Enforcement Action Memoranda
Audit No. 276
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Enforcement Action Memoranda
The Securities and Exchange Commission's Office of Inspector General (OIG) conducted an audit of the Commission's Enforcement Action Memoranda Process. Action Memoranda are the primary formal communications from the Enforcement staff to the Commissioners about investigations of alleged violations of securities laws. Commission instructions, based on the information in Action Memoranda, provide the Enforcement staff guidance concerning the case. Appendix A provides additional background information on the process.
The objective of the audit was to determine how well the staff and Commissioners communicate through this process. The audit primarily consisted of 13 structured workshops, with approximately 19% of the Enforcement staff participating, and interviews with non-Enforcement staff involved in the process.
The workshop participants indicated that, generally, the staff is successfully obtaining case specific instructions from the Commission by providing it relevant information, although some obstacles are impairing the Commission's ability to fully achieve this objective.
Among the recommendations suggested by the participants were: (1) enhanced communication of Commission and Division information needs, policies, and procedures to the staff; (2) improved capability to research related previous Action Memoranda; (3) standardization of review procedures, especially those of interested offices and divisions; and (4) additional training on the Action Memoranda process.
We recommend the establishment of an Enforcement Task Force on the Action Memoranda process to consider the participants' recommendations (and any the Task Force generates or identifies from other sources) and implement those recommendations that have merit. The Division has already begun taking significant steps to improve the Action Memoranda process and is commended for its timely efforts.
SCOPE AND OBJECTIVES
The scope of our audit consisted primarily of structured workshops with Enforcement managers and professional staff from the Division and regional/district offices. One hundred and forty six Enforcement staff1 and managers (approximately 19% of the total) took part in workshops that assessed the achievement of objectives. Their views and assessments were considered "expert" because of the qualifications necessary to be selected as enforcement staff and supervisors, and their intimate knowledge of the process. Enforcement liaisons in interested offices and divisions2 and the Commissioners' legal assistants were also interviewed. We did not independently review or analyze source documents to validate statements made by either the participants or those individuals whom we interviewed. However, participants did verify workpapers from each workshop and senior management reviewed draft versions of this audit report.
The primary objective of the audit was to determine the extent to which the Enforcement Action Memoranda process is achieving its primary and supporting objectives. This audit report makes numerous recommendations to increase the likelihood that the Commission's Enforcement objectives will be achieved.
During the audit, Division management identified the primary objective of the Action Memoranda process:
Obtain case specific instructions from the Commission, by providing it relevant information
Six supporting objectives, that make achievement of the primary objective more likely, were also developed. They are:
- COMMUNICATE COMMISSION AND ENFORCEMENT NEEDS - Provide Enforcement staff with criteria and guidance with respect to the Commission's information needs and Enforcement's procedural requirements.
- DRAFT ACTION MEMORANDA - Prepare Action Memoranda with the information required by the Commission (e.g., precedent, novel issues, legal analysis, source of case, other divisions and offices consulted, prior Commission actions, staff recommendations to the Commission, etc.).
- REVIEW ACTION MEMORANDA - Ensure that the review process of Action Memoranda results in a work product acceptable to the Commission (e.g., editorial style, legal analysis and sufficiency, sufficiency of factual information, policy and procedural requirements, appropriate use of prosecutorial discretion, Commission precedent, etc.).
- MAXIMIZE PRODUCTIVITY AND TIMELINESS - Maximize the productivity of the staff and timeliness in supplying Enforcement information to the Commission.
- STAFF TRAINING - Ensure that staff and reviewers have sufficient training to provide the Commission with the information it requires and to ensure compliance with established policies and procedures.
- PERFORMANCE MEASURES - Measure and evaluate staff and office performance based on the quality and timeliness of Action Memoranda prepared.
The field work was performed from January 1998 through July 1998 in accordance with generally accepted government auditing standards.
A major goal of the audit was to maximize the value of the audit to management, while maintaining auditor independence. A version of a private sector, internal audit methodology (Control Self-Assessment or CSA) was adapted for this purpose. The Institute of Internal Auditors has promoted the concept internationally for the last several years with outstanding results reported.
The premises for using this approach are common to many applications that use a team approach to decision making (e.g., teams can process more diverse information than an individual, employees are closer to the information needed than anyone else, staff can make a good system fail or vice versa, etc.).
Primary data collection was accomplished through 13 workshops in which the primary and supporting objectives were discussed in detail. One hundred and forty six Enforcement staff and managers (or approximately 19% of the Enforcement program's professional staff) participated in the workshops. Selected interviews with other staff (e.g., Enforcement liaisons in interested offices and divisions) were also conducted. The methodology provided perceptions and judgments about the achievement of Enforcement management's objectives. No document reviews or other audit tests were performed to confirm the judgments of the Enforcement staff participants. However, participants did verify workpapers from each workshop and senior management reviewed draft versions of this audit report.
The CSA methodology used in the audit consists of four primary tasks: identify management objectives, convene workshops to discuss and rate each objective, evaluate the workshop data, and prepare an audit report. These audit steps are described in further detail in Appendix B.
