oversight

Employee Financial Disclosure: CFTC System Affords Reasonable Protection Against Conflicts of Interest

Published by the Government Accountability Office on 1990-11-07.

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

                    United   States   General   Accounting   Office
                    Report to the Chairman, Subcommittee
                    on Nutrition and Investigations,
                    Committee on Agriculture, Nutrition,
                    and Forestry, U.S. Senate

; November   199@
 +
;1                  EMPLOYEE FINANCIAL
i:‘                 DISCLOSURE
                    CFTC System Affords
                    ReasonableProtection
                    Against Conflicts of
                    Inkrest
United States
General Accounting    Office
Washington,   D.C. 20548

General   Government       Division

R-241873

November 7, 1990

The Honorable Tom Harkin
Chairman, Subcommittee on Nutrition
  and Investigations
Committee on Agriculture, Nutrition,
  and Forestry
ITnited States Senate

Dear Mr. Chairman:

This report, the third in response to your request, evaluates the
employee financial disclosure system of the Commodity Futures Trading
Commission (cF’I’c), an independent regulatory agency. As agreed with
the Subcommittee, we determined whether CFTC's system reasonably
ensures that conflicts between its employees’ duties and their outside
interests will be prexrented and, when they exist, will be detected and
resolved. We earlier reported to you on the disclosure systems of the
Department of Agriculture and the Farm Credit Administration.’

CEX is subject to the Ethics in Government Act of 1978, as amended;
related executive orders; and implementing regulations issued by the
Office of Personnel Management (OPM) and the Office of Government
Ethics (OGE).As such, CFTC is required to implement a system of finan-
cial disclosure. The system is to provide for the (1) identification of
employees who must file reports on their outside financial interests,
(2) collection of the reports by dates specified in the 1978 act or agency
instructions, and (3) review of the reports to ensure they are complete
and to identify any conflicts of interest. Conflicts of interest that CFTC
identifies are to be resolved by appropriate administrative action, such
as having the employee dispose of the interests or changing the
employee’s assigned duties.


 CFTC  has established a system of controls that, under current require-
 ments, should provide reasonable assurance that conflicts of interest
 will be prevented. The agency’s approach to preventing conflicts is to
 (1) restrict employees’ outside financial interests and (2) annually
 require all employees to report outside interests for CFTC’S review or cer-
 tify they have no suc,h interests that conflict with their CFTC duties.


 ‘Fmancial Disclosure: IJSDA’h System Lrnited by Insufficient Top Management Support
 (GAO/GGD 90-100. July 13, 1990) and Employee Financial Disclosure: Farm Credit Administration
 System Is Generally Operating --__
                                 Effectively (GAO/GGD-90-115.   Sept. 27, 1990).




 Page 1                                   GAO/GGD919      Employee   Financial   Disclosure   at CFl’C
             example, it did not make decisions on 19 public reports out of 31 filed in
             1989 until more than 60 days (the maximum allowed by the 1978 act)
             and in some cases more than 180 days after CFTCreceived the reports.
             CFTC’also did not require employees filing confidential reports to disclose
             certain information (namely, employees’ financial transactions during
             the year and the dollar value of employees’ financial holdings at the end
             of the year) that, in our view, was necessary in reviewing outside inter-
             ests and making conflict decisions. CETCalso had not established an
             ethics training program.


             An agency of 558 employees in June 1989, CFTCis headed by a chairman
Background   and four commissioners nominated by the president and confirmed by
             the Senate. The agency is responsible for administering federal legisla-
             tion and developing comprehensive regulations to protect the public
             from fraud and manipulation in, and to ensure the financial integrity of,
             the commodity futures markets. CFTCoversees these markets by making
             regular or periodic examinations of self-regulatory organizations, such
             as the Chicago Board of Trade and the Chicago Mercantile Exchange;
             maintaining a surveillance system for oversight of daily trading activity;
             and reviewing and approving rules and rule changes. CETCprovides
             direct regulation primarily by rulemaking, investigating alleged wrong-
             doing. and hearing complaints of market participants.

