Schapiro Issa Letter 20110131

8/6/2019 Schapiro Issa Letter 20110131

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UNITED STATESSECURITIES AND EXCHANGE COMMISSION

WASHINGTON. D.C. 20549

THE CHAIRMAN January 31, 2011

The Honorable Darrell E. IssaChairmanCommittee on Oversight and Government ReformUnited States House of Representatives2157 Rayburn House Office BuildingWashington, DC 20515Dear Chairman Issa:

Thank you for your letter of January 5, 2011 and the opportunity to meet with you todiscuss ways to improve the SEC.

As you know from our discussions, in the past two years the SEC has taken decisive andcomprehensive steps to reform the way it operates. We have brought in new leadership andsenior management, revitalized and restructured our enforcement and examination operations,revamped our handling of tips and complaints, taken steps to break down internal silos and createa culture of collaboration, improved our risk assessment capabilities, recruited more staff withspecialized expertise and real world experience, and enhanced safeguards for investors' assets,among other things. Our efforts are paying dividends. Last Fiscal year, for example, there was$2.8 billion in disgorgement and penalties ordered in SEC enforcement actions, a 163 percent


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The H onorable Darrell E. IssaPage 2

understand the imp lications of financial statements and o ther reports, while enablingcom parisons between filers and among industries.The Co mm ission has incorporated data tagging requirements into several of its mostsignificant rulemak ing initiatives so as to increase the ability of parties to analyze the d ata thatfilers are required to provide. Am ong these are the C om mission's rules on Interactive Data toImprov e Financial Reporting (Jan. 30, 2009) and the rules on Interactive Data for M utual Fund

Risk/Return Summary (Feb. 6, 2009). The Com mission also included data tagging requirementsin amendm ents to its Nationally Recognized S tatistical Rating O rganizations rules (Feb. 2 &Nov . 23, 2009), its rule on M oney Marke t Fund Refo rm (F eb. 23, 2010), as well as in itsproposed rules on Asset-Bac ked Securities (Apr. 7, 2010), Disclosure of Payme nts for ResourceExtraction Issuers (Dec. 15, 2010) and Security-Based Swap D ata Repository Reg istration (Nov.19, 2010). 1It is critical that the SEC be able to b enefit from our d ata-tagging initiatives, both in

terms of e nhanced analytics and increased efficiencies. To enable prom pt and effective analysisof such tagg ed data, I directed staff early in my tenure to identify, acquire, and begin to train ourreviewing staff on how to use new analytic tools that may b e available. I understand that stafffrom the S EC's D ivision of Risk, Strategy, and Financial Innovation demonstrated thecapabilities of certain of these too ls to mem bers of your staff last October. U nfortunately, theSEC's current budg et situation has reduced our ab ility to staff fully the desired interactive dataplatform.I am confident the Com mission will continue to promote transparency through datastandardization techniques such as data tag ging w ith the go al of improv ing the intelligibility andanalyzability of filings. How ever, this effort, like our other IT initiatives, will be dependant in


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these form ats, and I expect the v ariety and volum e of data to be filed in these formats w illincrease in the future. We w ill soon be evaluating w hich, if any, legislative recom me ndations,we w ill make to Cong ress in the coming year, and you can be assured that we will certainlyinclude consideration of the A ct in our deliberations.Finally, I would we lcome the O ffice of Financial Research or other cross- agencycoordination to help financial regulators better use and share information. Staff of the

Com mission would be happy to contribute our expertise to any cross-agency working g roupcreated to w ork on com mon d ata standards for financial regulators.Employee Discipline

In the year before I became Ch airman, the SEC did not terminate the employm ent of anyemployees. In 2009, the SEC terminated the emp loyment of nine em ployees, and during 2010,the SEC terminated the employm ent of two employees. Also in 2010, an additional threeemployees resigned and one retired in lieu of termination, while an additional four employeesresigned, and four retired, after receiving notice that the ag ency had be gun or intended to initiatedisciplinary action. The Commission did not terminate any temporary employees in 2010.