The workshop participants anonymously rated how well the Enforcement Action Memoranda process achieved its primary objective, as well as each of the six supporting objectives. The rating scale (Appendix C) used by the participants ranged from 7.0 (full implementation) to 1.0 (not being implemented in a meaningful manner).
The composite rating of all workshop participants for the achievement of the primary objective was as follows:
|Obtain Case Specific Instructions from the Commission, by Providing it Relevant Information||4.4|
This rating indicates that, generally, the staff is successful in obtaining case specific instructions from the Commission, by providing it relevant information. The rating also implies, however, that although several actions for implementation are successful, some obstacles are impairing the Commission's ability to fully implement the objective.
The participants recommended numerous improvements to the Enforcement Action Memoranda process. The Division has already begun taking significant steps to improve the Action Memoranda process and is commended for its timely efforts.
The composite ratings for how well the Action Memoranda process achieved its six supporting objectives were as follows:
COMMUNICATE COMMISSION AND ENFORCEMENT NEEDS
DRAFT ACTION MEMORANDA
REVIEW ACTION MEMORANDA
MAXIMIZE PRODUCTIVITY AND TIMELINESS
ENFORCEMENT TASK FORCE
Although the participants indicated that they are generally successful in obtaining case specific instructions from the Commission, they made literally hundreds of recommendations to improve operations of the Action Memoranda Process (some major; some minor; some conflicting). As previously mentioned, Enforcement management has already taken, and is taking, action on many of them, to their credit. We believe, however, that the program and the Commission should consider a systematic review of the Enforcement Action Memoranda Process. New technologies, growth in the securities markets, the increasing complexity of securities instruments and Enforcement cases, and rapid staff turnover and growth are additional bases for reevaluating Enforcement's formal communication process with the Commission.
Traditionally, the Commission establishes a high level staff task force to review fundamental operations or policies. The general consensus is that these task forces have been very effective in modernizing Commission procedures.
The Director of Enforcement should establish an Enforcement Task Force. The Task Force should be chaired by the Deputy Director of Enforcement. It should consist of senior Enforcement staff and managers from the home office and regional/district offices, as well as representatives from interested offices and divisions. As appropriate, staff from Commission support offices (e.g., Office of Administrative and Personnel Management) should be consulted.
The Task Force should consider the issues and recommendations presented in this audit report, as well as any it develops. It should also take into account comments from the workshop participants, grouped by relevant issues, contained in the audit analysis workpapers3.
Most of the specific recommendations that follow are made with the understanding that they will be considered and addressed by the Task Force.
The remainder of this report focuses on the substantive comments and recommendations of the workshop participants, and OIG findings and recommendations. It is organized around the six supporting objectives that were the focus of the audit.
Communicate Commission and Enforcement Information Needs
Provide Enforcement staff with criteria and guidance with respect to the Commission's information needs and Enforcement's procedural requirements
The Commission's Enforcement program has long been widely respected for its effectiveness in protecting investors. Moreover, the integrity of the Enforcement process has been repeatedly applauded.
The guidance from the Commission on some Enforcement matters appears to be mixed. The participants did seem to understand Action Memoranda structural requirements4. However, investigation and litigation policies (e.g., criteria for acquiring subpoena authority, settlement standards) in some areas were perceived as informal, evolving, and not always well documented. For instance, the Commissioners occasionally make offhand statements about a particular case which may lead to confusion and frustration about whether these statements relate solely to Action Memoranda under consideration or to all future Action Memoranda with similar issues. As a result, unnecessary new requirements occasionally may be created since the Enforcement program tries to accommodate the Commissioners' preferences. Other pending Action Memoranda with similar issues are typically delayed and/or revised.
The Director of Enforcement should consider whether to request an annual meeting with the Commission to identify any new information requirements (e.g., procedures individual Commissioners require the staff to follow), and other issues relating to the Action Memoranda process.
COMMUNICATION BETWEEN THE COMMISSION AND ENFORCEMENT STAFF
The Commissioners' views and Enforcement procedures are generally communicated to the staff through closed Commission meetings, regularly scheduled senior staff meetings (that include the Regional Directors and District Administrators and certain levels of their staff), an annual conference for senior attorneys, meetings with Regional Directors and District Administrators, and conference calls to the regional/district offices. Participants generally knew of these communications, although they did not always receive the information.
Many participants also complained of poor communication of Enforcement policy. They maintained that information is not systematically disseminated to the staff by the Division. Participants explained that, in many instances, Commissioners' comments and votes about Enforcement matters are interpreted by the staff present at closed meetings and then synthesized and communicated to guide Enforcement staff. The information may not always reach all staff. Information is not systematically conveyed and is not necessarily timely. Frequently, some participants knew of a policy or procedure that others in the workshop had not received.
