oversight

Securities and Exchange Commission: Preliminary Observations on SEC's Spending and Strategic Planning

Published by the Government Accountability Office on 2003-07-23.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                            United States General Accounting Office

GAO                         Testimony
                            Before the Subcommittee on Government
                            Efficiency and Financial Management,
                            Committee on Government Reform,
                            House of Representatives
For Release on Delivery
Expected at 2:30 p.m. EST
Wednesday, July 23, 2003    SECURITIES AND
                            EXCHANGE COMMISSION
                            Preliminary Observations
                            on SEC's Spending and
                            Strategic Planning
                            Statement of Richard J. Hillman, Director,
                            Financial Markets and Community Investment




GAO-03-969T
                                                July 2003


                                                SECURITIES AND EXCHANGE
                                                COMMISSION
Highlights of GAO-03-969T, a testimony to
the Chairman, Subcommittee on
                                                Preliminary Observations on SEC’s
Government Efficiency and Financial
Management, Committee on Government
                                                Spending and Strategic Planning Efforts
Reform, House of Representatives




In February 2003, the Securities                In GAO’s 2002 operations report, GAO identified a number of operational
and Exchange Commission (SEC)                   challenges facing SEC stemming from an increasing workload (e.g., filings,
received the largest budget                     applications, and examinations) and staffing imbalances that threatened to
increase in the history of the                  impair SEC’s ability to fulfill its mission. As illustrated below, SEC’s
agency. The increased funding was               workload had grown at a much higher rate than its staffing since the mid-
designed to better position SEC to
address serious issues identified in
                                                1990s. In response to congressional concerns involving a number of high-
the Sarbanes-Oxley Act and to                   profile corporate failures and accounting scandals, SEC’s funding was
better enable SEC to address                    increased 45 percent in 2003. SEC plans to spend most of its 2003 and 2004
numerous operational and human                  budget increases to fund 842 new staff positions and double its information
capital management challenges                   technology budget. However, given the late appropriation and hiring
discussed in the GAO report                     challenges, SEC has to date filled few of these positions, and it is unlikely
entitled SEC Operations:                        that SEC will be able to utilize all of its 2003 funds.
Increased Workload Creates
Challenges (GAO-02-302). To help                GAO also found that SEC recognizes the need to develop a new strategic
ensure that SEC spends its                      plan and that such a plan is a vital component of its staff allocation and
budgetary resources in an efficient             human capital planning processes. A new strategic plan is also vital to SEC’s
and effective manner, GAO was
asked to review the SEC’s efforts to
                                                ability to develop performance-oriented, outcome-based performance
address the issues raised in the                measures. GAO found that while SEC has not updated its strategic plan, it
2002 report and to report on how                has begun efforts to overhaul its performance measures to make them more
SEC intends to utilize its new                  outcome-oriented. This effort seems premature given its lack of a new
budgetary resources. GAO’s final                strategic plan. Moreover, while GAO found that SEC has completed certain
report on these matters is expected             aspects of a strategic human capital plan, including development of a new
to be completed this Fall.                      pay structure comparable to other federal financial regulators, greater
                                                flexibility to expedite the hiring of certain critically needed professions,
This testimony provides requested               plans for more training, and implementation of agencywide-worklife
information on the status of SEC’s              programs, the lack of a new strategic plan inhibits SEC’s ability to develop a
current spending plan and                       formal human capital plan.
preliminary observations on SEC’s
strategic and human capital
planning efforts.                               Percent Change in SEC Staff Years and Workload, 1991-2004




www.gao.gov/cgi-bin/getrpt?GAO-03-969T.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Richard J.
Hillman at (202) 512-8678 or
hillmanr@gao.gov.
Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the Securities and Exchange
Commission’s (SEC) plans for spending the significant increases in its
2003 budget appropriation and its 2004 budget request as well as its
response to our recommendations for enhancing its strategic planning and
human capital planning processes, which are critical ingredients for
ensuring that the new appropriations are put to the best possible use.1

