SEC - FY 2011 Performance and Accountability Report

8/3/2019 SEC - FY 2011 Performance and Accountability Report

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U.S. SecUritieS and exchange commiSSion

FY 2011 Performance and Accountability Report


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Abot This Report

The U.S. Securities and Exchange Commissions (SEC) FY 2011 Perormance and Accountability Report

provides program perormance and fnancial inormation that enables Congress, the President, and the public

to assess the SECs perormance and accountability over the resources

entrusted to it. This report, available at http://www.sec.gov/about/

secpar2011.shtml provides inormation that satisfes requirements

contained in the ollowing statutes:

Accountability o Tax Dollars Act o 2002

Improper Payments Inormation Act o 2002, as amended

Reports Consolidation Act o 2000

Government Management Reorm Act o 1994

GPRA Modernization Act o 2010

Federal Managers Financial Integrity Act o 1982

Dodd-Frank Wall Street Reorm and Consumer Protection

Act Subtitle F. Sec. 963. Annual Financial Controls Audit andSec. 922. Whistleblower Protection

For the fth year in a row, the SEC received

a Certifcate o Excellence in Account-

ability Reporting rom the Association o

Government Accountants. The award is

presented to Federal Government agencies

whose annual reports achieve the highest

standards demonstrating accountability

and communicating results.


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Contents

Message rom the Chairman 2

Managements Discssion and Analysis 5

Vision, Mission, Values and Goals 6History and Purpose 7

Organizational Structure and Resources 8

FY 2011 Year in Review 12

Looking Forward 28

Financial Highlights 32

Perormance Highlights 38

Strategic and Perormance Planning Framework 38

Perormance Measures Overview 39

Perormance Results Summary 40

Management Assurances 45

Annual Assurance Statement 45

Perormance Section 51

A Readers Guide to the SECs Perormance Inormation 52

Verication and Validation o Perormance Data 53

FY 2011 Perormance Summary by Strategic Goal 53

Program Assessments and Evaluations 95

Financial Section 101

Message rom the Chie Financial Ocer 102

Report o Independent Auditors 104

Managements Response to Audit Opinion 121

Financial Statements 124

Notes to the Financial Statements 129Required Supplementary Inormation (Unaudited) 155

Investor Protection Fund Financial Statements 158

Notes to the Investor Protection Fund Financial Statements 161

Other Accompanying Inormation 167

Inspector Generals Statement on Management and Perormance Challenges 168

Managements Response to Inspector Generals Statement 175

Summary o Financial Statement Audit and Management Assurances 183

Improper Payments Elimination and Recovery Act Reporting Details 184

Appendixes 186

Appendix A: Chairman and Commissioners 186Appendix B: Major Enorcement Cases 189

Appendix C: SEC Divisions and Oces 204

Appendix D: Acronyms 206

Available on the Web at http://www.sec.gov/about/secpar2011.shtml

To contact the SEC, please seehttp://www.sec.gov or Contact Us athttp://www.sec.gov/contact.shtml.

For urther inormation on selected terms and topics, please see Fast Answers at http://www.sec.gov/answers.shtml


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Message rom the Chairman

that brought swit enorcement action And regional ocescontinued to play a key role in the development o specialized

skills and innovative approaches that help the agency identiy

and promptly investigate possible violations in key areas

such as asset valuation, microcap raud, and cross-borde

misconduct

These changes resulted in signicant victories or the agency

In 2011, the SEC led 735 enorcement actions, an 86 percen

increase rom 2010 and more cases than ever previously led

by the Division in a single scal year Eighty-ve o those

actions were designated National Priority Cases cases with

the greatest signicance and highest impact an increase o

80 percent rom 2010 In addition, in the last two scal years

the Commission distributed over $36 billion in disgorgemen

and penalties to harmed investors

In 2011, the Division o Enorcement continued to work with

criminal prosecutors to break up one o the largest inside

trading schemes ever uncovered To date, ve separate

Federal district court actions have been led, involving charges

against 22 individuals, including high-ranking corporateexecutives and hedge und managers, and against seven

entities involved in the scheme

In addition, the SEC continued to bring actions stemming

rom misconduct related to the nancial crisis To date

the Division o Enorcement has led 36 actions in nancia

crisis-related cases, charging 81 individuals and entities

Nearly hal o the individuals charged were CEOs, CFOs and

senior ocers Fiteen o those actions were led in 2011

a 25 percent increase over 2010 In connection with these

actions, the Commission has barred twenty-our individuals

rom the industry, rom serving as ocers and directors

and/or rom appearing beore the Commission In addition

$197 billion in penalties, disgorgement and other monetary

relie has been ordered, most o which has been or will be

returned to harmed investors

The United States Securitiesand Exchange Commission

is charged with protecting

investors; maintaining air,

orderly, and ecient markets;

and acilitating capital

ormation During scal year

2011, the SEC improved its

ability to carry out this mission

by making signicant progress

against a broad program oneeded change We brought

greater energy and sophistication to core agency unctions;

began implementing ar-reaching and complex nancial reorm

legislation; advanced an investor-ocused agenda rooted in

the agencys unique expertise; and improved the productivity

o our 3,800-member sta

Despite unding constraints, SEC sta worked diligently to

build an agency whose ability to support capital markets

and protect investors large and small continued to improve

SEC sta perormed traditional oversight and enorcementtasks with an increased ecacy derived rom improved

technology, increasing levels o sta expertise, innovative

management strategies and a more eective organizational

structure

In the Division o Enorcement, new specialized units

continued to build expertise in complex, high-priority areas,

including asset management, structured and new products,

complex trading strategies and current market structure

Complementing this new organization was the increasing

use o sophisticated analytic tools and data-based templates

that identiy suspicious patterns and activities, allowing

Enorcement to more quickly identiy and pursue unlawul

conduct Enorcement also strengthened and improved

its coordination with the Oce o Compliance Inspections

and Examinations (OCIEs) National Examination Program

(NEP), resulting in targeted exam and investigation eorts

2 2011 PERFORMANCE AND ACCOUNTABILITY REPORT

MESSAGE FROM THE CHAIRMAN


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Increasing scrutiny o registrant disclosure in areasparticularly important to contemporary investment

decisions, such as liquidity, loss contingencies, and

reverse mergers, and improving the quality o disclosed

inormation

Creating a cross-agency college o regulators to

improve oversight o nancial service rms and meeting

regularly to share inormation about the regulated rms

Recovering over $240 million or wronged investors

rom overseas accounts through eorts by the Oce oInternational Aairs, in collaboration with the Division o

Enorcement and oreign regulatory and law enorcement

bodies

Drating and adopting a large trader reporting rule,

designed by the Division o Trading and Markets and

the Division o Investment Management, to enhance

the agencys ability to identiy large market participants,

collect inormation on their trading, and analyze their

trading activity especially in the atermath o unusual or

suspicious activity

The agencys most signicant rulemaking task was imple-

menting many o the SEC-related mandates o the Dodd-Frank

Wall Street Reorm and Consumer Protection Act (the Dodd-

Frank Act) This has been a resource-intensive undertaking

or the SEC, but one which the Commission has approached

with energy and a detailed, cross-agency strategy that has

made or steady progress O the more than 90 mandatory

rulemaking provisions included in the Dodd-Frank Act, the

SEC had proposed or adopted rules or three-quarters by the

close o FY 2011, and had moved orward on many o the

dozens o rules stemming rom Dodd-Frank Act provisions

that give the SEC discretionary rulemaking authority, as

well Additionally, the SEC had issued 12 o the more than

20 studies and reports that it is required to complete under

the Act

The benets o OCIEs 2010 restructuring and the creationo its NEP became clear in 2011, the rst ull year in which

both were in place The NEP has improved OCIEs ability to

assess and evaluate risk, allowing the SEC to better monitor

systemically relevant institutions; aiding registrants in their

compliance eorts; and guiding OCIE as it targets examination

o high-risk entities In addition, the NEP has improved the

quality o examinations through more eective training and

hiring and new tools that streamline the examination process

OCIE also contributed to the agencys rulemaking process,

building on its role as the SECs eyes and ears in the eld to

bring a ront-line perspective to rulemakings aecting a broad

mix o agency priorities

Other oces and divisions within the SEC ocused orceully

and eectively on oversight and rulemakings in support o the

agencys investor protection and market stability initiatives

Highlights included:

