SEC OIG Report to Congress April 2011-Sept 2011

8/3/2019 SEC OIG Report to Congress April 2011-Sept 2011

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MISSIONThe mission of the Office of Inspector General (OIG) is to promote the integrity, efficiency,

and effectiveness of the critical programs and operations of the United States Securities and

Exchange Commission (SEC or Commission). This mission is best achieved by having an effective, vigorous, and independent office of seasoned and talented professionals who perform the following functions:

U.S. Securitiesand ExchangeCommission

OFFICE OF

INSPECTORGENERALSEMIANNUAL REPORT TOCONGRESS A p

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Conducting independent and objectiveaudits, evaluations, investigations, andother reviews of SEC programs andoperations;

Preventing and detecting fraud, waste,

abuse, and mismanagement in SECprograms and operations;

Identifying vulnerabilities in SEC systemsand operations and recommending con-structive solutions;

Offering expert assistance to improve SECprograms and operations;

Communicating timely and useful informa-tion that facilitates management decisionmaking and the achievement of measur-able gains; and

Keeping the Commission and the Congressfully and currently informed of significantissues and developments.


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CONTENTS

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..............................................................MESSAGE FROM THE INSPECTOR GENERAL 1

........................................................................MANAGEMENT AND ADMINISTRATION 5.................................................................................................................... Agency Overview 5

............................................................................................................................OIG Staffing 5

...................................CONGRESSIONAL TESTIMONY, REQUESTS, AND BRIEFINGS 7...........................................Inspector General Testimonies on the OIGs Leasing Investigation 7

.............................Inspector General Testimony on the OIGs Conflict-of-Interest Investigation 8............................................Inspector General Testimony on the OIGs Stanford Investigation 9

..................................................Reports Prepared in Response to Congressional Requests 10

...............................................................................................Other Requests and Briefings 10

THE INSPECTOR GENERALS STATEMENT ON THE SECS MANAGEMENT AND...................................................................................PERFORMANCE CHALLENGES 13

.............................................................................Challenge: Procurement and Contracting 13..................Challenge: Information Technology Management/ Information Systems Security 14

..........................................................................Challenge: Human Resource Management 15........................................................................................Challenge: Financial Management 16

.................................................................................................................Challenge: Ethics 17

........................................... ADVICE AND ASSISTANCE PROVIDED TO THE AGENCY 19

........................COORDINATION WITH OTHER OFFICES OF INSPECTOR GENERAL 23

......................................................................................... AUDITS AND EVALUATIONS 27...............................................................................................................................Overview 27

............................................................................................................................. Audits 27.....................................................................................................................Evaluations 28

...................................................................................... Audit Follow-Up and Resolution 28

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....................................................................................... Audits and Evaluations Conducted 28Report of Review of Economic Analyses Performed by the Securities and

....................Exchange Commission in Connection with Dodd-Frank Act Rulemakings 28Oversight of and Compliance with Conditions and Representations Related to

..........................................Exemptive Orders and No-Action Letters (Report No. 482) 30 Assessment of the Office of Investor Education and Advocacys

..........................................................................................Functions (Report No. 498) 33Review of Alternative Work Arrangements, Overtime Compensation, and

.................................................COOP-Related Activities at the SEC (Report No. 491) 36 Audit of SECs Employee Recognition Program and Recruitment, Relocation, and

.........................................................................Retention Incentives (Report No. 492) 41........................ Assessment of SECs Continuous Monitoring Program (Report No. 497) 44

Review of SEC Contracts for Inclusion of Language Addressing Privacy Act...................................................................................Requirements (Report No. 496) 47

..........................................Establishment of the Office of Minority and Women Inclusion 48............................................................................................Pending Audits and Evaluations 48

.......Review of the SECs Economic Analyses for Dodd-Frank Act Rulemaking Initiatives 48

..............................Review of the SECs System Certification and Accreditation Process 49...................................2011 Federal Information Security Management Act Assessment 49

.................................................... Assessment of the SECs Systems and Network Logs 50...............................................................Review of SECs Continuity of Operations Plan 50

Audit of Management of SEC-Furnished and SEC-Funded Property Used by.................................................................................................................Contractors 51

..........................................................................................................INVESTIGATIONS 53...............................................................................................................................Overview 53

.................................................................................Investigations and Inquiries Conducted 54.............Improper Actions Relating to the Leasing of Office Space (Report No. OIG-553) 54

Investigation of Conflict of Interest Arising from Former General Counsels.....................................Participation in Madoff-Related Matters (Report No. OIG-560) 63

Allegations of Enforcement Staff Misconduct in Insider Trading..............................................................................Investigation (Report No. OIG-511) 71

Investigation into Allegations of Improper Preferential Treatment and Special........... Access in Connection with an Enforcement Investigation (Report No. OIG-559) 75

Excessive Payment of Living Expenses for a Headquarters Senior Official in...............................................Contravention of OPM Guidance (Report No. OIG-561) 76

Inappropriate Communications Between an SEC Attorney and an Outside.........................................................................................Party (Report No. OIG-555) 77

Investigation of Alleged Enforcement Failure to Investigate Possible Violations...................................................of the Federal Securities Laws (Report No. OIG-554) 79

..............................................................................................Other Inquiries Conducted 80 Abuse of Leave and Attempt to Defraud the Federal Government by a

..................................................................Regional Office Senior Officer (PI 11-33) 80Misuse of Government Computer Resources, Office Equipment, andOfficial Time to Support a Personal Private Business, and Falsification of

................................................................ Time and Attendance Records (PI 10-04) 81Failure to Disclose Outside Position and Earnings and Misuse of

.................................................................................. Agency Resources (PI 09-70) 82


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................................Misuse of SEC Business Shuttle and Transit Benefits (PI 11-28) 83.......Misuse of Agency Resources and Official Time for a Private Business (PI 10-58) 84

Allegations of Misconduct by a Regional Office in an Enforcement............................................................................................Investigation (PI 10-19) 84

.................. Allegations of Misconduct by an Examiner in a Regional Office (PI 11-23) 85 Allegation of Possible Failure to Report Revenue on Financial Disclosure

.............................................................................Form by Senior Officer (PI 11-01) 85.................. Allegations of Waste and Fraud by Headquarters Employees (PI 09-115) 86

Complaint of Failure to Investigate Aggressively and Appearance of ............................................................................................Impropriety (PI 09-107) 86

Complaint of Ineffective Performance within the Office of Compliance.................................................................Inspections and Examinations (PI 10-25) 87

............................................................Sentencing Arising Out of Previous OIG Investigation 87..........................................................................................................Pending Investigations 88

............................... Allegations of Improper Document Destruction (Case No. OIG-567) 88................................. Allegations of Misconduct by a Senior Official (Case No. OIG-564) 88

Allegation of Favorable Treatment Provided by Regional Office to Prominent

......................................................................................Law Firm (Case No. OIG-536) 89............................ Allegations Regarding Court-Appointed Receiver (Case No. OIG-565) 89.....................Investigation of Forgery, False Statements, and Fraud (Case No. OIG-563) 90

Allegations of Misconduct, Time and Attendance Abuse, and Ethics...................................................... Violations at a Regional Office (Case No. OIG-562) 90

Complaint of Mismanagement and Inappropriate Use of Government..........................................................................................Funds (Case No. OIG-557) 90

............................................... Allegation of Procurement Violations (Case No. OIG-556) 91