As you know, in March 2002 we issued a report entitled SEC Operations:
Increased Workload Creates Challenges (GAO-02-302), which identified
numerous resource challenges SEC faced as its workload increased in
volume and complexity.2 We also cited other issues, including a turnover
rate among accountants, attorneys, and examiners that was almost twice
as high as the governmentwide average for comparable positions that was
draining staff from SEC and slowing its operations. To address these
issues, we recommended, among other things, that SEC broaden its
strategic planning process to systematically determine its regulatory
priorities and the resource levels needed to fulfill its mission. We also
recommended that SEC engage in a comprehensive coordinated
workforce planning effort to ensure that critical human capital goals and
strategies were implemented.

In the wake of several high-profile corporate failures and accounting
scandals, in February 2003 SEC was given the largest spending increase in
its history. Given this substantial budget increase and the importance of
efficiently and effectively utilizing these gains, you requested that we
review SEC’s efforts to address the issues we raised in March 2002 and
report on how well SEC has utilized its new budgetary resources. We
expect to complete our report on these matters in the Fall. In advance of
the completion of this study, this statement provides requested
information on the status of SEC’s current spending plans for 2003 and
2004 and preliminary observations on SEC’s strategic planning and human
capital planning efforts.

Our observations about the status of SEC’s 2003 and 2004 spending plans
and related planning activities to date are based on our review and


1
All years are fiscal years unless otherwise noted.
2
U.S. General Accounting Office, SEC Operations: Increased Workload Creates Challenges,
GAO-02-302 (Washington, D.C.: Mar.5, 2002).



Page 1                                                                  GAO-03-969T
independent analysis of workload, budget, and staffing data provided by
SEC officials or presented in SEC’s 2003 revised budget estimate and 2004
budget request. In addition, we solicited views from a variety of SEC
officials, collected relevant information on SEC’s strategic planning and
human capital efforts, and analyzed statistics on staff turnover. This study
was completed in accordance with generally accepted government
auditing standards.

In summary, the 2003 appropriation of $716 million in February 2003
increased SEC’s budget 45 percent over its previous year’s spending level,
giving it additional resources to address critical staffing shortages and
information technology needs, among other things. However, SEC spent
the first 5 months of the fiscal year operating under a continuing
resolution and thus could not fully implement a spending plan based on its
new budget authority. In addition, SEC faced difficulties in hiring
accountants, economists, and examiners, further constraining its ability to
acquire needed expertise. Once it received its 2003 appropriation, SEC
determined that most of its increase would be used to fund new positions
and upgrade its technological resources, including doubling the operating
budget of the Office of Information Technology. However, given the late
appropriation and hiring challenges, to date SEC has filled few of these
positions, and it is unlikely that SEC will be able to fully utilize all of its
2003 funds.

We also found that SEC recognizes that it needs to develop a new
agencywide strategic plan and that such a plan is a vital component of its
workforce planning and human capital allocation process. However, SEC
has embarked on an effort to allocate resources and determine its needs
without the benefit of an updated strategic plan. Instead, SEC has relied
on views from its senior managers and on an internal study commissioned
by then Chairman Pitt that assessed the commission’s workload and
evaluated the resources available for doing that work. This study,
currently under review by Chairman Donaldson, has not been widely
distributed throughout the organization. We commend SEC for conducting
this study. Its findings confirm many of the workload and resource
challenges we discussed in our March 2002 report, and it includes
numerous recommendations for improving the agency’s operations. SEC
has also initiated a number of other efforts but because all of them are
grounded in SEC having a clear strategic direction and goals, all of them
hinge on SEC completing a new strategic plan. Among these are efforts to
develop more outcome-oriented performance measures to gauge the
effectiveness of its regulatory operations in fulfilling its statutory mission
and formalization of its strategic human capital plan.

