SEC Enforcement Unit Has Room for Improvement, GAO Says

Although the enforcement division of the U.S. Securities and Exchange Commission (SEC) has instituted management improvements in recent years, it has some distance to go to reach its greatest level of effectiveness, according to a new government study.

The Government Accountability Office (GAO) study, “Securities and Exchange Commission: Additional Actions Needed to Ensure Planned Improvements Address Limitations in Enforcement Division Operations,’ asserts that the enforcement unit still has particular problems in the way it manages investigations and the pace at which funds generated from its investigations are returned to harmed investors.

“While Enforcement has demonstrated considerable success in carrying out its law enforcement mission, some significant limitations in the division’s management processes and information systems have hampered its capacity to operate at maximum effectiveness and use limited resources efficiently,” the report says. “One key reason for these limitations appears to have been Enforcement’s management approach, which emphasized a broad delegation of key functions with limited centralized management review and oversight, particularly in the approval and review of new investigations and the administration of the Fair Fund (shareholder reimbursement) program.”

The report continues: “Delegation of authority is an important management principle that can foster creativity at the local level and, in the case of Enforcement, likely had some benefits for the investigative process and the administration of the Fair Fund program. However, without well-defined management processes to exercise some control over delegated functions, inefficient program implementation and resource allocation can also occur.”

Regarding the agency’s effort to repay affected investors from funds raised through its enforcement efforts – the “Fair Fund program – the GAO said management issues may have delayed getting those funds to their intended destination. In large measure, the agency said, that was because of the lack of necessary tracking data.

For example, of the 115 Fair Funds currently tracked by Enforcement (which were created by federal courts or through SEC administrative proceedings), only about $1.8 billion (21%) of the $8.4 billion ordered since the program’s 2002 inception had been distributed to harmed investors as of June 2007, according to SEC data, the GAO said.

Other problems pinpointed by the GAO included:

  • Enforcement has not developed written procedures and criteria for reviewing and approving new investigations.
  • Enforcement has not developed written controls to help ensure the timely and consistent entry of investigative data in the Hub information system, which could increase the risk of misleading or inaccurate management reports being generated by the system.
  • Enforcement’s potentially large backlog of investigations for which closing memoranda and other required administrative procedures have not been completed requires division management’s attention.
  • SEC has not yet staffed or defined the roles and responsibilities of the new office that is being established to administer the Fair Fund program.

The GAO report is available at