Working with se l-regulating organizations, the exchanges

and the Commodity Futures Trading Commission to

address structural weaknesses revealed by the market

turmoil on May 6, 2010, and taking steps to reduce

excess market volatility going orward

Moving to better protect investors against raud by

investment proessionals, with proposals to strengthen

audits o broker-dealers and oversight o their handling o

clients securities and cash

Creating three new oces within the Division o Corpora-

tion Finance, concentrating sta ocus and agency over-

sight on portions o the nancial markets that showed

serious weakness in the nancial crisis including asset-

backed securities and the largest nancial rms through

rulemaking and enhanced disclosure reviews

2011 PERFORMANCE AND ACCOUNTABILITY REPORT 3



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Importantly, each rulemaking or report has been inormed by

a determined eort to gather criticism, insight, and ideas rom

a broad range o market participants The SEC has convened

stakeholders or a series o roundtables on key rulemakings,senior sta have met with hundreds o individuals repre-

senting investors, industry groups, aected businesses and

academics, and thousands o comments have been received

and analyzed at the agencys highest levels

The result has been a series o proposals and rules that

balance the goals o protection and stability against the

imperatives o complex, dynamic and highly-integrated

nancial markets A new whistleblower program created

in response to Dodd-Frank Act requirements, or example,

was designed to complement, rather than replace, existing

corporate compliance programs While it provides incentives

or insiders and others with inormation about unlawul conduct

to come orward, it also encourages them to rst attempt to

work within their companys own compliance structure

In response to Dodd-Frank Act requirements, the agency has

worked to implement new rules regarding key areas o the

nancial markets that were not appropriately regulated prior

to the recent crisis

The SEC is working with the Commodity Futures TradingCommission to develop the regulatory blueprint and

requirements or a transparent, ecient and competitive

marketplace or over-the-counter swaps and derivatives

Inormation about the identities, size, gatekeepers and

disciplinary history o hedge und and other private und

advisers was made available to both regulators and the

investing public, enabling more ecient investing and

more eective oversight

The SEC proposed rules that will improve the integrity

o the process which yielded so many fawed ratings

o subprime mortgage products, by increasing trans-

parency o the rating process and o the agencies that

produce ratings, and by protecting against conficts o

interest when entities or individuals provide ratings or

their clients

These are just a ew o the areas in which the SEC is turning

the legislative language o the Dodd-Frank Act into eective

and intelligent regulation

I am also pleased to report that the SEC has succeeded

in its remediation eorts and has no material weaknesses

in its internal controls over nancial reporting The SECs

independent auditor, the US Government Accountability

Oce, also arms that the SECs nancial statements are

presented airly in all material respects, in conormity with

the US generally accepted accounting principles (US

GAAP) Finally, based on our review, we can conrm that the

nancial and perormance data presented in this report are

undamentally complete, reliable, and conorm to Oce o

Management and Budget guidance

The SECs many dierent actions and initiatives com

together in service o a single, uniying principle: Investors

who uel Americas capital markets and growing businesses

must be condent that those markets are air, orderly and

ully transparent We hope that the inormation contained in

this report provides readers with a ull understanding o the

activities and challenges o the SEC in 2011 a year that saw

the SEC take great strides in a number o vital areas, and se

the stage or continued progress in 2012

Mary L. Schapiro

Chairman

November 15, 2011




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ManageMents

DiscussionanD analysis

t

he US Securities and Exchange Commissions (SEC)

Managements Discussion and Analysis (MD&A) serves as a brie

overview o this entire report It provides a concise descriptiono the agencys perormance measures, nancial statements,

systems and controls, compliance with laws and regulations, and actions

taken or planned It also provides an assessment o the SECs programs

and nancial perormance, and the eciency and eectiveness o the SECs

operations


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Vision, Mission, Vales and Goals

VisionThe SEC strives to promote a market environment

that is worthy o the publics trust and characterized

by transparency and integrity

Mission

The mission o the SEC is to protect investors;

maintain air, orderly, and ecient markets;

and acilitate capital ormation

Vales

Integrity TeamworkAccountability Fairness

Eectiveness Commitment to Excellence

In order to comply with the GPRA Modernization Act o2010, the SEC is developing an addendum to the scal

year (FY) 2010 - FY 2015 Strategic Plan. The addendum

will refect the agencys mission, vision, values, and

strategic goals through FY 2014, and highlight specic

initiatives the agency plans to undertake in the coming

24 months. Additionally, the addendum will include

an updated perormance measurement ramework,

as well as updates to existing perormance measures

that will be used to gauge the agencys progress in

accomplishing the strategic goals and outcomes. The

addendum will be nalized and available on the SECs

website at http://www.sec.gov in February 2012.

Strategic Goals and Otcomes

Goal 1: Foster and enorce compliance with

the Federal secrities laws

Otcome 1.1: The SEC osters compliance with the

Federal securities laws

Otcome 1.2: The SEC promptly detects violationso the Federal securities laws

Otcome 1.3: The SEC prosecutes violations o Federal

securities laws and holds violators accountable

Goal 2: Establish an eective reglatory environment

Otcome 2.1: The SEC establishes and maintains

a regulatory environment that promotes high-quality

disclosure, nancial reporting, and governance, and

that prevents abusive practices by registrants, nancial

intermediaries, and other market participants

Otcome 2.2: The US capital markets operate in a air,

ecient, transparent, and competitive manner, ostering

capital ormation and useul innovation

Otcome 2.3: The SEC adopts and administers rules and

regulations that enable market participants to understand

clearly their obligations under the securities laws

Goal 3: Facilitate access to the inormation investors

need to make inormed investment decisions

Otcome 3.1: Investors have access to high-quality disclo-

sure materials that are useul to investment decision making

Otcome 3.2: Agency rulemaking and investor education

programs are inormed by an understanding o the widerange o investor needs

Goal 4: Enhance the Commissions perormance throgh

eective alignment and management o hman,

inormation, and fnancial capital

Otcome 4.1: The SEC maintains a work environment

that attracts, engages, and retains a technically procient

and diverse workorce that can excel and meet the

dynamic challenges o market oversight

Otcome 4.2: The SEC retains a diverse team o

world-class leaders who provide motivation andstrategic direction to the SEC workorce

Otcome 4.3: Inormation within and available to the

SEC becomes a Commission-wide shared resource,

appropriately protected, that enables a collaborative

and knowledge-based working environment

Otcome 4.4: Resource decisions and operations

refect sound nancial and risk management principles


MANAGEMENTS DISCUSSION AND ANAlYSIS


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History and Prpose

During the peak o the Depression, Congress passed the

Securities Act o 1933 This law, together with the SecuritiesExchange Act o 1934 (Exchange Act), which created the

SEC, was designed to restore investor condence in our

capital markets by providing investors and the markets with

more reliable inormation and clear rules o honest dealing

The main purposes o these laws were to ensure that:

Companies publicly oering securities or investment

dollars must tell the public the truth about their

businesses, the securities they are selling, and the risks

involved in investing

People who sell and trade securities brokers, dealers

and exchanges must treat investors airly and honestly,

putting investors interests rst

The SEC consists o ve presidentially appointed Commis-

sioners, with staggered ve-year terms One o them is des-

ignated by the President as Chairman o the Commission (see

Appendix A: Chairman and Commissioners) President Frank-

lin Delano Roosevelt appointed Joseph P Kennedy, to serve

as the rst Chairman o the SEC

By law, no more than three o the Commissioners may belong

to the same political party The Commission convenes regularlyat meetings that are open to the public and the news media

unless the discussion pertains to condential subjects, such

as whether to begin an enorcement investigation

Each year the SEC brings hundreds o civil enorcement

actions against individuals and companies or violation

o securities laws Examples o inractions include insider

trading, accounting raud, and providing alse or misleading

inormation about securities or the companies that issue

them One o the major sources o inormation that the SEC

relies on to bring enorcement action is investors themselves another reason that educated and careul investors are so

critical to the unctioning o ecient markets To help inorm

investors, the SEC oers the public a wealth o educational

inormation on its website athttp://www.investor.gov , as well

as an online database o disclosure documents at http://

www.sec.gov/edgarthat public companies and other market

participants are required to le with the SEC




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HI

SEC Headquarters

New York Regional OfficeNew York, New Jersey

Boston Regional OfficeConnecticut, Maine, Massachusetts, New Hampshire, Vermont, Rhode Island