Page 2                                                             GAO-03-969T
                        In March 2002, we reported that SEC’s workload and staffing imbalances
SEC Plans to Spend      had challenged SEC’s ability to protect investors and maintain the integrity
Most of Its Budgetary   of securities markets. Appendix I graphically depicts SEC’s workload and
                        staffing imbalance from 1990 through 2000 as reported in our 2002 report
Increase on Staffing    and appendix II updates this graphic using SEC budget documents
and Information         including its 2003 and 2004 workload and staffing estimates. As reported in
                        March 2002, we found that SEC generally managed to bridge the gap
Technology              between its workload and staff by determining which of its statutorily
                        mandated duties it could accomplish with existing resources or only
                        marginally increased resource levels. This approach, while practical,
                        forced SEC to be largely reactive rather than proactive. We also reported
                        that SEC tended to develop its annual budget request based on the
                        previous year’s appropriation rather than on what it would actually need
                        to fulfill its mission. In 2003, this practice resulted in a modest increase
                        over the previous year’s request. But several high-profile corporate failures
                        and accounting scandals, plus concerns that public companies should be
                        held more accountable for information they report to investors, led
                        Congress to pass the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act).3
                        The act addresses a number of concerns involving corporate governance,
                        auditor independence, regulation and oversight of the accounting
                        profession, and SEC’s resource limitations. In part because of the level
                        authorized in the Sarbanes-Oxley Act, SEC increased its initial 2003 budget
                        request of $466 million to $769 million. Ultimately, Congress appropriated
                        $716 million. For 2004, SEC requested a budget of almost $842 million
                        reflecting a supplemental carryover, annualization of new 2003 positions,
                        inflation (pay and nonpay), and merit pay increases less one-time 2003
                        information technology costs.




                        3
                            Pub. L. 107-204.



                        Page 3                                                           GAO-03-969T
A Significant Portion of    SEC’s planned allocations appear to be consistent with the Sarbanes-Oxley
SEC’s Budget Increase Has   Act, which mandated that the $776 million authorization be used to:
Been Allocated to New
                            •   fund pay parity, allowing SEC to set salaries for certain staff positions
Staff Positions                 at levels comparable to those at other federal financial regulators;4
                            •   fund information technology, security enhancements, and recovery and
                                mitigation activities in light of the terrorist attacks of September 11,
                                2001; and
                            •   fund no fewer than 200 additional professional staff to increase
                                oversight of auditors and audit services in order to improve SEC’s
                                investigative and disciplinary efforts as well as additional professional
                                support staff necessary to strengthen existing program areas.

                            SEC’s allocations were also apparently influenced by its internal review of
                            operations and resource needs and on justifications made by each division
                            and office. SEC determined that most of the planned increase would be
                            used to hire an additional 842 staff, primarily accountants, attorneys, and
                            examiners, and to upgrade its technological resources over the next few
                            years.

                            Table 1 provides information on SEC’s staff allocation as of July 1, 2003,
                            by program area. The 2002 numbers include 125 new positions that were
                            authorized by a supplemental appropriation to SEC’s 2002 budget to deal
                            with the increasing workload from financial fraud and reporting cases, to
                            improve and expedite the review of periodic filings, and to deal with new
                            programmatic needs and policy. According to an SEC official, the current
                            and proposed budgets factor in the increased workload resulting from
                            SEC’s new responsibilities under various new laws including the Sarbanes-
                            Oxley Act, Gramm-Leach-Bliley Act, and Commodity Futures
                            Modernization Act.5 For example, between 2002 and 2004, the full
                            disclosure program is slated to receive the largest percentage increase in
                            positions  39 percent. This program includes the Division of Corporation


                            4
                             The crisis in the thrift industry in the 1980s led Congress to pass the Financial Institutions
                            Reform, Recovery, and Enforcement Act of 1989 (FIRREA). Among other things, FIRREA
                            authorized certain financial regulators, such as the Federal Deposit Insurance Corporation,
                            the National Credit Union Association, the Office of the Comptroller of the Currency, and
                            the Office of Thrift Supervision to determine their own compensation and benefits so that
                            they could more effectively compete in the marketplace for qualified applicants. P. L. No.
                            101-73 §1206, codified at 12 U.S.C. §1833b. The Federal Reserve Board of Governors also
                            has independent authority to set the compensation of its employees. 12 U.S.C. §248l(l).
                            5
                             Pub. L. 107-204, 116 Stat. 745 (2002), Pub. L. 106-102, 113 Stat. 1338 (1999), and Pub. L.
                            106-554 (H.R. 5660).