..........................................................REVIEW OF LEGISLATION AND REGULATIONS 93

................STATUS OF RECOMMENDATIONS WITH NO MANAGEMENT DECISIONS 97

.........................................................................REVISED MANAGEMENT DECISIONS 97

................................. AGREEMENT WITH SIGNIFICANT MANAGEMENT DECISIONS 97

..................................................INSTANCES WHERE INFORMATION WAS REFUSED 97

......................................TABLE 1: LIST OF REPORTS: AUDITS AND EVALUATIONS 99

TABLE 2: REPORTS ISSUED WITH COSTS QUESTIONED OR........FUNDS PUT TO BETTER USE (INCLUDING DISALLOWED COSTS) 101

TABLE 3: REPORTS WITH RECOMMENDATIONS ON.................WHICH CORRECTIVE ACTION HAS NOT BEEN COMPLETED 103

.................................................TABLE 4: SUMMARY OF INVESTIGATIVE ACTIVITY 115


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......................................................TABLE 5: SUMMARY OF COMPLAINT ACTIVITY 117

TABLE 6: REFERENCES TO REPORTING REQUIREMENTS OF

..............................................................THE INSPECTOR GENERAL ACT 119

............................................... APPENDIX A: PEER REVIEWS OF OIG OPERATIONS 121

.................................................................Peer Review of the SEC OIGs Audit Operations 121......................................................Peer Review of the SEC OIGs Investigative Operations 121

APPENDIX B: ANNUAL REPORT ON THE OIG SEC EMPLOYEESUGGESTION PROGRAM ISSUED PURSUANT TO SECTION 966 OF

.............................................................................................THE DODD-FRANK ACT 123

..............................................................................................Introduction and Background 123............................................Summary of Employee Suggestions and Allegations Received 124

....................................................................................Examples of Suggestions Received 125...................................................................................Leave and Earnings Statements 125

........................................................................................Code of Federal Regulations 125......................................................................................................Unclaimed Property 126

..................................................................................................Service of Subpoenas 126............................................................................................... Teleconference Services 126

.......................................................................................Examples of Allegations Received 127............................................................Protection of Personally Identifiable Information 127

...............................................................................Referrals to Office of Investigations 127.........................................................................................................................Conclusion 127

APPENDIX C: THE INSPECTOR GENERALSCONGRESSIONAL TESTIMONIES

Before the Oversight and Investigations Subcommittee of the Committee on........................................................Financial Services, U.S. House of Representatives 129

Before the Economic Development, Public Buildings and EmergencyManagement Subcommittee of the Committee on Transportation and

...............................................................Infrastructure, U.S. House of Representatives 147Before the Economic Development, Public Buildings and Emergency

Management Subcommittee of the Committee on Transportation and...............................................................Infrastructure, U.S. House of Representatives 169

Before the Federal Financial Management, Government Information,Federal Services, and International Security Subcommittee of the

.......................U.S. Senate Committee on Homeland Security and Government Affairs 177Before the Subcommittee on Oversight and Investigations, Committee on

Financial Services, and Subcommittee on TARP, Financial Services andBailouts of Public and Private Programs, Committee on Oversight and

...................................................Government Reform, U.S. House of Representatives 199


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I am pleased to present this Semiannual Report to Congress on the activi-ties and accomplishments of the Securities and Exchange Commission(SEC) Office of Inspector General (OIG) for the period of April 1, 2011through September 30, 2011. This report is required by the InspectorGeneral Act of 1978, as amended, and covers the work performed by theOIG during the period indicated.

The audits, reviews, and investigations described in this report illustrate the commitment of theSEC OIG to promote efficiency and effectiveness in the SEC, as well as the tremendous effect and im-pact that the SEC OIG has had upon SEC operations.

During this reporting period, we issued several significant audit reports on matters critical to theSECs programs and operations. We conducted a review of the SECs cost-benefit analyses inconnection with Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)rulemakings pursuant to a request from several members of the United States (U.S.) Senate Committeeon Banking, Housing, and Urban Affairs. The review concluded that a systematic cost-benefit analysiswas conducted for each of the six rules we reviewed. Overall, we found that the SEC formed teamswith sufficient expertise to conduct comprehensive and thoughtful economic analyses of the six pro-posed releases we reviewed. In several instances, we found that staff from the Division of Risk, Strat-egy, and Financial Innovation were involved in the early stages of the rulemaking process and contrib-uted extensively to the scope and breadth of the cost-benefit analyses. In these instances particularly,we found the analyses to be thorough and to have incorporated all aspects of the principles of the ap-plicable Executive Orders and the SECs internal compliance handbook for rulemakings.

We also conducted a review of the SECs oversight of and compliance with conditions and repre-sentations related to exemptive orders and no-action letters that are granted to regulated entities. TheSEC has statutory authority to issue an exemptive order, in response to an entitys request, which allowsthe entity to engage in transactions that would otherwise be prohibited by the securities laws, rules, orregulations. In some instances, instead of exemptive relief, a company may request a no-action letterfrom Commission staff. A no-action letter states that the staff will not recommend enforcement actionin response to the entitys proposed activity. We found that the Commission could improve its processesfor monitoring compliance with the conditions and representations related to exemptive orders and no-action letters in a variety of ways. Significantly, our review found that the SEC divisions that issue ex-emptive orders and no-action letters to regulated entities do not have a coordinated process for review-

ing these entities compliance with the conditions and representations related to the orders and letters,and instead rely on the Office of Compliance Inspections and Examinations to review compliance aspart of its examinations. Because exemptive orders and no-action letters allow industry participants toconduct activities that, without the relief, could violate the securities laws and regulations, our reviewdetermined that monitoring is important to ensure that regulated entities fully comply with all condi-tions and representations related to exemptive orders and no-action letters.

During the reporting period, we also conducted an assessment of the functions of the SECs Officeof Investor Education and Advocacy (OIEA), which receives investor inquiries and complaints from the

Message from the

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general public, and is responsible for gathering, processing, and responding to these inquiries andcomplaints. Our assessment resulted in several recommendations designed to improve the opera-tions of OIEA. We also conducted a review of alternative work arrangements, overtime compensa-tion, and continuity of operations (COOP)-related activities at the SEC, an audit of the SECs em-ployee recognition program and recruitment, relocation, and retention incentives, and reviews of information technology (IT) areas of concern we identified as part of our annual assessment con-ducted pursuant to the Federal Information Security Management Act.

We also had a very productive semiannual report period for investigations. At the request of theChairman, we investigated any conflicts of interest arising from the former SEC General Counselsparticipation in matters relating to the Bernard L. Madoff Ponzi scheme, most notably, the liquida-tion proceeding under the Securities Investor Protection Act. During the course of our investi-gation, we obtained and reviewed over 5.1 million e-mails for a total of 45 current and former SECemployees and took the sworn testimony or interviewed 40 witnesses, including the former SECGeneral Counsel, the former SEC Ethics Counsel who provided pertinent ethics advice, theChairman, the Commissioners, Securities Investor Protection Corporation officials, the trustee ad-ministering the Madoff liquidation, and various current and former SEC employees. After com-

pleting the fact-finding phase of our investigation, we provided to the Acting Director of the Officeof Government Ethics (OGE) a summary of the salient facts uncovered in the investigation and re-quested that OGE review those facts and provide its opinion regarding the former General Coun-sels participation in matters that could have given rise to a conflict of interest. After reviewing thatfactual summary, the Acting Director of OGE informed us that based upon the facts provided, theformer General Counsels work on the policy determination of the calculation of net equity inconnection with clawback actions stemming from the Madoff matter, and the former GeneralCounsels work on proposed legislation affecting clawbacks should be referred to the U.S. Depart-ment of Justice (DOJ) for possible violations of Section 208 of Title 18 of the United States Code(U.S.C.). In late October 2011, the DOJ decided not to pursue prosecution of the former GeneralCounsel.