From 2008 to the present, the Com mission's Inspector General issued 84 reports in whichhe recom mende d disciplinary action or the co nsideration of disciplinary action againstCom mission employees or contractors. Attached to this letter is a spreadsheet with informationregarding the action taken by the SEC with respect to these recom mendations.W ith regard to wh ether any laws, policies or procedures impe de the SE C's ability toremov e staff, I am not aware of any that prevent us from do ing so, though there is a process that


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Improving Financial ManagementAs you and I d iscussed, it is unacceptable that the G AO has identified materialwe aknesses in the SEC's internal controls over financial reporting. The root causes of thesematerial weaknesses are gaps in the security and functionality of the ag ency's financial system.Rather than incur the developm ent risks of creating new technolog y and systems, we m ade thedecision to outsource this function by migrating to one of the Office of M anagem ent and

Budg et's designated Federal Shared Service Provide rs (FSSP), under the Financial Manag eme ntLine of Business (FMLoB ) mod el. Although dependent on adequate resources, the FML oBsolution will meet the following criteria: remed iate the agency's material weak nesses and other audit deficiencies in controls; establish a single data mod el for transaction processing and reporting; host a system capab le of producing the SE C's financial stateme nts as published in thePerform ance and Accountability Report (PAR ) and managem ent and analytical reports; host a system compliant with the O ffice of M anagement and Budget (OM B) C ircular No.A-127, Financial Managem ent Systems;

minimize the processing'ocessing of transactions that use current manual workarounds,spreadsheets and external databases, as they are resource intensive and prone to error; provide imp rovem ents in routine accounting reports; and


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The Honorable Darrell E. IssaPage 5

We expect that the implementation phase will be completed during the second quarter ofFiscal Year 2012.

This project and a number of other programs are being directed by Jeffrey Heslop, ournew Chief Operating Officer. Mr. Heslop joined the SEC in May 2010 from Capital OneFinancial Corporation, where he was responsible for the company's information and resiliencyrisk management. He, along with our new Chief Information Officer (Thomas Bayer, whojoined the Commission in October 2010 from his practice advising banking and financialservices clients on technology strategy, software development, and program managementsolutions) are applying private sector techniques and methods to increase the Commission'sefficiency and processes. Staff in our Office of Legislative and Intergovernmental Affairs willcontact your staff to arrange a mutually agreeable date and time for Mr. Heslop and, if you sodesire, Mr. Bayer to meet with members of the Committee on Oversight and GovernmentReform.

Please call me at (202) 551-2100 or have your staff call Tim Henseler, Deputy Directorof the Office of Legislative and Intergovernmental Affairs, at (202) 551-2015 if you have anyquestions or comments.

Sincerely,

(3(AkgeitzMary L. SchapiroChairman


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Treatment of D isciplinary Recommen dationsMade by the Office of Inspector General (OIG) 2008-Present

Date of OIGReport

Title of OIG Report Employee Title Action Taken by the SEC

1/23/2008 01G-462: Misuse of Government Computer Staff Accountant Resigned in lieu of terminationResources and Official Time

1/30/2008 PI-08-14: Misuse of Government Computer Human Resources Specialist CounselingResources and Official Time

1/30/2008 PJ-08-15: Misuse of Government Computer Legal Instruments Examiner CounselingResources and Official Time

1/31/2008 P1-08-13: Misuse of Government Com puter Attorney Advisor CounselingResources and Official Time

2/13/2008 P1-08-16: Misuse of Government Com puter Confidential Assistant CounselingResources

3/11/2008 PI-08-24: Misuse of Government Computer Attorney Advisor ResignedResources and Official Time

3/11/2008 PI-08-25: Misuse of Government Computer Staff Accountant Reprim andResources and O fficial Time

3/13/2008 OIG-466: Abuse of Time and Attendance atthe New York R egional Office

Program Analyst Resigned in lieu of termination; reimbursed ag ency foramounts received during unauthorized absence fromduty

3/25/2008 OIG-473: Misuse of Government Computer Senior Counsel 10-clay suspensionResources and O fficial Time

3/25/2008: 010-456: Misuse of Government Parking Program Management TerminationSupp. Permit Specialist5/23/2008


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Date of OIG Report

Title of OIG Report Employee Titles Action Taken by the SEC

3/27/2008 OIG-465: M isrepresentation of P rofessionalCredentials and M isuse of GovernmentComputer R esources and Official Time atHeadquarters

Staff Accountant 3-day suspension

4/30/2008 OIG-468: Misuse of Government ComputerResources and Official Time at NYR O

Staff Accountant 14-day suspension

12/31/2007;Supp.6/2/2008

OIG-472: Disruptive Act at the Workplace:Intimidating and Controlling Behavior; Lack