                            Page 4                                                                          GAO-03-969T
Finance and the Office of the Chief Accountant, which are responsible for
reviewing the financial statement filings for over 17,000 reporting public
companies and providing rule-making and interpretive advice. In this area,
staffing is driven in part by the Sarbanes-Oxley Act, which requires SEC to
review the financial statements of each reporting company every 3 years.
In 2002 SEC’s average translated into a review once every 6 years. The
area slated to receive the next largest percentage increase (35 percent) is
the supervision and regulation of securities markets. This program
includes the Division of Market Regulation and part of the Office of
Compliance, Inspections and Examinations and is responsible for
establishing and maintaining policies for fair, orderly, and efficient
markets and conducting examinations and inspections of 9 registered
securities exchanges and an estimated 8,000 brokerage firms among
others. The prevention and suppression of fraud program, which includes
the Division of Enforcement, is slated to receive a 21 percent increase,
which SEC said would help with the increasing number of investigations
into possible violations of securities laws.

Table 1: SEC Staff Allocations from 2002 to 2004

                                                2002           2004     Change in       Percentage
 Program Positions                            Actual       Request      Allocation         Change
 Full disclosure                                 508            704           +196       39 percent
 Prevention and suppression of                 1,037          1,255           +218                21
 fraud
 Supervision and regulation of                   465            627           +162                35
 securities markets
 Investment management                           593            790           +197                33
 regulation
 Legal and economic services                     175            194             +19               11
 Program direction                               387            437             +50               13
 Total                                         3,165          4,007           +842
Source: SEC.



Notes: GAO did not verify the reliability of SEC’s budget data. SEC’s 2003 budget estimate is omitted
because these numbers were unavailable at the time of the hearing. The 2004 figures are estimates
subject to revision.


SEC’s staff allocations appear consistent with legislative requirements and
what is currently known about its operating environment. However,
because SEC’s staff positions were allocated without the benefit of a
strategic plan, we are unable to fully assess the appropriateness or
effectiveness of this use of its budget increase.


Page 5                                                                                GAO-03-969T
                         Given that staff salaries and benefits average about 70 percent of SEC’s
                         budget, we would expect the spending allocations to roughly correlate to
                         its staffing allocations. However, SEC was unable to provide us
                         information to analyze SEC’s budgetary allocation across each program
                         area. At the time of this study, SEC was in the process of completing its
                         2005 budget request for OMB, which will include its allocation of its
                         budgetary resources for its 2004 budget estimate by program area. SEC
                         expects to have these estimates completed by sometime in late August or
                         early September.

                         In 2002, we reported the difficulty SEC faced in hiring accountants for the
                         125 positions authorized by its 2002 supplemental appropriation.6 SEC had
                         identified the existing competitive service hiring requirements as
                         hampering its ability to fill these and other positions because of the length
                         of time involved. SEC subsequently asked for and received relief from
                         competitive hiring requirements under the Accountant, Compliance and
                         Enforcement Staffing Act of 2003, which was enacted in July 2003. This
                         new legislation is designed to enable SEC to expedite the hiring of
                         accountants, economists, and examiners so that the agency can more
                         quickly fill the 842 positions created. As of July 1, 2003, SEC has only filled
                         a few of the vacancies for the allocated positions but is now better
                         positioned to hire under its new authority. It is too soon to determine
                         whether this new authority will enable SEC to quickly fill the hundreds of
                         vacancies it needs to fill by the end of 2004.


