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8/3/2019 SEC - FY 2011 Performance and Accountability Report
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U.S. SecUritieS and exchange commiSSion
FY 2011 Performance and Accountability Report
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Abot This Report
The U.S. Securities and Exchange Commissions (SEC) FY 2011 Perormance and Accountability Report
provides program perormance and fnancial inormation that enables Congress, the President, and the public
to assess the SECs perormance and accountability over the resources
entrusted to it. This report, available at http://www.sec.gov/about/
secpar2011.shtml provides inormation that satisfes requirements
contained in the ollowing statutes:
Accountability o Tax Dollars Act o 2002
Improper Payments Inormation Act o 2002, as amended
Reports Consolidation Act o 2000
Government Management Reorm Act o 1994
GPRA Modernization Act o 2010
Federal Managers Financial Integrity Act o 1982
Dodd-Frank Wall Street Reorm and Consumer Protection
Act Subtitle F. Sec. 963. Annual Financial Controls Audit andSec. 922. Whistleblower Protection
For the fth year in a row, the SEC received
a Certifcate o Excellence in Account-
ability Reporting rom the Association o
Government Accountants. The award is
presented to Federal Government agencies
whose annual reports achieve the highest
standards demonstrating accountability
and communicating results.
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Contents
Message rom the Chairman 2
Managements Discssion and Analysis 5
Vision, Mission, Values and Goals 6History and Purpose 7
Organizational Structure and Resources 8
FY 2011 Year in Review 12
Looking Forward 28
Financial Highlights 32
Perormance Highlights 38
Strategic and Perormance Planning Framework 38
Perormance Measures Overview 39
Perormance Results Summary 40
Management Assurances 45
Annual Assurance Statement 45
Perormance Section 51
A Readers Guide to the SECs Perormance Inormation 52
Verication and Validation o Perormance Data 53
FY 2011 Perormance Summary by Strategic Goal 53
Program Assessments and Evaluations 95
Financial Section 101
Message rom the Chie Financial Ocer 102
Report o Independent Auditors 104
Managements Response to Audit Opinion 121
Financial Statements 124
Notes to the Financial Statements 129Required Supplementary Inormation (Unaudited) 155
Investor Protection Fund Financial Statements 158
Notes to the Investor Protection Fund Financial Statements 161
Other Accompanying Inormation 167
Inspector Generals Statement on Management and Perormance Challenges 168
Managements Response to Inspector Generals Statement 175
Summary o Financial Statement Audit and Management Assurances 183
Improper Payments Elimination and Recovery Act Reporting Details 184
Appendixes 186
Appendix A: Chairman and Commissioners 186Appendix B: Major Enorcement Cases 189
Appendix C: SEC Divisions and Oces 204
Appendix D: Acronyms 206
Available on the Web at http://www.sec.gov/about/secpar2011.shtml
To contact the SEC, please seehttp://www.sec.gov or Contact Us athttp://www.sec.gov/contact.shtml.
For urther inormation on selected terms and topics, please see Fast Answers at http://www.sec.gov/answers.shtml
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Message rom the Chairman
that brought swit enorcement action And regional ocescontinued to play a key role in the development o specialized
skills and innovative approaches that help the agency identiy
and promptly investigate possible violations in key areas
such as asset valuation, microcap raud, and cross-borde
misconduct
These changes resulted in signicant victories or the agency
In 2011, the SEC led 735 enorcement actions, an 86 percen
increase rom 2010 and more cases than ever previously led
by the Division in a single scal year Eighty-ve o those
actions were designated National Priority Cases cases with
the greatest signicance and highest impact an increase o
80 percent rom 2010 In addition, in the last two scal years
the Commission distributed over $36 billion in disgorgemen
and penalties to harmed investors
In 2011, the Division o Enorcement continued to work with
criminal prosecutors to break up one o the largest inside
trading schemes ever uncovered To date, ve separate
Federal district court actions have been led, involving charges
against 22 individuals, including high-ranking corporateexecutives and hedge und managers, and against seven
entities involved in the scheme
In addition, the SEC continued to bring actions stemming
rom misconduct related to the nancial crisis To date
the Division o Enorcement has led 36 actions in nancia
crisis-related cases, charging 81 individuals and entities
Nearly hal o the individuals charged were CEOs, CFOs and
senior ocers Fiteen o those actions were led in 2011
a 25 percent increase over 2010 In connection with these
actions, the Commission has barred twenty-our individuals
rom the industry, rom serving as ocers and directors
and/or rom appearing beore the Commission In addition
$197 billion in penalties, disgorgement and other monetary
relie has been ordered, most o which has been or will be
returned to harmed investors
The United States Securitiesand Exchange Commission
is charged with protecting
investors; maintaining air,
orderly, and ecient markets;
and acilitating capital
ormation During scal year
2011, the SEC improved its
ability to carry out this mission
by making signicant progress
against a broad program oneeded change We brought
greater energy and sophistication to core agency unctions;
began implementing ar-reaching and complex nancial reorm
legislation; advanced an investor-ocused agenda rooted in
the agencys unique expertise; and improved the productivity
o our 3,800-member sta
Despite unding constraints, SEC sta worked diligently to
build an agency whose ability to support capital markets
and protect investors large and small continued to improve
SEC sta perormed traditional oversight and enorcementtasks with an increased ecacy derived rom improved
technology, increasing levels o sta expertise, innovative
management strategies and a more eective organizational
structure
In the Division o Enorcement, new specialized units
continued to build expertise in complex, high-priority areas,
including asset management, structured and new products,
complex trading strategies and current market structure
Complementing this new organization was the increasing
use o sophisticated analytic tools and data-based templates
that identiy suspicious patterns and activities, allowing
Enorcement to more quickly identiy and pursue unlawul
conduct Enorcement also strengthened and improved
its coordination with the Oce o Compliance Inspections
and Examinations (OCIEs) National Examination Program
(NEP), resulting in targeted exam and investigation eorts
2 2011 PERFORMANCE AND ACCOUNTABILITY REPORT
MESSAGE FROM THE CHAIRMAN
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Increasing scrutiny o registrant disclosure in areasparticularly important to contemporary investment
decisions, such as liquidity, loss contingencies, and
reverse mergers, and improving the quality o disclosed
inormation
Creating a cross-agency college o regulators to
improve oversight o nancial service rms and meeting
regularly to share inormation about the regulated rms
Recovering over $240 million or wronged investors
rom overseas accounts through eorts by the Oce oInternational Aairs, in collaboration with the Division o
Enorcement and oreign regulatory and law enorcement
bodies
Drating and adopting a large trader reporting rule,
designed by the Division o Trading and Markets and
the Division o Investment Management, to enhance
the agencys ability to identiy large market participants,
collect inormation on their trading, and analyze their
trading activity especially in the atermath o unusual or
suspicious activity
The agencys most signicant rulemaking task was imple-
menting many o the SEC-related mandates o the Dodd-Frank
Wall Street Reorm and Consumer Protection Act (the Dodd-
Frank Act) This has been a resource-intensive undertaking
or the SEC, but one which the Commission has approached
with energy and a detailed, cross-agency strategy that has
made or steady progress O the more than 90 mandatory
rulemaking provisions included in the Dodd-Frank Act, the
SEC had proposed or adopted rules or three-quarters by the
close o FY 2011, and had moved orward on many o the
dozens o rules stemming rom Dodd-Frank Act provisions
that give the SEC discretionary rulemaking authority, as
well Additionally, the SEC had issued 12 o the more than
20 studies and reports that it is required to complete under
the Act
The benets o OCIEs 2010 restructuring and the creationo its NEP became clear in 2011, the rst ull year in which
both were in place The NEP has improved OCIEs ability to
assess and evaluate risk, allowing the SEC to better monitor
systemically relevant institutions; aiding registrants in their
compliance eorts; and guiding OCIE as it targets examination
o high-risk entities In addition, the NEP has improved the
quality o examinations through more eective training and
hiring and new tools that streamline the examination process
OCIE also contributed to the agencys rulemaking process,
building on its role as the SECs eyes and ears in the eld to
bring a ront-line perspective to rulemakings aecting a broad
mix o agency priorities
Other oces and divisions within the SEC ocused orceully
and eectively on oversight and rulemakings in support o the
agencys investor protection and market stability initiatives
Highlights included:
Working with se l-regulating organizations, the exchanges
and the Commodity Futures Trading Commission to
address structural weaknesses revealed by the market
turmoil on May 6, 2010, and taking steps to reduce
