolio securities  practices with an acknowledged potential for abuse. However since these abuses have come to light, SEC and NASD, which  oversees the broker-dealers that sell fund shares, have acted vigorously to  address inappropriate practices in the mutual fund industry. SEC Has Increased Resource Allocations Without the Benefit of An Updated Strategic Plan

After experiencing an extended period in which increases in SEC’s  workload grew faster than its staffing and other resources, SEC has  received recent budget increases that have begun to allow it to increase its  staffing, including positions in the divisions and offices with  responsibilities for mutual fund regulation, oversight, and enforcement. As a result, it is difficult to determine whether SEC  has optimally allocated its limited resources to achieve the greatest  benefits. The rapid  growth of the mutual fund industry during this time also posed challenges  to SEC’s staff. To address the mutual fund scandals, SEC has plans to substantially  increase the staffing in the units responsible for mutual fund oversight. SEC also has made progress in developing performance measures that are  part of an overall strategic planning framework. SEC Faces Agencywide Challenges That Also Affect Mutual Fund Oversight

Although it has received additional resources in recent years, SEC still  faces a number of agencywide challenges impacting its mission and its  ability to oversee the mutual fund industry. These challenges include  improving its ability to head off major problems before they occur by  better anticipating and detecting abuses in the securities industry. SEC  also faces challenges in hiring and retaining all the staff it needs to achieve  its mission as demands on staff continue to grow. Moreover, SEC has  experienced difficulties in obtaining the information technology it needs to  effectively oversee the mutual funds industry. Finally, SEC faces  challenges in overcoming impediments to its ability to gather information,  cooperate with other law enforcement authorities, and collect monies  owed.
Why GAO Did This Study

Having grown to over $7.5 trillion in assets, mutual funds have become vital components of the financial security of more than 95 million American investors. However, in 2003, various allegations of misconduct and abusive practices involving mutual funds came to light. Therefore, ensuring that the Securities and Exchange Commission (SEC), which has primary oversight of the mutual fund industry, has the necessary resources and strategic focus to adequately oversee fund practices has never been more important. To assess how SEC is positioned to oversee mutual funds, GAO reviewed (1) how the abusive mutual fund practices were identified and SEC's subsequent responses, (2) SEC's plans for increasing its staffing in the divisions and offices responsible for overseeing mutual funds and its progress in developing a new strategic plan to guide staff deployment, and (3) the challenges SEC faces in overseeing the mutual fund industry.

What GAO Found

In late 2003, state law enforcement authorities were the first to bring to light various abusive practices in the mutual fund industry. SEC did not identify these practices because detecting fraud in routine examinations is difficult and it has been challenged to keep pace with the rapid growth of the mutual fund industry using its existing resources. However, since the abuses were identified SEC has acted vigorously to address these inappropriate practices, including taking various enforcement actions to punish wrongdoers and issuing numerous rule proposals designed to better prevent or detect abusive practices in the future. After years during which its workload grew faster than its resources, SEC recently received budget increases that have allowed it to significantly increase its staffing. SEC also plans to significantly increase the numbers of staff that oversee mutual funds. However, SEC made these allocation decisions without the benefit of an updated and complete strategic plan, which it is preparing but has yet to finalize. As a result, GAO was unable to determine whether SEC has optimally allocated its limited resources to achieve the greatest benefits. Although it has received additional resources in recent years, SEC faces a number of agencywide challenges impacting its mission and ability to oversee the mutual fund industry. These include improving its ability to better anticipate and detect problems in the industry and identifying and obtaining all the staff it needs to achieve its mission. SEC has experienced difficulty in effectively implementing various agencywide information technology initiatives, such as an electronic document imaging system and projects needed by units responsible for mutual funds. SEC also has various gaps in its authority that impede its ability to gather information, cooperate with other law enforcement authorities, and collect monies owed by violators.