Philadelphia Regional OfficeDelaware, Maryland, Pennsylvania, Virginia, West Virginia, District of Columbia

Miami Regional OfficeFlorida, Mississippi, Louisiana, U.S. Virgin Islands, Puerto Rico

Atlanta Regional OfficeGeorgia, North Carolina, South Carolina, Tennessee, Alabama

Chicago Regional OfficeIllinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, Ohio, Wisconsin

Denver Regional OfficeColorado, Kansas, Nebraska, New Mexico, North Dakota, S outh Dakota, Wyoming

Fort Worth Regional OfficeTexas, Oklahoma, Arkansas, Kansas (except for the exam program which is administered by the Denver Regional Office)

Salt Lake Regional OfficeUtah

Los Angeles Regional OfficeArizona, Hawaii, Guam, Nevada, Southern California (zip codes 93599 and below, except for 93200-93299)

San Francisco Regional OfficeWashington, Oregon, Alaska, Montana, Idaho, Northern California (zip codes 93600 and up, plus 93200-93299)

AK OR

WA ND

UT

SD

NE IA

NV

AZ

TX

OKAR

LAMS

FL

GASC

NC

VAKY

IL

WI

MI

WVNJ

MT

WY

NM

AL

IN

DC

OH PA

MA

RI

ID

CO

MD

MN

MOKS

NY

MEVT

NH

CT

DE

TN

PR

SouthernCA

NorthernCA

SEC HEADQUARTERS AND REGIONAL OFFICE LOCATIONS

CHART 1.1

Organizational Strctre and Resorces



SEC Ofce Locations

The SECs headquarters are in Washington, DC, and it has 11 regional oces located throughout the country The regiona

oces are responsible or investigating and litigating potential violations o the securities laws The oces also have examination

sta, who impact regulated entities such as investment advisers, investment companies and broker-dealers The map below

shows the locations o the regional oces, and the states that are included in each region


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SEC Organization Strctre

The SEC is an independent Federal agency established pursuant to the Exchange Act It is headed by a bipartisan ve-member

Commission, comprised o the Chairman and our Commissioners, who are appointed by the President and conrmed bythe Senate (seeAppendix A: Chairman and Commissioners) The Chairman serves as the Chie Executive Ocer The SEC is

organized into ve main divisions: Enorcement; Corporation Finance; Investment Management; Trading and Markets; and Risk,

Strategy, and Financial Innovation In FY 2011, the SECs budgetary authority amounted to $1,673 million, consisting o an

appropriation or salaries and expenses in the amount o $1,185 million, carryover balances o $36 million or the expenses o

the agency, and $452 million in the Investor Protection Fund In FY 2011, the agency employed 3,844 ull-time equivalents (FTE),

including 3,806 permanent and 38 temporary FTEs The below SEC organization chart is as o September 30, 2011

SEC ORGANIZATION CHART

CHART 1.2




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SEC Programs

The SEC organizes its divisions and oices under the 10 major programs outlined below in Table 1.1, SEC Programs and

Program Descriptions

TABLE 1.1

SEC PROGRAMS AND PROGRAM DESCRIPTIONS

Program Divisions and Oces Program Descriptions

Enorcement Division o Enorcement and

enorcement sta within the

SECs regional oces

This program investigates and brings civil charges in Federal district court or in administrative

proceedings based on violations o the Federal securities laws An integral part o the programs

unction is to seek penalties and the disgorgement o ill-gotten gains in order to return unds

to harmed investors Also organized within the Enorcement program is the new Oce o the

Whistleblower, created to administer the SECs Whistleblower Program that rewards individuals

who provide the agency with tips that lead to successul enorcement actions under the

Dodd-Frank Act

ComplianceInspections and

Examinations

Oce o ComplianceInspections and Examinations

and examinations sta within

the SECs regional oces

This program conducts the SECs examinations o registrants such as investment advisers,investment companies, broker-dealers, sel-regulatory organizations (SROs), credit rating

agencies, transer agents, and clearing agencies

Corporation Finance Division o Corporation

Finance

This program perorms unctions to assure that investors have access to materially complete

and accurate inormation, and to deter raud and misrepresentation in the public oering,

trading, voting, and tendering o securities

Trading and Markets Division o Trading and

Markets

This program conducts activities to establish and maintain standards or air, orderly and ecient

markets, while ostering investor protection and condence in the markets

Investment

Management

Division o Investment

Management

This program seeks to minimize the nancial risks to investors rom raud, mismanagement,

sel-dealing, and misleading or incomplete disclosure in the investment company and

investment adviser segments o the nancial services industry

Risk, Strategy, and

Financial Innovation

Division o Risk, Strategy, and

Financial Innovation

The division provides economic analyses as part o Commissions rulemaking process; supports

its rule review, examination and enorcement programs with data-driven, risk-based analytical

methods; and oversees its Tips, Complaints and Reerrals (TCR) and interactive data programs

General Counsel Oce o the General Counsel The Oce o the General Counsel (OGC) serves as the chie legal ocer o the Commission and

provides independent legal analysis and advice to the Chairman, Commissioners, and operating

divisions on all aspects o the Commissions activities The General Counsel also deends the

Commission in Federal district courts, represents the Commission in all appellate matters and

amicus curiae lings, and oversees the SECs bankruptcy program

Other Program

Oces

Oce o the Chie

Accountant;

Oce o Investor

Education and

Advocacy;

Oce o International

Aairs; and

Oce o Administrative

Law Judges

These oces are responsible or:

serving as the chie advisor to the Commission on all accounting and auditing policy and

overseeing private sector standards setting;

serving investors who contact the SEC, ensuring that retail investors perspectives inorm

the Commissions regulatory policies and disclosure program, and improving investors

nancial literacy;

advancing international regulatory and enorcement cooperation, promoting converged high

regulatory standards worldwide, and acilitating technical assistance programs in oreign

countries; and

adjudicating allegations o securities law violations

(Continued on next page)




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TABLE 1.1 Continued rom previous page

Program Divisions and Oces Program Descriptions

Agency Direction

and Administrative

Support

The Chairman and

Commission;

Oce o Legislative and

Intergovernmental Aairs;

Oce o Public Aairs;

Oce o the Secretary;

Oce o the Chie

Operating Ocer;

Oce o Inormation

Technology;

Oce o Freedom oInormation Act, Records

Management, and

Security;

Oce o Financial

Management;

Oce o the Executive

Director1;

Oce o Human

Resources;

Oce o Administrative

Services;

Oce o Equal

Employment Opportunity;

and

Oce o Minority and

Women Inclusion

The Chairman is responsible or overseeing all aspects o agency operations, and the Chairman

and Commissioners are responsible or the review and approval o enorcement cases and

ormal orders o investigation and the development, consideration, and execution o policies and

rules The other oces in Agency Direction and Administrative Support are responsible or:

working with Members o Congress on issues that aect the Commission;

coordinating the SECs communications with the media, the general public, and oreign

visitors;

reviewing all documents issued by the Commission, and preparing and maintaining records

o Commission actions;

maximizing the use o SEC resources by overseeing the strategic planning, inormation

technology, nancial management, records management, human resources, and

administrative unctions o the agency;

ensuring that the SEC is an equal opportunity employer in ull compliance with all Federal

equal employment opportunity laws; and

enhancing the diversity o the SECs workorce, contractors, and regulated entities in

accordance with existing Federal laws and regulations

Inspector General Oce o Inspector General The Oce o Inspector General (OIG) is an independent oce that conducts audits o programs

and operations o the SEC and investigations into allegations o misconduct by sta or

contractors The mission o OIG is to detect raud, waste, and abuse and to promote integrity,

economy, eciency, and eectiveness in the SECs programs and operations

As shown in the Statement o Net Cost, on page 125, the SEC presents its net costs o operations by the programs outlined above

consistent with the presentation used by the agency in submitting its budget requests A detailed discussion o program achievements

and program contributions to accomplishing the mission o the SEC can be ound in the Perormance Section

1 The Oce o the Executive Director was eliminated in FY 2011, but the costs o the Oce during the early months o the scal year are included under

Agency Direction and Administrative Support. The Oce o the Executive Director was responsible or management o the agencys human resources,

budget management, and administrative services unctions. When the Oce was eliminated, these unctions were transerred under the Oce o the

Chie Operating Ocer.