Associate Director/ChiefCounsel and an AssistantChief Counsel

The Associate Director/Chief Counsel was removedfrom Chief C ounsel position and received counseling;the Assistant Chief Counsel received counseling

6/5/2008 OIG-469: Conflict of Interest. ImproperSolicitation, and Receipt of Gifts from aProhibited Source. Misuse of OfficialPosition and Other M isconduct

Deputy Chief InformationOfficer and a Branch Chief

No action as to the Deupty Chief Information Officer;the Branch Chief resigned

6/24/2008 OIG-493:alsification of EmploymentApplication and Personnel Forms

Program A nalyst Termination

7/1/2008 PI-08-48: Misuse of Government ComputerResources and Official 'l ime

Human Resources Specialist Counseling

7/2/2008 P1-08-49: Misuse of Government ComputerResources and Official Time Contractor Removed from contract

7/9/2008 01G-484: Misuse of Government ComputerResources and Official Time at ChicagoRegional Office

Securities ComplianceExaminer

Resigned in lieu of termination

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Date of OIGReport

Title of OIG Report Employee Titles Action Taken by the SEC

7/18/2008 OIG-476: Misuse of Government Resourcesand Official Time at Head quarters

Document InformationAssistant

14-day suspension

7 / 2 40 0 0 8 0 IG- 46 4: M is us e o f Go ve rn m en t R esou rc esand Official Time

Market Surveillance Specialist 9-day suspension

7/30/2008 01G-490 : No Merit to Complaint of Ordersto Falsify a Government Record and Need toAddress Personnel Issues in the SecurityBranch

Security Branch No measures required because staff mem ber at issueresigned

8/4/2008 01G-457 : Misuse of GovernmentResources, App earance of Confl ict ofInterest and Lack of Candor at the ChicagoRegional Office

Senior Attorney Counseling

8/12/2008 OIG-480: Misuse of Offic ial GovernmentPosition

Acting Secretary/DeputySecretary

Reprimand

8/12/2008 OIG-497: Misuse of Government Resourcesand O ffic ial Time

Attorney Advisor Reprimand

8/14/2008 OIG-479: Misuse of Government Resourcesand O ffic ial Time Contractor Written counseling

9/30/2008 OIG-431:e-Investigation of Claims byGary Aguirre of Improper PreferentialTreatment and Retaliatory Termination

Division Director, anAssistant Director, and aBranch Chief

The Assistant D irector retired: for the DivisionDirector and Branch Chief, an Administrative LawJudge determined formal disciplinary action was notappropriate

11/7/2008 01G-488 : Misuse of Government Resourcesand Official Time at Headquarters

Information TechnologySpecialist

9-day suspension

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Date of OIGReport

Title of OIG Report Employee Titles A c t i o n T a k e n b y t h e S E C

11/26/2008 OIG-503: Misuse of Government ComputerResources and Official Time at Los AngelesRegional Office

Assistant Regional Director Reprimand; employee has since resigned

12/12'2008 PI-09-19: Misuse of Government ComputerResources and Official Time

Contractor Removed from contract

12/12/2008 PI-09-20: Misuse of Government ComputerResources and Official Time


12/12/2008 PI-09-21: Misuse of Government ComputerResources

C ontractor Rem oved from contract


Staff Accountant Counseling

12/15/2008 OIG-495: Violation of D.C. MetropolitanPolice Security Officers ManagementBranch Rules, Improper Issuance of Waiverfrom Co ntractual Requirements and OtherInappropriate C onduct InvolvingCom mission Security Operations

Contractor and a SecuritySpecialist

Contractor removed from contract and employeereprimanded

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Date of OIGReport

Title of OIG Report Employee Titles Action Taken by the SEC.