Information Technology   Information technology was another area identified in our 2002 report as
Will Also Receive a      having funding gaps that had contributed to existing inefficiencies. Like
Significant Increase     the rest of the government, SEC’s needs in the area of information
                         technology continue to increase, and SEC staff must have the necessary
                         tools to successfully meet the agency’s increasing demands. SEC
                         maintains a list of technology improvement projects that have not been
                         funded due to budgetary constraints, which SEC officials said include
                         applications to improve the manipulation and connectivity of various SEC
                         data systems and computerized reports. The budget increase has allowed
                         SEC to begin improving its information technology capabilities. SEC’s
                         Office of Information Technology, which supports the agency’s



                         6
                          U.S. General Accounting Office, Financial Statement Restatements: Trends, Markets
                         Impacts, Regulatory Responses, and Remaining Challenges, GAO-03-138 (Washington,
                         D.C.: Oct. 4, 2003).



                         Page 6                                                                  GAO-03-969T
    information systems and computer users, received an increase in its 2003
    operating budget of more than 100 percent, from around $44 million to
    $100 million. Our understanding is that SEC plans to undertake a few small
    projects each year such as system upgrades and software purchases, to
    enhance its systems and will implement larger long-term projects over
    time. SEC began developing an enterprise architecture a strategic
    approach to information technology planning in 2001. This architecture is
    designed to allow SEC to fund and develop information technology
    initiatives based on agencywide needs by strategically identifying and
    organizing technology projects. In 2002, SEC continued to develop its
    enterprise architecture in order to identify and document relationships
    between agency business functions and supporting technologies. SEC
    management also began incorporating the enterprise architecture into its
    information technology capital planning process. Although most of SEC’s
    long-term projects are in the developmental stages, we are cautiously
    optimistic that, if properly implemented, they can improve SEC’s
    operational efficiencies. Some of these longer-term projects include

•   Converting SEC’s Electronic Data Gathering Analysis and Retrieval
    (EDGAR) system into a searchable database that would help SEC conduct
    various types of industry and trend analyses. EDGAR is the database
    system that public companies use to file registration statements, periodic
    reports, and other forms electronically. Currently, EDGAR receives and
    archives data, but staff cannot immediately and easily analyze it. The goal
    is to create filings that will allow anyone to extract relevant data.

•   Implementing a document management and imaging initiative, intended to
    eventually eliminate paper documents and allow SEC staff to review and
    electronically file the large volumes of information that are part of
    litigation, examination, and enforcement activities. Staff told us that the
    planned system will provide an agencywide electronic capture, search, and
    retrieval mechanism for all investigative and examination materials.

•   Implementing a disaster recovery program that is being designed to store
    and move large amounts of data among regional or district offices without
    first going through Washington, D.C. The current project, when completed,
    will allow the agency to back up critical information and data on a daily
    basis at multiple locations.




    Page 7                                                         GAO-03-969T
                           In 2002, we found that SEC had not engaged in a comprehensive
SEC Has An Outdated        agencywide strategic planning process and little has changed in this regard
Strategic Plan and An      in 2003. As we have previously reported in earlier reports, high-performing
                           organizations identify their current and future human capital needs—
Incomplete Human           including the appropriate number of employees, the key competencies
Capital Plan               needed, and plans for deploying staff across the organization—and then
                           create strategies to fill any gaps.7 Given the SEC’s role in the securities
                           industry’s self-regulatory structure, a critical element of SEC’s strategic
                           planning process is an evaluation of the external environment in which the
                           agency operates. SEC’s budget increase has heightened the need for
                           strategic planning and the significance of the process, as SEC’s spending
                           plan will have to withstand considerable scrutiny. SEC’s lack of a current
                           strategic plan may also affect other aspects of SEC’s operations as
                           strategic plans are the starting point for each agency’s performance
                           measurement efforts and should provide the basis for strategic human
                           capital planning.