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A More Modern and Eective SEC

In scal year 2011, the US Securities and Exchange

Commission continued to improve its eectiveness in pursuit

o its investor protection and market integrity missions This

progress was the result o an ongoing, comprehensive eort

to improve basic agency unctions and organization; align

regulation, enorcement and oversight strategies and priorities

with evolving nancial market conditions; and equip the SECs

3,800 proessionals with the tools and training required to

perorm at the highest level

Institutional enhancements begun two years ago continuedto bear ruit, as a changing culture increased the capacity

and improved the perormance o the SEC New hiring and

training strategies lited sta perormance while the creation

o specialized teams in the enorcement and examination

programs helped the agency increase in-house expertise in

those areas Reorganization o key divisions and oces and

an increased emphasis on collaboration and intra-agency

communication made the SEC more creative and responsive

Core unctions, including examination and enorcement,

benetted rom new and upgraded inormation systemswhich allowed sta to ocus resources on high-risk registrants

and to discover suspicious conduct more rapidly Other

divisions and oces looked beyond traditional priorities to

identiy emerging threats and opportunities within the nancial

markets, adjusting strategies and priorities to better protect

investors and markets in a rapidly-changing environment

Recognizing the historic signicance o the Dodd-Frank Wall

Street Reorm and Consumer Protection Act (the Dodd-Frank

Act), the SEC supported its many Dodd-Frank Act-related

rulemakings with aggressive eorts to solicit and considerideas and criticisms rom market participants o all types,

and to align action with domestic and oreign regulators

(with whom the SEC must coordinate policy in order to limit

exploitable regulatory inconsistencies)

And the SEC continued to upgrade human resources

and back oce unctions, improving resource allocation,

increasing the value o the SECs human capital, and allowing

sta to ocus on the SECs investor protection and market

stability mission all while capturing savings through urthe

eciencies in administrative tasks

It should be noted, however, that savings and eciencies

alone will not ree up sucient resources to allow the SEC to

eectively carry out a mission that is expanding signicantly as

a result o the Dodd-Frank Act

The SEC is better positioned today than it has been in many

years to respond quickly to events and developments in the

nancial world; to keep regulatory pace with the continuing

evolution o the nancial markets; and to deter, identiy, andpursue wrongdoers It is important that the agencys unding

increases in step with these increasing responsibilities, in orde

to ensure that investors and markets continue to benet rom

the SECs improving perormance

Enorcement: A Record Perormance

A reorganized Division o Enorcement is collaborating more

closely than ever with other SEC oces and increasingly

utilizing technology as a way to identiy and halt unlawu

activity beore it occurs or results in additional investor harmThe Divisions aggressive strategy sends a clear message that

securities law violations will be discovered and punished

Enorcements broad ocus has meant successul actions

against a wide range o unlawul conduct, ranging rom

raud committed by large nancial institutions whose actions

contributed to the nancial crisis including Countrywide

Financial, JP Morgan, and Wachovia to smaller rauds that

did not generate headlines but nonetheless threatened the

savings o vulnerable individuals

Having completed the most signicant restructuring since its

establishment almost 40 years ago, Enorcement continued

to enhance its eectiveness by ocusing resources on the

misconduct that most harms investors and markets, by

developing risk-based initiatives that anticipate suspicious

behavior beore a raud takes hold, and by using the agencys

new IT resources to create analytical tools and to process the

increasing amounts o data that accompany its investigations

FY 2011 Year in Review




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The Division o Enorcement has built closer ties with the

Oce o Compliance Inspections and Examinations (OCIE),

as well And, the Division is developing specialized skills and

new approaches or investigating possible violations in key

areas such as valuation, aberrational perormance by hedge

unds and investment advisers, and microcap raud

These changes have allowed Enorcement to move aster and

more strategically to attack securities laws violations, and to

achieve record results in the process

The SEC brought 735 enorcement actions in FY 2011,

more than have ever been led by the Commission in a scal

year Eighty-ve o those actions were designated National

Priority Cases the Divisions most important and complex

In addition to the improvement in the quantity and quality o

the led enorcement actions, the Division obtained orders or

$28 billion in penalties and disgorgement; utilized enhanced

remedies available under the Dodd-Frank Act to bar numerous

wrongdoers rom uture work in the securities industry; and

obtained relie that sent a strong deterrent message, including

asset reezes, trading suspensions, and penny stock bars

A uller description o Division o Enorcement actions led

in FY 2011 can be ound inAppendix B: Major Enorcement

Cases, but this brie survey conveys the breadth and

eectiveness o those eorts:

Financial Crisis

Since 2008, the SEC has led 36 actions against 81 individual

and corporate deendants alleging a wide range o miscon-

duct arising rom the nancial crisis Fiteen o these actions

were led in 2011, up rom 12 led in 2010

Among the most signicant o these actions was that

led against JP Morgan Securities, LLC, or misleading

investors in a complex mortgage securities transaction

executed just as the housing market was starting to

plummet The SEC charged JP Morgan or structuring

and marketing a synthetic collateralized debt obligation

(CDO) without inorming investors that a hedge und

helped select the assets in the CDO portolio and that

the und had a short position in more than hal o those

assets JP Morgan settled the SECs charges by paying

$1536 million, which represented a ull return o losses

to harmed investors JP Morgan also agreed to improve

its processes or the review and approval o mortgage

securities transactions and to return more than $56million to investors who were harmed in a second CDO

transaction

Countrywide Financial Chie Executive Ocer (CEO)

Angelo Mozilo agreed to pay a record $225 million penalty

to settle SEC charges that he and two other ormer

Countrywide executives ailed to disclose to investors

the signicant credit risk that Countrywide was taking

on as it increased its share o the subprime mortgage

market Mozilo was permanently barred rom serving as

an ocer or director o a publicly-traded company and

agreed to disgorge $45 million in ill-gotten gains A totalo $675 million is being returned to harmed investors

The SEC settled charges led previously against Morgan

Keegan & Company and Morgan Asset Management,

which agreed to pay $200 million to settle raud charges

Two Morgan Keegan employees also agreed to pay

penalties or their alleged misconduct, including one who

is now barred rom the securities industry The Memphis-




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based rms, ormer portolio manager James C Kelsoe

Jr and comptroller Joseph Thompson Weller were

accused by the SEC o causing the alse valuation o

subprime mortgage-backed securities in ve unds

managed by Morgan Asset Management, rom January

2007 to July 2007 The SECs order issued in settling the

charges also ound that Morgan Keegan ailed to employ

reasonable pricing procedures and consequently did not

calculate accurate net asset values (NAV) or the unds

Morgan Keegan nevertheless published the inaccurate

daily NAVs and sold shares to investors based on the

infated prices

In separate actions, the SEC charged RBC Capital

Markets LLC and brokerage rm Stiel, Nicolaus & Co

with derauding ve Wisconsin school districts by sellingthem unsuitably risky and complex CDO investments