The participants made numerous recommendations to improve this communication. The recommendations included:
- Create an intranet-based central depository of approved Action Memoranda, related Office of General Counsel (OGC) Counseling Memoranda, and any other case related documents. The database should be organized to ensure efficient and effective research (e.g., by type of case and violation). While this is being developed, the Division should provide periodic lists of recently approved Action Memoranda to Enforcement staff, with a brief synopsis of the significant issues raised in Action Memoranda, OGC Counseling Memoranda, and other related documents.
- Create electronic bulletin boards or mail lists on the Commission's E-Mail system for staff working on various types of cases (e.g., Insider Trading cases) or issues. The Task Force should identify senior attorneys (in the Division, regions/district offices, or interested offices and divisions) who are willing to administer the bulletin boards and maintain a dialogue for a period of time (e.g., one year).
- Improve the Trial Unit's bulletin board on the E-Mail system and make it more user friendly (e.g., improved search capability, index by subject matter).
Beginning in the spring of 1998, the Secretary of the Commission began to teleconference the closed Commission meetings and make the discussions available to regional/district offices. In January 1999, the Secretary of the Commission video conferenced a closed Commission meeting between headquarters and two regional offices. Overall, the experiment appeared to be successful. The Office of Secretary (OS) should continue its efforts to implement two-way video conferencing of the closed Commission meetings. The Secretary should make the minutes of the closed Commission meetings or audio tapes of the meetings available to the staff, if full implementation of video conferencing is significantly delayed.
Within six months of this report, the Task Force, in consultation with the Offices of Information Technology (OIT), Administrative and Personnel Management (OAPM), and General Counsel should consider whether to prepare a statement(s) of work for a contract(s) to the Office of the Executive Director (OED) for approval, which would address the research recommendations identified above and in the `Technology' section under "Maximize Productivity and Timeliness." Enforcement management stated that a document management system (e.g., PC Docs) is a critical need not currently addressed.
The Director of Enforcement or a suitable designate from the Division should hold "Town Meetings" with the staff, including those in the regional and district offices, to discuss enforcement procedures, policies, and trends.
ACTION MEMORANDA CHECKLIST
During the workshops, participants identified diverse information that would enhance their ability to achieve the program's goals. They noted that the checklist for Administrative Proceedings has been helpful and thought that a comparable checklist for Action Memoranda would be useful. The specific recommendations that the participants thought would be suitable for such a document are reflected in the various recommendations included in this report.
Within six months of this report, the Task Force should consider issuing a "checklist" for Enforcement Action Memoranda on the Intranet. The checklist should be periodically updated, as warranted.
REGIONAL OFFICE CONTACTS WITH HEADQUARTERS
Some participants in the regional/district offices stated that they felt they are discouraged from speaking directly with headquarters personnel (e.g., Enforcement liaisons, specialists in the interested offices and divisions, the legal assistants, etc.).5 They stated that:
- The Branch of Regional Office Assistance (BROA) is perceived as wanting to act as a gate-keeper over the flow of information;
- Some headquarters staff are perceived to have an attitude of superiority; and
- Senior management in some regional/district offices want to act as a gatekeeper with respect to staff communications with headquarters personnel.
Some participants stated that they are reluctant to contact the interested offices and divisions because the interested offices' and divisions' positions frequently change because either the liaisons change or some liaisons are junior staff, who lack the authority to set policy on behalf of the interested offices and divisions. One interested division stated that policy decisions do change over time and Enforcement cases cannot always be brought quickly. In addition, sometimes the facts that are informally discussed during the investigation or while drafting Action Memoranda deviate somewhat from what is ultimately written in Action Memoranda.
The interested offices and divisions indicated that they were willing to discuss issues with staff attorneys either during the investigation or the Action Memoranda drafting process, although they differed on the extent to which they prefer BROA to be involved in the discussions. BROA's involvement is needed, if they are to provide guidance to all the regional/district offices and ensure consistency throughout the Enforcement program. The interested offices and divisions generally agreed that BROA does act as a gatekeeper of information. During a workshop of current and former BROA staff, participants stated that they encouraged direct communication between regional/district office staff and headquarters personnel.
The Division of Enforcement should make clear that direct communication between regional office staff and headquarters personnel may be beneficial, and explain BROA's need to know the issues discussed.
The Division of Enforcement should periodically verify the names and telephone numbers of the Enforcement liaisons. Any changes should be promptly forwarded to all Enforcement staff.
Some participants felt that the Commission should consider various policy or rule changes that would increase the efficiency and effectiveness of the process.
Alternatives to Action Memoranda
Many participants believed that, in certain instances, there could be alternatives to Action Memoranda (e.g., oral presentations, templates, checklists for routine matters, etc.). Other federal agencies use methods other than Action Memoranda (e.g., oral presentations, delegations of authority) to provide its staff with the necessary instructions. Although in emergency actions, oral briefings are currently held before a Duty Officer, Action Memoranda are subsequently prepared so that the other Commissioners can approve the action.
The interested offices and divisions generally believed that only Action Memoranda are adequate in order for them to review Enforcement's case. However, most of the legal assistants thought that, in certain instances, something other than Action Memoranda could be used.
