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U.S. Securities and Exchange Commission

Fiscal 2007 Appropriations Request

by Chairman Christopher Cox
U.S. Securities & Exchange Commission

Before the U.S. House Appropriations Subcommittee on Science, State, Justice and Commerce and Related Agencies

April 27, 2006

Chairman Wolf, Ranking Member Mollohan, and Members of the Subcommittee:

Thank you for the opportunity to testify today on the Securities and Exchange Commission's fiscal 2007 budget request. It is good to see each of you, and I look forward to working with you throughout your deliberations on the SEC's funding needs.

I also want to say at the outset, that I appreciate the support the SEC has received under Chairman Wolf's capable leadership. His support for the SEC throughout his chairmanship has been invaluable to the agency and our nation's investors.

As you know, the President's budget requests $904.8 million for the SEC in 2007. I fully support this funding level and am appreciative of the information technology funds that it provides the SEC. However, before detailing our budget proposal for fiscal 2007, I would like to give you a status report on the steps I have taken to fix several serious financial problems that were first identified last spring, before I arrived at the Commission.

Facilities Update

When I arrived at the SEC last summer, I faced an immediate budget challenge: paying for an estimated $48.7 million in unbudgeted expenses associated with the build-out of the agency's facilities in Washington, DC, New York, and Boston. As the Government Accountability Office has documented in several reports and in briefings with your staff, I immediately took actions to remedy this material budgeting shortfall by funding the entirety of this amount out of our fiscal 2005 and 2006 budgets.

I did this because the SEC has an obligation to ensure that taxpayer resources are used wisely and efficiently and because resorting to long-term financing would have burdened the SEC's budget for years to come and cost taxpayers millions of dollars in financing costs. I also took this approach because it was the only way to ensure that the SEC could start fiscal 2007 fresh, with all its resources devoted to the agency's core mission of protecting investors.

In this regard, I am pleased to report that the SEC's facilities-related deficit is now entirely behind us. During the second quarter of 2006, the agency successfully moved more than 1,400 employees into new offices and completed all of our major facilities projects. In addition, we were able to reduce the costs of these projects by a combined $6 million by relying on value-engineering to identify and eliminate unnecessary aspects of the building design and by obtaining lower build-out prices during the bidding process. We are also in the process of completing the specific reforms that GAO has recommended. Already, the SEC has:

  • Strengthened the process for developing facilities-related budget estimates and for overseeing construction and lease improvement activities;

  • Begun implementing a Budget and Program Performance Analysis System to detect errors or abnormalities in budget estimates and streamline the budget formulation process significantly, freeing up staff to focus more on budget analysis;

  • Created new positions in our Office of Administrative Services responsible for facilities-related budgeting and oversight, and a new budget analysis branch in our Office of Financial Management to conduct more rigorous budget analysis; and

  • Redistributed duties to strengthen accountability among the agency's facilities-management staff and ensure that employees with the most appropriate skills handle the most critical tasks.

Within the next several weeks, we also will have hired the necessary additional budget staff identified by GAO for both our Office of Financial Management and Office of Administrative Services.

Internal Controls

Separately, in May 2005, three months before I arrived at the agency, GAO identified three material weaknesses in the SEC's internal controls over financial reporting. Specifically, these weaknesses relate to the SEC's controls over: (1) recording and reporting of disgorgements and penalties, (2) information security, and (3) preparation and reporting of financial statements.

Since becoming Chairman in August, I have made it one of my highest priorities to eliminate these weaknesses, and we are on track to do so this fiscal year.

With regard to the SEC's controls over recording and reporting of disgorgements and penalties, we have made substantial progress in addressing each of GAO's recommendations. This spring our efforts have focused on developing and implementing comprehensive policies and controls to ensure that the disgorgement and penalty data recorded and reported on the SEC's financial statements are accurate, timely, and complete. To date, we have undertaken the following specific initiatives:

  • clarifying the division of responsibilities among the various divisions and offices,

  • documenting and implementing a comprehensive set of procedures and controls,

  • designing a new financial management system for tracking penalties and disgorgements that will replace the financial portion of Enforcement's existing case tracking database (CATS),

  • eliminating inaccuracies in the existing database to ensure data integrity in the new financial system going forward, and

  • clarifying the Commission's policies with respect to debt terminations and write-offs and clearing out a substantial backlog of old, uncollected debts.

