This is the accessible text file for GAO report number GAO-03-969T 
entitled 'Securities and Exchange Commission: Preliminary Observations 
on SEC's Spending and Strategic Planning' which was released on July 
23, 2003.

This text file was formatted by the U.S. General Accounting Office 
(GAO) to be accessible to users with visual impairments, as part of a 
longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov.

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately.

Testimony:

Before the Subcommittee on Government Efficiency and Financial 
Management, Committee on Government Reform, House of Representatives:

United States General Accounting Office:

GAO:

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:

GAO Highlights:

Highlights of GAO-03-969T, a testimony to the Chairman, Subcommittee 
on Government Efficiency and Financial Management, Committee on 
Government Reform, House of Representatives 

Why GAO Did This Study:

In February 2003, the Securities and Exchange Commission (SEC) 
received the largest budget increase in the history of the agency. The 
increased funding was designed to better position SEC to address 
serious issues identified in the Sarbanes-Oxley Act and to better 
enable SEC to address numerous operational and human capital 
management challenges discussed in the GAO report entitled SEC 
Operations: Increased Workload Creates Challenges (GAO-02-302). To 
help ensure that SEC spends its budgetary resources in an efficient 
and effective manner, GAO was asked to review the SEC’s efforts to 
address the issues raised in the 2002 report and to report on how SEC 
intends to utilize its new budgetary resources. GAO’s final report on 
these matters is expected to be completed this Fall.

This testimony provides requested information on the status of SEC’s 
current spending plan and preliminary observations on SEC’s strategic 
and human capital planning efforts.

what GAO Found:

In GAO’s 2002 operations report, GAO identified a number of 
operational challenges facing SEC stemming from an increasing workload 
(e.g., filings, applications, and examinations) and staffing 
imbalances that threatened to impair SEC’s ability to fulfill its 
mission. As illustrated below, SEC’s workload had grown at a much 
higher rate than its staffing since the mid-1990s. In response to 
congressional concerns involving a number of high-profile corporate 
failures and accounting scandals, SEC’s funding was increased 45 
percent in 2003. SEC plans to spend most of its 2003 and 2004 budget 
increases to fund 842 new staff positions and double its information 
technology budget. However, given the late appropriation and hiring 
challenges, SEC has to date filled few of these positions, and it is 
unlikely that SEC will be able to utilize all of its 2003 funds.

GAO also found that SEC recognizes the need to develop a new strategic 
plan and that such a plan is a vital component of its staff allocation 
and human capital planning processes. A new strategic plan is also 
vital to SEC’s ability to develop performance-oriented, outcome-based 
performance measures. GAO found that while SEC has not updated its 
strategic plan, it has begun efforts to overhaul its performance 
measures to make them more outcome-oriented. This effort seems 
premature given its lack of a new strategic plan. Moreover, while GAO 
found that SEC has completed certain aspects of a strategic human 
capital plan, including development of a new pay structure comparable 
to other federal financial regulators, greater flexibility to expedite 
the hiring of certain critically needed professions, plans for more 
training, and implementation of agencywide-worklife programs, the lack 
of a new strategic plan inhibits SEC’s ability to develop a formal 
human capital plan. 

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.

[End of section]

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.[Footnote 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.[Footnote 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 
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.

SEC Plans to Spend Most of Its Budgetary Increase on Staffing and 
Information Technology:

In March 2002, we reported that SEC's workload and staffing imbalances 
had challenged SEC's ability to protect investors and maintain the 
integrity of securities markets. Appendix I graphically depicts SEC's 
workload and staffing imbalance from 1990 through 2000 as reported in 
our 2002 report and appendix II updates this graphic using SEC budget 
documents including its 2003 and 2004 workload and staffing estimates. 
As reported in March 2002, we found that SEC generally managed to 
bridge the gap 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).[Footnote 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.

A Significant Portion of SEC's Budget Increase Has Been Allocated to 
New Staff Positions:

SEC's planned allocations appear to be consistent with the Sarbanes-
Oxley Act, which mandated that the $776 million authorization be used 
to:

* fund pay parity, allowing SEC to set salaries for certain staff 
positions at levels comparable to those at other federal financial 
regulators;[Footnote 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.[Footnote 5] For example, between 
2002 and 2004, the full disclosure program is slated to receive the 
largest percentage increase in positions æ 39 percent. This program 
includes the Division of Corporation 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:

Program Positions: Full disclosure; 2002: Actual: 508; 2004: Request: 
704; Change in Allocation: +196; Percentage Change: 39 percent.

Program Positions: Prevention and suppression of fraud; 2002: Actual: 
1,037; 2004: Request: 1,255; Change in Allocation: +218; Percentage 
Change: 21.

Program Positions: Supervision and regulation of securities markets; 
2002: Actual: 465; 2004: Request: 627; Change in Allocation: +162; 
Percentage Change: 35.

Program Positions: Investment management regulation; 2002: Actual: 593; 
2004: Request: 790; Change in Allocation: +197; Percentage Change: 33.

Program Positions: Legal and economic services; 2002: Actual: 175; 
2004: Request: 194; Change in Allocation: +19; Percentage Change: 11.

Program Positions: Program direction; 2002: Actual: 387; 2004: Request: 
437; Change in Allocation: +50; Percentage Change: 13.

Program Positions: Total; 2002: Actual: 3,165; 2004: Request: 4,007; 
Change in Allocation: +842; Percentage Change: [Empty].

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.

[End of table]

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.

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.[Footnote 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 Will Also Receive a Significant Increase:

Information technology was another area identified in our 2002 report 
as having funding gaps that had contributed to existing inefficiencies. 
Like 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 
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 architectureæ 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.

SEC Has An Outdated Strategic Plan and An Incomplete Human Capital 
Plan:

In 2002, we found that SEC had not engaged in a comprehensive 
agencywide strategic planning process and little has changed in this 
regard in 2003. As we have previously reported in earlier reports, 
high-performing organizations identify their current and future human 
capital needs--including the appropriate number of employees, the key 
competencies needed, and plans for deploying staff across the 
organization--and then create strategies to fill any gaps.[Footnote 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 Provides a Framework for Strategic Planning:

In 2002, SEC took a critical step toward developing a strategic plan 
when it conducted an internal study of SEC's current operations, 
workload, 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 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 Effort to Develop Outcome-Oriented Performance 
Measures:

Consistent with the findings in our March 2002 report, SEC's subsequent 
GPRA 2002 annual performance report continued to use measures of 
outputs rather than outcomes.[Footnote 8] For example, under the goal 
of protecting investors by improving public awareness and educating 
investors, SEC 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 
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 Plan is Vital to a Strategic Human Capital 
Plan:

We are also reviewing the status of SEC's strategic human capital 
planning. As you may recall, in our September 2001 report, we examined 
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.[Footnote 9] In 
our 2001 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.

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.[Footnote 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.

Observations:

SEC's dynamic regulatory environment and tumultuous past year has 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, 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.

Contacts and Acknowledgements:

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

[End of section]

Appendix I: Percent growth in SEC staff years and workload, 1991 - 2000:

[See PDF for image]

[End of figure]

[End of section]

Appendix II: Percent growth in SEC staff years and workload, 1991 - 
2004:

[See PDF for image]

[End of figure]

[End of section]

FOOTNOTES

[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).

[3] Pub. L. 107-204.

[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).

[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).

[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).

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

[9] GAO-01-947.

[10] P.L. 107-123