SEC’s Internal Study       In 2002, SEC took a critical step toward developing a strategic plan when
Provides a Framework for   it conducted an internal study of SEC’s current operations, workload,
Strategic Planning         resource allocations, methods for assigning and managing work, and
                           measures of performance, productivity and quality of effort. The study,
                           which was facilitated by a consulting firm (McKinsey & Company) and
                           includes discussions of staffing and resource allocation issues, appears to
                           have been a factor in SEC’s allocation of many of the 842 new positions.
                           But this confidential study has not been widely distributed within SEC,
                           and it is unclear whether it will be in the near future. This study serves as a
                           useful framework for SEC as it begins developing a dynamic
                           comprehensive strategic plan that will better enable it to identify its
                           mission and staffing needs. More immediately, such an effort is vital as it
                           determines how best to use its additional resources. We acknowledge that
                           over the past year and a half, SEC has had to deal with a considerable
                           amount of change, which has limited its ability to focus on a new strategic
                           plan. SEC has had to acclimate itself to two new chairmen and adjust to
                           new management teams, manage a 45 percent budget increase, negotiate
                           its first agreement with its newly organized union, implement and manage
                           a new fee rate structure, prepare for its first financial statement audit, and



                           7
                            U.S. General Accounting Office, Securities and Exchange Commission: Human Capital
                           Challenges Require Management Attention, GAO-01-947 (Washington, D.C., Sept. 17,
                           2001).



                           Page 8                                                                GAO-03-969T
                         respond to dozens of new requirements under the Sarbanes-Oxley Act.
                         However, since SEC issued its existing plan in September 2000, the
                         financial world has changed significantly.

                         Although SEC’s Government Performance and Results Act (GPRA) annual
                         reports attempt to provide a tactical focus, a new long-range planning
                         effort is long overdo. As stated in SEC’s 2000 plan, “Our strategic plan is a
                         living document, one that must be continually reexamined and modified to
                         assure it remains responsive and relevant in an ever-changing
                         environment.” In addition to the changing external environment, a number
                         of internal processes and organizational efforts within SEC hinge on SEC
                         completing a new strategic plan, including developing more outcome-
                         oriented performance measures to gauge the effectiveness of its regulatory
                         operations in fulfilling its statutory mission and formalizing its strategic
                         human capital plan. Rather than measuring outputs, SEC is working to
                         develop measures for how effectively its actions achieve its goals and
                         fulfill its mission. SEC is also beginning to take steps that will improve its
                         ability to leverage its technological capabilities.


SEC Has Embarked on an   Consistent with the findings in our March 2002 report, SEC’s subsequent
Effort to Develop        GPRA 2002 annual performance report continued to use measures of
Outcome-Oriented         outputs rather than outcomes.8 For example, under the goal of protecting
                         investors by improving public awareness and educating investors, SEC
Performance Measures     tracks the number of investor education events organized by senior
                         Commission staff in a given year. Within the goal of maintaining fair,
                         honest, and efficient markets SEC uses the number self-regulatory
                         organization rule changes reviewed as a measure of performance. As we
                         reported, performance measures can help to provide detailed information
                         SEC needs to make informed workforce decisions, including (1) the
                         relationship between its budget request for full-time equivalent staff years
                         and the agency’s plans and ability to meet individual strategic goals and
                         (2) any excesses or shortages in needed competencies.

                         In late June, SEC began to take steps to transform its annual plan into a
                         management tool aimed at helping SEC move to a more outcome-oriented
                         approach to measuring the performance of its regulatory activities—an
                         important part of strategic planning. To achieve this end, each program



                         8
                          In 2003, as directed by OMB, SEC is merging its GPRA annual plan with its annual budget
                         document.



                         Page 9                                                                     GAO-03-969T
                               area is to develop a “performance dashboard”—a collection of measures
                               identifying those key performance measures that will allow each program
                               area manager to track performance. This movement to a performance
                               dashboard, also involves managing the budget at the program level with
                               each division head being held accountable for managing its individual
                               budgetary resources.