Delegation of Authority
Some participants indicated that they were unsure of what information was required for Formal Order Action Memoranda. A few participants also stated that they prefer to seek voluntary cooperation from defendants and witnesses because of the time spent in drafting and having the Formal Orders reviewed. Some participants stated that the delegation of subpoena Enforcement authority to the Enforcement Director has been very beneficial. It has reduced delays and helped the Division protect investors. The participants also stated that there may be more reluctance to close an investigation when a Formal Order has been issued because it requires substantial work to effect a closing under these circumstances.
Legal Analysis Section
Most participants stated that the summary of the relevant law in Action Memoranda has become boilerplate. Sometimes, the summary of the relevant law is just copied from a previous Action Memoranda involving the same statutes or rules. Some believed that this standardization may impair the Commissioners from making a well-informed decision. They believed that the statements of law could be improved by tailoring the statements more to the facts of the case.
On the other hand, some participants believed that the standardized language serves the Division's objectives of efficiency and consistency and has been preferred by some Commissioners.
Participants variously suggested that the legal analysis section be:
- Kept as is;
- Drafted in non-standardized language based on the specifics of the case;
- Transferred to the appendix; or
- Referenced to another document (e.g., an OGC memorandum).
The Enforcement liaisons and legal assistants similarly had differing views about the legal analysis section.
A January 1994 memorandum from the Chairman to the Director of Enforcement stated, "As already implemented, Action Memoranda sent to the Commission should be no longer than approximately twenty pages. Any more detailed analysis should be attached as an exhibit or an appendix." The page limit was established because, in prior years, some believed that Action Memoranda were too long.
Most participants believed that a strict page limit could in certain cases prevent them from providing the Commissioners with all of the relevant information necessary for the Commissioners to make a well informed decision. Thus, many have used appendices to supplement the Action Memoranda. Examples, additional explanations, and strengths and weaknesses of evidence cannot in certain complex cases be fully explained without the use of an appendix. Furthermore, although the Action Memoranda might be twenty pages when initially drafted by the staff attorney, it might exceed the limit after review comments are incorporated. This may require either removing information or transferring information to an appendix to meet the limit.
The consensus view of the Enforcement liaisons was that twenty pages should be the goal, but not a limit. They suggested the Assistant Director should determine the page length.
Individuals who favored the page limit believed that the staff include too much evidentiary information (as if staff are seeking summary judgment from a judge). In addition, they believed that the staff seek to demonstrate the thoroughness of the investigation in the highly visible work product.
Division management did not believe that the page limit (supplemented by appendices) is a problem.
Expedited Treatment Requests
Some participants stated that when they seek expedited treatment requests, some of the Commissioner Offices give the impression that such requests are not warmly received.
The legal assistants generally stated that requests for expedited treatment (e.g., trading suspensions) are received on equal footing as all other requests. However, they acknowledged that Commissioners sometimes get upset when the expedited treatment request could have been avoided, for example, if the urgency is the result of a statute of limitations issue arising from case inactivity.
Within six months of this report, the Task Force should review the five issues discussed above and, if appropriate, recommend changes to the Commission.
Draft Action Memoranda
Prepare Action Memoranda with the information required by the Commission (e.g., precedent, novel issues, legal analysis, source of case, other divisions and offices consulted, prior Commission actions, staff recommendations to the Commission, etc.)
Action Memoranda are written for many different audiences including Commissioners and their legal assistants, interested offices and divisions, BROA, and Enforcement supervisors. Participants thought that the characteristics of an outstanding Action Memoranda are that it be easy to read and to understand, concise, and balanced. The primary purpose of Action Memoranda is to provide the Commissioners with the information necessary for them to make a well-informed decision. The participants generally felt that Action Memoranda are written defensively to avoid criticism and to gain approval.
Workshop participants generally believed that reviewers of Action Memoranda have too many stylistic preferences. They reported that many Branch Chiefs and Assistant Directors rewrite Action Memoranda to change the style but not the substance of the content. However, stylistic preferences among supervisors are often inconsistent. Moreover, the participants believed that many of the stylistic preferences are inconsistent with Plain English.
Within six months of this report, the Task Force should consider the utility of establishing and disseminating stylistic rules, which are consistent with Plain English.
Review Action Memoranda
Ensure that the review process of Action Memoranda results in a work product acceptable to the Commission (e.g., editorial style, legal analysis and sufficiency, sufficiency of factual information, policy and procedural requirements, appropriate use of prosecutorial discretion, Commission precedent, etc.)
Workshop participants generally thought some review of Action Memoranda is necessary and valuable. Regional office participants also thought that BROA is generally successful in providing consistency among Action Memoranda from the regional/district offices, and providing information and guidance about the current issues and concerns of the Commissioners.
TIMING AND NUMBER OF REVIEWS
Many participants described the review process as the least productive aspect of the Action Memoranda process. They indicated that there are generally about four reviews within the originating office, a BROA review (if from a regional/district office), and then reviews by interested offices and divisions. This series of reviews can be repeated if substantive changes are required. The participants perceived the multiple reviews as having similar objectives:
- legal sufficiency
- consistency with prior cases and Commission policies
- legal analysis
- appropriateness of remedies sought
- format (e.g., writing style and organization).