             The 1978 act requires high-level federal employees, such as presidential
             appointees and senior executives, to file public disclosure reports by
             May 15 each year. OPMregulations require employees not covered by the
             above public disclosure requirements and in positions designated by
             agencies for confidential disclosure to report outside financial interests
             as of June 30 each year. The OPMregulations do not specify when the
             reports are to be submitted to agencies. CFTC’Sregulations on financial
             disclosure (17 C.F.R. 140.735) require employees in CFTC-designated
             positions to prepare confidential disclosure reports as of June 30. CFTC’S
             reporting instructions require employees to submit reports to CFTCby
             .July 15 each year.

             (WC‘ has named the General Counsel, who reports to the CFTCChairman,
             as the Designated Agency Ethics Official (DAEO).As such, the General
             Counsel is responsible under OGEregulations (5 C.F.R. 2638) for CFTC’S
             entire ethics program, including training and counseling, public and con-
             fidential disclosure, and ethics program evaluation. The General
             Counsel, and a Deputy General Counsel who acts as alternate DAEO,are
             authorized to make conflict-of-interest decisions for public disclosure


             Page 3                          GAO/GGD-913   Employee   Pinmcial   Disclosure   at CFlT
                          E-241873




                          the 23 reports we selected. We also determined whether CFTC imple-
                          mented recommendations made by OGE in 1986 to improve the CPX dis-
                          closure system.

                          Our review, made during the period from August 1989 to May 1990 at
                          CFTC headquarters where disclosure reports were received, reviewed,
                          and maintained, was done in accordance with generally accepted gov-
                          ernment auditing standards.


                          CFTC  has reduced the risk of conflicts of interest by (1) restricting
Employees’ Outside        employees’ outside financial activities and (2) requiring all employees to
Financial Interests Are   file reports or certifications concerning their financial interests.
Restricted and Must
Be Reported

CFTC Restricts Outside    CFTC'S regulatory functions present significant risks of conflict bet,ween
Financial Activities      employees’ duties and their financial interests. Employees assigned to
                          these functions have duties and responsibilities that can affect financial
                          organizations and transactions outside CFTC. For example, economists in
                          the Division of Economic, Analysis survey the commodity futures mar-
                          kets to detect and prevent actions by companies to manipulate com-
                          modity prices. Employees in this division analyze the terms of
                          commodity futures contracts to ensure that they are not susceptible to
                          price manipulation or distortion. These employees and those in other
                          CETC offices and divisions, such as the Division of Trading and Markets
                          and Division of Enforcement, are in positions to potentially benefit from
                          their relationships with. or knowledge of, individuals and organizations
                          outside CFTC.

                          To deal with such risks, U-K prohibits or limits employees’ interests in
                          outside entities that are subject to CFK oversight or direct regulation.
                          The Commodity Exchange Act of 1936, as amended, imposes certain
                          restrictions on CFTC employees’ outside interests, such as not allowing
                          employees to direct,ly buy and sell commodity futures contracts. CFTC
                          has implemented thesr restrictions and provided additional restrictions
                          and guidance through its Code of Conduct. CFTC requires the Code to be
                          distributed to all its employees when they begin employment with the
                          agency.




                          page5                          GAO/GGDSI-3   Employee   Financial   Disclosure   at CFTC
                              -
                                  B241873




All Employees Must File           CFTC  monitors employees’ compliance with the Code and other require-
                                  ments, such as those in the 1978 act and related regulations, through its
Financial Disclosure              financial disclosure system. CFTC requires all employees to annually file
Reports or Certify No             either (1) a financial disclosure report (public or confidential) showing
Conflict of Interest Exists       interests outside WIT that are to be reviewed for conflicts of interest or
                                  (2) a certification of compliance indicating that no conflicts of interest
                                  exist.

                                  CE’TC’Sregulations include specific criteria on who must file each type of
                                  disclosure report and certifications of compliance. The regulations
                                  require annual confidential reporting by all employees at the GS-13
                                  through GS-16 levels. Regardless of grade level, all attorneys, auditors,
                                  economists, investigators, and futures trading specialists must file confi-
                                  dential reports because they (1) have access to sensitive, nonpublic
                                  information and (2) can influence CFTC decisions through their collection
                                  and analysis of data.

                                  According to CFTC, other employees not covered by public and confiden-
                                  t,ial disclosure requirements also have access to sensitive, nonpublic
                                  information. Therefore. CFIY:requires every employee who is not
                                  required to file a public or confidential report to file certifications of
                                  compliance by July 15 chachyear. They must certify that they have no
                                  financial interests, including outside employment, that violate the Code.