3/3/2009 OIG-481: Employees' SecuritiesTransactions R aise Suspicions of InsiderTrading and Create Appearances ofImpropriety; Violations of FinancialReporting Requirements: and Lack of SE CEmployee Securities TransactionsCompliance System

2 Attorneys Pending

3/5/2009 OIG-499: Appearance of Lack of P artialityin the Performance of Official Duties

Assistant Director Reprimand

3/17/2009 OIG-477: Allegations of Perjury andObstruction of Justice by Former SECEnforcement Attorney

Administrative Contact Counseling

3/18/2009 01G-492: Abuse of Time and Attendanceby SK-12 Employee of the Division ofInvestment Management

Financial Analyst Termination

3 /3 0/ 20 09 O I G- 50 1 : D is cl os ur e o f N on p ub li cInformation

Staff Attorney Counseling received prior to completion of 010report; no action taken thereafter

6/5/2009 PI-09-81: Misuse of Government ComputerResources and O fficial Time Information TechnologySpecialist 1 -day suspension


Branch Chief Written reprimand and donation a 8 hours of annualleave to leave bank

6/15/2009 PI-09-85: Misuse of Government ComputerResources and O fficial Time


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Date of OIGeport Title of OIG Report Employee Titles Action Taken by the SEC


Contractor Warning


Contractor Warning6/24/2009 P1-09-76: Misuse of Government ComputerResources and Official Time Assistant Director No action taken7/1/2009 PI-08-39: Misuse of Government Computer

Resources and Official TimeLegal Instruments Examiner Counseling

7/9/2009 OIG-506: Misuse of Government ComputerResources and Official Time at the AtlantaRegional Office

Supervisory Staff Accountant 5-day suspension

7/9/2009 OIG-514: Possession of a DangerousWeapon in a Federal Facility by Division ofEnforcement SK-14 Employee

Assistant Chief Accountant 30-day suspension and signed an agreement providingfor abridged disciplinary process in the event of futuremisconduct; resigned prior to serving entire suspension

8/5/2009 OIG-08-37: Misuse of GovernmentComputer Resources and Official Time

Information TechnologySpecialist

Counseling

8/31/2009 OIG-509:nvestigation of Failure of theSEC To Uncover Bernard Madoff's PonziScheme

Certain OCIE and ENF staff Pending

9/15/2009 OIG-494A: Allegations of RetaliatoryPersonnel Actions

Associate Director and aRegional Office Director

No action taken

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Pate of OIGReport

T i t l e o f O I G R e p o r t Employee Titles Action Taken by the SEC

9/25/2009 OIG-494B: Violation of Standards ofEthical Conduct in Regards to OfficialGovernment Travel

Associate Director Reprimand

9/30/2009 OIG-504: Misuse of Government ComputerResources and Violation of the Standards ofEthical Conduct for Employees

Support Services Supervisor Employee re t ired pr ior to complet ion of OIG report

9/30/2009 OIG-519: Misuse of Position, GovernmentResources and Official Time in DenverRegional Office and Home Office

Senior Special Counsel and aResearch Specialist

The Senior Special Counsel received 14 -daysuspension and mandatory ethics training; the otheremployee received counseling

11/24/2009 OIG-515;isclosure of Non-PublicProcurement Information and Lack ofCandor at Headquarters Contractor and a BranchChief No action taken as to the contractor and a reduction inpay and grade as to the Branch Chief12/17/2009 OIG-517: Misuse of Government Resources

and Official Time at Headquarters Procurement Analyst 30-day suspension

1/12/2010 OIG-512:nauthorized Disclosure of Non-Public Information

2 Staff Attorneys Counseling as to both

2/26/2010 OIG-505:ailure to Timely InvestigateAllegations of Financial Fraud Enforcement Staff Two emp loyees received counseling; managementdiscussed issues with working-group to ensure futuretips are reviewed in a timely manner3/8/2010 PI-10-20: Misuse of Computer Resources Attorney Advisor Counseling

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Date o f OIGRepor t T i tle o f OIG Repor tEm ployee Titles Action Taken by the SEC

3/8/2010 PI-10-21: Misuse of Computer Resources Attorney Advisor Reprimand

3/8/2010 PI-10-22: Misuse of Computer Resources Attorney Advisor 30-day suspension

3/29/2010 OIG-508:llegations of Inappropriate andUnprofessional Conduct by a Current SECEmployee and Unauthorized ComputerAccess by a Former SEC Employee

Branch Chief Counseling

3/31/2010 OIG-526:nvestigation of the SEC'sResponse to Concerns Regarding RobertAllen Stanford's Alleged Ponzi Scheme Certain ENF and OCIE staff Pending4/3(1/2010 PI-10-30: Misuse of Computer Resources

and Official TimeDisclosure Assistant 30-day suspension

4/30/2010 PI-10-31: Misuse of Computer Resourcesand Official Time

Human Resources Specialist Resigned in l ieu of termination

4/30/2010 PI-10-32: Misuse of Computer Resourcesand Official Time

Legal Instrument Examiner 30-day suspension

6/10/2010 OIG-530: Unprofessional Conduct bySupervisor While Conducting an InvestmentAdviser Examination