We also conducted an investigation of the SECs decision to lease 900,000 square feet of spaceat a facility in Washington, D.C., known as Constitution Center. Our investigation concluded thatthe analysis the SEC conducted to justify the lease was deeply flawed and unsound, and that theSECs Office of Administrative Services (OAS) grossly overestimated the amount of space needed atSEC headquarters for the SECs projected expansion and used unsupportable figures to justify theSEC committing to an expenditure of $556,811,589 over ten years. We also found that OAS pre-pared a faulty Justification and Approval to support entering into the Constitution Center leasewithout competition. Moreover, this Justification and Approval was prepared after the SEC hadalready signed the contract to lease space at the Constitution Center facility. Further, OAS back-dated the Justification and Approval, thereby creating the false impression that it had been prepared

only a few days after the SEC entered into the lease. Our report recommended that the newly-appointed Chief Operating Officer/Executive Director carefully review the reports findings andconduct a thorough and comprehensive assessment of all matters currently under the purview of OAS, and that disciplinary action be taken against several of the senior OAS officials involved in theleasing process. We also recommended that the Office of Financial Management, in consultationwith the Office of the General Counsel, request a formal opinion from the Comptroller General asto whether the Commission violated the Antideficiency Act by failing to obligate appropriate fundsfor the Constitution Center lease. On June 15, 2011, the SECs Chief Financial Officer submitted arequest for a formal opinion to the Comptroller General on this issue, and that request was pending at the end of the semiannual reporting period. On October 3, 2011, the Comptroller General


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issued a decision that the SEC had no authority to record an obligation for an amount less than itsfull liability under [its Constitution Center] contract, and that the SEC failed to fully record its ob-ligation when it entered into the contract.

We also completed several additional complex investigations during the semiannual reporting period and issued comprehensive reports that did not substantiate allegations of misconduct by Di-

vision of Enforcement (Enforcement) staff in an insider trading investigation, improper preferentialtreatment and special access in connection with an Enforcement investigation, and the failure toinvestigate possible violations of the federal securities laws. We also completed investigations thatfound evidence of the excessive payment of living expenses in contravention of OPM guidance fora headquarters senior official and inappropriate communications between an SEC manager and anoutside party.

This semiannual reporting period has also been a particularly busy one for consultations andbriefings with Congressional offices. I testified before Congressional Subcommittees on five sepa-rate occasions during the reporting period. Three of these testimonies pertained to our invest-igation of the SECs leasing of space at Constitution Center, one related to our investigation of con-

flicts of interest arising from the former SEC General Counsels participation in Madoff-relatedmatters, and one related to an investigation we completed during a previous semiannual reporting period regarding the SECs response to concerns regarding Robert Allen Stanfords alleged Ponzischeme. During the reporting period, I also conducted numerous briefings of, and had discussionswith, Members of Congress and Congressional staff concerning a wide variety of issues impacting the SEC.

This semiannual report also includes, for the first time (at Appendix B), the annual report of ourefforts conducted pursuant to the newly-established OIG SEC Employee Suggestion Program. Weimplemented this program pursuant to section 966 of the Dodd-Frank Act, and it has been an un-qualified success. During the past year, we received and reviewed a total of 74 suggestions and

allegations, with a significant number of the suggestions leading to tangible improvements in theSECs programs and operations and, in some instances, cost savings.

The accomplishments of my Office have been enhanced by the support of the SEC Chairmanand Commissioners, as well as that of the SECs management team and employees. I wish to par-ticularly note Chairman Mary Schapiros leadership and support of the OIG, which has been in-strumental to the many significant improvements in the SEC over the past several years. I look for-ward to continuing this productive and professional working relationship as we continue to help theSEC meet its important challenges.

H. David KotzInspector General

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MANAGEMENT AND ADMINISTRATION

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AGENCY OVERVIEW

The U.S. SECs mission is to protect inves-tors; maintain fair, orderly, and efficient mar-kets; and facilitate capital formation. The SECstrives to promote a market environment that isworthy of the publics trust and characterizedby transparency and integrity. The SECs core

values consist of integrity, accountability, effec-tiveness, teamwork, fairness, and commitmentto excellence. The SECs goals are to foster andenforce compliance with the federal securitieslaws; establish an effective regulatory environ-ment; facilitate access to the information inves-tors need to make informed investmentdecisions; and enhance the Commissions per-formance through effective alignment andmanagement of human resources, information,and financial capital.

SEC staff monitor and regulate a securitiesindustry comprising more than 35,000 regis-trants, including approximately 10,000 publiccompanies, 11,000 investment advisers, about7,500 mutual funds, and about 5,000 broker-dealers, as well as national securities exchangesand self-regulatory organizations, 500 transferagents, 15 national securities exchanges, nineclearing agencies, and ten credit rating agencies.Additionally, the agency has oversight responsi-

bility for the Public Company Accounting Oversight Board (PCAOB), the Financial In-dustry Regulatory Authority (FINRA), the Mu-nicipal Securities Rulemaking Board (MSRB),and the Securities Investor Protection Corpo-ration (SIPC). While about 3,200 smaller in-

vestment advisers will transition to state regula-tion under the Dodd-Frank Act, the SEC isgaining responsibility for directly overseeing ap-proximately 700 larger private fund advisers,including hedge funds.

In order to accomplish its mission most ef-fectively and efficiently, the SEC is organizedinto five main divisions (Corporation Finance;Enforcement; Investment Management; Trad-ing and Markets; and Risk, Strategy, and Fi-nancial Innovation) and 16 functional offices.The Commissions headquarters is located inWashington, D.C., and there are 11 regionaloffices located throughout the country. As of September 30, 2011, the SEC employed 3,844full-time equivalents (FTEs), consisting of 3,806permanent and 38 temporary FTEs.

OIG STAFFING

During the reporting period, the OIGadded an investigator and an auditor to the



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staff, thereby further increasing its capacity toconduct its oversight responsibilities.

In May 2011, Elizabeth Leise joined theOIG as a Senior Investigator. Ms. Leise comesto us from the law firm of Arnold & PorterLLP, where she was a litigation associate forover eight years. Her law practice at Arnold &Porter focused on securities litigation and en-forcement matters. This practice encompassed

various types of matters under the federalsecurities laws and general corporate law, in-cluding the defense of corporations, as well astheir officers and directors, at all stages of securities fraud actions brought by privateplaintiffs and in investigations by the SECs Di-

vision of Enforcement; internal investigations;

and the representation of special litigationcommittees. Ms. Leise received a Juris Doctordegree from the George Washington UniversitySchool of Law in 2002 and Bachelor of Artsdegrees in Foreign Affairs and French from theUniversity of Virginia in 1999.

In June 2011, Russell Moore joined theOIG as an auditor. Mr. Moore comes to usfrom the Environmental Protection Agency(EPA) OIG, where he served as a project

manager in the Office of Program Evaluation.

During his time at the EPA, Mr. Mooresupervised reviews of the agencys positionmanagement program, Freedom of Informa-tion Act (FOIA) program, and EPAsmanagement of classified national security in-formation. Prior to joining EPA, Mr. Moorewas a supervisory auditor at the Naval AuditService, where he conducted reviews of classi-fied programs that focused on acquisitionsmanagement, contract management, financialmanagement, organizational structure, and in-ternal controls. Mr. Moore retired from theU.S. Marine Corps in 2007, after more than 20

years of military service. He graduated fromthe U.S. Naval Academy in 1987, subsequentlycompleting a masters degree in military studiesand a certificate in accounting. Mr. Moore will

also complete an MBA in accounting in May2012. Mr. Moore is a member of the Instituteof Internal Auditors and the American Societyof Military Comptrollers.

During the semiannual reporting period,one of our senior auditors, Jim Etheridge, re-tired after over 30 years of federal service. A second senior auditor, Laura Benton, left theOIG for an opportunity outside theCommission.