The participants also thought the reviews were a source of significant delay. Some participants noted that the review process on rare occasion can take more than a year, occasionally as long as the investigation itself took. However, they acknowledged that the review process does serve important functions and that cases seeking emergency action (e.g., TROs, asset freezes) are reviewed quickly. They also acknowledged that cases involving high priority issues receive expeditious review. The participants felt that the value added to Action Memoranda by each review diminished with each subsequent review.
Within six months of this report, the Task Force should examine the scope of each level of review, in order to ensure that the value added justifies the costs incurred (e.g., timeliness, personnel costs).
The Division of Enforcement should consider the utility of developing and implementing policies and procedures for tracking and reporting the timeliness of Action Memoranda, including identifying the source(s) of delays.
REVIEWS BY INTERESTED OFFICES AND DIVISIONS
Action Memoranda review procedures depend on whether the Division or a regional/district office prepared it. BROA regularly sends all regional/district Action Memoranda to interested offices and divisions for comment. Associate Directors make the determinations of whether to send headquarters' Action Memoranda to interested offices and divisions for review.6 Headquarters' Action Memoranda frequently are not sent to interested offices and divisions for review. As a result, most Action Memoranda reviewed by the interested offices and divisions are from regional/district offices. One interested division stated that headquarters has been sending more Action Memoranda for review lately and that headquarters is more likely to seek informal advice throughout the investigation and Action Memoranda process. The interested offices and divisions, as well as Commissioners' legal assistants, generally believed that review by interested offices and divisions served to strengthen Action Memoranda.
Many participants believed that the reviewers make too many non-substantive (e.g., stylistic) comments. They also conjectured that some reviewers justify their positions based on the number of (not quality of) comments and that they are not held accountable for their comments.
The Enforcement liaisons indicated that they are not evaluated on the number of comments provided nor do they have the time to make immaterial review comments. They also maintained that they are held accountable for their review comments. They suggested that some technical corrections may seem like stylistic comments to staff attorneys. However, they agreed that they sometimes do highlight typos and obvious errors.
Communication of review comments
Many participants perceived that reviews by interested offices and divisions have become somewhat adversarial and less collegial. They identified poor communication as a significant cause of this relationship. Regional office participants generally thought that some of the review comments from the interested offices and divisions imply that they do not trust the abilities of regional office staff.
Enforcement liaisons stated that they have no objection if staff attorneys respond verbally to them concerning their review comments. The liaisons indicated that staff frequently do discuss the review comments with them. Enforcement management stated that staff have always been free to provide oral or written explanations to interested offices and divisions and that it frequently happens. However, to the extent that the comment is not incorporated into Action Memoranda, the usefulness of Action Memoranda to serve as a future reference tool is diminished. This needs to be considered since prior Action Memoranda with similar issues are a critical reference tool. The Enforcement liaisons generally stated that their comments do indicate whether the comments are advisory or material. In addition, they indicated that they try to obtain the staff attorneys' reasoning.
Some participants thought that some interested offices and divisions will not review proposed settlements until they are signed by the defendant to ensure that the settlement offers are legitimate. As a result, these participants believed that some defendants have to sign multiple versions of the settlement offer. These participants thought that this may give the appearance that the Commission is not negotiating in good faith. They also believed that requiring multiple signed offers is occurring more frequently than in the past. The interested offices and divisions have all stated that they are willing to review proposed settlements before the signature is obtained.
Within six months of this report, the Task Force should consider the four issues discussed above and, if appropriate, recommend changes to the Commission.
"One bite rule"
In general, participants thought that the frequent multiple rounds of Action Memoranda reviews were counter-productive and caused unnecessary delay. Many participants observed that the interested offices and divisions frequently made new (or even contradictory) comments on subsequent reviews of the same Action Memorandum. They believed that this was mainly caused by the Enforcement liaisons' lack of authority to take policy positions. Also cited were casual initial reviews by the liaisons.
The interested offices and divisions disagreed with this assessment. They felt that their initial reviewers have sufficient authority to make authoritative comments. They believed that multiple rounds of comments are caused by:
- Enforcement staff in the regional/district offices who do not incorporate their review comments or explain why they did not do so
- The need to determine whether prior comments were incorporated appropriately
- The need to determine the effects of comments from other interested offices and divisions
- Occasional complex cases that may require a second thorough review.
During the audit, Enforcement management consulted with the interested offices and divisions to develop new policies and procedures and establish a more streamlined approach for typical Action Memoranda. We commend Enforcement management for taking prompt action to resolve this situation.
COMMUNICATIONS BETWEEN DEFENSE COUNSEL AND REVIEWERS
Some participants expressed their views that certain defense counsel may seek to affect the Action Memoranda review process through communications with reviewers. They conjectured that former staff and staff from prestigious firms may attempt to communicate with reviewers (e.g., at professional and social functions), without Enforcement staff attorneys present, and present a one-sided argument benefiting their client. The participants believed that this could in some cases tend to undermine their ability to negotiate a settlement.