excess market volatility going orward
Moving to better protect investors against raud by
investment proessionals, with proposals to strengthen
audits o broker-dealers and oversight o their handling o
clients securities and cash
Creating three new oces within the Division o Corpora-
tion Finance, concentrating sta ocus and agency over-
sight on portions o the nancial markets that showed
serious weakness in the nancial crisis including asset-
backed securities and the largest nancial rms through
rulemaking and enhanced disclosure reviews
2011 PERFORMANCE AND ACCOUNTABILITY REPORT 3
MESSAGE FROM THE CHAIRMAN
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Importantly, each rulemaking or report has been inormed by
a determined eort to gather criticism, insight, and ideas rom
a broad range o market participants The SEC has convened
stakeholders or a series o roundtables on key rulemakings,senior sta have met with hundreds o individuals repre-
senting investors, industry groups, aected businesses and
academics, and thousands o comments have been received
and analyzed at the agencys highest levels
The result has been a series o proposals and rules that
balance the goals o protection and stability against the
imperatives o complex, dynamic and highly-integrated
nancial markets A new whistleblower program created
in response to Dodd-Frank Act requirements, or example,
was designed to complement, rather than replace, existing
corporate compliance programs While it provides incentives
or insiders and others with inormation about unlawul conduct
to come orward, it also encourages them to rst attempt to
work within their companys own compliance structure
In response to Dodd-Frank Act requirements, the agency has
worked to implement new rules regarding key areas o the
nancial markets that were not appropriately regulated prior
to the recent crisis
The SEC is working with the Commodity Futures TradingCommission to develop the regulatory blueprint and
requirements or a transparent, ecient and competitive
marketplace or over-the-counter swaps and derivatives
Inormation about the identities, size, gatekeepers and
disciplinary history o hedge und and other private und
advisers was made available to both regulators and the
investing public, enabling more ecient investing and
more eective oversight
The SEC proposed rules that will improve the integrity
o the process which yielded so many fawed ratings
o subprime mortgage products, by increasing trans-
parency o the rating process and o the agencies that
produce ratings, and by protecting against conficts o
interest when entities or individuals provide ratings or
their clients
These are just a ew o the areas in which the SEC is turning
the legislative language o the Dodd-Frank Act into eective
and intelligent regulation
I am also pleased to report that the SEC has succeeded
in its remediation eorts and has no material weaknesses
in its internal controls over nancial reporting The SECs
independent auditor, the US Government Accountability
Oce, also arms that the SECs nancial statements are
presented airly in all material respects, in conormity with
the US generally accepted accounting principles (US
GAAP) Finally, based on our review, we can conrm that the
nancial and perormance data presented in this report are
undamentally complete, reliable, and conorm to Oce o
Management and Budget guidance
The SECs many dierent actions and initiatives com
together in service o a single, uniying principle: Investors
who uel Americas capital markets and growing businesses
must be condent that those markets are air, orderly and
ully transparent We hope that the inormation contained in
this report provides readers with a ull understanding o the
activities and challenges o the SEC in 2011 a year that saw
the SEC take great strides in a number o vital areas, and se
the stage or continued progress in 2012
Mary L. Schapiro
Chairman
November 15, 2011
4 2011 PERFORMANCE AND ACCOUNTABILITY REPORT
MESSAGE FROM THE CHAIRMAN
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ManageMents
DiscussionanD analysis
t
he US Securities and Exchange Commissions (SEC)
Managements Discussion and Analysis (MD&A) serves as a brie
overview o this entire report It provides a concise descriptiono the agencys perormance measures, nancial statements,
systems and controls, compliance with laws and regulations, and actions
taken or planned It also provides an assessment o the SECs programs
and nancial perormance, and the eciency and eectiveness o the SECs
operations
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Vision, Mission, Vales and Goals
VisionThe SEC strives to promote a market environment
that is worthy o the publics trust and characterized
by transparency and integrity
Mission
The mission o the SEC is to protect investors;
maintain air, orderly, and ecient markets;
and acilitate capital ormation
Vales
Integrity TeamworkAccountability Fairness
Eectiveness Commitment to Excellence
In order to comply with the GPRA Modernization Act o2010, the SEC is developing an addendum to the scal
year (FY) 2010 - FY 2015 Strategic Plan. The addendum
will refect the agencys mission, vision, values, and
strategic goals through FY 2014, and highlight specic
initiatives the agency plans to undertake in the coming
24 months. Additionally, the addendum will include
an updated perormance measurement ramework,
as well as updates to existing perormance measures
that will be used to gauge the agencys progress in
accomplishing the strategic goals and outcomes. The
addendum will be nalized and available on the SECs
website at http://www.sec.gov in February 2012.
Strategic Goals and Otcomes
Goal 1: Foster and enorce compliance with
the Federal secrities laws
Otcome 1.1: The SEC osters compliance with the
Federal securities laws
Otcome 1.2: The SEC promptly detects violationso the Federal securities laws
Otcome 1.3: The SEC prosecutes violations o Federal
securities laws and holds violators accountable
Goal 2: Establish an eective reglatory environment
Otcome 2.1: The SEC establishes and maintains
a regulatory environment that promotes high-quality
disclosure, nancial reporting, and governance, and
that prevents abusive practices by registrants, nancial
intermediaries, and other market participants
Otcome 2.2: The US capital markets operate in a air,
ecient, transparent, and competitive manner, ostering
capital ormation and useul innovation
Otcome 2.3: The SEC adopts and administers rules and
regulations that enable market participants to understand
clearly their obligations under the securities laws
Goal 3: Facilitate access to the inormation investors
need to make inormed investment decisions
Otcome 3.1: Investors have access to high-quality disclo-
sure materials that are useul to investment decision making
Otcome 3.2: Agency rulemaking and investor education
programs are inormed by an understanding o the widerange o investor needs
Goal 4: Enhance the Commissions perormance throgh
eective alignment and management o hman,
inormation, and fnancial capital
Otcome 4.1: The SEC maintains a work environment
that attracts, engages, and retains a technically procient
and diverse workorce that can excel and meet the
dynamic challenges o market oversight
Otcome 4.2: The SEC retains a diverse team o
world-class leaders who provide motivation andstrategic direction to the SEC workorce
Otcome 4.3: Inormation within and available to the
SEC becomes a Commission-wide shared resource,
appropriately protected, that enables a collaborative
and knowledge-based working environment
Otcome 4.4: Resource decisions and operations
refect sound nancial and risk management principles
6 2011 PERFORMANCE AND ACCOUNTABILITY REPORT
MANAGEMENTS DISCUSSION AND ANAlYSIS
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History and Prpose
During the peak o the Depression, Congress passed the
Securities Act o 1933 This law, together with the SecuritiesExchange Act o 1934 (Exchange Act), which created the
SEC, was designed to restore investor condence in our
capital markets by providing investors and the markets with
more reliable inormation and clear rules o honest dealing
The main purposes o these laws were to ensure that:
Companies publicly oering securities or investment
dollars must tell the public the truth about their
businesses, the securities they are selling, and the risks
involved in investing
People who sell and trade securities brokers, dealers
and exchanges must treat investors airly and honestly,
putting investors interests rst
The SEC consists o ve presidentially appointed Commis-
sioners, with staggered ve-year terms One o them is des-
ignated by the President as Chairman o the Commission (see
Appendix A: Chairman and Commissioners) President Frank-
lin Delano Roosevelt appointed Joseph P Kennedy, to serve
as the rst Chairman o the SEC
By law, no more than three o the Commissioners may belong
to the same political party The Commission convenes regularlyat meetings that are open to the public and the news media
unless the discussion pertains to condential subjects, such
as whether to begin an enorcement investigation
Each year the SEC brings hundreds o civil enorcement
actions against individuals and companies or violation
o securities laws Examples o inractions include insider
trading, accounting raud, and providing alse or misleading
inormation about securities or the companies that issue
them One o the major sources o inormation that the SEC
relies on to bring enorcement action is investors themselves another reason that educated and careul investors are so
critical to the unctioning o ecient markets To help inorm
investors, the SEC oers the public a wealth o educational
inormation on its website athttp://www.investor.gov , as well
as an online database o disclosure documents at http://
www.sec.gov/edgarthat public companies and other market