                                  Thus, all CFTC employees must file reports on their outside interests or
                                  certifications of compliance at least annually. According to a CFTC per-
                                  sonnel official, as of May 1989, CETC had required public disclosure
                                  reports from 31 employc,es; confidential reports from 318 employees,
                                  such as economists, attorneys. and auditors; and certifications from the
                                  remaining employees.


                                  (‘FTC’had procedures for identifying employees who must file disclosure
Employees Filed                   reports, notifying employees to file, and following up with late filing
Required Disclosure               tamployees. To identify clmployees who must file each year, CFTC officials
Reports and Usually               said the Office of Information Resources Management uses a computer
                                  program to identify from the automated payroll system each employee’s
Did So by Due Dates               grade/pay level. position, and type of appointment. The officials said
                                  this information allows them to determine the type of report (public,
                                  confidential, or certification) that each CFTC employee must file. Offi-
                                  cials in C'FTC'S Office of General Counsel and Office of Personnel said
                                  they use lists provided by Information Resources Management to notify
                                  all ('FTC employees of filing requirements. In 1989, General Counsel and


                                   Page 7                         GAO/GGDSl-3   Employee   Financial   Disclosure   at CFTC
                        B-241873




                        of the Division of Economic Analysis obtain reports, within 5 days, from
                        employees who should have filed by .July 15 but had not filed. Most (13
                        of 19) of the late confidential reports due from GS-15 employees were
                        filed within 30 days after the due date. Six reports were filed more than
                        30 days after the due date. We do not know why these employees did
                        not file their reports earlier.

                                                                                         ~-
                        When reviewing public and confidential reports, General Counsel and
CFTC Report Reviews     Personnel reviewers took steps to determine whether employees fol-
Included Steps to       lowed reporting guidelines and complied with prohibitions and limita-
Detect Errors and       tions on their outside financial interests. If the outside interests reported
                        by employees do not meet the restrictions and other requirements, the
Conflicts of Interest   reviewers are to determine whether the employees should take remedial
                        action such as to recuse themselves from certain CYK activities or dis-
                        pose of the interest to meet requirements.

                        Reviewers in General Counsel and Personnel required errors in disclo-
                        sure reports, such as the omission of required information, to be cor-
                        rected. For example, General Counsel reviewers required 6 of the 9
                        public reports in our sample to be corrected before making conflict-of-
                        interest decisions. General Counsel and Personnel reviewers also ques-
                        tioned employees’ interests in persons or organizations subject to CFTC
                        oversight or direct regulation. Of the 9 public and 14 confidential
                        reports that we reviewed, 6 reports (2 public and 4 confidential) dis-
                        closed interests in large traders. The CFTC reviewers determined that
                        none of the employees’ interests were in conflict with related CFTC
                        restrictions. The CFK reviewers determined that none of the outside
                        interests in the 23 reports posed apparent or possible conflicts of
                        interest. We also determined, on the basis of information available
                        during the review and requirements in the 1978 act and implementing
                        regulations, that the reported interests did not present conflicts of
                        interest.


                        Although CFTC'S disclosure system was generally operating effectively,
CFTC Can Strengthen     CFTC can make certain improvements in the administration of the
Certain Financial       system. These improvements include (1) making more timely conflict-of-
Disclosure Procedures   interest decisions and (2) requiring additional information in confiden-
                        tial disclosure reports for such decisions.




                        Page 9                          GAO/GGDSl-3   Employee   Financial   Disclosure   at CFTC
                             final and signed to indicate no conflicts of interest existed until Feb-
                             ruary 1990.

                             We believe that the lengthy delays, ranging up to more than 6 months, in
                             completing the reviews of some public and confidential reports indicate
                             t,hat review timeliness needs improving. Of the 26 public report reviews
                             that were completed late, 20 were reviewed from 61 to 180 days after
                             receipt, and 6 were completed more than 180 days after receipt. As t,able
                             3 shows, Personnel completed the final review of 64 of the 87 confiden-
                             t,ial reports more t,han 60 days after the employees’ signature dates on
                             the reports. Of these 54 reports, 24 were reviewed between 61 and 180
                             days, and 30 were reviewed more than 180 days after the employees’
                             signature dates.