Interested offices and divisions indicated that they refer occasional telephone calls from defense attorneys regarding ongoing Enforcement matters to the appropriate officials in the Division or regional/district office.
Enforcement management, in consultation with the interested offices and divisions and the Office of General Counsel, has prepared a memorandum confirming the general practice that substantive communications between the non-Enforcement staff and defense counsel be disclosed to the Enforcement staff. We commend Commission staff for reinforcing management controls concerning these communications and encourage the widespread distribution of the memorandum.
Maximize Productivity and Timeliness
Maximize the productivity of the staff and timeliness in supplying Enforcement information to the Commission
The participants generally noted that the technology available at the Commission appears to be inadequate, especially compared to private industry. For instance, the participants stated that there is little software available for document management or case management. They also stated that when technology is obtained, it is frequently obsolete.
Recommendation C addresses these issues. According to Enforcement management, a new computer system "CATS2000" will be implemented in April 1999. The system will address some of the specific suggestions made by participants.
Ensure that staff and reviewers have sufficient training to provide the Commission with the information it requires and to ensure compliance with established policies and procedures
Workshop participants stated that staff attorneys and Enforcement supervisors mostly learn the Action Memoranda Process on-the-job, because there is little formal training relating to the process. For instance, staff attorneys rely heavily on prior Action Memoranda with similar issues as a reference tool in conducting their investigation and drafting Action Memoranda. Supervisors rely on their experience as staff attorneys to know how to review Action Memoranda and supervise investigations. We asked the participants if there were training topics that, if properly taught, would be beneficial. The participants believed that such training topics existed and, at our request, identified training topics for the staff attorneys, Enforcement supervisors, Enforcement liaisons, and the Commissioners' legal assistants. In addition, they identified certain improvements that could be made to the annual September Enforcement training program.
The participants also commented on the timing and availability of training. Because the need for training and the availability of requisite training was often out of sequence, the value of training that was provided was sometimes diminished. If training was available "just in time," its benefits could be significantly enhanced.
During the audit, Enforcement management was quoted in an article recognizing that improvements to its training program would be beneficial. Also, a recently completed internal study of the Enforcement program concluded that the Division should "implement a new and expanded staff training program by working with the industry and professional groups to provide a formal program for attorneys to enhance their legal skills and business knowledge to more effectively and efficiently conduct investigations." The Division has begun making improvements to its training program. For instance:
- At the September 1998 training program, the Division established a new training section on drafting Action Memoranda and press releases. The staff were given a set of facts and asked either to draft the summary section of an Action Memorandum or a press release. Their work was then critiqued;
- The Division recently appointed a senior management official to oversee its training program. This individual has been coordinating with the Securities Industry Association.
In prior years, the Division required headquarters attorneys, who had been with the Division for less than two years, to attend sessions on various enforcement related topics. Lately, the sessions have not been conducted. However, Enforcement management stated that such sessions will be reinstated in the near future. Home Office staff are also apprised of and encouraged to attend a wide variety of Commission sponsored training programs taking place in headquarters, including both live and videotaped lectures. The videotapes are then made available to regional/district office staff.
SEPTEMBER TRAINING PROGRAM
Some of the participants described the September training program as not being fully effective in training new staff attorneys in the Action Memoranda process (e.g., communicating information needs, writing style, etc.). They believed that the training topics are too broad and general, in part, because some of the training program is open to the public.
Also, some of the participants thought that the introductory training program should be offered more than once a year. This would allow for more personal interaction between the instructors and staff attorneys. In addition, depending on the start date of the staff attorney, he/she might have to wait close to twelve months before taking the training program. The participants thought that the September training program reference book should be provided to staff attorneys because it is a valuable reference tool.
The Division of Enforcement should consider offering the September training program more than once a year, 7 making it non-public, and providing the September training program reference books to new staff attorneys on their first day on the job.
We asked the participants to identify formal training topics that, if properly taught, would be beneficial for staff attorneys, Enforcement supervisors, Enforcement liaisons, and the Commissioners' legal assistants. The participants identified numerous training topics.
Some participants stated that they received management training. However, these programs were generally not effective because they were either too general and did not provide enough specifics or they were not applicable to supervising Enforcement attorneys. Lastly, some participants believed that management did not verify whether the participants attended these training programs.
Within six months of this report, the Division of Enforcement should enhance its training program for Enforcement attorneys and supervisors. The Division should review applicable training programs at other Federal agencies.
The Division of Enforcement should determine whether the regional/district offices have adequate reference materials in their libraries.
The Enforcement liaisons stated that they would be receptive to receiving enforcement orientated training because they generally believe that knowledge of the Enforcement program is important.
The participants stated, based on our questions, that a number of the current legal assistants lack an Enforcement background (e.g., experience in investigating and litigating cases). This, in part, causes the staff to draft Action Memoranda defensively, in order to avoid potential criticism. The majority of the legal assistants came from one of the Commission's interested offices and divisions and not the Division.
