Addressing Issues Raised in the Inspector General's Stanford Report
On April 16, the SEC released a report by the Inspector General recounting events that occurred at the Commission between 1997 and 2005. Since that time, there have been many changes regarding the agency's leadership, its internal procedures and its culture of collaboration.
The actions below address all of the recommendations contained in the report:
Establishing escalation procedures and revamping the process for handling tips, complaints and referrals:
In late 2006, referral review committees were established, whereby examiners and Enforcement Division staff in regional offices discuss referrals, analyze them, and identify those that should have the highest priority. In addition, the meetings provide feedback to the enforcement and examination programs to enhance the referral process.
More recently, the Commission has been revamping the way it handles tips, complaints and referrals. In fact, in March 2010, it completed the first phase of its overhaul by centralizing this information into one database so this information can be searched better. The Examination and Enforcement Divisions are working together to make certain that all enforcement referrals are handled efficiently and effectively.
Further, the Chairman and the new leadership have been instilling a collaborative culture within the organization, in which employees at all levels "own" the problems that they see and diligently work with colleagues across the agency to solve them.
Changing performance metrics so that quantity does not trump quality:
As of 2002, the Enforcement Division had ended an evaluation system that included the number of cases as a significant component of how the regional and district offices were evaluated each year.
In addition, in the past year, the Enforcement Division has made fundamental changes to the metrics used to manage and evaluate the performance of its staff. Rather than focusing on the number of actions filed, Enforcement Division members are now accountable based on their strategic focus on the most important cases; swift action; smart use of scarce resources; and successful efforts in building a strong case.
Further, the Enforcement Division now generates a priority case report on a regular basis so that the division focuses on significant cases, tracks the status of these cases, and ensures that appropriate resources are being devoted to these cases. The Enforcement Division designates certain investigations as "National Priority Matters," based in part on:
Finally, the SEC's Strategic Plan for Fiscal Years 2010-2015 -- which was circulated for public comment -- sets forth the performance measures it intends to use to gauge its progress in meeting its enforcement mission. The metrics focus not on how many cases that have been brought, but on the effect and impact of those cases.
Streamlining the approval procedures:
In 2009, the Commission streamlined its enforcement procedures by delegating authority for the initiation of a formal investigation. Now, instead of requiring Commission approval, senior managers in the enforcement program can authorize the issuance of subpoenas. This has eliminated the sometimes burdensome process of Commission review and approval, allowing staff to issue investigative subpoenas in real-time rather than waiting to compel the production of necessary information.
Also in August, the Enforcement Division announced that it would adopt a flatter, more streamlined organizational structure, including the elimination of an entire layer of management. And, the Enforcement Division has reduced the layers of approval required to begin and pursue an investigation, issue Wells notices, and engage in settlement negotiations.
Considering potential, and potentially growing, investor harm:
The current enforcement manual makes it clear that staff should consider the potential investor losses involved, or harm to investors, in determining whether to open an inquiry into potential wrongdoing.
The manual, which was developed and disseminated in October 2008, and last updated in March 2010, also lays out other factors to consider, including:
And, before closing an investigation, the manual spells out factors that the staff should consider. Listed first among the factors is the seriousness of the conduct and potential violations.
Establishing and consistently applying factors for referring matters to others agencies:
A newly-established Office of Market Intelligence has been created to oversee and coordinate the collection, analysis and distribution of complaints, tips and referrals that come to the Enforcement Division's attention.
If, in the course of conducting its initial review and triage, OMI recognizes that a piece of information is relevant to the mission of another component of the SEC, a state or federal agency, a criminal authority, or a self regulatory organization, OMI will provide the information to all other entities that may have an interest.
In addition to setting out general policies as to when referrals should be made to other entities, the manual also advises staff that after an informal referral is made, the staff should maintain periodic communication with the agencies to which the matter was referred concerning the status of any investigation or inquiry.
Making effective use of other resources within the agency, such as economic and international experts:
Each component of the SEC now has a formal liaison for Enforcement Division staff to contact with questions and concerns. With respect to international issues in particular, Enforcement Division staff regularly consults with and seeks assistance from the Office of International Affairs (OIA) when confronted with international issues.
In fact, OIA has a proactive program to work with the Enforcement Division to obtain documents and information from abroad, to locate and freeze assets abroad, and to help with other international enforcement issues.
Additionally, in 2009, the SEC established the Division of Risk, Strategy, and Financial Innovation to help bore through the silos that have compartmentalized, and therefore limited the impact of our institutional expertise. This new division - the first created in more than 30 years - has attracted renowned experts in the economic, legal, and public policy implications of the financial innovations being crafted on Wall Street.
Training Enforcement Division staff on potential remedies available under the laws applicable to both investment advisers and broker-dealers:
During fiscal year 2009, the SEC brought at least 76 actions against 227 individuals and entities in matters involving investment adviser misconduct, comprising more than 10% of the total number of enforcement actions during the fiscal year. During the same year, the SEC brought at least 109 actions against 182 individuals and entities in matters involving broker-dealer misconduct, comprising 16% of total actions.
As with the SEC at large, the Enforcement Division also is strengthening its training programs for new hires and for current staff. For example:
Sensitizing employees who leave the organization to their ongoing restrictions:
The events described in the OIG's report demonstrate that the SEC's current system operated effectively to prevent a former SEC employee from violating applicable "revolving door" restrictions.
The SEC enforces the same laws as other federal agencies regarding restrictions on former government employees' contacts with the agency they left. Under those laws, no former employee may switch sides on the same party matter that he or she had actually worked on. Supervisors with official responsibility for party matters may not appear in that matter for two years.
Senior officials, such as Commissioners and upper management, are subject to a one-year cooling off period, during which they may not appear before the Commission on any matter at all. The Commission has a process designed to ensure that all of these laws and rules are followed. To implement stronger restrictions, the Commission would need additional authority from Congress.
As with other federal agencies, former SEC employees, under certain circumstances (for example, after the expiration of the required "cooling off" period), are allowed to contact the SEC so long as it's about matters they did not work on while at the agency. In fact, the SEC goes further by providing a way for employees to confirm that they are not violating the party matter restrictions.
# # #