participants are required to le with the SEC
2011 PERFORMANCE AND ACCOUNTABILITY REPORT 7
MANAGEMENTS DISCUSSION AND ANAlYSIS
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HI
SEC Headquarters
New York Regional OfficeNew York, New Jersey
Boston Regional OfficeConnecticut, Maine, Massachusetts, New Hampshire, Vermont, Rhode Island
Philadelphia Regional OfficeDelaware, Maryland, Pennsylvania, Virginia, West Virginia, District of Columbia
Miami Regional OfficeFlorida, Mississippi, Louisiana, U.S. Virgin Islands, Puerto Rico
Atlanta Regional OfficeGeorgia, North Carolina, South Carolina, Tennessee, Alabama
Chicago Regional OfficeIllinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, Ohio, Wisconsin
Denver Regional OfficeColorado, Kansas, Nebraska, New Mexico, North Dakota, S outh Dakota, Wyoming
Fort Worth Regional OfficeTexas, Oklahoma, Arkansas, Kansas (except for the exam program which is administered by the Denver Regional Office)
Salt Lake Regional OfficeUtah
Los Angeles Regional OfficeArizona, Hawaii, Guam, Nevada, Southern California (zip codes 93599 and below, except for 93200-93299)
San Francisco Regional OfficeWashington, Oregon, Alaska, Montana, Idaho, Northern California (zip codes 93600 and up, plus 93200-93299)
AK OR
WA ND
UT
SD
NE IA
NV
AZ
TX
OKAR
LAMS
FL
GASC
NC
VAKY
IL
WI
MI
WVNJ
MT
WY
NM
AL
IN
DC
OH PA
MA
RI
ID
CO
MD
MN
MOKS
NY
MEVT
NH
CT
DE
TN
PR
SouthernCA
NorthernCA
SEC HEADQUARTERS AND REGIONAL OFFICE LOCATIONS
CHART 1.1
Organizational Strctre and Resorces
8 2011 PERFORMANCE AND ACCOUNTABILITY REPORT
MANAGEMENTS DISCUSSION AND ANAlYSIS
SEC Ofce Locations
The SECs headquarters are in Washington, DC, and it has 11 regional oces located throughout the country The regiona
oces are responsible or investigating and litigating potential violations o the securities laws The oces also have examination
sta, who impact regulated entities such as investment advisers, investment companies and broker-dealers The map below
shows the locations o the regional oces, and the states that are included in each region
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SEC Organization Strctre
The SEC is an independent Federal agency established pursuant to the Exchange Act It is headed by a bipartisan ve-member
Commission, comprised o the Chairman and our Commissioners, who are appointed by the President and conrmed bythe Senate (seeAppendix A: Chairman and Commissioners) The Chairman serves as the Chie Executive Ocer The SEC is
organized into ve main divisions: Enorcement; Corporation Finance; Investment Management; Trading and Markets; and Risk,
Strategy, and Financial Innovation In FY 2011, the SECs budgetary authority amounted to $1,673 million, consisting o an
appropriation or salaries and expenses in the amount o $1,185 million, carryover balances o $36 million or the expenses o
the agency, and $452 million in the Investor Protection Fund In FY 2011, the agency employed 3,844 ull-time equivalents (FTE),
including 3,806 permanent and 38 temporary FTEs The below SEC organization chart is as o September 30, 2011
SEC ORGANIZATION CHART
CHART 1.2
2011 PERFORMANCE AND ACCOUNTABILITY REPORT 9
MANAGEMENTS DISCUSSION AND ANAlYSIS
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SEC Programs
The SEC organizes its divisions and oices under the 10 major programs outlined below in Table 1.1, SEC Programs and
Program Descriptions
TABLE 1.1
SEC PROGRAMS AND PROGRAM DESCRIPTIONS
Program Divisions and Oces Program Descriptions
Enorcement Division o Enorcement and
enorcement sta within the
SECs regional oces
This program investigates and brings civil charges in Federal district court or in administrative
proceedings based on violations o the Federal securities laws An integral part o the programs
unction is to seek penalties and the disgorgement o ill-gotten gains in order to return unds
to harmed investors Also organized within the Enorcement program is the new Oce o the
Whistleblower, created to administer the SECs Whistleblower Program that rewards individuals
who provide the agency with tips that lead to successul enorcement actions under the
Dodd-Frank Act
ComplianceInspections and
Examinations
Oce o ComplianceInspections and Examinations
and examinations sta within
the SECs regional oces
This program conducts the SECs examinations o registrants such as investment advisers,investment companies, broker-dealers, sel-regulatory organizations (SROs), credit rating
agencies, transer agents, and clearing agencies
Corporation Finance Division o Corporation
Finance
This program perorms unctions to assure that investors have access to materially complete
and accurate inormation, and to deter raud and misrepresentation in the public oering,
trading, voting, and tendering o securities
Trading and Markets Division o Trading and
Markets
This program conducts activities to establish and maintain standards or air, orderly and ecient
markets, while ostering investor protection and condence in the markets
Investment
Management
Division o Investment
Management
This program seeks to minimize the nancial risks to investors rom raud, mismanagement,
sel-dealing, and misleading or incomplete disclosure in the investment company and
investment adviser segments o the nancial services industry
Risk, Strategy, and
Financial Innovation
Division o Risk, Strategy, and
Financial Innovation
The division provides economic analyses as part o Commissions rulemaking process; supports
its rule review, examination and enorcement programs with data-driven, risk-based analytical
methods; and oversees its Tips, Complaints and Reerrals (TCR) and interactive data programs
General Counsel Oce o the General Counsel The Oce o the General Counsel (OGC) serves as the chie legal ocer o the Commission and
provides independent legal analysis and advice to the Chairman, Commissioners, and operating
divisions on all aspects o the Commissions activities The General Counsel also deends the
Commission in Federal district courts, represents the Commission in all appellate matters and
amicus curiae lings, and oversees the SECs bankruptcy program
Other Program
Oces
Oce o the Chie
Accountant;
Oce o Investor
Education and
Advocacy;
Oce o International
Aairs; and
Oce o Administrative
Law Judges
These oces are responsible or:
serving as the chie advisor to the Commission on all accounting and auditing policy and
overseeing private sector standards setting;
serving investors who contact the SEC, ensuring that retail investors perspectives inorm
the Commissions regulatory policies and disclosure program, and improving investors
nancial literacy;
advancing international regulatory and enorcement cooperation, promoting converged high
regulatory standards worldwide, and acilitating technical assistance programs in oreign
countries; and
adjudicating allegations o securities law violations
(Continued on next page)
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MANAGEMENTS DISCUSSION AND ANAlYSIS
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TABLE 1.1 Continued rom previous page
Program Divisions and Oces Program Descriptions
Agency Direction
and Administrative
Support
The Chairman and
Commission;
Oce o Legislative and
Intergovernmental Aairs;
Oce o Public Aairs;
Oce o the Secretary;
Oce o the Chie
Operating Ocer;
Oce o Inormation
Technology;
Oce o Freedom oInormation Act, Records
Management, and
Security;
Oce o Financial
Management;
Oce o the Executive
Director1;
Oce o Human
Resources;
Oce o Administrative
Services;
Oce o Equal
Employment Opportunity;
and
Oce o Minority and
Women Inclusion
The Chairman is responsible or overseeing all aspects o agency operations, and the Chairman
and Commissioners are responsible or the review and approval o enorcement cases and
ormal orders o investigation and the development, consideration, and execution o policies and
rules The other oces in Agency Direction and Administrative Support are responsible or:
working with Members o Congress on issues that aect the Commission;
coordinating the SECs communications with the media, the general public, and oreign
visitors;
reviewing all documents issued by the Commission, and preparing and maintaining records
o Commission actions;
maximizing the use o SEC resources by overseeing the strategic planning, inormation
technology, nancial management, records management, human resources, and
administrative unctions o the agency;
ensuring that the SEC is an equal opportunity employer in ull compliance with all Federal
equal employment opportunity laws; and
enhancing the diversity o the SECs workorce, contractors, and regulated entities in
accordance with existing Federal laws and regulations
Inspector General Oce o Inspector General The Oce o Inspector General (OIG) is an independent oce that conducts audits o programs
and operations o the SEC and investigations into allegations o misconduct by sta or
contractors The mission o OIG is to detect raud, waste, and abuse and to promote integrity,
economy, eciency, and eectiveness in the SECs programs and operations
As shown in the Statement o Net Cost, on page 125, the SEC presents its net costs o operations by the programs outlined above
consistent with the presentation used by the agency in submitting its budget requests A detailed discussion o program achievements
and program contributions to accomplishing the mission o the SEC can be ound in the Perormance Section
1 The Oce o the Executive Director was eliminated in FY 2011, but the costs o the Oce during the early months o the scal year are included under
Agency Direction and Administrative Support. The Oce o the Executive Director was responsible or management o the agencys human resources,
budget management, and administrative services unctions. When the Oce was eliminated, these unctions were transerred under the Oce o the
Chie Operating Ocer.