The legal assistants did not believe that their lack of an Enforcement background was a material problem, but they generally thought that training for them would be beneficial.
Within six months of this report, the Task Force should establish a training program for the Enforcement liaisons and legal assistants. The training should be available for each new Enforcement liaison and legal assistant (on videotape for example), at the start of their new assignment.
Measure and evaluate staff and office performance based on the quality and timeliness of Action Memoranda prepared
EVALUATIONS OF REGIONAL/DISTRICT OFFICES
Most regional/district office staff participants expressed great frustration with the annual Enforcement performance evaluation of each regional/district office. They complained that the regional/district offices were the only organizations in the Commission so evaluated and that the office management kept the results of the appraisals from the staff. They identified several significant adverse and unintended consequences of the evaluations.
Enforcement management stated that the evaluation provides an objective basis for rating Regional Directors and District Administrators, provides discipline for the up-coming work year, provides a structure to the Enforcement program, and serves as a management tool by enabling headquarters to provide the regional/district offices with constructive criticism. We believe that these objectives can be achieved at less cost without formal written evaluations.
Many participants offered recommendations for improving the evaluation process. Some participants suggested discontinuing the formal evaluation. We believe that the costs of the evaluation (e.g., staff hours spent to collect and analyze data, the perceived unintended adverse consequences) exceed the benefits derived from the evaluation.
The Division of Enforcement should experiment with alternatives to the current regional evaluations. The Division should notify (e.g., by E-Mail) all regional and district office Enforcement attorneys and professional staff of any new process.
During the audit, we discussed this recommendation with Enforcement management because the 1998 evaluation process was starting. Enforcement management concurred and began to implement the recommendation.
RECOGNITION OF STAFF CONTRIBUTIONS
Most participants felt that there are so many contributors to the Action Memoranda process that their own contributions are hard to discern. Some of the reasons cited were:
- Action Memoranda that are sent to the Commission are often dramatically different from the staff attorneys' versions
- The lack of timeliness in the Action Memoranda review process
- Staff attorneys generally do not present their cases to the Commission
- After the closed Commission meeting, Enforcement management do not always recognize the staff attorney
- Staff attorneys may lack a primary role in the litigation of their case, if it is not settled
- Staff attorneys may not be present at senior Enforcement management meetings involving their case
The Division of Enforcement should encourage supervisors to provide staff attorneys with immediate recognition of their contributions to their cases, when warranted, and allow staff attorneys to participate in senior staff meetings involving their cases, to the extent practical.
Enforcement staff need authority from the Commission to take certain actions including opening formal investigations;8approving settlement offers; and filing Enforcement actions.
To obtain this authority, the staff prepare Action Memoranda, which provide the Commission with all the necessary information supporting the staff's recommendations. Action Memoranda describe the entities and facts involved, the alleged violations of the securities laws, etc.
In the regional/district offices, Action Memoranda are typically prepared by the staff attorney assigned to the case. They are then reviewed by several levels of regional office management before being sent to the Division's Branch of Regional Office Assistance (BROA).
BROA makes comments on Action Memoranda and obtains additional review comments from the interested offices and divisions (e.g., Market Regulation, Investment Management, Corporation Finance, Office of the Secretary, Office of the Chief Accountant, and Office of General Counsel). BROA provides the comments to the regional office, which makes the appropriate revisions. Action Memoranda are then submitted to the Commission for calendar (i.e., closed Commission meeting), seriatim or Duty Officer consideration.9
The process is similar for Action Memoranda from headquarters, except BROA is not involved and Action Memoranda are not necessarily sent to the interested offices and divisions for review, except for OGC and OS.
CONTROL SELF ASSESSMENT METHODOLOGY
The Control Self Assessment (CSA) methodology used consists of four primary tasks: identify management objectives, convene workshops to discuss and rate each objective, evaluate the workshop data, and prepare an audit report.
At the beginning of the audit, the OIG audit staff worked closely with Enforcement management to develop concise objectives for the Enforcement Action Memoranda Process. Examples of possible objectives were initially discussed in several joint meetings of management and auditors. The objectives selected for evaluation were those that management thought were both important and for which evaluation data would be useful.
The primary objective developed by management was:
Obtain Case Specific Instructions from the Commission by Providing it Relevant Information
Six supporting objectives, reflecting the activities that make achievement of the primary objective more likely, were also developed by management. They were:
COMMUNICATE COMMISSION AND ENFORCEMENT NEEDS - Provide Enforcement staff with criteria and guidance with respect to the Commission's information needs and Enforcement's procedural requirements.
DRAFT ACTION MEMORANDA - Prepare Action Memoranda with the information required by the Commission (e.g., precedent, novel issues, legal analysis, source of case, other divisions and offices consulted, prior Commission actions, staff recommendations to the Commission, etc.).
REVIEW ACTION MEMORANDA - Ensure that the review process of Action Memoranda results in a work product acceptable to the Commission (e.g., editorial style, legal analysis and sufficiency, sufficiency of factual information, policy and procedural requirements, appropriate use of prosecutorial discretion, Commission precedent, etc.).