                               While this outcome-oriented approach is promising, we are concerned that
                               SEC is developing new performance measures before it has completed or
                               even started its new agencywide strategic plan. By identifying
                               performance measures before it develops a new strategic plan, SEC runs
                               the risk of having to redo any measures that are inconsistent with its
                               newly defined strategic vision or allowing the existing measures to
                               constrain its planning so that the new plan is consistent with them. We see
                               this approach as analogous to a commuter rail company exploring the
                               most efficient way to expand rail service to a new location before deciding
                               whether that location is the best place for the new line.


An Agencywide Strategic        We are also reviewing the status of SEC’s strategic human capital
Plan is Vital to a Strategic   planning. As you may recall, in our September 2001 report, we examined
Human Capital Plan             SEC’s strategies for managing its human capital and found that its human
                               capital practices were driven by its need to confront its growing staffing
                               crisis. This crisis was evidenced in a turnover rate that was almost twice
                               the government average for attorneys, accountants, and examiners;
                               hundreds of vacant positions; and the average tenure for examiners and
                               attorneys had fallen below 3 years. We found that to counter its
                               compensation challenge, SEC—more than the rest of the government—
                               was aggressively using special pay rates and retention allowances to
                               improve staff compensation. However, such actions were not stemming
                               their turnover problems. We also identified a number of nonpay issues that
                               threatened to impair SEC’s ability to carry out its mission and thus
                               warranted SEC management’s attention.

                               As we have reported, strategic planning is a key part of human capital
                               management. Strategic human capital planning focuses on developing
                               long-term strategies for acquiring, developing, and retaining an
                               organization’s employees and for implementing human capital approaches
                               that are clearly linked to achieving programmatic goals.9 In our 2001


                               9
                               GAO-01-947.



                               Page 10                                                        GAO-03-969T
human capital report, we found that SEC had begun to take key steps
toward developing a strategic human capital plan but lacked adequate
succession planning because of its high turnover rate. Moreover, we found
that SEC had not articulated the details of its plans for carrying out its
recruiting and retention efforts. SEC also lacked any formal mechanism to
evaluate the effectiveness of its recruiting efforts and ways to gauge the
effectiveness of its worklife programs. We also found that SEC had not
created a culture that ensured ongoing attention to human capital issues,
that human capital management was still focused on traditional personnel
functions, and that it was not a priority for senior management in
decisionmaking. We made a number of recommendations to SEC aimed at
improving its human capital management, including a recommendation
that it expand its annual performance plan into a comprehensive human
capital plan that includes all program areas.

We are looking into SEC’s progress in the above identified areas. However,
we have found that SEC has not yet developed a formal strategic human
capital plan that articulates how it intends to align its human capital
approaches with its organizational goals. While it has yet to do this, we
have found that SEC continues to take important steps to improve its
strategic human capital management. First, as previously discussed, SEC
has taken steps to improve its recruiting/hiring process. Second, SEC has
begun to take steps to develop its people and has announced plans for an
agencywide training program. One key training component that is
currently in the early stages of development is targeted training for
supervisors—which was an area identified in our 2001 human capital
report as warranting management’s attention. However, it is too soon to
determine the effectiveness of this new training effort.

Third, SEC has taken actions to retain its human capital and address its
staffing crisis. Most significantly, SEC has negotiated an agreement with
the union, which outlines a uniform program for various worklife
programs, such as flextime, flexiplace, and tuition reimbursement, among
others, and has standardized various of these human capital policies.
Historically, many of these programs have varied by division and office.
SEC has just begun to review the use and effectiveness of these programs,
therefore, it is too soon to determine what effect, if any, they will have on
employee retention and morale.