                             Until CFK completes its reviews of employees’ reported outside inter-
                             ests, it runs the risk that conflicts of interest will exist but will not be
                             detected and resolved. Accordingly, we believe that CFTC needs to estab-
                             lish a time limit for completing reviews of confidential disclosure reports
                             and ensure that both public and confidential reports are reviewed
                             within the established time limit.


Additional Information in    In 1988 and 1989, CF’K did not require employees to provide information
                             in confidential reports on (1) their financial transactions during the year
Confidential Reports Is      and (2) the value of their financial interests. Although current federal
Needed for Monitoring        regulations do not specifically require this information, we believe it is
Outside Interests            needed to help CFTC and its employees ensure that, outside interests meet
                             (‘FTCrestrictions and other requirements.

Financial Transactions Not   (YK required employees filing confidential reports-unlike      those filing
Reported                     public reports-to    annually report financial interests held on the last
                             day of the reporting period (June 30) but did not require them to report
                             changes in interests that occurred during the reporting year. Although
                             the (‘FTC Code restricts employees’ outside financial interests that could
                             pose conflicts of interest, we believe that information on employees’
                             transactions during the year, as well as their holdings at the end of the
                             year, is needed for monitoring compliance with the Code. Currently,
                             c~mployces can engagcain prohibited transactions, such as the purchase
                             and sale of commodity futures contracts, during the year and not be
                             required to disclose the transactions in their year-end disclosure reports
                             because they do not hold the financial interests on the last day of the
                             reporting period, .Juntx31).



                             Page 11                          GAO/GGD-91-3   Employee   Financial   Disclosure   at CFK
                     To improve the disclosure system, CFTC made changes in its report
CFTC Implemented     review procedures that OGErecommended in a January 1986 report to
Most of OGE’s 1986   the DAEO. For example. in response to the OGEreport, the DAEO advised
Recommendations      OGGE that General Counsel and Personnel would (1) use consistent criteria
                     in determining whether employees’ out,side interests pose conflicts of
                     interest and (2) share information, such as Personnel’s microfiche list of
                     CF’I’Cregistrants and large traders, that each needed to review reports.
                     We determined in our review of selected public and confidential disclo-
                     sure reports that General Counsel and Personnel reviewed reports using
                     the same criteria and shared information in their respective reviews.

                     Although the OGE recommendations dealt mainly with the disclosure
                     system, OGE recommend(,d as well that the DAEO establish a crrc-specific
                     ethics training program for all its employees. In October 1986, when OGE
                     made a follow-up visit to CF’I’C,the DAEO said he had not established the
                     recommended ethics training program because legislative changes were
                     being considered that could affect restrictions on CFTC employees’
                     outside financial interests.

                     According to OGE,an ethics training program has been required since
                     passage of the Ethics in Government Act of 1978, but the requirement in
                     the act and implementing regulations is very general. In April 1989,
                     President Bush issued Executive Order 12674 containing specific
                     requirements for ethics training. The order requires, among other
                     things, that agency heads, in coordination with OGE, develop annual
                     agency-specific ethics training plans. The order requires mandatory
                     annual briefings on ethics and standards of conduct for those employees
                     required to file public, or confidential disclosure reports.!’

                     In Sept,ember 1990, CYK still had not developed a program of regular
                     ethics training for its employees. At that time, ethics training was lim-
                     ited to new CFK employees and given as part of their orientation.
                     According to CFTC General Counsel officials, changes in both the com-
                     modity futures laws and ethics laws and regulations have delayed the
                     development of a cYT(‘ vt hits training program.


                     CF~‘Chas reduced the risk of conflicts of interest by restricting t,he finan-
Conclusions          cial interests of all its employees. In our view, on the basis of applicable


                     !‘ln Scptembcr 1990, OGE pubbshui   proposed regulations   on executive agency ethics training pro-
                     qxr~s (55 Frd. Reg 38,335)




                     Page 13                                   GAO/GGD913        Employee   Financial   Disclosure   at CFTC
B-241873




Major contributors to this report are listed in appendix I. Please contact
me on 275-5074 if you have any questions about this report.

Sincerely yours,




Bernard L. IJngar
Director, Federal Human
  Resource Management Issues




Page 15                         GAO/GGDSl-3   Employee   Financial   Disclosure   at CFl’C
    ordering   Infornultion

    The first five copies of each GAO report are free. Additional copies
    are $2 each. Orders should be sent to the following address, accom-
    panied by a check or money order made out to the Superintendent
    of Documents, when necessary. Orders for 100 or more copies to be
    mailed to a single address are discounted 25 percent.