Based on these efforts, I believe these initiatives will fully resolve the concerns identified by GAO so that this material weakness can be eliminated by the end of fiscal year 2006.

Improvements in information technology education and training will help address the SEC's second internal control weaknesses: information security. While the core values of the agency focus on transparency and the free flow of information, we nevertheless have significant amounts of sensitive data, ranging from confidential enforcement and examination-related files to internal financial information.

It is imperative that we maintain strong safeguards to ensure that such information is held confidentially, maintains its integrity, and is available for use even in the face of cyber attacks or business disruptions. I am committed to rectifying the critical information security gaps identified by GAO, and we are on track to do so in the current fiscal year. Of 58 specific weaknesses identified by GAO, we have resolved 28 as of the end of March, with the remaining 30 on track to be resolved by the end of the fiscal year.

For instance, we are implementing a new system to control employees' access to proprietary Commission information; instituting new procedures for handling security incidents and intrusion attempts; and instituting a range of other new policies and procedures to respond to the issues identified by GAO. However, the fast pace of advances in technology require that we continue to be vigilant and continue to improve our security posture in response to new threats.

We also have made substantial progress in improving the SEC's controls over the preparation of financial statements. In accordance with GAO's recommendations, we have added resources and expertise to the Office of Financial Management, and we are nearing completion of a comprehensive set of written procedures governing financial reporting processes and related internal controls.

In addition, beginning with our second quarter financial statements, our Financial Management Oversight Committee will be providing executive-level review of the SEC's financial statements and our financial and accounting policies and procedures. We expect to have this weakness fully resolved well before the completion of GAO's fiscal 2006 audit.

Again, I stress to you that I am resolutely determined to clean up these audit weaknesses.

Fiscal 2007 Request

The President's fiscal 2007 budget requests a total of $904.8 million for the SEC. While this request provides much needed funds for information technology, given the built-in 5.5% annual escalator in personnel costs, which represent 67% of the SEC budget, I do not want to understate the challenge any SEC Chairman would face in managing the agency at this level. Because I fully appreciate the budget constraints imposed by the war on terror, Hurricane Katrina, and other vitally important national emergencies I wholly support the funding level in the President's budget. As a result, my main request to this committee is not for more money, but rather for greater flexibility in spending what you already give us.

In 2007, under this proposed budget, the SEC would at least expect to be able to stop shrinking the agency. We could begin to replace staff who depart during the year, though not staff vacancies that have been created in the last several years and through the remainder of this year. Reaching a staff plateau at a lower level will be possible in 2007 because of the substantial staffing losses we have incurred since 2005.

If it were necessary for the SEC to receive less than the President's budget request, the agency would deal with that further reduction by continuing to reduce the size of the workforce, through maintenance of the current attrition policy. This would be necessary because the largest component of the SEC's budget — roughly 67% — is dedicated to personnel costs.

So that the agency will not be adversely affected by this situation, I would like to offer to work with you to explore ways that the agency could be provided with additional authority to ensure we manage our limited budget resources wisely, such as clarifying the Chairman's authority to weigh the benefits of increases in employee pay against the expense of increased attrition in mission-critical programs.

In addition, I am also looking to give the heads of our offices — especially the regions and districts — greater flexibility to decide how best to manage the agency's limited resources within their offices to ensure maximum benefit to taxpayers. Finally, I would like to develop with you a more streamlined but comprehensive approval framework for other reprogramming funds.

With such added flexibility, I am confident the amount the President has budgeted for the SEC will permit the agency to continue to carry out its core mission and serve the investing public with no diminution in effectiveness.

The SEC's fiscal 2007 budget also includes a total of $110 million for information technology, the same level as in the SEC's fiscal 2005 budget and $15 million more than this year. I view this amount as a conservative figure for what the SEC should allocate to technology, especially given my priority as Chairman of using information technology to improve the quality, timeliness, and usefulness of disclosure for individual investors.

This nearly stable funding level will also allow the SEC to continue to make the improvements in our internal controls and other critical agency functions that the GAO and others, including this Committee, have demanded.

As you may know, I have been very public in my belief that investors can benefit greatly from "interactive data."