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CONGRESSIONAL TESTIMONY,

REQUESTS, AND BRIEFINGS

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During this semiannual reporting period,the OIG continued to keep the Congress fullyand currently informed of the OIGs investi-gations, audits, and other activities through tes-timony and written reports, as well as numerousmeetings and telephonic communications. TheInspector General (IG) testified before Congres-sional Subcommittees on five separate occa-sions during the reporting period. As discussedin detail below, three of these testimonies per-tained to the OIGs investigation of Improper

Actions Relating to the Leasing of Office Space(ReportNo. OIG-553, issued May 16, 2011); onerelated to the OIGs Investigation of Conflict of

Interest Arising from Former General Counsels Partici- pation in Madoff-Related Matters(Report No. OIG-560, issued September 16, 2011); and onerelated to an OIG investigation completed dur-ing a previous semiannual reporting period,

Investigation of the SECs Response to Concerns Re- garding Robert Allen Stanfords Alleged Ponzi Scheme (Report No. OIG-526, issued March 31, 2010).

INSPECTOR GENERAL TESTIMONIESON THE OIGS LEASINGINVESTIGATION

On June 16, 2011, the IG testified beforethe Economic Development, Public Buildings,

and Emergency Management Subcommittee(Economic Development Subcommittee) of theU.S. House of Representatives Committee onTransportation and Infrastructure regarding the OIGs investigation into numerous com-plaints received about the SECs decisions andactions relating to the leasing of office space ata newly-renovated building known as Constitu-tion Center. The IG described in detail theinvestigative work conducted and the results of the OIGs investigation, as reflected in theOIGs report of investigation containing over90 pages of analysis and more than 150exhibits.

The IG informed the Subcommittee that theOIG investigation found that the SECs enter-ing into a lease for 900,000 square feet of spaceat Constitution Center in July 2010 was part of a long history of missteps and misguided leas-ing decisions made by the SEC since it wasgranted independent leasing authority by Con-gress in 1990. The IG also summarized thereports recommendations, including that (1)the SECs Chief Operating Officer/ExecutiveDirector (COO) carefully review the reportsfindings and conduct a thorough and compre-hensive review and assessment of all matterscurrently under the purview of the SECs Of-fice of Administrative Services (OAS); (2) the



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COO, upon conclusion of this review and as-sessment, determine the appropriate discipli-nary action and/or performance-based actionto be taken for matters relating to the OIGsreport; and (3) the SEC request a formal opin-ion from the Comptroller General as towhether the SEC violated the AntideficiencyAct by failing to obligate appropriate funds forthe Constitution Center lease. The full text of the IGs written testimony is contained in Ap-pendix C to this Report and can also be foundat http://www.sec-oig.gov/Testimony/KotzTestimonyBeforeHouseEconomicDevelopmentSubcommittee_6.16.11.pdf .

The IG testified a second time before theEconomic Development Subcommittee regard-

ing the OIGs leasing investigation on July 6,2011. In hi s testimony, the IG summari zed theresults of the OIGs investigation and focusedin particular on the reports recommendationsthat were designed to ensure that the requisiteimprovements to policies and procedures weremade and appropriate disciplinary action wastaken. The IG noted that the OIG was com-mitted to following up on all the recommenda-tions made in the report and described the ac-tions taken by the OIG to date to ensure that

appropriate steps were being taken to imple-ment the OIGs recommendations. The fulltext of the IGs written testimony is containedin Appendix C to this Report and can also befound at http://www.sec-oig.gov/Testimony/KotzTestimony_7_6_11.pdf .

On August 4, 2011, the IG testified beforethe Federal Financial Management, Govern-ment Information, Federal Services, and Inter-national Se curity Subcommittee of the U.S.

Senate Com mittee on Homeland Security andGovernment Affairs regarding the OIGs leas-ing investigation. During that testimony, the IGdiscussed in detail the investigative work con-ducted, the results of the investigation, and therecommendations contained in the OIGsreport. The OIG also described the follow-upefforts the OIG had undertaken subsequent tothe issuance of its report to ensure that the

necessary improvements were made and ap-propriate disciplinary action was taken. Thefull text of the IGs written testimony is con-tained in Appendix C to this Report and canalso be found at http://www.sec-oig.gov/Testimony/ KotzWrittenTestimonyBeforeSenateSubcommitteeonFederalFinMangtGovInfoFedServcsandIntnlSecurity8

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INSPECTOR GENERAL TESTIMONY ON THE OIGS CONFLICT-OF-INTEREST INVESTIGATION

On September 22, 2001, the IG testifiedbefore a joint hearing of the Subcommittee onOversight and Investigations of the U.S. Houseof Representatives Committee on FinancialServices, and the Subcommittee on TARP, Fi-nanci al Services, and Bailouts of Public andPrivate Programs of the U.S. House of Repre-sentatives Committee on Oversight andGovernment Reform, concerning the conflict-of-interest matter investigated by the OIG.Specifically, the IG described SEC ChairmanMary Schapiros request that the OIG investi-gate any conflicts of interest arising from theformer General Counsels participation in de-termining the SECs position in the liquidationproceeding brought by the Securities InvestorProtection Corporation of Bernard L. Madoff Investment Securities, LLC. The IG discussedin detail the investigative work conducted bythe OIG and the results of the investigation, asreflected in the OIGs report of investigationcontaining nearly 120 pages of analysis and200 exhibits.

The IG informed the Subcommittees thatthe OI Gs investigation found overall that thef ormer General Counsel participated person-ally and substantially in particular matters inwhich he had a personal financial interest by

virtue of hi s inheritan ce of the proceeds of hismothers es tates Madoff account and thatthe matters on which he advised could havedirectly imp acted his financial position.
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The IG further testified that after conduct-ing the fact-finding phase of the investigation,the OIG provided a summary of the salientfacts uncovered in the investigation to the Act-ing Director of the Office of Government Eth-ics (OGE), and requested that OGE review

those facts and provide the OIG with its opin-ion regarding the former General Counselsparticipation in matters that could have givenrise to a conflict of interest. The IG reportedin his testimony that the Acting Director of OGE advised the OIG that, in his opinion, aswell as that of senior attorneys on his staff, theformer General Counsels work on two mattersrelating to Madoff should be referred to theU.S. Department of Justice (DOJ) for consid-eration of whether he had violated 18 U.S.C.

208, and that, based upon this guidance, theOIG had referred t he result of its investigationto the Public Integr ity Section of DOJsCriminal Division. The IG also described therecommendations made in the OIGs report,including recommendations for enhancementof the SECs Ethics Office. The IG noted thathe was confident that under ChairmanSchapiros leadership, the SEC will review thereport and take appropriate steps to implementthe OIGs recommendations to ensure the con-

cerns identified in the investigation are appro-priately addressed. The full text of the IGswritten testimony is contained in Appendix Cto this Report and can also be found athttp://www.sec-oig.gov/Testimony/Kotzwrittentestimony_92211.pdf .

INSPECTOR GENERAL TESTIMONY ON THE OIGS STANFORDINVESTIGATION

On May 13, 2011, the IG testified beforethe Oversight and Investigations Subcommitteeof the U.S. House of Representatives Commit-tee on Financial Services concerning the OIGsinvestigation of the handling of the SECs in-

vestigations into Robert Allen Stanford and his various companies. The IG described the work completed during the investigation, as reflectedin the OIGs report of investigation containing

over 150 pages of analysis and 200 exhibits.The IG reported in detail the results of theOIGs investigation, which reviewed the SECsexaminations and investigations of Stanfordfrom 1997 through 2009, and the agencys re-sponse to all complaints it received regarding

the activities of Stanfords companies. The IGfurther described the recommendations con-tained in the OIGs report of investigation, aswell as the steps the OIG had taken to followup with Enforcement and the Office of Com-pliance Inspections and Examinations (OCIE)concerning the implementation of those rec-ommendations. The IG noted that all of thereports recommendations had been imple-mented and closed to the OIGs satisfaction.