Page 11                                                          GAO-03-969T
               In our 2001 report we found that the single largest retention issue among
               attorneys, accountants, and examiners involved compensation. To
               enhance SEC’s ability to adequately compensate its employees, Congress
               enacted legislation that allows SEC to create a new pay system.10 In May
               2002, acting on its new compensation authority, SEC implemented a new
               system, which established a pay structure more comparable with other
               federal financial regulators. This new pay structure increased base pay for
               attorneys, accountants, and examiners similar to that of other federal
               financial services regulators. More specifically, this new system structure
               consists of 20 grade levels, some with up to 31 steps. This new system has
               also provided additional compensation based on performance and has
               established new pay categories to compensate staff in supervisory
               positions. In conjunction with this new merit-based compensation system,
               SEC has also implemented a new performance management system, which
               is also an important part of the human capital planning process.

               Since our 2001 human capital report, we found that at least one symptom
               of SEC’s staffing crisis has improved. SEC’s turnover rate for attorneys,
               accountants, and examiners has decreased from 9 percent in 2001 to 6
               percent on average in 2002, which in part may be attributed to pay parity.
               To date SEC reports that its average turnover rate is about 4 percent.
               However, the declining turnover rate may also reflect the state of the
               economy and resulting changes in the job market.


               SEC’s dynamic regulatory environment and tumultuous past year has
Observations   made focusing on a strategic direction and vision for the agency difficult.
               Moreover, because SEC operated under its 2002 allocation for five months
               of the year, and had difficulty hiring needed expertise, it has been unable
               to fully implement its 2003 spending plan. Although SEC has begun to take
               a number of important steps aimed at addressing its operational and
               human capital challenges, additional work is needed to ensure that it has
               appropriately positioned itself to operate more efficiently and effectively
               in the 21st century. First, it is critical that SEC complete its strategic
               planning effort, which includes the systematic reevaluation of all of its
               current approaches, efforts, goals and activities in light of its current
               regulatory environment. An important part of any such effort would
               include working with the industry to ensure that SEC has accurately
               established priorities that reflect the current environment. For example,


               10
                P.L. 107-123



               Page 12                                                        GAO-03-969T
                   SEC would be benefited by reevaluating its existing rules, regulations, and
                   regulatory approaches to ensure that they continue to reflect the realities
                   of today’s financial markets and are consistent with the mission and goals
                   established by SEC. Second, a critical step involves identifying ways to
                   leverage existing resources, be it through better technology or regulatory
                   processes. For example, SEC needs to fully fund and follow through on
                   technology initiatives that offer the greatest opportunities to increase its
                   effectiveness. SEC’s technology evolution could perhaps be one of the
                   most important aspects in improving the efficiency of SEC’s operations
                   and will likely require a sustained and ongoing resource commitment. SEC
                   could also reevaluate its historical focus in areas such as small businesses
                   and initial public offerings to ensure that it continues to meet the needs of
                   the securities markets. Finally, aligning SEC’s human capital with its
                   strategic plan is an important part of strategic human capital planning. To
                   date, SEC has taken important steps aimed at establishing a coordinated
                   human capital management approach but still lacks a formal plan.


                   Thank you for your attention to SEC’s operations and planning processes.
                   The leadership this subcommittee has shown, by holding this hearing
                   should help to maintain the momentum needed for change at SEC. Mr.
                   Chairman, this concludes my prepared statement. I would be pleased to
                   answer any questions you or other members of the subcommittee may
                   have at this time.


                   For further information regarding this testimony, please contact Orice M.
Contacts and       Williams at (202) 512-8678. Individuals making key contributions to this
Acknowledgements   testimony include Toayoa Aldridge, Joe E. Hunter, Jose Martinez-Fabre,
                   and David Tarosky.




                   Page 13                                                          GAO-03-969T
Appendix I: Percent growth in SEC staff
years and workload, 1991 - 2000




              Page 14                     GAO-03-969T
Appendix II: Percent growth in SEC staff
years and workload, 1991 - 2004




(250155)
              Page 15                      GAO-03-969T
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