OIG’s General Statement on the SEC’s Management and Performance Challenges

On October 7, 2019, the Office of Inspector General, an internal office of the U.S. Securities and Exchange Commission (SEC), issued a Statement on the SEC’s Management and Performance Challenges (Statement). 

What type of Regulatory Oversight does the SEC provide?

The SEC is charged with overseeing more than 26,000 registered market participants, including investment advisers, mutual funds, exchange-traded funds, broker-dealers, municipal advisors, and transfer agents. The SEC also oversees 22 national securities exchanges, 10 credit rating agencies, and 7 active registered clearing agencies, as well as the Public Company Accounting Oversight Board, the Financial Industry Regulatory Authority, the Municipal Securities Rulemaking Board, the Securities Investor Protection Corporation, and the Financial Accounting Standards Board. In addition, the SEC is responsible for selectively reviewing the disclosures and financial statements of almost 4,300 exchange-listed public companies.  The SEC’s fiscal year 2020 request is $1.746 billion dollars.

What are the SEC’s main Management and Performance Challenges?

The Statement only focuses on the most serious challenges and they are in the following areas:

• Meeting Regulatory Oversight Responsibilities
• Protecting Systems and Data
• Improving Contract Management
• Ensuring Effective Human Capital Management

Challenge: Meeting Regulatory Oversight Responsibilities

The Statement describes challenges to the SEC’s ability to

• Keep pace with changing markets and innovations: These innovations include blockchain technology, automated investment advice, online marketplace lending, and crowdfunding. Cybersecurity threats are continuing to grow in both frequency and sophistication. 
• Ensure sufficient examination coverage of registered investment advisers and timely enforcement investigations: The Office of Compliance Inspections and Examinations (OCIE) conducts the SEC’s National Examination Program, which seeks to protect investors, ensure market integrity, and support responsible capital formation through risk-focused strategies that: improve compliance, prevent fraud, monitor risk and inform policy.  However, the SEC reported that “the size of the SEC-regulated community continues to grow in volume and complexity, and significantly exceeds existing resource levels.” Also, Enforcement plays an essential role in carrying out the SEC’s mission by investigating and bringing actions against those who violate Federal securities laws.  Enforcement did not meet percentage or timeliness targets during the past two fiscal years. 
• Leverage technology and analytics to meet mission requirements, while operating with limited resources:  The SEC hast taken several steps to develop a new electronic disclosure system in an attempt to redesign the EDGAR (Electronic Data Gathering, Analysis, and Retrieval System), however, the SEC’s approach to redesigning EDGAR was unclear, EDGAR redesign program cost and schedule estimates presented to agency decision makers and senior officials were not based on best practices, and the EDGAR Business Office created a Grand Functional Requirements Document for the redesigned EDGAR system but did not include sufficient detail about the system’s security requirements.

Challenge: Protecting Systems and Data

According to SEC Chairman’s May 2019 congressional testimony, “The SEC and other agencies are frequent targets of attempts by threat actors who seek to penetrate our systems, and some of those actors may be backed by substantial resources.” Despite this, the SEC has recognized material weakness in its internal controls related to cybersecurity risks and underlying deficiencies identified in this area.  According to the Statement, “the SEC appropriately adapts its operational focus and remains an effective regulator.” However, on page 10 the Statement reports “the SEC’s information security program did not meet annual Inspector General FISMA reporting metrics’ definition of “effective.””

Challenge: Improving Contract Management

The SEC relies on contractor support in a variety of programs and operations and a huge chunk (29% or $509 million) of the SEC’s total requested amount ($1.746 billion) is for contractual services and supplies. However, the Statement identified concerns relating to requirements definition, competition and pricing, and contractor oversight performed by contracting officers and contracting officer’s representatives. This means that there are some serious deficiencies with the way the SEC is managing potentially sensitive work performed by contractors.

Challenge: Ensuring Effective Human Capital Management

The SEC partnered with the U.S. Office of Personnel Management Human Resources Solutions in February 2016 for an evaluation of the SEC’s four-tier pilot program.  However, the SEC has been unable to implement a single effect personnel management program and performance work plans for both senior officers and SK employees was delayed shortly after the start of the fiscal year 2019 performance cycle.  This means that senior officers and SK employees did not receive critical feedback necessary to improve performance. 

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