    U.S. General Accounting Office
    P.O. Box 6016
    Gaithersburg, MD 20877

    Orders may also be placed by calling   (202) 275-6241.


i
Appendix I
_---

Major Contributors to This Report


                        James T. Campbell, Assistant Director, Federal Human Resource Man-
General Government      agement Issues
Division, Washington,   Gary V. Lawson, Evaluator-In-Charge
D.C.             -      Ellen T. Wineholt, Evaluator
                        Stuart M. Kaufman, Technical Advisor
                        Valerie A. Miller, Technical Advisor

                                        -
                        Michael R. Volpe, Assistant General Counsel
Office of General
Counsel, Washington,
D.C.




 (966428)                Page 16                      GAO/GCB913   Employee   Financial   Disclosure   at CFTC
                      B-241873




                      requirements for financial disclosure, CETC’Ssystem provides a reason-
                      able basis for monitoring compliance with the restrictions on employees’
                      outside interests.

                      Although CFTC improved the system in response to OGErecommenda-
                      tions, the administration of the system can be further improved. Specifi-
                      cally, CETC needs to ensure that (1) conflict-of-interest decisions are
                      made in a timely manner. (2) confidential reports provide all the infor-
                      mation necessary for conflict-of-interest decisions, and (3) an ethics
                      training program is established for all CFTC employees.


                      To further reduce the risk of conflicts of interest and improve the CE’T(
Recommendations       disclosure system, wf’ recommend that the CFTCChairman direct the
                      DAEO t0


                  . establish a time limit, such as 60 days after receipt, for completing
                    reviews of confidential disclosure reports and ensure t,hat (1) confiden-
                    tial report reviews are completed within that limit and (2) public report
                    reviews are completed within the existing GO-day statutory limit;
                  l require employees to include information on their financial transact,ions
                    that occur during the year in their confidential reports; and
                  l establish a program of regular ethics training for all CFTC employees.


                      We discussed the cements of this report with the DAK0 and other General
Agency Comments       Counsel and Personnel officials, and their comments were considered
                      when we prepared the final report. These officials agreed with the
                      thrust of our recommendations but said they planned to defer making
                      changes to the agency’s confidential disclosure requirements until OGE
                      issues regulations on the subject. Given ( 1) the history of OGE's efforts to
                      issue regulations on confidential requirements and (2) that CKXhas not
                      committed to a firm publication date, we believe that CFK should make
                      the recommended changes before the next annual filing period.

                                 __-   -   -~~- -___      __-
                      As arranged with the Subcommittee, unless you publicly announce its
                      contents earlier, we plan no further distribution of this report until 30
                      days from the issm date. At that time, we will send copies to the CF~‘C
                      Chairman and othc>r interested parties.




                      Page 14                          GAO/GGD-91.3   Employee   Financial   Disclosure   at CFTC
                                 B-241873




                                 CFX officials believed that the agency was complying with applicable
                                 requirements for disclosing financial transactions in confidential disclo-
                                 sure reports. We believe that applicable regulations do not clearly
                                 require information on financial transactions to be disclosed in confiden-
                                 tial reports. Even so, we believe that CFK needs this information for
                                 conflict-of-interest decisions and should require employees to provide it
                                 in their confidential disclosure reports, because without this information
                                 CF”K cannot review employees’ transactions during the year and deter-
                                 mine whether they meet CFTC restrictions and other requirements.

                                 The Department of Agriculture, like CFTC, did not require employees to
                                 report their financial transactions in confidential reports, but the
                                 Department has since agreed to request OGE approval to include this
                                 rcquiremcnt.i Hecauso current regulations are unclear regarding
                                 employees’ financial transactions, we recommended, in *June 1990, that
                                 OGErequire information on financial transactions to be reported in confi-
                                 dential disclosure reports8 The OGE Acting Director said this require-
                                 ment will be included in regulations now being developed.