Branch Chief Resignation prior to issuance of OIG report

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Date of OIGReport

Title of O I G R e p o r t Employee Titles Action Taken by the SEC

6/29/2010 PI-09-04: Appearance of Impropriety WithRespect to Acts A ffecting a P ersonalFinancial Interest

Branch Chief No action taken; employee retired

7/9/2010 PI-10-59: Misuse of Government ComputerResources and Work Time


S/912010 P1-10-54: Enforcement Attorney Engaged inProhibited Political Activity

Attorney No action taken; the Office of Special Counsel("OSC") has sole jurisdiction to pursue violations ofthe Hatch Act; OSC did not take action becauseemployee withdrew from election

9/1/2010 OIG-520: Corporation Finance AttorneySuspended from State Bars, MisrepresentedBar Status. Lacked Candor. Ab used Fall-Time Telework Medical Accommodationand Leave and Engaged in Conflicts ofInterest

Attorney Advisor Pending.

9/8/2010:11/23/2010Supp.

OIG-541: Alleged Misrepresentation ofIdentity and Lack of Bar Mem bership byChicago R egional Office Staff Attorney

Staff Attorney Resigned in lieu of disciplinary action

9/30/2010 Memorandum Report: improper Pre-Selection of Contractor Associate Executive Director No action taken

10/22/2010 OIG-547: Misuse of Government ComputerResources and Official Time

Staff Accountant Pending

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Date of O IGReport Title of OIG ReportEmployee Titles Action Taken by the SEC

1 0/2 6/ 20 10 O IG -5 33 :eport of Investigation,Investigation of the Failure of the SEC'sLARO to Uncover Fraud in WestridgeCapital Management NotwithstandingInvestment Adviser Examination Conductedin 2005 and Inappropriate Conduct on Partof Senior Los Angeles Official

Assistant Regional Director Resigned

10/26/2010 OIG-533: Report of Investigation,Investigation of the Failure of the SEC'sLARO to Uncover Fraud in WestridgeCapital Management NotwithstandingInvestment Adviser Exam ination Conductedin 2005 and Inappropriate Conduct on Partof Senior Los Angeles Official

Certain LARD examinationstaff

Pending

11/10/2010 OIG-537: Abusive and IntimidatingBehavior Within the Securities andExchange Com mission Security Branch.Inappropriate Personal RelationshipBetween Security Specialist and ContractorEmployee, and Inadequate Management ofSecurity Branch

Security Specialist Pending.

11/10/2010 01G-537: Abusive and IntimidatingBehavior Within the Securities andExchange Com mission Security Branch,Inappropriate Personal RelationshipBetween Security Specialist and ContractorEmployee. and Inadequate Management ofSecurity Branch

Contractor. a Chief of th eSecurity Branch, and aSecurity Specialist

Pending

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Date of OIGReport

T i t le o f O I G R e p o r t Employee Titles Action Taken by the SEC

1 1/ 23 /2 01 0 P I -0 9-11 3:mproper T ravel Expendituresand Lack of Supervisory Review

2 B ranch C hiefs Pending

12/14/2010 OIG-523:mproprieties in the Selection ofInformation Technology and the Aw ard of aSole-Source Contract

Deputy Director, AssistantDirector, and 2 ContractSpecialists

Pending

12/28/2010 PI-10-05:alsification of Time andAttendance Records, Abuse of Telework andLack of Supervisory Review

Associate Director and CaseManagement Specialist

Pending

1/6/2011 PI-11-06: Misuse of Go vernment ComputerResources and Work Time


1/11/2011 P1-11-05: Misuse of Government ComputerResources and Official Time Senior Attorney Resigned prior to com pletion or DIG report

1/13/2011 PI-11-07: Misuse of Government ComputerResources and Official Time Senior Counsel Pending

1/20/2011 OIG-544: OIT Contract Employees GivenAccess to SEC Buildings and ComputerSystems for Several Weeks beforeBackground Investigation Clearance

Project Manager andContractor

Pending

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Schapiro Issa Letter 20110131

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