Stiel and ormer Stiel Senior Vice President David W

Noack were charged with misrepresenting the risk o the

investments and ailing to disclose material acts to the

school districts The sales took place despite signicant

concerns within RBC Capital about the suitability o

the product or municipalities like the school districts

RBC Capital agreed to settle the SECs charges by

paying a total o $304 million, which will be distributed in

varying amounts to the harmed school districts through a

Fair Fund The SECs case against Stiel, Nicolaus & Co

is continuing

The SEC charged Wells Fargo Securities LLC ormerly

known as Wachovia Capital Markets LLC with

misconduct by Wachovia in the sale o two CDOs tied

to the perormance o residential mortgage-backed

securities as the housing market was beginning to show

signs o distress The SECs order ound that Wachovia

violated securities laws by charging undisclosed excessive

markups in the sale o certain interests to investors in

one CDO, and by misrepresenting to investors in another

CDO the value at which it had acquired assets romaliates In settling the action, Wells Fargo agreed to

pay more than $11 million in disgorgement and penalties,

most o which will be returned to harmed investors

Fradlent Schemes

Supporting investor condence in the nancial markets means

bringing cases not only against major nancial rms and theirexecutives, but also against individuals and smaller rms

whose misdeeds can steal a lietimes savings or devastate an

investors uture

The SEC charged three senior executives at the Akron

Ohio-based Fair Finance Company with orchestrating a

$230 million raudulent scheme involving at least 5,200

investors many o them elderly The SEC alleges tha

ater purchasing Fair Finance Company, Chie Executive

Ocer Timothy S Durham, Chairman James F Cochran

and Chie Financial Ocer Rick D Snow deceived

investors, selling interest-bearing certicates whoseproceeds were supposed to be used to purchase and

service discounted consumer nance contracts Instead

Durham and Cochran schemed to divert investo

proceeds to themselves and others, as well as to

struggling and unprotable entities that they controlled

The SEC charged internet-based investment compan

Imperia Invest IBC with securities raud and obtained

an emergency court order reezing Imperias assets

The SEC alleged that Imperia solicited several millio

dollars rom US investors and promised them returns o

12 percent per day while in reality siphoning the undsinto oreign bank accounts and not paying a single penny

back Imperia allegedly raised more than $7 million rom

approximately 14,000 investors worldwide More than

hal the unds were collected rom US investors who are

members o the Dea community

Insider Trading

The Commission has aggressively pursued practices tha

damage the integrity o nancial markets and discourage

investors who seek a air and level playing eld Most notablythe SEC discovered and developed inormation that ultimately

led to criminal convictions or Galleon hedge und ounder Ra

Rajaratnam and others, and to Commission charges against

22 individuals including high-ranking corporate executives

and hedge und managers and against seven entities

involved in the scheme (in November 2011, Rajaratnam was

ordered to pay a record $928 million to resolve SEC charges

in the case)




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There have been other important cases, as well

The SEC charged a ormer Mariner Energy Inc board

member and his son with insider trading on condential

inormation about an impending takeover o the oil andgas company Acting on a tip rom his ather, H Clayton

Peterson, son Drew Clayton Peterson purchased Mariner

Energy stock or himsel, his relatives, his clients and a

close riend in advance o an announcement that Apache

Corporation would be acquiring Mariner Peterson also

tipped several other close riends, who traded on the

nonpublic inormation ahead o the April 2010 acquisition

announcement The insider trading by the Petersons and

others generated more than $52 million in illicit prots

The SEC charged ormer Nasdaq managing director

Donald L Johnson with insider trading on condential

inormation he stole while working in two units at Nasdaq

that communicated with companies in advance o

market-moving public announcements The SEC alleged

that Johnson used the stolen inormation to trade in

the stock o six companies on at least nine occasions,

realizing illicit prots o more than $755,000

The SEC charged Cheng Yi Liang, a chemist at the

US Food and Drug Administration (FDA), with insider

trading on condential inormation concerning upcoming

announcements o FDA drug approval decisions,

generating more than $36 million in illicit prots and

avoided losses Liang illegally traded in advance o

28 public announcements about FDA drug approval

decisions, involving 20 publicly-traded companies, or

prots and losses avoided totaling over $37 million In

each instance, Liang traded in the same direction as the

announcement Liang went to great lengths to conceal

his insider trading, including trading in multiple accounts,

none o which were in his name

Mnicipal Secrities

The SEC ocused increased attention on the lightly-regulated

municipal securities market, in which well-connected

individuals and rms use infuence and collusion to win

lucrative und management contracts or otherwise short-

change the municipalities whose interests they are supposed

to be serving

In a series o cases, the SEC charged JP Morgan

Securities LLC, UBS Financial Services Inc, and Banc

o America Securities, LLC with rigging more than 200

municipal bond re-investment transactions, generating

tens o millions o dollars in ill-gotten gains Together, the

settlements o these three cases resulted in the return

o $134 million to harmed municipalities and conduit

borrowers in more than 40 states In addition, the

companies paid a total o $391 million to settle parallel

cases brought by other Federal and state authorities

Misleading Investors

The SEC continued its vigilant enorcement o regulations

regarding entities such as mutual unds, investment advisers,

and broker-dealers who are entrusted with a signicant portion

o the investing publics assets

The Commission charged Charles Schwab Investment

Management and Charles Schwab & Co Inc with

making misleading statements about the Schwab

YieldPlus Fund at one time, the largest ultra-short bond

und The misleading statements included descriptions

o the und as a cash alternative that oered only slightly

higher risk than a money market und The und suered

a signicant decline during the credit crisis o 2007 and

2008 The Schwab entities agreed to pay more than

$118 million to settle the SECs charges The SEC also

charged the responsible Schwab executives, who are

currently litigating the SECs claims

OCIE Reerrals

Increased cooperation with OCIE, which collaborates with

Enorcement when its examinations reveal suspicious activity,

resulted in several important cases, including the Stiel,

Nicolaus & Co case described above

Three AXA Rosenberg entities, as well as the co-

ounder o the rm, Barr Rosenberg, were charged with

securities raud or concealing a signicant error in the

computer code o the quantitative investment model

that they developed and used to manage client assets

AXA Rosenberg agreed to settle the SEC charges by

paying $217 million to cover investor losses, to pay an

additional $25 million penalty and to take other remedial




18/212

steps Separately, Barr Rosenberg agreed to settle the

SECs charges by paying a $25 million penalty and

agreeing to be barred rom the securities industry

The SEC led an emergency action and obtained emer-

gency relie to halt a multi-million dollar misappropriation

o investor assets by registered investment adviser MK

Capital Management, LLC and its principal, Francisco

Illarramendi The Commission subsequently amended

its complaint to allege that Illarramendi and MK Capital

had misappropriated investor assets and misused two

hedge unds they managed in a Ponzi scheme involving

hundreds o millions o dollars The SEC obtained a court

order reezing the assets o the hedge unds and ordered

that all assets o the hedge unds, including $230 million

held in oshore accounts, be repatriated to the UnitedStates Illarramendi was permanently barred by the SEC

rom serving in the securities industry

The Division o Enorcements 2011 perormance reinorces

what a growing number o individuals and entities are

discovering: recent improvements in the Divisions structure,

expertise, management, technology, and sta capacity are

allowing the Commission not only to bring more and more

complex cases, but to obtain better results on investors

behal

OCIE: Protecting Investors throghMore Eective Examinations

In 2011, OCIE signicantly expanded its ability to contribute

to the SECs mission improving its ability to identiy risk and

target examinations and resources accordingly, changing

structure to more eectively acquire and deploy expertise,

and collaborating across the agency to improve both the

examination and the rulemaking processes OCIEs National

Exam Program (NEP) anchored this improving perormance

by weaving a number o key initiatives into a single eective

eort

Collaboration with the Division o Risk, Strategy and Financial

Innovation (RSFI) allows the NEP to continuously improve its

targeting and risk indicators and to ocus exams on registrants

that are most likely to merit them A recently-established

Oce o Risk Analysis and Surveillance within OCIE guides

that targeting strategy across dierent program areas and

sharpens ocus on registrants and practices that pose the

greatest risk to investors and market integrity

As part o its risk assessment eorts, OCIE began developing

risk proles o systemically relevant institutions, including large

broker-dealers, clearing agencies and exchanges OCIE has

completed risk proles o each o the 21 national securities

exchanges and sel regulatory organizations (SROs), enabling

NEP to understand individual risk, and risk among the

exchanges as a group OCIE has audited all ten nationally

recognized statistical rating organizations, and publicly

reported the ndings OCIE has begun risk-monitoring o

clearing agencies and it is moving to develop risk proles o

the largest and most systemically signicant broker-dealers

Continuing improvements in risk-based targeting allow theNEP to extend resources and stang strained by the continued