Value of Outside Interests Not   UTC required employees to identify certain entities in which they had
Reported                         financial interests but, did not require them to disclose in confidential
                                 reports the dollar or share value of such interests. As mentioned earlier,
                                 CFTC restricted certain employees’ holdings to a specific number of dol-
                                 lars or shares. such as $25,000 or 10 percent of the outstanding shares
                                 of entities trading commodity futures contract,s. Because CFTCdid not
                                 receive information in the reports to compare the values of employees’
                                 holdings against t htb restrictions, Personnel had to contact filers to
                                 obtain this information when employees reported interests in entities
                                 subject to the restrict ions.

                                 Because CFTC needs information on employees’ financial transactions for
                                 making conflict-of-interest decisions, we believe that employees should
                                 be required to provide the information when filing their reports. We dis-
                                 cussed the need for this information with Personnel officials during our
                                 review. Subsequently, in ,June 1990, CFK issued instructions to require
                                 that employees inc4ude the number and value of shares held in reported
                                 entities.


                                 ‘Our report entitled Financial Disrlosure: IJSDA’s System Limited by Insufficient Top Management
                                 Supper-t (GAO/GGD-SO-IOO. hly 13, 1990) contains a more detailed discussion on current regulatory
                                 ments         for disclosrw 111financial transactmns in confidential reports.




                                 Page 12                                  GAO/GGD-91-3     Employee   Financial   Disclosure   at CFK
                                           B-241873




Conflict-Of-Interest                       General Counsel reviewers did not complete the review of public reports
                                           within the time required by the act-60 days after receipt-for      26 of
Decisions Should Be More                   the total 60 public reports filed in 1988 and 1989, as table 2 shows.
Timely
Table 2: Public Report Review Timeliness
                                                                                                                  1988                 1989            Total
                                           Total number     of annual reports                                        29                  31               60
                                           Reww       completeda
                                             Wlthr     60 days                                                       22                  12               34
                                             More than 60 days                                                        7                  19               26

                                           aWe used the rfwe’w”9     official‘s signature date on the report to mdlcate the review completion date


                                           CFTCdid not require confidential reports to be reviewed within any spec-
                                           ified period of time. Current federal regulations on confidential disclo-
                                           sure do not establish a time limit for these reviews. However, as stated
                                           earlier, the 1978 act imposes a 60.day standard for review of pub!ic
                                           reports. ow has proposed a 60-day standard for review of confidential
                                           reports.” Were a 60-day standard in effect for confidential reports, CFTC
                                           would not have met the standard for most of the 87 reports filed by GS-
                                            15 employees in 1988 and 1989, as table 3 shows.

Table 3: Confidential Report Review
Timeliness Assuming a BO-Day Review                                                                               1988                 1989            Total
Requirement                                Total GSl5     annual   reports   filed                                   39                  48               i7
                                           Flew&i     completeda
                                             With,”    60 days                                                        7-                 26               33
                                             More than 60 days                                                       32                  22               54

                                           aWe used the Personnel rwew~ng            official‘s signature date on the report as the rewew complet,on date


                                           A General Counsel official responsible for reviewing public reports
                                           believed that. when compared to the number required to be reviewed
                                           and the other work required of the report reviewers, the number of
                                           public report, reviews completed late was not significant. A Personnel
                                           official said that, in 1989, some of the confidential reports that were not
                                           reviewed within 60 days had been initially reviewed within 60 days but,
                                           because of a misunderstanding within Personnel, were not reviewed in

                                           “OGE proposed the tiO-da? review standard in regulations published in the Bin
                                           December 19% In August IRHO, the Acting Director of OGE said OGE had reworked the r?gul;rtions
                                           m responsr to the Ethics Reform 4ct of 1989 and was consulting with OPM and the Department of
                                           .Justrc on the rwistvl rr~gld~nons ils wquired by presidential executwe order According to tht>
                                           Acting Director. no Rrm pnhlic,w)n date had been set, wnding completion of CGE’s ronsultatiun with
                                           OPM and .luslict’




                                           Page 10                                            GAO/GGD-91-3     Employee    Financial    Disclosure   at CFTC
                                        B-241873




                                        Personnel sent notifications to employees at least 30 days before public
                                        reports were due on May 15 and before confidential reports and certifi-
                                        cations of compliance were due on July 15.

                                        We determined that in 1988 and 1989 all employees required to file
                                        annual public reports and all employees at the GS-15 level required to
                                        file annual confidential reports did so. Most of these employees filed
                                        reports on time in both years, as table 1 shows.