2011 PERFORMANCE AND ACCOUNTABILITY REPORT 11
MANAGEMENTS DISCUSSION AND ANAlYSIS
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A More Modern and Eective SEC
In scal year 2011, the US Securities and Exchange
Commission continued to improve its eectiveness in pursuit
o its investor protection and market integrity missions This
progress was the result o an ongoing, comprehensive eort
to improve basic agency unctions and organization; align
regulation, enorcement and oversight strategies and priorities
with evolving nancial market conditions; and equip the SECs
3,800 proessionals with the tools and training required to
perorm at the highest level
Institutional enhancements begun two years ago continuedto bear ruit, as a changing culture increased the capacity
and improved the perormance o the SEC New hiring and
training strategies lited sta perormance while the creation
o specialized teams in the enorcement and examination
programs helped the agency increase in-house expertise in
those areas Reorganization o key divisions and oces and
an increased emphasis on collaboration and intra-agency
communication made the SEC more creative and responsive
Core unctions, including examination and enorcement,
benetted rom new and upgraded inormation systemswhich allowed sta to ocus resources on high-risk registrants
and to discover suspicious conduct more rapidly Other
divisions and oces looked beyond traditional priorities to
identiy emerging threats and opportunities within the nancial
markets, adjusting strategies and priorities to better protect
investors and markets in a rapidly-changing environment
Recognizing the historic signicance o the Dodd-Frank Wall
Street Reorm and Consumer Protection Act (the Dodd-Frank
Act), the SEC supported its many Dodd-Frank Act-related
rulemakings with aggressive eorts to solicit and considerideas and criticisms rom market participants o all types,
and to align action with domestic and oreign regulators
(with whom the SEC must coordinate policy in order to limit
exploitable regulatory inconsistencies)
And the SEC continued to upgrade human resources
and back oce unctions, improving resource allocation,
increasing the value o the SECs human capital, and allowing
sta to ocus on the SECs investor protection and market
stability mission all while capturing savings through urthe
eciencies in administrative tasks
It should be noted, however, that savings and eciencies
alone will not ree up sucient resources to allow the SEC to
eectively carry out a mission that is expanding signicantly as
a result o the Dodd-Frank Act
The SEC is better positioned today than it has been in many
years to respond quickly to events and developments in the
nancial world; to keep regulatory pace with the continuing
evolution o the nancial markets; and to deter, identiy, andpursue wrongdoers It is important that the agencys unding
increases in step with these increasing responsibilities, in orde
to ensure that investors and markets continue to benet rom
the SECs improving perormance
Enorcement: A Record Perormance
A reorganized Division o Enorcement is collaborating more
closely than ever with other SEC oces and increasingly
utilizing technology as a way to identiy and halt unlawu
activity beore it occurs or results in additional investor harmThe Divisions aggressive strategy sends a clear message that
securities law violations will be discovered and punished
Enorcements broad ocus has meant successul actions
against a wide range o unlawul conduct, ranging rom
raud committed by large nancial institutions whose actions
contributed to the nancial crisis including Countrywide
Financial, JP Morgan, and Wachovia to smaller rauds that
did not generate headlines but nonetheless threatened the
savings o vulnerable individuals
Having completed the most signicant restructuring since its
establishment almost 40 years ago, Enorcement continued
to enhance its eectiveness by ocusing resources on the
misconduct that most harms investors and markets, by
developing risk-based initiatives that anticipate suspicious
behavior beore a raud takes hold, and by using the agencys
new IT resources to create analytical tools and to process the
increasing amounts o data that accompany its investigations
FY 2011 Year in Review
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The Division o Enorcement has built closer ties with the
Oce o Compliance Inspections and Examinations (OCIE),
as well And, the Division is developing specialized skills and
new approaches or investigating possible violations in key
areas such as valuation, aberrational perormance by hedge
unds and investment advisers, and microcap raud
These changes have allowed Enorcement to move aster and
more strategically to attack securities laws violations, and to
achieve record results in the process
The SEC brought 735 enorcement actions in FY 2011,
more than have ever been led by the Commission in a scal
year Eighty-ve o those actions were designated National
Priority Cases the Divisions most important and complex
In addition to the improvement in the quantity and quality o
the led enorcement actions, the Division obtained orders or
$28 billion in penalties and disgorgement; utilized enhanced
remedies available under the Dodd-Frank Act to bar numerous
wrongdoers rom uture work in the securities industry; and
obtained relie that sent a strong deterrent message, including
asset reezes, trading suspensions, and penny stock bars
A uller description o Division o Enorcement actions led
in FY 2011 can be ound inAppendix B: Major Enorcement
Cases, but this brie survey conveys the breadth and
eectiveness o those eorts:
Financial Crisis
Since 2008, the SEC has led 36 actions against 81 individual
and corporate deendants alleging a wide range o miscon-
duct arising rom the nancial crisis Fiteen o these actions
were led in 2011, up rom 12 led in 2010
Among the most signicant o these actions was that
led against JP Morgan Securities, LLC, or misleading
investors in a complex mortgage securities transaction
executed just as the housing market was starting to
plummet The SEC charged JP Morgan or structuring
and marketing a synthetic collateralized debt obligation
(CDO) without inorming investors that a hedge und
helped select the assets in the CDO portolio and that
the und had a short position in more than hal o those
assets JP Morgan settled the SECs charges by paying
$1536 million, which represented a ull return o losses
to harmed investors JP Morgan also agreed to improve
its processes or the review and approval o mortgage
securities transactions and to return more than $56million to investors who were harmed in a second CDO
transaction
Countrywide Financial Chie Executive Ocer (CEO)
Angelo Mozilo agreed to pay a record $225 million penalty
to settle SEC charges that he and two other ormer
Countrywide executives ailed to disclose to investors
the signicant credit risk that Countrywide was taking
on as it increased its share o the subprime mortgage
market Mozilo was permanently barred rom serving as
an ocer or director o a publicly-traded company and
agreed to disgorge $45 million in ill-gotten gains A totalo $675 million is being returned to harmed investors
The SEC settled charges led previously against Morgan
Keegan & Company and Morgan Asset Management,
which agreed to pay $200 million to settle raud charges
Two Morgan Keegan employees also agreed to pay
penalties or their alleged misconduct, including one who
is now barred rom the securities industry The Memphis-
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based rms, ormer portolio manager James C Kelsoe
Jr and comptroller Joseph Thompson Weller were
accused by the SEC o causing the alse valuation o
subprime mortgage-backed securities in ve unds
managed by Morgan Asset Management, rom January
2007 to July 2007 The SECs order issued in settling the
charges also ound that Morgan Keegan ailed to employ
reasonable pricing procedures and consequently did not
calculate accurate net asset values (NAV) or the unds
Morgan Keegan nevertheless published the inaccurate
daily NAVs and sold shares to investors based on the
infated prices
In separate actions, the SEC charged RBC Capital
Markets LLC and brokerage rm Stiel, Nicolaus & Co
with derauding ve Wisconsin school districts by sellingthem unsuitably risky and complex CDO investments
Stiel and ormer Stiel Senior Vice President David W
Noack were charged with misrepresenting the risk o the
investments and ailing to disclose material acts to the
school districts The sales took place despite signicant
concerns within RBC Capital about the suitability o
the product or municipalities like the school districts
RBC Capital agreed to settle the SECs charges by
paying a total o $304 million, which will be distributed in
varying amounts to the harmed school districts through a
Fair Fund The SECs case against Stiel, Nicolaus & Co
is continuing
The SEC charged Wells Fargo Securities LLC ormerly
known as Wachovia Capital Markets LLC with
misconduct by Wachovia in the sale o two CDOs tied
to the perormance o residential mortgage-backed
securities as the housing market was beginning to show
signs o distress The SECs order ound that Wachovia
violated securities laws by charging undisclosed excessive
markups in the sale o certain interests to investors in
one CDO, and by misrepresenting to investors in another
CDO the value at which it had acquired assets romaliates In settling the action, Wells Fargo agreed to
pay more than $11 million in disgorgement and penalties,
most o which will be returned to harmed investors
Fradlent Schemes
Supporting investor condence in the nancial markets means
bringing cases not only against major nancial rms and theirexecutives, but also against individuals and smaller rms