growth in the number and complexity o the registrants OCIE

is charged with examining Further, specialized groups

now ocus on complex and high-risk areas o the nancia

marketplace

OCIE also is working to extend its capacity by establishing

an inrastructure that refects the SECs increasingly diverse

registrant population, including private und advisers, credi

rating agencies, and quantitative/high-requency trading

advisers

A major restructuring is underway within OCIE, including the

development o specialized working groups (SWGs) in six key

areas and over thirty other signicant improvement initiatives

The SWGs will serve as orums in which the NEP and othe

agency sta can collaborate and discuss current issues

initiatives, and concerns related to each specialized area

They will serve as an ongoing resource or training and o

disseminating this specialized knowledge, as well

OCIE is hiring exam sta with industry experience and

specialized expertise in targeted areas, and enhancing the

resources and tools available to examination sta These

eorts also include new training: OCIE has worked with

SEC University to develop targeted training in areas like

risk management and on specic topics related to new

responsibilities created by the Dodd-Frank Act, such as

examining private und advisers Development o a new

certied examiner program is underway, as well




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The examination process itsel has been improved Once

examination targets are identied, an open architecture stang

system allows the NEP to assemble more eective teams by

bringing together dierent combinations o individuals, with

varying areas o expertise, to address the unique challenges

each examination presents

OCIE is increasingly collaborating with other organizations,

inside and outside the SEC, to improve the quality o

examinations and o disclosures made by registered entities

The Oce is reaching out to state regulators, local and national

law enorcement agencies and where appropriate oreign

regulators, sharing inormation and examinations strategies

Within the SEC, OCIE is collaborating with the Division o

Trading and Markets (TM) on examinations o broker-dealers,

SROs, and transer agents This allows OCIE to identiy

important areas o ocus and has led to TM requests that rms

change certain practices OCIE also teams with the Division

o Investment Management (IM) or examinations o various

investment unds and their management, collaborating on

reviews o money market und lings and using data provided

by IM in its risk assessment o registrants

Key OCIE actions that led to Division o Enorcement action

include:

Identiying the sale o millions o dollars o micro-cap

securities through alse and misleading statements,

ollowed by swit action to protect investors assets,

including reezes, trading halts and/or nes The micro-

cap review demonstrates the benets o OCIEs recently-

created specialized groups, one o which ocuses on

these securities

Discovering that a broker was churning two accounts

owned by the Sisters o Charity one account or care o

nuns in assisted living acilities and a second supporting

the sisters charitable endeavors in order to generateexcess commissions or the broker

Identiying inormation that led to the charging o

Raymond James with misrepresenting and omitting

material inormation in connection with the sale to

customers o over $24 billion in market value o auction

rate securities

OCIEs eort to promote voluntary compliance, good gover-

nance and risk management within the industry serves both

investors and registrants: it diminishes the need or ormal

action while ensuring that investors have access to accurate,

timely inormation As part o this eort, OCIE has conducted

Chie Compliance Ocer Outreach (CCOutreach) events

designed to encourage open communications and coordina-

tion on compliance issues between the SEC and the mutual

und, investment adviser, and broker-dealer industries OCIE

published two public reports as part o a new initiative to

create more transparency about issues identied in its exami-

nations Additionally, OCIE created an expansive large-rm

monitoring program and improved communication eorts with

senior management and und boards at a number o large

organizations A primary goal o these eorts is to increase

awareness, engagement and support on key risk and regula-

tory issues

Finally, OCIE is contributing to the SECs rulemaking process,

imparting practical knowledge and inormation gathered

during examinations while taking part in over 50 working

groups implementing various Dodd-Frank Act rulemaking

provisions Other rulemakings have benetted rom signicant

OCIE input, as well, including large trader reporting rules,

amendments to the Advisers Act and the consolidated audittrail rule proposal




20/212

Operating Divisions:Progress throghot the Agency

Enorcement, examination and rulemaking are the SECs mostvisible unctions However, the importance o other eorts

cannot be overstated The SEC ensures that investors have

access to timely, accurate and complete inormation, that

markets unction eciently, that regulations are anchored in

sound economics and that the agency as a whole is keeping

up with changes in the nancial marketplace

The Division o Corporation Finance (CF), which oversees

corporate disclosure o inormation, established new oces

concerned with three vital acets o the nancial world: an

oce ocused on the largest nancial institutions; the Oce o

Structured Finance, which deals with disclosure reviews and

policy-making in asset-backed securities and other structured

products; and the Oce o Capital Market Trends These

oces are increasing the attention paid to market sectors

that have proved systemically signicant in recent years,

aiding rulemaking and improving the SECs amiliarity with and

expertise in these increasingly important areas

CFs Oce o Disclosure Operations worked in 2011 to

enhance investor protection by targeting specic disclosure

issues that had previously received little attention: requesting

disclosure o overseas cash holdings which, i repatriated,would result in material, negative consequences; questioning

whether current litigation contingency disclosure practices

comply with existing requirements; and working with

Enorcement, the Oce o the Chie Accountant (OCA) and

the Oce o International Aairs (OIA) to combat an uptick in

problems with reverse mergers by stepping up scrutiny o the

Form 8-Ks led in their wake

In support o the SECs call to acilitate capital ormation or

small enterprises, CF also began reviewing restrictions on

communications in public oerings, the impact o the banon general solicitation in private oerings, triggers or public

reporting under Section 12(g) o the Exchange Act and

regulatory questions around subjects including secondary

trading platorms and new capital raising strategies

In addition to very signicant rulemaking responsibilities

regarding derivatives trading, the Division o Trading and

Markets (TM) addressed a broad spectrum o issues as it

worked to help stabilize the nancial markets and protect the

interests o large and retail investors

TM received and processed over 2,000 SRO lings rom

exchanges, clearing agencies, the Financial Industry Regu-

latory Authority (FINRA), and the Municipal Securities Rule

making Board (MSRB), including those regarding complex ee

structures, new products, and revamped governance struc

tures TM led Commission monitoring o and, as appropriate

response to market activities in connection with signicant

events, including Hurricane Irene and the August 2011 market

volatility, helping markets continue to unction normally despite

signicant stress

TM also continued to solicit stakeholder views on the structure

o todays nancial markets and on potential changes tha

might improve market integrity or help maintain a level playing

eld or investors o all types

TM established a new Oce o Derivatives Policy to ocus on

implementing the derivatives provisions o the Dodd-Frank

Act TM also continued to expand the clearance and settle

ment program, an eort that culminated in the establishment

o a new Oce o Clearance and Settlement Traditionally

ocused on securities clearing agencies and transer agents

the Oce o Clearance and Settlement is now also respon-sible or implementing Dodd-Frank Act regulations or clearing

agencies that clear security-based swaps, and or overseeing

security-based swap data repositories

The Dodd-Frank Act expanded the SECs regulatory authority

over previously-exempted advisers to hedge unds and othe

private unds, an important expansion o agency responsibility

The Division o Investment Management (IM) ormed a

new Private Funds group headed by an experienced hedge

und attorney to spearhead this regulatory program and to

gear up or the task o collecting and conveying inormationthat will be reported to the SEC by these entities or use by the

Financial Stability Oversight Council (FSOC)

IM also worked with FSOC members to share inormation

newly led by money market unds with the SEC and the

related analyses This has acilitated critical consultations

with other agencies responsible or monitoring systemic risk

related to the European debt crisis




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The Division o Risk, Strategy, and Financial Innovation

