Today at 2:30 pm ET, the U.S. Senate Banking Committee's Subcommittee on Securities, Insurance, and Investment will hold an important hearing on "Strengthening the SEC's Vital Enforcement Responsibilities." The hearing comes just one day after the release of an extraordinary Report to Congressional Requesters by the Government Accountability Office (that bears the unextraordinary title of “Greater Attention Needed to Enhance Communication and Utilization of Resources in the Division of Enforcement,” and is available here).

The GAO report shines a brutally bright light on the inner workings of the Enforcement Division and many of the problems it has faced, past and present. Indeed, you could call it a hatchet job if it weren't for the fact that the facts appears to have come directly from the Enforcement staff and management themselves, and even certain SEC Commissioners. Maybe a "confession" is a better way to describe it.

Among the four witnesses at today's hearing will be Robert Khuzami, the new Director of the SEC's Division of Enforcement. It has been rumored that Khuzami will use today's hearing to formally introduce numerous reforms that the Enforcement Division will be implementing to improve its performance (many of which are discussed in detail here), so listen closely to his prepared testimony today.

In any event, however, the GAO report flags numerous gaping holes in the SEC's Enforcement program that must be addressed immediately. Specifically, here are four questions to which I believe Congress must seek an answer:

1. How much money does the Enforcement Division need to raise its administrative support and information technology to effective levels?

The GAO report reveals that Enforcement has little or no administrative or paralegal support, which causes its staff to waste considerable time — sometimes half of their workday — on duties such as copying, filing, document scanning, assembling document storage boxes, preparing exhibits, making travel arrangements, soliciting bids for court reporters, and logging and processing documents submitted by respondents. This problem is exacerbated because frequent equipment breakdowns mean attorneys must waste additional time searching for working copiers and scanners.

With respect to the Enforcement Division's IT resources, the GAO report paints a bleak picture of inefficient and outdated technology. Enforcement’s Concordance system for managing documents is said to be generally ineffective. It sometimes takes weeks, or even months, for case records to be sent to headquarters and loaded onto the system to become available for use, and the system lacks useful functions that are available to the private sector, such as certain search features or the ability to reconstruct chains of e-mail communication. A securities defense attorney told the GAO that "it is not uncommon for Enforcement attorneys to call, asking to be directed to information of interest in records the defense already has produced, because the staff cannot search for the information."

The GAO report also reveals that, surprisingly, Enforcement has no divisionwide knowledge management system in place for sharing information, such as litigation documents or legal analyses, meaning attorneys developing cases cannot easily take advantage of work already done by others. In addition, Enforcement cannot access information maintained by OCIE.

2. What is the proper way to track the performance of the Enforcement Division?

The GAO observed that because Enforcement pursues actions against alleged securities law violators, and the entire population of such violators is unknown, there is no metric, such as volume of trading or number of public company filings, for directly measuring the division’s workload or results achieved. As a result, Enforcement has traditionally focused on two process-oriented performance indicators to track the division’s activities: number of investigations opened annually, and number of enforcement actions filed annually.

The focus on these "stats," however, has for some time been the source of criticism. Enforcement attorneys told the GAO that such gross tallies present an incomplete view of Enforcement activity because they "do not indicate the relative significance or magnitude of cases, and are vulnerable to manipulation. For example, a major enforcement case involving significant violations or market practices would be reported in the statistics with the same weight as a matter more administrative in nature, such as failure to make required filings with the agency."

How, then, should the success and performance of the overhauled Enforcement Division be measured?

3. What changes will be made to address the structure and performance of the Office of Collections and Distributions (OCD)?

The GAO report discloses several important points about OCD, the relatively new office that is responsible for administering and distributing Fair Funds money.

First, although OCD was created to have agency-wide responsibilities in centralizing and professionalizing the function of distributing Fair Funds, to date it has handled collections for the headquarters office in Washington and the Boston regional office only. For unexplained reasons, Enforcement staff remain responsible for collections and distributions in all other offices.

In addition, the GAO report reveals that the SEC established OCD with an unusual "dual reporting structure" where the OCD director reports to SEC’s executive director, who reports to the SEC Chairman. OCD's deputy director, however—to whom all but two OCD staff ultimately report—has a direct report relationship to both the OCD director and the Director of Enforcement. Thus, a small portion of OCD reports directly to one superior (the OCD director), while nearly all of the office reports to a deputy whose supervisory chain also leads to a different superior outside OCD (the Enforcement director).

Both the OCD director and deputy director told GAO that this structure has resulted in confusion within the office and among Enforcement staff about who is responsible for what duties. It has also resulted in delay, as additional meetings and deliberations among a larger group of parties are required to consider issues and reconcile viewpoints.

4. What is being done to remove delays and bureaucracy from the internal case review process?

Finally, the GAO report describes an internal case review process that is so layered and redundant that it can lead to absurd results. The internal process for an “action memorandum" presenting an enforcement matter for consideration to the Commission generally includes the following levels of review:

• Staff investigative attorney;• Branch chief;• Assistant director;• Associate director;• Regional director (for regional offices);• Senior Enforcement management, other relevant divisions of the agency, and Office of General Counsel;• “To-be-calendared” review (for additional review by senior Enforcement management in advance of Commission meeting); and• Pre-calendar review immediately before Commission meeting.

Some Enforcement attorneys estimated that they spend as much as a third to 40 percent of their time on the internal review process, and stated that the effect of the intensive process is to create a culture of risk aversion, an atmosphere of fear or insecurity, or incentives to drop cases or narrow their scope. Indeed, Enforcement attorneys offered the following eye-opening examples:

in two cases, charges were dropped or reduced because the matters had taken so long that people were unable to recall earlier considerations of evidence.

in another situation, it took 2-½ months to prepare a paragraph requesting permission to send a Wells notice;

in another case, staff prepared multiple drafts of a Wells memo over 3 years before finally closing the case because it was so old.

in yet another case, a company under investigation offered to pay "whatever penalty amount Enforcement asked" but five months later the matter still remained open, with an action memorandum in its tenth draft.

There is obviously a lot for the Senate to raise today as it meets with Khuzami and other witnesses, and going forward. Seeking answers to these four questions, however, would be a great start.

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