whose misdeeds can steal a lietimes savings or devastate an
investors uture
The SEC charged three senior executives at the Akron
Ohio-based Fair Finance Company with orchestrating a
$230 million raudulent scheme involving at least 5,200
investors many o them elderly The SEC alleges tha
ater purchasing Fair Finance Company, Chie Executive
Ocer Timothy S Durham, Chairman James F Cochran
and Chie Financial Ocer Rick D Snow deceived
investors, selling interest-bearing certicates whoseproceeds were supposed to be used to purchase and
service discounted consumer nance contracts Instead
Durham and Cochran schemed to divert investo
proceeds to themselves and others, as well as to
struggling and unprotable entities that they controlled
The SEC charged internet-based investment compan
Imperia Invest IBC with securities raud and obtained
an emergency court order reezing Imperias assets
The SEC alleged that Imperia solicited several millio
dollars rom US investors and promised them returns o
12 percent per day while in reality siphoning the undsinto oreign bank accounts and not paying a single penny
back Imperia allegedly raised more than $7 million rom
approximately 14,000 investors worldwide More than
hal the unds were collected rom US investors who are
members o the Dea community
Insider Trading
The Commission has aggressively pursued practices tha
damage the integrity o nancial markets and discourage
investors who seek a air and level playing eld Most notablythe SEC discovered and developed inormation that ultimately
led to criminal convictions or Galleon hedge und ounder Ra
Rajaratnam and others, and to Commission charges against
22 individuals including high-ranking corporate executives
and hedge und managers and against seven entities
involved in the scheme (in November 2011, Rajaratnam was
ordered to pay a record $928 million to resolve SEC charges
in the case)
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There have been other important cases, as well
The SEC charged a ormer Mariner Energy Inc board
member and his son with insider trading on condential
inormation about an impending takeover o the oil andgas company Acting on a tip rom his ather, H Clayton
Peterson, son Drew Clayton Peterson purchased Mariner
Energy stock or himsel, his relatives, his clients and a
close riend in advance o an announcement that Apache
Corporation would be acquiring Mariner Peterson also
tipped several other close riends, who traded on the
nonpublic inormation ahead o the April 2010 acquisition
announcement The insider trading by the Petersons and
others generated more than $52 million in illicit prots
The SEC charged ormer Nasdaq managing director
Donald L Johnson with insider trading on condential
inormation he stole while working in two units at Nasdaq
that communicated with companies in advance o
market-moving public announcements The SEC alleged
that Johnson used the stolen inormation to trade in
the stock o six companies on at least nine occasions,
realizing illicit prots o more than $755,000
The SEC charged Cheng Yi Liang, a chemist at the
US Food and Drug Administration (FDA), with insider
trading on condential inormation concerning upcoming
announcements o FDA drug approval decisions,
generating more than $36 million in illicit prots and
avoided losses Liang illegally traded in advance o
28 public announcements about FDA drug approval
decisions, involving 20 publicly-traded companies, or
prots and losses avoided totaling over $37 million In
each instance, Liang traded in the same direction as the
announcement Liang went to great lengths to conceal
his insider trading, including trading in multiple accounts,
none o which were in his name
Mnicipal Secrities
The SEC ocused increased attention on the lightly-regulated
municipal securities market, in which well-connected
individuals and rms use infuence and collusion to win
lucrative und management contracts or otherwise short-
change the municipalities whose interests they are supposed
to be serving
In a series o cases, the SEC charged JP Morgan
Securities LLC, UBS Financial Services Inc, and Banc
o America Securities, LLC with rigging more than 200
municipal bond re-investment transactions, generating
tens o millions o dollars in ill-gotten gains Together, the
settlements o these three cases resulted in the return
o $134 million to harmed municipalities and conduit
borrowers in more than 40 states In addition, the
companies paid a total o $391 million to settle parallel
cases brought by other Federal and state authorities
Misleading Investors
The SEC continued its vigilant enorcement o regulations
regarding entities such as mutual unds, investment advisers,
and broker-dealers who are entrusted with a signicant portion
o the investing publics assets
The Commission charged Charles Schwab Investment
Management and Charles Schwab & Co Inc with
making misleading statements about the Schwab
YieldPlus Fund at one time, the largest ultra-short bond
und The misleading statements included descriptions
o the und as a cash alternative that oered only slightly
higher risk than a money market und The und suered
a signicant decline during the credit crisis o 2007 and
2008 The Schwab entities agreed to pay more than
$118 million to settle the SECs charges The SEC also
charged the responsible Schwab executives, who are
currently litigating the SECs claims
OCIE Reerrals
Increased cooperation with OCIE, which collaborates with
Enorcement when its examinations reveal suspicious activity,
resulted in several important cases, including the Stiel,
Nicolaus & Co case described above
Three AXA Rosenberg entities, as well as the co-
ounder o the rm, Barr Rosenberg, were charged with
securities raud or concealing a signicant error in the
computer code o the quantitative investment model
that they developed and used to manage client assets
AXA Rosenberg agreed to settle the SEC charges by
paying $217 million to cover investor losses, to pay an
additional $25 million penalty and to take other remedial
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steps Separately, Barr Rosenberg agreed to settle the
SECs charges by paying a $25 million penalty and
agreeing to be barred rom the securities industry
The SEC led an emergency action and obtained emer-
gency relie to halt a multi-million dollar misappropriation
o investor assets by registered investment adviser MK
Capital Management, LLC and its principal, Francisco
Illarramendi The Commission subsequently amended
its complaint to allege that Illarramendi and MK Capital
had misappropriated investor assets and misused two
hedge unds they managed in a Ponzi scheme involving
hundreds o millions o dollars The SEC obtained a court
order reezing the assets o the hedge unds and ordered
that all assets o the hedge unds, including $230 million
held in oshore accounts, be repatriated to the UnitedStates Illarramendi was permanently barred by the SEC
rom serving in the securities industry
The Division o Enorcements 2011 perormance reinorces
what a growing number o individuals and entities are
discovering: recent improvements in the Divisions structure,
expertise, management, technology, and sta capacity are
allowing the Commission not only to bring more and more
complex cases, but to obtain better results on investors
behal
OCIE: Protecting Investors throghMore Eective Examinations
In 2011, OCIE signicantly expanded its ability to contribute
to the SECs mission improving its ability to identiy risk and
target examinations and resources accordingly, changing
structure to more eectively acquire and deploy expertise,
and collaborating across the agency to improve both the
examination and the rulemaking processes OCIEs National
Exam Program (NEP) anchored this improving perormance
by weaving a number o key initiatives into a single eective
eort
Collaboration with the Division o Risk, Strategy and Financial
Innovation (RSFI) allows the NEP to continuously improve its
targeting and risk indicators and to ocus exams on registrants
that are most likely to merit them A recently-established
Oce o Risk Analysis and Surveillance within OCIE guides
that targeting strategy across dierent program areas and
sharpens ocus on registrants and practices that pose the
greatest risk to investors and market integrity
As part o its risk assessment eorts, OCIE began developing
risk proles o systemically relevant institutions, including large
broker-dealers, clearing agencies and exchanges OCIE has
completed risk proles o each o the 21 national securities
exchanges and sel regulatory organizations (SROs), enabling
NEP to understand individual risk, and risk among the
exchanges as a group OCIE has audited all ten nationally
recognized statistical rating organizations, and publicly
reported the ndings OCIE has begun risk-monitoring o
clearing agencies and it is moving to develop risk proles o
the largest and most systemically signicant broker-dealers
Continuing improvements in risk-based targeting allow theNEP to extend resources and stang strained by the continued
growth in the number and complexity o the registrants OCIE
is charged with examining Further, specialized groups
now ocus on complex and high-risk areas o the nancia
marketplace
OCIE also is working to extend its capacity by establishing
an inrastructure that refects the SECs increasingly diverse
registrant population, including private und advisers, credi
rating agencies, and quantitative/high-requency trading
advisers
A major restructuring is underway within OCIE, including the
development o specialized working groups (SWGs) in six key
areas and over thirty other signicant improvement initiatives
The SWGs will serve as orums in which the NEP and othe
agency sta can collaborate and discuss current issues