Today, investors have a huge amount of SEC-filed information at their disposal and available online through our EDGAR system — but most of it is difficult to wade through and analyze. Transferring more of this information to computer-readable, analytically useful data formats, such as XBRL and XML, would significantly improve the ability of investors to take advantage of this information. In fiscal 2007, I intend to expand our activities in interactive data, which will involve continued investments in EDGAR and other technologies to make this vision a reality.

Besides helping investors, our information technology investments also are targeted at increasing the productivity of our staff. This is particularly important since we are continuing to shrink the agency. It is a near-certainty that the securities markets will continue to expand faster than the SEC's resource base. It is therefore imperative that we leverage information technology to ensure that we use our staff and financial resources as efficiently as possible and deploy them towards the most significant issues.

In fiscal 2007, we plan to make improvements to the enforcement case management system. We also plan to invest in improvements to the system used to manage the activities of the examination program. And we plan to make better use of risk assessment tools that can help better inform resource allocation decisions and ensure the agency gives taxpayers the most bang for their bucks.


Having explained our request and its context, I would now like to discuss another area of great importance to the agency, Mr. Chairman, one that I know is a priority for you and the Subcommittee: telework. Since my arrival at the agency, I have come to appreciate first-hand the benefits of telework for our agency, and its importance as part of our continuity of operations planning.

I recently submitted to the Subcommittee the SEC's fiscal 2006 certification documenting the expansion of our telecommuting program. As that report stated, telework continues to be available to 100% of the eligible SEC workforce, and we continue to make great strides in increasing participation. By centering on the positive advances the SEC has experienced in telework and emphasizing its role in advancing our strategic goals, we have been able to increase support for expanded telework at the SEC.

During the first half of this year, we increased our telework participation to more than 1,100 employees. This represents an increase of 532 over the level at the start of fiscal 2005. We have discovered that employees who initially telework on an unplanned or ad hoc basis recognize its benefits and will frequently seek regularly scheduled telework. Last but not least, given our evaluation to date of our Virtual Workforce pilot program within the Division of Corporation Finance, we are considering options for expanding the program to other divisions and offices within the agency.

I am proud of the SEC's telework program, and I intend to build upon our strong foundation.

Office of Global Security Risk

Equally, important, I now turn to another program of significant interest to you and other members of this subcommittee — the agency's Office of Global Security Risk. This office, which is located within the Division of Corporation Finance, continues to refine its operations and procedures. It is now fully staffed with one supervisor, three attorneys, and a research specialist. The activities of this core Office staff are augmented by its regular interaction with the Division's examination staff, who continue to monitor filings for global security risk issues and to evaluate company disclosure and pursue enhanced disclosure where appropriate.

I fully support the goals of this office and believe it will play a more significant role in the future, especially given the increasingly global nature of public company activities. In its review of the filings of nearly 7,500 companies over the past year, the Division of Corporation Finance considered whether each company's disclosure indicated material contacts with countries the State Department has identified as sponsors of terrorism.

The Office of Global Security Risk continues to review Securities Act registration statements and Exchange Act filings referred to it by the Division's examination staff. It also continues to perform independent reviews of companies not under review by the rest of the Division. In the past year, the Office issued comments to 137 companies.

In evaluating disclosure, the Office staff considers the information in a company's filings and other publicly available information. The staff also uses an online global security risk assessment product called the Global Security Risk Monitor, as part of the mix of information it considers in determining whether, and how, to comment on companies' disclosures regarding their contacts with state sponsors of terrorism. In addition, the Office continues to coordinate with other relevant federal agencies, such as Treasury's Office of Foreign Assets Control and Commerce's Bureau of Industry and Security.

The added layer of review the Office provides to the Division and the Commission has increased the quality of information provided to investors regarding companies' contacts with countries identified by our government as state sponsors of terrorism. I appreciate the leadership of this subcommittee in ensuring that investors have the relevant information they need to make informed investment decisions regarding the foreign activities of the companies that they own. I am confident that the Office of Global Security Risk is well positioned to continue fulfilling these vitally important responsibilities.

This concludes my written testimony. Thank you for the opportunity to speak with you today regarding the Commission's priorities and challenges for fiscal 2007. Given the tight budgetary environment in which I know you must make decisions, I believe the SEC's budget request is appropriate, modest, and fully justifiable. I would be happy to answer any questions that you may have, and I look forward to working with you to determine how the SEC can best fulfill its mission and protect investors.


Modified: 04/27/2006