In his testimony, the IG also reported on arecently-completed audit of the process bywhich OCIE refers examination results to En-forcement in the SECs regional offices thatwas conducted in response to the request of theformer Chairman of the U.S. Senate Commit-tee on Banking, Housing, and Urban Affairs(Senate Banking Committee), the HonorableChristopher Dodd (D-Connecticut). The IGtestified that the audit found that examinersacross the SEC regional offices were generally

satisfied with their Enforcement attorney coun-terparts, but that certain aspects of the referralprocess could be improved. The IG providedinformation concerning the numerous recom-mendations made by the OIG to address theareas of improvement identified and noted thatthe OIG was following up to ensure these rec-ommendations are implemented.

Finally, in his testimony, the IG discussedanother investigation involving the SECs Fort

Worth Regional Office that was completed inSeptember 2009. The IG noted that this inves-tigation concluded that complaints voiced bytwo members of the Fort Worth examinationstaff about programmatic issues at a planning meeting improperly led to actions being takenagainst them. The IG reported that basedupon the OIGs investigative findings, the OIGrecommended the consideration of performance-based or disciplinary action
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against two Fort Worth senior managementofficials. The full text of the IGs writtentestimony is contained in Appendix C tothis Report and can also be found athttp://www.sec-oig.gov/Testimony/House%20Oversight%20and%20Investigations%20written%20testimony%205%2013%2011%20(FINA L).pdf .

REPORTS PREPARED IN RESPONSETO CONGRESSIONAL REQUESTS

During the reporting period, the OIG pre-pared two reports in response to Congressionalrequests. On May 4, 2011, the OIG received aletter from several members of the SenateBanking Committee requesting that the IGreview the economic analyses performed by theSEC in connection with rulemaking initiativesundertaken pursuant to the Dodd-Frank Act.The letter specifically requested that the OIGsreview focus on six particular Dodd-Frank Actregulatory initiatives. As is more fully describedin the Audit and Evaluations Conducted Sec-tion of this Report, the OIG completed areport containing the OIGs initial assessmentof the economic analyses related to the six spe-cific rulemakings identified. On June 13, 2011,the OIG provided this initial report to the Sen-ate Banking Committee members who had re-quested the review. The OIGs report statedthat, overall, the OIG found that the SECformed teams with sufficient expertise to con-duct a comprehensive and thoughtful economicanalysis of the six proposed releases. However,we also identified two areas of potential defi-ciencies in the SECs cost-benefit analyses. Asnoted in the report, the OIG will issue a subse-quent report on the results of our furtherreview of the SECs cost-benefit analyses. Thisreport is available on the OIG website athttp://www.sec-oig.gov/Reports/AuditsInspections/2011/Report_6_13_11.pdf .

At a he aring o f the Subcommittee onFinancial S ervices and General Government of the U.S. Ho use of Representatives Committeeon Appropr iations at which the IG testified in a

prior reporting period, the Honorable BarbaraLee (D-California) questioned the IG regarding the status of the SECs Office of Minority andWomen Inclusion. In response to Congress-woman Lees question, the OIG reviewed theSECs implementation of the requirement foran Office of Minority and Women Inclusioncontained in Section 342(a)(1)(A) of the Dodd-Frank Act. As is more fully discussed in theAudit s and Evaluations Conducted Section of this Report, the OIG found that the SEC hadnot established the required office within thestatutory timeframe of six months from thedate of enactment of the Dodd-Frank Act.SEC management informed the OIG that ithad not met this deadline because Congresshad not yet approved the SECs request to cre-

ate the office, but that in the meantime the SEChas been planning for the implementation of the new office and other SEC offices have beenconducting activities intended to promote di-

versity and inclusion. The OIG provided itsreport to Congresswoman Lee on June 15,2011; it can also be found athttp://www.sec-oig.gov/Reports/AuditsInspections/2011/496.pdf .

OTHER REQUESTS AND BRIEFINGSDuring the reporting period, the IG also

conducted numerous briefings of, and had dis-cussions with, Members of Congress and Con-gressional staff concerning a wide variety of issues impacting the SEC. For example, onApril 21, 2011, the IG met with staff of theSubcommittee on Oversight and Investigationsof the U.S. House of Representatives Commit-tee on Financial Services regarding the OIGs

Stanford report and the status of the OIGsconflict of interest investigation. On May 2,2011, and again on June 22, 2011, the IGbriefed various staff of the Senate Banking Committee on the OIGs review of the cost-benefit analyses performed by the SEC inconne ction with Dodd-Frank Act rulemaking initiati ves. On that same day, the IG discussedissues pertaining to the SECs budget andDodd- Frank Act implementation efforts with
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staff of the Subcommittee on Financial Serv-ices and General Government of the U.S. Sen-ate Committee on Appropriations.

In addition, on May 31, 2011, the IG metwith staff of the Subcommittee on EconomicDevelopment, Public Buildings, and Emer-gency Management of the U.S. House of Rep-resentatives Committee on Transportation andInfrastructure, concerning the SECs leasing investigation. On June 16, 2011, the IG andDeputy IG met with staff of the Subcommitteeon Federal Financial Management, Govern-ment Information, Federal Services, and Inter-national Security of the U.S. Senate Commit-tee on Homeland Security and GovernmentAffairs on that same topic. The IG also had

numerous meetings and telephone calls withCongressional majority and minority staff concerning the OIGs conflict-of-interest inves-tigation, and on September 14, 2011, the IGmet with the Honorable Randy Neugebauer(R-Texas), Chairman of the Subcommittee onOversight and Investigations of the U.S. Houseof Representatives Committee on FinancialServices, regarding the findings of the OIGsinvestigation.

The OIG also received a Congressionalrequest for investigative work during the re-porting period. On May 2, 2011, the Honor-able Roger F. Wicker (R-Mississippi) sent a let-ter to the IG expressing concerns regarding allegations pertaining to the SECs treatment of whistleblowers in connection with the allegedStanford Ponzi scheme. Congressman Wickerrequested that the IG review correspondencepertinent to the matter and, if appropriate, in-

vestigate the matter. On May 4, 2011, the

OIG commenced an inquiry to review thematter.

Finally, the OIG responded during the pe-riod to Congressional requests for informationregarding closed investigations, evaluations andaudits, as well as open and unimplementedrecommendations. On May 31, 2011, the IGprovided the Honorable Charles Grassley(R-Iowa), Ranking Member, U.S. SenateCommittee on the Judiciary, and the Honor-able Tom Coburn (R-Oklahoma), Ranking Member, Permanent Subcommittee on Investi-gations of the U.S. Senate Committee onHomeland Security and GovernmentalAffairs, with a previously-requested biannualreport on all closed investigations, evaluations,

and audits conducted by the OIG. On April27, 2011, the IG responded to a letter datedApril 7, 2011, from the Honorable Darrell Issa(R-California), Chairman, U.S. House of Rep-resentatives Committee on Oversight andGovernment Reform, requesting informationon open and unimplemented recommenda-tions. In that letter, the IG identified, among other things, all pending OIG recommenda-tions with estimated cost savings as of April 1,2011. The IG also described what the OIG

considered to be the three most importantopen and unimplemented recommendations,which were that (1) OAS determine the uni-

verse of active and open contracts and thecorresponding contract values; (2) OASensure that the Leasing Branchs policies andprocedures provide comprehensive guidancefor SEC leasing officials; and (3) OAS manage-ment institute a strong and effective anti-retaliation policy and communicate this policyin writing.


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THE INSPECTOR GENERALSSTATEMENT ON THE SECSMANAGEMENT AND PERFORMANCECHALLENGES

U . S .