initiatives, and concerns related to each specialized area
They will serve as an ongoing resource or training and o
disseminating this specialized knowledge, as well
OCIE is hiring exam sta with industry experience and
specialized expertise in targeted areas, and enhancing the
resources and tools available to examination sta These
eorts also include new training: OCIE has worked with
SEC University to develop targeted training in areas like
risk management and on specic topics related to new
responsibilities created by the Dodd-Frank Act, such as
examining private und advisers Development o a new
certied examiner program is underway, as well
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The examination process itsel has been improved Once
examination targets are identied, an open architecture stang
system allows the NEP to assemble more eective teams by
bringing together dierent combinations o individuals, with
varying areas o expertise, to address the unique challenges
each examination presents
OCIE is increasingly collaborating with other organizations,
inside and outside the SEC, to improve the quality o
examinations and o disclosures made by registered entities
The Oce is reaching out to state regulators, local and national
law enorcement agencies and where appropriate oreign
regulators, sharing inormation and examinations strategies
Within the SEC, OCIE is collaborating with the Division o
Trading and Markets (TM) on examinations o broker-dealers,
SROs, and transer agents This allows OCIE to identiy
important areas o ocus and has led to TM requests that rms
change certain practices OCIE also teams with the Division
o Investment Management (IM) or examinations o various
investment unds and their management, collaborating on
reviews o money market und lings and using data provided
by IM in its risk assessment o registrants
Key OCIE actions that led to Division o Enorcement action
include:
Identiying the sale o millions o dollars o micro-cap
securities through alse and misleading statements,
ollowed by swit action to protect investors assets,
including reezes, trading halts and/or nes The micro-
cap review demonstrates the benets o OCIEs recently-
created specialized groups, one o which ocuses on
these securities
Discovering that a broker was churning two accounts
owned by the Sisters o Charity one account or care o
nuns in assisted living acilities and a second supporting
the sisters charitable endeavors in order to generateexcess commissions or the broker
Identiying inormation that led to the charging o
Raymond James with misrepresenting and omitting
material inormation in connection with the sale to
customers o over $24 billion in market value o auction
rate securities
OCIEs eort to promote voluntary compliance, good gover-
nance and risk management within the industry serves both
investors and registrants: it diminishes the need or ormal
action while ensuring that investors have access to accurate,
timely inormation As part o this eort, OCIE has conducted
Chie Compliance Ocer Outreach (CCOutreach) events
designed to encourage open communications and coordina-
tion on compliance issues between the SEC and the mutual
und, investment adviser, and broker-dealer industries OCIE
published two public reports as part o a new initiative to
create more transparency about issues identied in its exami-
nations Additionally, OCIE created an expansive large-rm
monitoring program and improved communication eorts with
senior management and und boards at a number o large
organizations A primary goal o these eorts is to increase
awareness, engagement and support on key risk and regula-
tory issues
Finally, OCIE is contributing to the SECs rulemaking process,
imparting practical knowledge and inormation gathered
during examinations while taking part in over 50 working
groups implementing various Dodd-Frank Act rulemaking
provisions Other rulemakings have benetted rom signicant
OCIE input, as well, including large trader reporting rules,
amendments to the Advisers Act and the consolidated audittrail rule proposal
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Operating Divisions:Progress throghot the Agency
Enorcement, examination and rulemaking are the SECs mostvisible unctions However, the importance o other eorts
cannot be overstated The SEC ensures that investors have
access to timely, accurate and complete inormation, that
markets unction eciently, that regulations are anchored in
sound economics and that the agency as a whole is keeping
up with changes in the nancial marketplace
The Division o Corporation Finance (CF), which oversees
corporate disclosure o inormation, established new oces
concerned with three vital acets o the nancial world: an
oce ocused on the largest nancial institutions; the Oce o
Structured Finance, which deals with disclosure reviews and
policy-making in asset-backed securities and other structured
products; and the Oce o Capital Market Trends These
oces are increasing the attention paid to market sectors
that have proved systemically signicant in recent years,
aiding rulemaking and improving the SECs amiliarity with and
expertise in these increasingly important areas
CFs Oce o Disclosure Operations worked in 2011 to
enhance investor protection by targeting specic disclosure
issues that had previously received little attention: requesting
disclosure o overseas cash holdings which, i repatriated,would result in material, negative consequences; questioning
whether current litigation contingency disclosure practices
comply with existing requirements; and working with
Enorcement, the Oce o the Chie Accountant (OCA) and
the Oce o International Aairs (OIA) to combat an uptick in
problems with reverse mergers by stepping up scrutiny o the
Form 8-Ks led in their wake
In support o the SECs call to acilitate capital ormation or
small enterprises, CF also began reviewing restrictions on
communications in public oerings, the impact o the banon general solicitation in private oerings, triggers or public
reporting under Section 12(g) o the Exchange Act and
regulatory questions around subjects including secondary
trading platorms and new capital raising strategies
In addition to very signicant rulemaking responsibilities
regarding derivatives trading, the Division o Trading and
Markets (TM) addressed a broad spectrum o issues as it
worked to help stabilize the nancial markets and protect the
interests o large and retail investors
TM received and processed over 2,000 SRO lings rom
exchanges, clearing agencies, the Financial Industry Regu-
latory Authority (FINRA), and the Municipal Securities Rule
making Board (MSRB), including those regarding complex ee
structures, new products, and revamped governance struc
tures TM led Commission monitoring o and, as appropriate
response to market activities in connection with signicant
events, including Hurricane Irene and the August 2011 market
volatility, helping markets continue to unction normally despite
signicant stress
TM also continued to solicit stakeholder views on the structure
o todays nancial markets and on potential changes tha
might improve market integrity or help maintain a level playing
eld or investors o all types
TM established a new Oce o Derivatives Policy to ocus on
implementing the derivatives provisions o the Dodd-Frank
Act TM also continued to expand the clearance and settle
ment program, an eort that culminated in the establishment
o a new Oce o Clearance and Settlement Traditionally
ocused on securities clearing agencies and transer agents
the Oce o Clearance and Settlement is now also respon-sible or implementing Dodd-Frank Act regulations or clearing
agencies that clear security-based swaps, and or overseeing
security-based swap data repositories
The Dodd-Frank Act expanded the SECs regulatory authority
over previously-exempted advisers to hedge unds and othe
private unds, an important expansion o agency responsibility
The Division o Investment Management (IM) ormed a
new Private Funds group headed by an experienced hedge
und attorney to spearhead this regulatory program and to
gear up or the task o collecting and conveying inormationthat will be reported to the SEC by these entities or use by the
Financial Stability Oversight Council (FSOC)
IM also worked with FSOC members to share inormation
newly led by money market unds with the SEC and the
related analyses This has acilitated critical consultations
with other agencies responsible or monitoring systemic risk
related to the European debt crisis
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The Division o Risk, Strategy, and Financial Innovation
(RSFI) was created in 2009 as the SECs internal think tank,
and provides the agency with sophisticated analyses that
integrate economic, nancial, and legal expertise A linchpin o
the SECs eort to break down silos and bring together critical
data rom across the agency, RSFI is the business owner o
the SECs new TCR (tips, complaints and reerrals) System,
generating data and statistics on the systems operations and
helping to dene urther system development
RSFI provided critical support in the successul ederal insider
trading prosecutions o Raj Rajaratnam and Winired Jiau,
analyzing expert testimony and other documents proered
by the deense and allowing prosecutors to successully
challenge key portions o the deenses strategies
The Division has contributed substantially to the Dodd-Frank
Act rulemaking process, particularly with regard to the over-
the-counter derivatives market And RSFI is at the center
o the SECs work to provide detailed economic analysis o
proposed agency actions
RSFI also worked closely with OCIE, rening risk models that
help OCIE direct exam resources in light o current trends and
suspected abuses, and it participated in exams as part o
