Risk & Compliance

Report: SEC Enforcement Needs an Overhaul

A new report from the Government Accountability Office questions whether the SEC is making good use of the "substantial increase" in funding it rec...
Alan RappeportSeptember 17, 2007

The Securities and Exchange Commission’s enforcement methods have “significant limitations” that have “hampered” its ability to carry out investigations efficiently, according to a new report released Monday by the Government Accountability Office.

The 49-page report finds that the SEC enforcement division’s decentralized approach to handling investigations fails to allocate its limited resources and that it must take action to address the problem.

“Although SEC received a substantial increase in its appropriations as a result of the Sarbanes-Oxley Act of 2002, questions have been raised in Congress and elsewhere on the extent to which the agency is using these resources to better fulfill its mission,” said Orice Williams, director of the GAO’s office of financial markets and community investment, in a letter to Senator Charles Grassley, included in the report. “Moreover, we have reported that aspects of Enforcement’s information systems and management procedures could limit the efficiency and effectiveness of its operations.”

The GAO said that the commission has shown improvement since last March when it agreed to introduce a more centralized approach to new investigations of potential securities law violations, but that it has yet to provide written rules to convey the changes to its staff.

The SEC’s enforcement division is also lacking in the technology department. Its Case Activity Tracking System (CATS), which tracks investigations and enforcement actions is “severely limited as a management tool,” the GAO said. CATS is unable to produce reports on ongoing investigations and cannot produce reports about certain types of investigations such as those pertaining to hedge funds. The SEC is planning to switch systems later this year to a tool called the “Hub,” but the GAO expressed concern that without better controls ensuring that SEC staff members input the data properly, the Hub may not be an improvement.

The GAO also criticized the SEC for its backlog of cases. The commission took measures in May to speed up the closure of investigations that are no longer being pursued, yet many remain unresolved. The GAO said that as of March 2007 nearly 35 percent of the SEC’s investigations were more than two years old but did not have pending enforcement actions. It cited burdensome administrative obstacles as reasons for the delays and said that individuals and companies could be “negatively impacted” by having their cases remain open without reason.

The SEC’s Fair Fund program also came in for criticism. The fund is intended to return money to harmed investors, but the GAO found that since 2002, only 21 percent of the funds awarded to such investors had been distributed. Although the SEC has set up a new Fair Fund office, the GAO scolded it for failing to staff it or define its responsibilities.

For its part, the SEC promised to do better. In a written response attached to the report, Christopher Cox, SEC chairman, agreed that the regulator had room to improve and did not deny any of the GAO critique. “The agency is committed to moving with alacrity to implement each of the GAO’s recommendations,” Cox said.