S e c u r i

t i e s a n

d E x c

h a n g e C o m m

i s s i o n

As required by the Reports ConsolidationAct of 2000 and Office of Management andBudget guidance, I am pleased to submit thefollowing statement summarizing what I con-sider to be the most serious management chal-lenges facing the Securities and ExchangeCommission. This statement has been com-piled based on Office of Inspector Generalaudits, investigations, evaluations, and theOffices general knowledge of the agencysoperations.

CHALLENGE:PROCUREMENT AND CONTRACTING

The OIG first identified the SECs pro-curement and contracting function as amanagement challenge in Fiscal Year (FY)2008. While management has reported thatimprovements were made in the procurementand contracting area during FYs 2010 and2011, the SECs efforts in this area have notbeen completed, and the SECs procurementand contracting function continues to be amanagement challenge.

Moreover, work performed by the OIGsinvestigative unit during FY 2011 demonstratedthat there are particular deficiencies in theSECs processes relating to the use of Justifica-tions for Other than Full and Open Competi-tion. Specifically, on May 16, 2011, the OIGcompleted an investigation regarding the cir-cumstances surrounding the SECs entering into a lease for 900,000 square feet of space at afacility located in Washington, D.C., known asConstitution Center. The OIGs Report of In-

vestigation found that after the SEC committeditself to a ten-year lease term at a cost of $556,811,589 based upon flawed projections of its space needs, the SECs Office of Administra-tive Services prepared a Justification and Ap-proval for Other than Full and Open Competi-tion, which the Federal Acquisition Regulation(FAR) requires when an agency decides not toallow for full and open competition on a pro-curement or lease.

The OIG investigation found that the Justi-fication and Approval to lease space at Consti-tution Center without competition was inade-quate, not properly reviewed, and backdated.



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Although the SECs Competition Advocatesigned the Justification and Approval, the OIGinvestigation found that she did not take suffi-cient steps to verify that the information in the

Justification and Approval was accurate. Inaddition, the Justification and Approval was notposted publicly within 30 days after contractaward as required by the FAR.

The OIG investigation also found that afterthe SECs Competition Advocate executed thesignature page of the Justification and Ap-proval, she initially backdated her signature toreflect an earlier date and then whited-out aportion of the date of her signature to make itappear that she signed the document nearly amonth before she actually did. This action

gave the public a false impression about whenthe SEC finalized the Justification andApproval.

In addition, an OIG Report of Investiga-tion issued earlier in FY 2011 found that the

Justification and Approval for Other than Fulland Open Competition used to support the solesource acquisition of approximately $1 millionof information technology (IT) equipment re-lied on an inapplicable provision of the FAR.

Similarly, OIG audit reports issued in previousFYs have questioned the propriety of the SECsuse of Justification and Approvals for Otherthan Full and Open Competition in variouscircumstances.

Therefore, while the SEC continues tomake improvements in the procurement andcontracting area, further progress is needed toensure that the SEC complies fully with all per-tinent provisions of the FAR and provides for

maximum competition consistent with the re-quirements of federal laws and regulations.

CHALLENGE:INFORMATION TECHNOLOGY MANAGEMENT/ INFORMATIONSYSTEMS SECURITY

IT management continues to be amanagement challenge for the SEC, although

significant improvements have been made inFY 2011. The OIGs 2010 Annual FISMA Ex-ecutive Summary Report,Report No. 489, issuedMarch 3, 2011, confirmed that additionalimprovements are needed in several IT-related areas, specifically relating to Federal In-formation Security Management Act (FISMA)requirements ( e.g., deviations from FederalDesktop Core Configurations), access controls,privacy requirements, and the SECs continu-ous monitoring program. During FY 2011, inaddition to the Annual FISMA SummaryReport, we conducted reviews of two addi-tional areas of IT management and issued thefollowing reports: (1) Assessment of SECs Con-tinuous Monitoring Program, Report No. 497 (is-sued August 11, 2011), and (2) Review of SEC

Contracts for Inclusion of Language Addressing Privacy Act Requirements,Report No. 496 (issued July 18,2011).

In its 2010 Annual FISMA Executive Summary Report , Report No. 489, the OIG identifiedconcerns with the agencys identification,documentation, and reporting of Federal Desk-top Core Configuration requirements to theNational Institute of Standards and Technol-ogy. Further, this report identified multiple

concerns in key areas relating to logical accesscontrols, including the disabling of accountsand oversight of user accounts with elevatedprivileges.

The OIGs Assessment of SECs Continuous Monitoring Program, Report No. 497, also identi-fied several key areas of concern, including access control, audit and accountability, confi-guration management, contingency planning,identity and authentication, system and services

acquisition, system and communications pro-tection, and system and information integrity.

The OIGs Review of SEC Contracts for Inclu-sion of Language Addressing Privacy Act Requirements,Report No. 496, found that although the sam-pled SECs contracts contained language re-quiring that vendors and their employees com-ply with the Privacy Act, strengthening the lan-guage in SEC contracts pertaining to privacy


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and information would help to ensure vendorscompliance with those privacy-related provisionsand could further reduce the risk that personallyidentifiable information (PII) will be mishandled.

Additionally, as noted in SECs FY 2010 Per-

formance and Accountability Report, attention isstill needed in specific critical IT areas, such asoversight of IT capital investment, oversight of IT contracts and IT human capital. These keyinitiatives remain challenges because measureshave not been completed to mitigate deficienciesthat were identified in the past.

The Office of Information Technology(OIT) and the Office of the Chief Operating Officer concurred with the recommendations

identified in the aforementioned OIG reportsand have already begun taking steps to remediatethe deficiencies.

CHALLENGE:HUMAN RESOURCE MANAGEMENT

The OIG has identified the SECs humanresource management as a managementchallenge.

During FY 2011, the OIG conducted auditsrelated to human resource management thatidentified a number of concerns and the need forincreased management controls. Specifically, theOIG issued Audit of SECs Employee Recognition

Program and Recruitment, Relocation, and Retention In-centives, Report No. 492, in August 2011, and

Review of Alternative Work Arrangements, OvertimeCompensation, and COOP-Related Activities,ReportNo. 491, in September 2011.

In OIG Report No. 492, we identified nu-merous areas in which the Office of HumanResources (OHR) needed to improve its proc-esses related to awards and recruitment, reloca-tion, and retention incentives. Significantly, ouraudit found that OHR had not fully imple-mented recommendations pertaining to theSECs award activities that resulted from a 2007Office of Personnel Management (OPM) human

resources operations audit and, therefore, defi-ciencies identified in OPMs audit continued toexist.

The OIGs audit also found that there wereinsufficient resources dedicated to developing

and overseeing the SECs Employee RecognitionProgram (ERP), and that a large number of sampled awards and recruitment, relocation, andretention incentives lacked documentary support.The audit also found that OHR lacked updatedcomprehensive policies and procedures and for-mal training for awards and incentives. Further,we found that the SECs budgeting processes forawards and incentives for SEC SK (staff-level)employees were flawed which made it difficult forsupervisors to reward employees for outstanding

performance in the course of their normal jobduties.

In OIG Report No. 491, we determined thatseveral improvements were needed to the SECsalternative work schedule (AWS), overtime, andtelework programs. The OIG audit found thatalthough only three types of AWSs were author-ized for SEC employeesFlexitour, 5-4/9 com-pressed, and 10-4 compressed, SEC employeesactually used eight types of AWSs in FYs 2008

through 2010. We also determined that, due tothe benefits that AWS options provide to em-ployees (i.e., flexibility with respect to their arrivaland departure times and the length of workdayswithin the workweek or pay period), the SECmight benefit from making additional flexiblework schedule options officially available to itsemployees. Our review also found that the SECdid not have a comprehensive manual that ad-dressed the AWS options available to employees.We further determined that the SEC had no

official form for employees to use when request-ing to participate in AWS programs, and littletraining on AWS was available to SEC employees.