RSFIs work developing tools, algorithms, and analytics that
enhance the eectiveness o eld teams at these exams
Consistent with its think tank role, RSFI economists con-
ducted research on nancial and economic issues relevant to
the SECs mission, or publication in peer-reviewed academic
journals, on relevant subjects such as Short Selling in Initial
Public Oerings and Venture Capital Reputation, Post-IPO
Perormance, and Corporate Governance
The Oce o the Chie Accontant (OCA) continued to
coordinate and monitor progress towards convergence o US
Generally Accepted Accounting Principles and InternationalFinancial Reporting Standards (IFRS) OCA published both a
report on progress against the stas IFRS work plan and a Sta
Paper exploring a possible method or incorporation o IFRS
OCA also worked with the SECs Oce o International
Aairs (OIA) to develop recommendations and a nal report
regarding the IFRS Monitoring Board Governance Review
In connection with OCAs role in overseeing the Public Company
Accounting Oversight Board (PCAOB), the SEC approved
a PCAOB rulemaking to update its Audit Risk Assessment
Standards These standards are designed to benet investors
by enhancing the eectiveness o the auditors assessment o
and response to the risks o material misstatement
The SEC also approved temporary rules establishing the
PCAOBs Interim Program o Inspection or Audits o Broker-
Dealers These rules are part o the PCAOBs initial steps to
implement the expanded authority over auditors o broker-
dealers granted it in the Dodd-Frank Act
Since the Commissions appointment o three new PCAOB
Board Members in February, 2011, OCA has been working
closely with the new Board and PCAOB sta on several Board
initiatives, including its consideration o potential changes to
the auditors reporting model
OCA is also working with the PCAOB and the SECs OIA
on continuing negotiations with certain jurisdictions most
notably in the European Union and China aimed at obtaining
or the PCAOB the ability to adequately inspect audits by
registrants accountants These negotiations occur at a time
when the reliability o nancial reports and audit practices in
some jurisdictions has been called into question, leading to
investor losses and the de-listing o a number o entities
In addition to its work with OCA, OIA is working closely with
Enorcement to ensure that the SECs reach is as global as the
nancial markets have become tracing and reezing $317
million o raud proceeds located overseas and repatriating
$241 million to harmed investors It helped coordinate more
than one thousand assistance requests between Enorcement
and its oreign counterparts, while working to increase rom
71 nations to 80 the number o signatories to a memorandum
o understanding regarding compliance with and enorcement
o securities laws In addition, OIA brokered inormation-sharing agreements between the PCAOB and the United
Kingdom and the Swiss Audit Oversight Authorities, allowing
the PCAOB to inspect the auditors o oreign companies listed
on US exchanges and registered with the SEC
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OIA also created and led a Task Force on International
Implementation an intra-agency task orce coordinating the
international aspects o the Dodd-Frank Act The Task Forces
work is diminishing the risk that Dodd-Frank Act regulation
will confict with regulations in other countries, and create the
potential or regulatory arbitrage
The Oce o Investor Edcation and Advocacy (OIEA)
redesigned and expanded its investorgov website, adding
inormation on a variety o topics, and materials aimed at the
particular needs o specic groups, such as service members,
teachers and retirees OIEA completed a Dodd-Frank Act
study on ways to improve investors access to registration
inormation about investment proessionals In addition, it
began a multi-part study on nancial literacy among retail
investors underway
A Critical Market Response:May 6th and Market Condence
In 2011, the SEC continued eorts to address the unusual
market volatility that occurred on May 6, 2010
At 2:42 on the aternoon o May 6, 2010, stock prices on
US exchanges began to all with almost unprecedentedspeed 573 points in ve minutes leaving the nations
most prominent stock index down over 900 points rom the
previous days close At the worst end o the spectrum, more
than 300 securities suered declines o more than 60 percent
And then, just as suddenly, the markets reversed themselves,
recovering to pre-crash levels within minutes
These unusual price swings caused signicant harm to many
investors, including those who lost money when stop loss
programs led to automatic selling during the dramatic bu
quickly reversed decline In addition to nancial losses, the
sudden disruptions also delivered a signicant blow to the
condence o investors o all types individual retail investors
large institutions and all those in between
Recognizing the signicance o the markets unusua
fuctuations, the SEC acted immediately, working with the
exchanges, FINRA and the Commodity Futures Trading
Commission (CFTC) to determine causes o the volatility and
to take action to reduce the possibility o other, similar, events
occurring in the uture
Beginning in May 2010, the SEC spearheaded by the
Division o Trading and Markets joined with FINRA and the
exchanges to propose the single-stock circuit breakers which
would ultimately be applied to most US equity securities
On October 1, 2010, stas o the SEC and CFTC presented
a comprehensive analysis o the causes and consequence o
the May 6 volatility, as the SECs eorts to enhance marke
integrity continued into the new scal year
In 2011, the SEC adopted a rule eectively prohibiting
brokers and dealers rom oering customers unltered
or naked access to the exchanges by requiring tha
risk controls designed to prevent inadvertent risk
threats to market stability be in place beore access is
provided The rule requires brokers to put in place risk
management controls and supervisory procedures to
help prevent erroneous orders, ensure compliance with
regulatory requirements, and enorce pre-set credit o
capital thresholds
The SEC approved rules proposed by FINRA and the
exchanges that provide more certainty regarding the
circumstances under which trades will be consideredclearly erroneous and canceled Ater May 6, a variety
o market participants reported that the uncertainty
over which trades would be canceled contributed to
participants decision to withdraw rom trading, urthe
exacerbating the markets volatility
The SEC also approved rules proposed by FINRA and
the exchanges requiring that market makers maintain a
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quote within a certain percentage o the prevailing bid
and oer, which reduces the likelihood that stub quotes
oers to buy or sell a stock at a price so ar away
rom the prevailing market that they are not intended
to be executed will be executed against Executions
against quotes as low as a penny a share and as high
as $100,000 represented a signicant proportion o the
trades that were executed at extreme prices on May 6
and were subsequently broken
The SEC considered a proposed national market system
(NMS) plan led by national securities exchanges and
FINRA that would establish a new limit up-limit down
mechanism to address extraordinary market volatility in
US equity markets Limit up-limit down would prevent
trades in listed equity securities rom occurring outside aspecied price band, which would be set at a percentage
level above and below the average price o the security
over the immediately preceding ve-minute period
The Commission published or comment changes
proposed by SROs to rules governing market-wide circuit
breakers Among other things, the proposals would
lower the thresholds that trigger the respective Level 1,
2 and 3 market-wide circuit breakers rom 10 percent,
20 percent and 30 percent, to 7 percent, 13 percent
and 20 percent They also would replace the Dow Jones
Industrial Average with the S&P 500 Index as the pricingreerence against which to measure market decline
The Commission adopted a rule establishing large trader
reporting requirements that will enhance the agencys
ability to identiy large market participants, as well as to
collect and analyze inormation on their trading activity
This will both speed analysis o unexpected market
behavior and aid the SECs Division o Enorcement in
investigations o suspicious activity
Dodd-Frank Act Reglations:Implementing Financial Reorm
The Dodd-Frank Act is the most signicant piece o securities
legislation since the 1930s, one that both imposes signicant
new investor protection and market stability responsibilities on
the SEC, and provides new tools with which to meet those
responsibilities 2011 was the busiest portion o the multi-
year implementation agenda written by Congress into the law
and the SEC in collaboration with other regulatory bodies
and in close communication with stakeholders representing
every acet o the nancial marketplace made signicant
progress against that agenda
O the more than 90 mandatory rulemaking provisions in
the Dodd-Frank Act, the SEC had proposed or adopted
rules or three-quarters o them by the close o 2011, as
well as a number o the rules stemming rom the dozens o
other provisions that give the SEC discretionary rulemaking
authority Additionally, the SEC had issued 12 o the more
than 20 studies and reports that it is required to complete
under the Act
Derivatives
One o the most complex and important responsibilities
assigned to the SEC in the Dodd-Frank Act is the building
rom the ground up, together with the Commodity Futures
Trading Commission (CFTC) a regulatory system or an over-
the-counter derivatives market that has grown in notional