MAXIMIZE PRODUCTIVITY AND TIMELINESS - Maximize the productivity of the staff and timeliness in supplying Enforcement information to the Commission.
STAFF TRAINING - Ensure that staff and reviewers have sufficient training to provide the Commission with the information it requires and to ensure compliance with established policies and procedures.
PERFORMANCE MEASURES - Measure and evaluate staff and office performance based on the quality and timeliness of Action Memoranda prepared.
Prior to the workshops, each participant received a handbook which described what was expected and encouraged them to think about the management objectives in advance. Each workshop took 4 to 6 hours to complete.
Two flip charts were used to summarize and record the 1) strengths and 2) weaknesses identified by participants for each supporting objective. Participant recommendations were also solicited and recorded. Prior to the workshops, the auditors developed sets of questions that related to each objective. The questions gave structure to the discussions and facilitated the conduct of the workshops.
At the end of the discussion on each objective, participants were asked to use 4x6 inch cards to anonymously rate how well the management supporting objective was achieved using a scale of 1 to 7. [Appendix C contains the rating criteria used by the participants.] The cards were passed down to one of the participants who read them out loud. Each anonymous rating was recorded on the flipchart. The average was then calculated by OIG staff using an Excel spreadsheet.
During each workshop, the auditors typed the summary successes, obstacles, and recommendations from the flipcharts to a customized database program (one page per objective). Copies of the comment summaries were then mailed to each of the participants who were then asked to review the comments and verify their accuracy.
The anonymous assessment ratings of the workshop participants were keyed into an Excel spreadsheet for quantitative comparison.
All of the successes, obstacles, and recommendations ("comments") from the workshop participants were recorded on worksheets and subsequently verified by the participants.
Based on reading through all comments, 23 resulting issue areas were identified for the six supporting objectives by the audit staff. Each success, obstacle, and recommendation was then coded and electronically transferred to a "resulting issue worksheet." This brought all comments about a particular issue together in one document and facilitated discussion and evaluation of the issues. Each comment retained a cross-reference code to its original workshop so that the context of the comment could be obtained, if required.
The resulting issue area worksheets were reviewed by both management and the auditors. Several meetings were held to discuss the issues and identify what actions could be taken to enhance the Enforcement Action Memoranda Process. These analyses were the basis for this audit report.
Although the OIG drafted the audit report, discussions with management and their written comments were used to prepare it. This departure from the traditional comment process provided input at an earlier stage in the writing process. It also gave management a better understanding of the audit results, since they also analyzed the resulting issue worksheets.
Participant ideas, expressed during the discussions preceding the preparation of the audit report, exceeded the expectations of the OIG. We believe that the content of the final report is superior to what it would have been if only comments on the report itself were received from management. We estimate that the process took about the same amount of time as the traditional comment approach.
The Commission is successfully implementing the primary or supporting objective. Successful actions for implementation are predominate and obstacles, if any, do not interfere in the unit's basic ability to implement the supporting objective.
Midway between 5 and 7.
The Commission is generally implementing the primary or supporting objective. Several successful actions for implementation exist, but some obstacles are impairing the unit's ability to fully implement the supporting objective.
Midpoint of the scale.
The Commission is generally not implementing the primary or supporting objective. Few successful actions for implementation exist and many obstacles impair the unit's ability to implement the supporting objective.
Midway between 1 and 3.
The Commission is not implementing the primary or supporting objective in a meaningful manner. Very limited successful actions for implementation exist and obstacles are so prevalent that the unit is significantly impaired from implementing the supporting objective.
ISSUES ARISING FROM THE WORKSHOPS AND ANALYZED
1 Enforcement staff work in the Division of Enforcement and the Commission's regional and district offices. They are primarily attorneys and accountants who investigate and litigate alleged violations of securities laws.
2 Interested offices and divisions refer to Commission offices or divisions that have regulatory or oversight responsibility for the alleged violation.
3 A list of the issues arising from the workshops and analyzed during the audit is included as Appendix D.
4 The consensus of participants indicated that the Action Memo should include:
- who to charge with violating the securities laws and who not to name
- what violations have occurred
- litigation risks
- what relief is sought
- case precedents
- source of the case
- significant policy issues, and
- other government agencies which have an interest in the case.
5 Some participants did not know who the Enforcement liaisons were. During the audit, Enforcement management provided all Enforcement staff with the names and telephone numbers of the current Enforcement liaisons.
6 All Action Memoranda are sent to the Office of General Counsel and Office of the Secretary for review.
7 Recently, the Division started offering the testimony workshop (which is part of the September training program) twice during the year.
8 A Formal Order of Investigation is required for the staff to issue subpoenas for documents and testimony. If the subjects cooperate, a Formal Order may not be necessary (See Recommendation H).
9 The Duty Officer is a Commissioner assigned to handle pressing matters (e.g., Temporary Restraining Orders) for the entire Commission. The Duty Officer changes daily or weekly. Significant or complex issues are generally discussed in closed Commission meetings, rather than through Duty Officer or seriatim review.