The OIG audit also found that there was sig-nificant confusion with respect to SEC proce-dures regarding overtime compensation, as wellas a lack of formal policies on key issues such asthe earning of credit hours by SEC Senior Offi-


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cers. The audit also identified areas for im-provement with respect to the tracking of tele-work data and ensuring that SEC Continuity of Operations (COOP) personnel have telework agreements in place.

The OIG audits made numerous specificrecommendations designed to improve theSECs operations in the areas reviewed.Agency management concurred with all of theOIG audits recommendations and indicatedthat they intend to take steps to remedy the de-ficiencies.

CHALLENGE:FINANCIAL MANAGEMENT

The Government Accountability Offices(GAO) FY 2010 audit of the Commissions fi-nancial statements found that they were fairlypresented in all material respects, and the GAOfound no reportable noncompliance with thelaws and regulations tested. However, becauseof two material weaknesses in internal controlit identified, the GAO found that the SEC didnot maintain, in all material respects, effectiveinternal control over financial reporting, andthus did not provide reasonable assurance thatmisstatements, losses, or noncompliance mate-rial in relation to the financial statements wouldbe prevented or detected and corrected on atimely basis.

The GAO defines a material weakness as adeficiency or combination of deficiencies ininternal control, such that there is a reasonablepossibility that a material misstatement of thefinancial statements will not be prevented, ordetected and corrected on a timely basis. A significant deficiency is a deficiency, or combi-nation of deficiencies, in internal control that isless severe than a material weakness, yet impor-tant enough to merit attention by management.The material weaknesses identified by theGAO included (1) information systems controls,and (2) controls over financial reporting andaccounting processes.

The GAO has identified pervasive deficien-cies in the design and operation of the SECsinformation security and other system controlsthat span across its general support system andall key applications that support financialreporting. Many of these deficiencies haveexisted since SEC began preparing financialstatements in FY 2004. The identified defi-ciencies jeopardize the confidentiality, availabil-ity, and integrity of information processed bySECs key financial reporting systems and posea risk of material misstatement in financial re-porting. The continuing and newly-identifiedgeneral and application control deficiencies arein the areas of (1) security management, (2) ac-cess controls, (3) configuration management,(4) segregation of duties, and (5) contingency

planning. The significant deficiencies that col-lectively comprise a material weakness overfinancial reporting and accounting processesconcern internal control over (1) the financialreporting process, (2) budgetary resources,(3) registrant deposits, (4) disgorgement andpenalties, and (5) required supplementary in-formation.

In addition, the GAO identified other defi-ciencies in internal controls that although not

considered material weaknesses or significantdeficiencies, could adversely affect the Com-missions ability to meet financial reporting andother internal control objectives. These defi-ciencies concerned the Commissions (1) properand timely approvals of disbursements,(2) review of service providers auditor reports,and (3) controls over travel transactions.

The GAO also reported that it continued tofind ineffective automated controls for the

SECs general ledger system and supporting applications, and ineffective security controlsover the databases and supporting processesused to generate and maintain the SECs finan-cial reports. Many of the SECs key financialreporting applications occurred manually out-side the general ledger system through the useof spreadsheets and databases because many of the SECs key financial system applications didnot automatically interface with the general


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ledger system. Further, the SECs general ledgersystem and certain software applications andconfigurations lacked the capacity to timely andaccurately generate and report informationneeded to prepare financial statements and man-age operations on an ongoing basis. Until these

system deficiencies, limitations, and vulnerabili-ties are addressed, the SEC cannot rely on theinternal controls contained in its automated ac-counting system and supporting financial appli-cations systems to provide reasonable assurancethat, in the absence of effective compensating procedures, (1) its financial statements, taken as awhole, are fairly stated; (2) the information theSEC relies on to make decisions on a daily basisis accurate, complete, and timely; and (3) sensi-tive data and financial information are appropri-

ately safeguarded.

The OIG also conducted work in the finan-cial management area in FY 2011. Specifically,in March 2011, the OIG issued Audit of the SEC

Budget Execution Cycle, Report No. 488, whichidentified numerous concerns in the SECs budg-eting process. The audits findings included:(1) by alternating between two separate appro-priations, the SEC may have violated federal lawpertaining to the purpose of appropriations and,

as a consequence, the Antideficiency Act; (2) theSEC inactivated budgetary controls in the Mo-mentum financial system to facilitate processing payroll transactions, which could lead to a viola-tion of the Antideficiency Act; (3) the SECsBudget and Program Performance Analysis Sys-tem (BPPAS) was not configured to accept morethan one appropriation; (4) the Office of Finan-cial Management (OFM) did not have a formalbudgetary training program; (5) OFM did notrequire written authorization of reprogramming

and realignment actions between budget objectclasses; and (6) OFM did not sufficiently track thereprogramming and realignment of funds. TheOIG made nine specific and concrete recom-mendations to correct the deficiencies found inthe audit. OFM agreed to all of the recommen-dations and has taken significant steps to addressthem.

CHALLENGE:ETHICS

The OIG has identified the SECs Ethicsprogram as a management challenge.

In January 2011, the OIG issued a reportof investigation in response to a Congressionalrequest regarding whether a senior employeehad violated conflict-of-interest restrictions inconnection with employment at a trading firm.While the OIGs investigation found no evidencethat the former employee violated conflict-of-interest provisions or acted inappropriately inconnection with employment at the trading firm,the OIG investigation did find deficiencies in theagencys ethics procedures, including a lack of proper record keeping. The OIGs report madeseveral recommendations for improvement to theSEC Ethics Office, including that it documentthe advice provided to SEC employees.

In September 2011, the OIG completed aninvestigation of potential conflicts of interest aris-ing from the participation of the SECs formerGeneral Counsel in determining the SECs posi-tion in the liquidation proceeding brought bythe Securities Investor Protection Corporation(SIPC) of Bernard L. Madoff InvestmentSecurities, LLC (BMIS). After the SEC chargedBMIS and Bernard L. Madoff with securitiesfraud, SIPC determined that BMIS customerswere in need of certain protections against lossesthat are provided through a reserve fund that isused to restore money to investors who have as-sets with bankrupt or financially troubled broker-age firms.

The OIG investigation found that the former

General Counsel participated personally andsubstantially in particular matters in which hehad a personal financial interest by virtue of hisinheritance of the proceeds of his mothersestates Madoff account and that the matterson which he advised could have directly im-pacted his financial position.

The OIG investigation further found that theSECs former General Counsel had sought ethics


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advice from the former SEC Ethics Counselwho advised him that he did not have a finan-cial conflict of interest. We found that the for-mer SEC Ethics Counsels advice was basedupon several incorrect assumptions and that hedid not document the consideration of whetherthe former SEC General Counsels actions con-stituted an appearance of impropriety. We alsofound that the former Ethics Counsel reporteddirectly to the former General Counsel, whohad given the former Ethics Counsel a per-formance evaluation just seven months after theethics advice was provided.

The OIG investigation also found that theEthics Office considered the former GeneralCounsels participation differently when mat-

ters other than the Madoff liquidation proceed-ing were involved. In addition, the OIG inves-tigation found that the Ethics Office consideredrecusals in Madoff-related matters differently insituations that did not involve the former Gen-eral Counsel, and took a more conservative ap-proach for recusal from Madoff-related matterswith respect to other employees in the Office of the General Counsel. These findings raisedconcerns about the consistency of the advicebeing provided by the SEC Ethics Office.

The OIG Report of Investigation made thefollowing three recommendations with respectto the Ethics Office:

(1) The SEC Ethics Counsel shouldreport directly to the Chairman,rather than to the General Counsel.