(RSFI) was created in 2009 as the SECs internal think tank,

and provides the agency with sophisticated analyses that

integrate economic, nancial, and legal expertise A linchpin o

the SECs eort to break down silos and bring together critical

data rom across the agency, RSFI is the business owner o

the SECs new TCR (tips, complaints and reerrals) System,

generating data and statistics on the systems operations and

helping to dene urther system development

RSFI provided critical support in the successul ederal insider

trading prosecutions o Raj Rajaratnam and Winired Jiau,

analyzing expert testimony and other documents proered

by the deense and allowing prosecutors to successully

challenge key portions o the deenses strategies

The Division has contributed substantially to the Dodd-Frank

Act rulemaking process, particularly with regard to the over-

the-counter derivatives market And RSFI is at the center

o the SECs work to provide detailed economic analysis o

proposed agency actions

RSFI also worked closely with OCIE, rening risk models that

help OCIE direct exam resources in light o current trends and

suspected abuses, and it participated in exams as part o

RSFIs work developing tools, algorithms, and analytics that

enhance the eectiveness o eld teams at these exams

Consistent with its think tank role, RSFI economists con-

ducted research on nancial and economic issues relevant to

the SECs mission, or publication in peer-reviewed academic

journals, on relevant subjects such as Short Selling in Initial

Public Oerings and Venture Capital Reputation, Post-IPO

Perormance, and Corporate Governance

The Oce o the Chie Accontant (OCA) continued to

coordinate and monitor progress towards convergence o US

Generally Accepted Accounting Principles and InternationalFinancial Reporting Standards (IFRS) OCA published both a

report on progress against the stas IFRS work plan and a Sta

Paper exploring a possible method or incorporation o IFRS

OCA also worked with the SECs Oce o International

Aairs (OIA) to develop recommendations and a nal report

regarding the IFRS Monitoring Board Governance Review

In connection with OCAs role in overseeing the Public Company

Accounting Oversight Board (PCAOB), the SEC approved

a PCAOB rulemaking to update its Audit Risk Assessment

Standards These standards are designed to benet investors

by enhancing the eectiveness o the auditors assessment o

and response to the risks o material misstatement

The SEC also approved temporary rules establishing the

PCAOBs Interim Program o Inspection or Audits o Broker-

Dealers These rules are part o the PCAOBs initial steps to

implement the expanded authority over auditors o broker-

dealers granted it in the Dodd-Frank Act

Since the Commissions appointment o three new PCAOB

Board Members in February, 2011, OCA has been working

closely with the new Board and PCAOB sta on several Board

initiatives, including its consideration o potential changes to

the auditors reporting model

OCA is also working with the PCAOB and the SECs OIA

on continuing negotiations with certain jurisdictions most

notably in the European Union and China aimed at obtaining

or the PCAOB the ability to adequately inspect audits by

registrants accountants These negotiations occur at a time

when the reliability o nancial reports and audit practices in

some jurisdictions has been called into question, leading to

investor losses and the de-listing o a number o entities

In addition to its work with OCA, OIA is working closely with

Enorcement to ensure that the SECs reach is as global as the

nancial markets have become tracing and reezing $317

million o raud proceeds located overseas and repatriating

$241 million to harmed investors It helped coordinate more

than one thousand assistance requests between Enorcement

and its oreign counterparts, while working to increase rom

71 nations to 80 the number o signatories to a memorandum

o understanding regarding compliance with and enorcement

o securities laws In addition, OIA brokered inormation-sharing agreements between the PCAOB and the United

Kingdom and the Swiss Audit Oversight Authorities, allowing

the PCAOB to inspect the auditors o oreign companies listed

on US exchanges and registered with the SEC




22/212

OIA also created and led a Task Force on International

Implementation an intra-agency task orce coordinating the

international aspects o the Dodd-Frank Act The Task Forces

work is diminishing the risk that Dodd-Frank Act regulation

will confict with regulations in other countries, and create the

potential or regulatory arbitrage

The Oce o Investor Edcation and Advocacy (OIEA)

redesigned and expanded its investorgov website, adding

inormation on a variety o topics, and materials aimed at the

particular needs o specic groups, such as service members,

teachers and retirees OIEA completed a Dodd-Frank Act

study on ways to improve investors access to registration

inormation about investment proessionals In addition, it

began a multi-part study on nancial literacy among retail

investors underway

A Critical Market Response:May 6th and Market Condence

In 2011, the SEC continued eorts to address the unusual

market volatility that occurred on May 6, 2010

At 2:42 on the aternoon o May 6, 2010, stock prices on

US exchanges began to all with almost unprecedentedspeed 573 points in ve minutes leaving the nations

most prominent stock index down over 900 points rom the

previous days close At the worst end o the spectrum, more

than 300 securities suered declines o more than 60 percent

And then, just as suddenly, the markets reversed themselves,

recovering to pre-crash levels within minutes

These unusual price swings caused signicant harm to many

investors, including those who lost money when stop loss

programs led to automatic selling during the dramatic bu

quickly reversed decline In addition to nancial losses, the

sudden disruptions also delivered a signicant blow to the

condence o investors o all types individual retail investors

large institutions and all those in between

Recognizing the signicance o the markets unusua

fuctuations, the SEC acted immediately, working with the

exchanges, FINRA and the Commodity Futures Trading

Commission (CFTC) to determine causes o the volatility and

to take action to reduce the possibility o other, similar, events

occurring in the uture

Beginning in May 2010, the SEC spearheaded by the

Division o Trading and Markets joined with FINRA and the

exchanges to propose the single-stock circuit breakers which

would ultimately be applied to most US equity securities

On October 1, 2010, stas o the SEC and CFTC presented

a comprehensive analysis o the causes and consequence o

the May 6 volatility, as the SECs eorts to enhance marke

integrity continued into the new scal year

In 2011, the SEC adopted a rule eectively prohibiting

brokers and dealers rom oering customers unltered

or naked access to the exchanges by requiring tha

risk controls designed to prevent inadvertent risk

threats to market stability be in place beore access is

provided The rule requires brokers to put in place risk

management controls and supervisory procedures to

help prevent erroneous orders, ensure compliance with

regulatory requirements, and enorce pre-set credit o

capital thresholds

The SEC approved rules proposed by FINRA and the

exchanges that provide more certainty regarding the

circumstances under which trades will be consideredclearly erroneous and canceled Ater May 6, a variety

o market participants reported that the uncertainty

over which trades would be canceled contributed to

participants decision to withdraw rom trading, urthe

exacerbating the markets volatility

The SEC also approved rules proposed by FINRA and

the exchanges requiring that market makers maintain a




23/212

quote within a certain percentage o the prevailing bid

and oer, which reduces the likelihood that stub quotes

oers to buy or sell a stock at a price so ar away

rom the prevailing market that they are not intended

to be executed will be executed against Executions

against quotes as low as a penny a share and as high

as $100,000 represented a signicant proportion o the

trades that were executed at extreme prices on May 6

and were subsequently broken

The SEC considered a proposed national market system

(NMS) plan led by national securities exchanges and

FINRA that would establish a new limit up-limit down

mechanism to address extraordinary market volatility in

US equity markets Limit up-limit down would prevent

trades in listed equity securities rom occurring outside aspecied price band, which would be set at a percentage

level above and below the average price o the security

over the immediately preceding ve-minute period

The Commission published or comment changes

proposed by SROs to rules governing market-wide circuit

breakers Among other things, the proposals would

lower the thresholds that trigger the respective Level 1,

2 and 3 market-wide circuit breakers rom 10 percent,

20 percent and 30 percent, to 7 percent, 13 percent

and 20 percent They also would replace the Dow Jones

Industrial Average with the S&P 500 Index as the pricingreerence against which to measure market decline