Table 1: Timeliness of Annual Reports
Filed for 1988 and 1989                                                                                  1988                 1989                Total
                                        Public reports
                                        Number     reqwed                                                   29                  31                   60
                                        Number     flied
                                          By due date                                                       27                  29                   56
                                          After due date                                                     2                   2                    4
                                        Confidential        reports
                                        Number     in GAO sample                                            39                  40                   87
                                        Reoorts    flled”
                                          By due date                                                       29                  39                   68
                                          After due date                                                    10                   9                   19
                                        aWe used employees’ signature dates on reports to ndlcate the flllng dates for confldentlal     reports
                                        CFTC recorded receipt dates for public reports but not for confldentlal reports


                                        CETCtook steps to obtain late reports due in 1988 and 1989. CFTC
                                        employees who file public reports are few in number, and an Office of
                                        General Counsel official said that her office made contacts orally with
                                        employees to obtain late public reports. As table 1 shows, four public
                                        reports were late for the 2 years combined. Two reports were filed 7
                                        days after the due date, and a third one was filed 79 days late. A Gen-
                                        eral Counsel official said, after consulting with OGE on the fourth report,
                                        that the employee who had since left CFTC filed a report but not until
                                        203 days after the due date. The employee reported financial interests
                                        as of the date that the report was filed.”

                                        To obtain late confidential reports, Personnel sent letters to division and
                                        office heads requesting them to obtain employees’ reports. For example,
                                        on July 26, 1989, the Director of Personnel requested that the Director

                                        “The 1978 act did not prrwldts any penalty for late filing of public reports until it was amended by the
                                        Ethics Reform Act of 19X9 (I’ L. 101.194, Nov. 30, 1989). Beginning with reports due after January 1,
                                         1991, a filing fee of $200 must be imposed against employees who file public reports more than 30
                                        days after due dates or the extension dates approved by the agency, unless the filing fee is waived by
                                        the supervising ethics offiw w OGE for the rxecutive branch.




                                        Page 8                                      GAO/GGD91-3       Employee    Financial    Disclosure   at CFTC
    B241873




    Among other restrictions, the Code provides that CFK employees are not
    to have the following outside interests:

l any beneficial interest in an organization regulated by        such as reg-   CFTC,


  istered futures commission merchants;
. a significant beneficial ownership involving any person or organization
  required to file reports under the Commodity Exchange Act, such as
  large commodities traders; or
l purchase or sell any securities of a company that is involved in a
  pending        invtst,igation, a proceeding before CFTC or in which CFTC is
               CFTC


  a party, or other matters under CFTC’S consideration that could signifi-
  cantly affect the person or 0rganization.l

    The commodity futures markets were originally designed for agricul-
    tural-based products and have expanded to include contracts based on
    nonagricultural commodities such as metals, foreign currencies, and
    financial instruments. As these changes occurred, CFK supplemented
    the Code with related guidance on ethics matters and imposed new
    financial restrictions on employees. For example, in 1984, the DAEO pro-
    hibited all CFTC employees from participating in futures contracts on
    stock indexes and options on stock indexes, such as the Standard and
    Poor’s 500 Stock Price Index futures contra& traded on the Chicago
    Mercantile Exchange. The D.4EO determined that such financial instru-
    ments that are the subjects of futures contracts that CFTC has authorized
    for trading fall within the definition of the term “commodity” used in
    section 9(d) of the Commodity Exchange Act.

    Along with addressing changes in the futures markets, since 1982, the
    DAEO   had provided guidance in areas such as post-employment, accept-
    ance of food and refreshment, and political activity. According to CEW
    officials, restrictions in the Code and guidance issued by the D.4~0 apply
    to all WIT employees-regardless      of grade level and duties-their
    spouses, minor children, and other relatives who are residents of their
    immediate household.




    “CRC has defined terms uwd m the Code. For example, significant bencficlat ownership is defined to
    ~EUI rn~rf than 10 pern’nt or $25,000 of the outstanding stock of a person or organization subject to
    CFTC reporting requirrnwnth   Employrvas may have finamial mf~rests in these entities up to these
    limitatwns. CFTC has idcmtifkd thr typrs of wtsldc entities that are the subjerts of the prohibitions
    and limitations.




    Page 6                                    GAO/GGD-91-3     Employee   Financial     Disclosure   at CETC
                          5241873




                           reports. CETC has assigned responsibility to the Director of the Office of
                           Personnel, who reports to the CFTC Executive Director, for administering
                           the confidential disclosure system, including making conflict-of-interest
                           decisions.