(2) The SEC Ethics Office should take allnecessary steps, including the imple-mentation of appropriate policies andprocedures, to ensure that all adviceprovided by the Ethics Office is well-reasoned, complete, objective, andconsistent, and that Ethics officialsensure that they have all the necessaryinformation in order to properly de-termine if an employees proposedactions may violate rules or statutes orcreate an appearance of impropriety.

(3) The SEC Ethics Office should take allnecessary actions to ensure that allethics advice provided in significantmatters, such as those involving finan-cial conflict of interest, are docu-mented in an appropriate and consis-tent manner.

The SEC Ethics Office has indicated that itintends to implement all three recommenda-tions and take the necessary steps to improve

the SEC ethics program.


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ADVICE AND ASSISTANCE

PROVIDED TO THE AGENCY

U . S .

S e c u r i

t i e s a n

d E x c

h a n g e C o m m

i s s i o n

During this semiannual reporting period,the OIG provided advice and assistance toSEC management on various issues that werebrought to the OIGs attention during thecourse of audits and investigations conductedby the Office and otherwise. This advice wasconveyed through written communications, aswell as in meetings and conversations with

agency officials. The advice provided includedcomments on draft policies and procedures andsuggestions for improvements in existing poli-cies and procedures.

Specifically, during the reporting period, theIG met with the SECs Chief Operating Offi-cer (COO), who had recently taken over thefunctions of the agencys Executive Director, todiscuss this new role and future coordinationbetween the OIG and the COO. The IG dis-

cussed the challenges facing the COO and of-fered suggestions and recommendations withrespect to the offices under the COOs purview.The IG also met with outside consultants whowere advising the agency on the Voice of theCustomer portion of the Mission AdvancementProgram, the goal of which is to design anddeliver an effective shared services organizationfor the SEC. During that meeting, the IGprovided his insights on various topics including

an overview of support services, enterpriseplanning, financial services, human capitaladministration and facilities, IT data manage-ment, enterprise risk management, recordsmanagement, and internal legal and conflictmanagement.

In addition, the IG and Deputy IG met

with the newly-appointed Acting Director of the Office of Administrative Services (OAS) todiscuss issues identified in the OIGs Report of Investigation No. OIG-553, Improper Actions Re-lating to the Leasing of Office Space, issued on May16, 2011, as well as other OIG reports. The IGand OIG staff members met with the SECsChief Information Officer and Chief Informa-tion Security Officer, as well as other OIT staff,to review new technology OIT plans to deployto improve the effectiveness of the SEC, includ-

ing technology pertaining to business automa-tion, workflow, knowledge manage-ment, andelectronic discovery. Further, on a monthly ba-sis, the IG and the Counsel to the IG met withthe Office of Human Resources (OHR) Assis-tant Director for Work Life Engagement andher staff to review the status of disciplinary andother actions taken or to be taken in response torecommendations contained in OIG investiga-tive reports.



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In connection with an inquiry performedinto the misuse of government resources by anSEC attorney, we determined that certainguidance on the SECs intranet site concerning the use of SEC resources for pro bonomatterswas vague and potentially confusing. We rec-ommended that the SEC Ethics Office reviewthe guidance documents on the intranetpertaining to pro bonowork and the use of government resources, and ensure that all theintranet guidance on these matters was accu-rate and clear. The Ethics Office promptlytook the necessary steps to implement theOIGs recommendation.

Further, the OIG provided advice and assis-tance to management in connection with sev-

eral suggestions received by the OIG throughthe OIG SEC Employee Suggestion Program,established in accordance with Section 966 of the Dodd-Frank Wall Street Reform and Con-sumer Protection Act. For example, the OIGreceived and reviewed employee suggestionsthat cost savings could be achieved by eliminat-ing the mailing of hard copy leave and earningsstatements to employees home addresses andlimiting the distribution of paper copies of theCode of Federal Regulations (CFR). Based

upon our analysis of these suggestions, we con-cluded that both suggestions could result in costsavings. In particular, we noted that the SECspent over $21,000 for paper copies of theCFR during 2011, even though the CFR wasavailable online at no cost. The OIG recom-mended that management consider both sug-gestions and further recommended that OAStake steps to ensure that additional informationregarding the availability of the CFR online iscommunicated to SEC staff and that paper

copies of the CFR are not ordered unnecessar-ily. Management concurred with and agreed toimplement both suggestions. In particular,OAS agreed to implement new procedures tobe used the next time the Government Printing Office offered paper copies of the CFR for sale.

The OIG also reviewed an employee sug-gestion for revisions to the current SEC Rulesof Practice pertaining to service of subpoenas

to allow the service of subpoenas by e-mail inorder to expedite the investigative process anddecrease costs incurred by sending subpoenasby overnight mail. We determined that revi-sions to the current rule permitting service of subpoenas by personal service, U.S. mail,commercial carrier, or facsimile may be war-ranted to reflect advancements in technology.We recommended that Enforcement review themerits of the suggestion and determine if rec-ommended revisions to the Rules of Practicewould be beneficial. Enforcement concurredwith the suggestion and indicated that it wasworking with the Office of the General Coun-sel (OGC) to prepare a recommendation to theCommission to amend the Rules of Practiceand/or the Rules Relating to Investigations to

permit the service of investigative subpoenas bye-mail.

The OIG also reviewed an employee sug-gestion that OHR had received under itsprevious Employee Suggestion Program thatwas discontinued in April 2011. This sugges-tion noted the need for additional electronicpublic records search capabilities and that cer-tain services available to staff in the past hadprovided better information than the services

that were currently available. During ourreview of this suggestion, we learned that it waspossible that Lexis/Nexisoffered additional fea-tures that might be added to the Commissionsexisting subscription. We forwarded the sug-gestion to the Office of the Secretary for con-sideration, noting that employees could benefitfrom having additional information availablewhen conducting public records searches. Werecommended that the Office of the Secretaryreview current and available data subscriptions

to determine if additional data sources couldor should be procured, and ensure that allemployees receive notice if and when such newservices were procured or additional informa-tion was made available. In response, the Of-fice of the Secretary indicated that the SECLibrary had gained access to an additional fea-ture available through Lexis/Nexis, consistentwith the employees suggestion, and that thelibrary would work to strengthen its efforts to


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ensure that employees were fully aware of theavailable information resources.

The OIG reviewed another suggestion thathad been received through the previous OHREmployee Suggestion Program, which stated

that the SEC should contact state unclaimedproperty offices to determine whether fundsbelonging to the SEC were being held by stategovernments and could be recouped. Researchperformed by the employee who submitted thesuggestion and the OIG revealed numerousinstances in which the SEC appeared to be en-titled to unclaimed property and/or funds.The OIG learned during its review of the sug-gestion that the SEC currently had no policiesor procedures in place for searching for or po-

tentially retrieving unclaimed property. TheOIG referred the suggestion to the Office of Financial Management (OFM) for considera-tion of establishing procedures to search forpotential unclaimed property that could poten-tially result in cash and/or property being re-turned to the SEC. In response, OFM estab-lished new written procedures to implement aprocess for searching for and reclaiming SECproperty and, pursuant to those policies andprocedures, had begun to reclaim funds

belonging to the SEC.

In addition, during the reporting period,the OIG reviewed and submitted comments onseveral draft OIT policies and procedures. For

example, the OIG provided numerous com-ments on a draft System Development Life Cy-cle Management Waiver Request Form, whichwas designed to reflect the decision to allow aproject or product to proceed to the next lifecycle phase or to deny the waiver request.

Overall, the OIG suggested, among otherthings, that guidance be provid

Documents

SEC OIG Report to Congress April 2011-Sept 2011