value to hundreds o trillions o dollars A new, transparent
derivatives market, with a variety o trading platorms and
central clearing, will diminish risk and encourage competition,
which can increase liquidity and improve pricing
By the close o 2011, the SEC had begun to lay the groundwork
or regulating security-based swaps the agencys part o this
complex new derivatives market with a series o proposals
regarding its undamental legal, structural and denitional
issues
The SEC, jointly with the CFTC, proposed rules urther
dening a number o key terms, including swap, secu-
rity-based swap, security-based swap agreement,
swap dealer, security-based swap dealer, major
swap participant, and major security-based swap
participant These rules seek to clariy whether and how
derivatives market participants will be subject to regu-
lation, either as a result o the products in which they
transact or the activities they undertake
The SEC proposed rules governing the registration and
operation o security-based swap data repositories
(SDRs), new entities that will collect transaction inorma-
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tion on securities-related swap transactions and publicly
disseminate it in real time These rules also prescribe
the manner in which transactions must be reported to
SDRs, and how SDRs should disseminate transaction
inormation
The SEC proposed rules regarding clearance o security-
based swaps that are not covered by the end-user
exemption These rules would establish a process
through which clearing agencies provide inormation to
the SEC about the security-based swaps they plan to
accept or clearing The rules would also set minimum
operational and governance standards or clearing
agencies Additionally, the SEC proposed rules settingorth the requirements to which end-users must adhere
when they engage in security-based swap transactions
that are exempt any rom mandatory clearing requirement
that may apply
The SEC proposed rules establishing a ramework or
the registration and regulation o swap execution acilities
(SEFs) platorms on which security-based swaps
required to be cleared may be traded These regulations
would encourage transparent and air trading o security
based swaps
The SEC took steps to provide or the registration and
regulation o security-based swap dealers and majo
security-based swap participants by, among othe
things, proposing rules establishing business conduc
standards applicable to those entities
Asset-Backed Secrities
The collapse o the market or one type o asset-backed
securities (ABS), those backed by residential subprime
mortgages, was a precipitating event or the global nancia
crisis Mortgage originators, able to transer the risk o
oreclosure to securitizers, allowed underwriting standards to
collapse Securitizers then transerred their risk to investors
who lost billions when mortgage-holders began deaulting on
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an unprecedented scale The SEC is pursuing regulations that
would encourage high underwriting standards by aligning the
interests o originators and securitizers with those o investors,
and by ensuring that investors in these securities have access
to the inormation needed to invest rationally
Risk retention requirements would ensure that securitizers
have skin in the game and, thus, incentive to ensure
quality underwriting The SEC joined the Federal Reserve
Board, the Oce o the Comptroller o the Currency,
the Federal Deposit Insurance Corporation, the Federal
Housing Finance Agency and the Department o Housing
and Urban Development in seeking public comment on
a proposed rule that would require sponsors o ABS to
retain at least ve percent o the credit risk o the assets
underlying the security
The SEC adopted rules requiring issuers o asset-backed
securities to disclose the history o repurchase requests
received and repurchases made, and requiring issuers
o asset-backed securities to conduct a review o the
assets underlying those securities
The SEC also adopted rules implementing the Dodd-
Frank Act provision which requires ABS issuers in
registered transactions to review the assets underlying
the ABS and disclose the nature o the review
The SEC proposed a rule prohibiting material conficts
o interest between those who package and sell asset-
backed securities and those who invest in them, helping
ensure that entities which create and sell asset-backed
securities cannot benet at the expense o their clients,
rom the ailure o those same securities
The SEC re-proposed or public comment rules requiring
greater accountability and enhanced quality around
ABS when issuers seek to use an expedited registration
process known as shel registration First proposed
beore that enactment o the Dodd-Frank Act, the revised
proposal would require that an executive ocer o the
issuer certiy the accuracy o the disclosure, that the
securitization be designed to ensure cash fows sucient
to service expected payments, that a risk manager be
appointed to review assets upon the occurrence o certain
trigger events, and that dispute resolution procedures be
in place in the event o a repurchase request
Credit Rating Agencies
The collapse o billions o dollars o triple-A rated mortgage-
backed securities was a key element o the nancial crisisOver-reliance on opinions issued by nationally recognized
statistical rating organizations (NRSROs or, simply, rating
agencies) let investors exposed to risks that were, in act,
ar greater than the securities initial ratings implied (many o
these triple A securities were eventually downgraded to junk
status)
Independent o nancial reorm legislation, the SEC had
previously proposed rules that would lessen reliance on rating
agencies by requiring that investors have access to data on
the assets, including individual mortgage data, underlying
ABS
In response to the Dodd-Frank Act, the SEC proposed
rules and amendments intended to increase transparency
and improve the integrity o credit ratings by requiring
that NRSROs report on internal controls, protect against
conficts o interest, establish proessional standards
or credit analysts, publicly disclose the methodology
used to determine individual ratings and enhance their
public disclosures about the perormance o their credit
ratings
The SEC removed credit ratings as eligibility requirements
or companies seeking to use short-orm registration
when registering securities or public sale The SEC
also proposed amendments to existing rules that would
remove reerences to credit ratings in several rules under
the Exchange Act, including rules concerning broker-
dealer nancial responsibility, distributions o securities,
and conrmations o reserve requirements or broker-
held excess margin securities In addition, the SEC
proposed removing credit rating reerences in certain
rules and orms under the Investment Company Act o
1940, including Rule 2a-7, governing the operations omoney market unds
Exective Compensation
The SEC adopted rules concerning shareholder approval
o executive compensation and golden parachute
compensation arrangements, requiring that say-on-pay
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votes occur at least once every three years and that a
requency vote be held at least once every six years
Companies also are required to provide additional
disclosure regarding golden parachute compensation
arrangements made with certain executive ocers in
connection with merger transactions
The SEC, jointly with the Federal Reserve and ve other
nancial regulatory agencies, proposed a rule that would
require certain nancial institutions including broker-
dealers and investment advisers with $1 billion or more in
assets to disclose the structure o their incentive-based
compensation practices, and which would prohibit such
institutions rom maintaining compensation arrange-
ments that encourage inappropriate risks
The SEC also proposed rules requiring the Commission
to direct the national securities exchanges and national
securities associations to prohibit the listing o any equity
security o an issuer that does not comply with new
compensation committee and compensation adviser
requirements
Private Fnds
The SEC adopted rules requiring advisers to hedge unds
and other private unds to register with the SEC and
reallocating regulatory responsibility or smaller advisers
to the states In addition, the Commission approved
rules that implement exemptions rom registration or
three types o private und advisers: advisers solely to
venture capital unds; advisers solely to private unds
with less than $150 million in assets under management
in the US; and certain private advisers without a place
o business in the US
In a joint release with the CFTC, the Commission
proposed a new rule that would require hedge und
advisers and other private und advisers to report
systemic risk inormation on a new orm, Form PF (thisproposal was adopted in October, 2011)
The SEC adopted a rule dening amily oces that will
be excluded rom the denition o an investment adviser
under the Investment Advisers Act, and thereore not
subject to regulation under the Act
Other Signifcant Dodd-Frank Act Rlemakings
The SEC proposed a rule creating a new process b
which municipal advisers must register with the SEC
submitting detailed inormation and certiying that theyhave met or will meet the qualications and regulatory
obligations required o them Required inormation would
include contact inormation, a list o municipal advisory
activities in which they engage, and disciplinary history
When adopted, this rule will supersede a more limited
temporary rule adopted shortly ater the passage o the
Dodd-Frank Act
The SEC proposed rules that would require reporting
issuers to disclose annually whether they use confict