The Commission adopted a rule establishing large trader

reporting requirements that will enhance the agencys

ability to identiy large market participants, as well as to

collect and analyze inormation on their trading activity

This will both speed analysis o unexpected market

behavior and aid the SECs Division o Enorcement in

investigations o suspicious activity

Dodd-Frank Act Reglations:Implementing Financial Reorm

The Dodd-Frank Act is the most signicant piece o securities

legislation since the 1930s, one that both imposes signicant

new investor protection and market stability responsibilities on

the SEC, and provides new tools with which to meet those

responsibilities 2011 was the busiest portion o the multi-

year implementation agenda written by Congress into the law

and the SEC in collaboration with other regulatory bodies

and in close communication with stakeholders representing

every acet o the nancial marketplace made signicant

progress against that agenda

O the more than 90 mandatory rulemaking provisions in

the Dodd-Frank Act, the SEC had proposed or adopted

rules or three-quarters o them by the close o 2011, as

well as a number o the rules stemming rom the dozens o

other provisions that give the SEC discretionary rulemaking

authority Additionally, the SEC had issued 12 o the more

than 20 studies and reports that it is required to complete

under the Act

Derivatives

One o the most complex and important responsibilities

assigned to the SEC in the Dodd-Frank Act is the building

rom the ground up, together with the Commodity Futures

Trading Commission (CFTC) a regulatory system or an over-

the-counter derivatives market that has grown in notional

value to hundreds o trillions o dollars A new, transparent

derivatives market, with a variety o trading platorms and

central clearing, will diminish risk and encourage competition,

which can increase liquidity and improve pricing

By the close o 2011, the SEC had begun to lay the groundwork

or regulating security-based swaps the agencys part o this

complex new derivatives market with a series o proposals

regarding its undamental legal, structural and denitional

issues

The SEC, jointly with the CFTC, proposed rules urther

dening a number o key terms, including swap, secu-

rity-based swap, security-based swap agreement,

swap dealer, security-based swap dealer, major

swap participant, and major security-based swap

participant These rules seek to clariy whether and how

derivatives market participants will be subject to regu-

lation, either as a result o the products in which they

transact or the activities they undertake

The SEC proposed rules governing the registration and

operation o security-based swap data repositories

(SDRs), new entities that will collect transaction inorma-




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tion on securities-related swap transactions and publicly

disseminate it in real time These rules also prescribe

the manner in which transactions must be reported to

SDRs, and how SDRs should disseminate transaction

inormation

The SEC proposed rules regarding clearance o security-

based swaps that are not covered by the end-user

exemption These rules would establish a process

through which clearing agencies provide inormation to

the SEC about the security-based swaps they plan to

accept or clearing The rules would also set minimum

operational and governance standards or clearing

agencies Additionally, the SEC proposed rules settingorth the requirements to which end-users must adhere

when they engage in security-based swap transactions

that are exempt any rom mandatory clearing requirement

that may apply

The SEC proposed rules establishing a ramework or

the registration and regulation o swap execution acilities

(SEFs) platorms on which security-based swaps

required to be cleared may be traded These regulations

would encourage transparent and air trading o security

based swaps

The SEC took steps to provide or the registration and

regulation o security-based swap dealers and majo

security-based swap participants by, among othe

things, proposing rules establishing business conduc

standards applicable to those entities

Asset-Backed Secrities

The collapse o the market or one type o asset-backed

securities (ABS), those backed by residential subprime

mortgages, was a precipitating event or the global nancia

crisis Mortgage originators, able to transer the risk o

oreclosure to securitizers, allowed underwriting standards to

collapse Securitizers then transerred their risk to investors

who lost billions when mortgage-holders began deaulting on




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an unprecedented scale The SEC is pursuing regulations that

would encourage high underwriting standards by aligning the

interests o originators and securitizers with those o investors,

and by ensuring that investors in these securities have access

to the inormation needed to invest rationally

Risk retention requirements would ensure that securitizers

have skin in the game and, thus, incentive to ensure

quality underwriting The SEC joined the Federal Reserve

Board, the Oce o the Comptroller o the Currency,

the Federal Deposit Insurance Corporation, the Federal

Housing Finance Agency and the Department o Housing

and Urban Development in seeking public comment on

a proposed rule that would require sponsors o ABS to

retain at least ve percent o the credit risk o the assets

underlying the security

The SEC adopted rules requiring issuers o asset-backed

securities to disclose the history o repurchase requests

received and repurchases made, and requiring issuers

o asset-backed securities to conduct a review o the

assets underlying those securities

The SEC also adopted rules implementing the Dodd-

Frank Act provision which requires ABS issuers in

registered transactions to review the assets underlying

the ABS and disclose the nature o the review

The SEC proposed a rule prohibiting material conficts

o interest between those who package and sell asset-

backed securities and those who invest in them, helping

ensure that entities which create and sell asset-backed

securities cannot benet at the expense o their clients,

rom the ailure o those same securities

The SEC re-proposed or public comment rules requiring

greater accountability and enhanced quality around

ABS when issuers seek to use an expedited registration

process known as shel registration First proposed

beore that enactment o the Dodd-Frank Act, the revised

proposal would require that an executive ocer o the

issuer certiy the accuracy o the disclosure, that the

securitization be designed to ensure cash fows sucient

to service expected payments, that a risk manager be

appointed to review assets upon the occurrence o certain

trigger events, and that dispute resolution procedures be

in place in the event o a repurchase request

Credit Rating Agencies

The collapse o billions o dollars o triple-A rated mortgage-

backed securities was a key element o the nancial crisisOver-reliance on opinions issued by nationally recognized

statistical rating organizations (NRSROs or, simply, rating

agencies) let investors exposed to risks that were, in act,

ar greater than the securities initial ratings implied (many o

these triple A securities were eventually downgraded to junk

status)

Independent o nancial reorm legislation, the SEC had

previously proposed rules that would lessen reliance on rating

agencies by requiring that investors have access to data on

the assets, including individual mortgage data, underlying

ABS

In response to the Dodd-Frank Act, the SEC proposed

rules and amendments intended to increase transparency

and improve the integrity o credit ratings by requiring

that NRSROs report on internal controls, protect against

conficts o interest, establish proessional standards

or credit analysts, publicly disclose the methodology

used to determine individual ratings and enhance their

public disclosures about the perormance o their credit

ratings

The SEC removed credit ratings as eligibility requirements

or companies seeking to use short-orm registration

when registering securities or public sale The SEC

also proposed amendments to existing rules that would

remove reerences to credit ratings in several rules under

the Exchange Act, including rules concerning broker-

dealer nancial responsibility, distributions o securities,

and conrmations o reserve requirements or broker-

held excess margin securities In addition, the SEC

proposed removing credit rating reerences in certain

rules and orms under the Investment Company Act o

1940, including Rule 2a-7, governing the operations omoney market unds

Exective Compensation

The SEC adopted rules concerning shareholder approval

o executive compensation and golden parachute

compensation arrangements, requiring that say-on-pay




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votes occur at least once every three years and that a

requency vote be held at least once every six years

Companies also are required to provide additional

disclosure regarding golden parachute compensation

arrangements made with certain executive ocers in

connection with merger transactions

The SEC, jointly with the Federal Reserve and ve other

nancial regulatory agencies, proposed a rule that would

require certain nancial institutions including broker-

dealers and investment advisers with $1 billion or more in

assets to disclose the structure o their incentive-based

compensation practices, and which would prohibit such

institutions rom maintaining compensation arrange-

ments that encourage inappropriate risks

The SEC also proposed rules requiring the Commission

to direct the national securities exchanges and national

securities associations to prohibit the listing o any equity

security o an issuer that does not comply with new

compensation committee and compensation adviser

requirements

Private Fnds

The SEC adopted rules requiring advisers to hedge unds

and other private unds to register with the SEC and

reallocating regulatory responsibility or smaller advisers

to the states In addition, the Commission approved

rules that implement exemptions rom registration or

three types o private und advisers: advisers solely to

venture capital unds; advisers solely to private unds

with less than $150 million in assets under management

in the US; and certain private advisers without a place

o business in the US

In a joint release with the CFTC, the Commission

proposed a new rule that would require hedge und

advisers and other private und advisers to report

systemic risk inormation on a new orm, Form PF (thisproposal was adopted in October, 2011)

The SEC adopted a rule dening amily oces that will

be excluded rom the denition o an investment adviser

under the Investment Advisers Act, and thereore not

subject to regulation under the Act

Other Signifcant Dodd-Frank Act Rlemakings

The SEC proposed a rule creating a new process b

which municipal advisers must register with the SEC

submitting detailed inormation and certiying that theyhave met or will meet the qualications and regulatory

obligations required o them Required inormation would

include contact inormation, a list o municipal advisory

activities in which they engage, and disciplinary history

When adopted, this rule will supersede a more limited

temporary rule adopted shortly ater the passage o the

Dodd-Frank Act

The SEC proposed rules that would require reporting

issuers to disclose annually whether they use confict

SEC - FY 2011 Performance and Accountability Report

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Transcript of SEC - FY 2011 Performance and Accountability Report