                           IJnder the 1978 act, OGEis responsible for developing ethics policies for
                           the executive branch. OGEreviews agency ethics programs, including
                           financial disclosure systems, to determine whether the programs con-
                           form with requirc\ments of the act and regulations. OGE last reported on
                           CFTC'S disclosure system in January 1986.



                           To determine how CFTC protects against employee conflicts of interest
Objectives, Scope, and     we ( 1) reviewed the agency’s policies and guidance to determine
Methodology                whether they reasonably restrict employees’ outside financial interests
                           that could pose conflicts; (2) determined which of CFTC’S employees must
                           submit reports on outside interests; and (3) compared CFTC’S disclosure
                           system with related requirements in the 1978 act, executive orders, and
                           regulations to determine whether the system adequately conforms with
                           those requirements.

                           To determine thfx timeliness of report filing and review we did the fol-
                           lowing work:

                         . We reviewed CFTC'S procedures for obtaining reports by due dates speci-
                           fied in the 1978 act and related regulations and reviewed the reports
                           within time periods required in the act.
                         . We reviewed all public disclosure reports due by May 15 in both 1988
                           and 1989 (60 reports) and all confidential disclosure reports due by
                           July 15 in 1988 and 1989 from employees at the GS-15 level (87
                           reports). We agreed with the Subcommittee that, because of the volume
                           of confidential reports filed at CETC each year (318 in 1989, according to
                           a CPTCPersonnel official), we would limit our review of confidential
                           reports to those filed by GS-15 level employees.

                           We assessed the adequacy of CFTC’Sprocedures for reviewing reports
                           and making conflict-of-interest decisions according to the 1978 act and
                           implementing regulations by reviewing a nonrepresentative sample of
                           public and confidential disclosure reports. We selected the sample of
                           reports by randomly picking 9 public reports from the universe of 3 1
                           filed in 1989 and 14 confidential reports from the total 48 annual
                           reports filed by GS-15 employees in 1989. CFTC had previously reviewed



                           Page 4                          GAO/GGD913   Employee   Financial   Disclosure   at CFFC
E-241873




CFTCdefines in its Code of Conduct those financial interests, such as
commodity futures contracts and certain investment transactions
involving an actual commodity, that all employees are to avoid.” Over
the years, CETC has added restrictions on employees’ outside interests to
address new futures contracts that are based on commodities such as
stock indexes and opl,ions on stock indexes.?

CFTC  uses its financial disclosure system to enforce these restrictions and
guard against conflicts of interest. In 1989, CFTC required disclosure
reports from 349 of its 558 employees. The 349 employees consisted of
3 1 high-level employees (presidential appointees and senior executives)
who were required to file reports that were available to the public. In
addition to these 31 employees, 318 other employees, such as econo-
mists, attorneys, and audit,ors, were required to file disclosure reports
that were to be kept confidential. CFTC required the remaining
employees all of whom were in positions that CFTC determined to be less
susceptible to conflicts of interest, to certify that, they had no conflicts
of interest.

For 1989, all but 2 of the 31 employees required by the 1978 act t,o file
public reports by the annual due date did so. In addition, all but 9 of 48
GS-15 employees required to file confidential reports by the annual due
date did so. CFTC took follow-up steps, such as sending notices to the
supervisors of late filing employees, and obtained these 11 late public
and confidential reports.

We selected at random 23 reports filed in 1989 (9 public reports filed by
high-level cmployccs and 14 confidential reports filed by GS-15
employees) and determined whether CFTC’S reviews of these reports
detected apparent or potential conflicts of interest. After requiring cer-
tain employees to supplement or clarify reports, CFTC determined that
none of the reports presented conflicts of interest. We also determined
that the 23 reports presented no financial interests that posed conflicts
of interest.

Although CFTC’S disclosure system works well overall, CFTC can improve
its administration of the system. CFTC did not always make timely con-
flict-of-interest decisions on public and confidential reports, For



“An example of a stock mdw IS the’ Standard and Poor’s 500 Stock Pncc Index, which is a weighted
index of the prices
                  of stwk.s of 500 rompanirs.




Page 2                                   GAO/GGD-91-3     Employee   Financial   Disclosure   at CFTC