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U.S. Securities and

Exchange Commission

FY2010 Performance and

Accountability Report

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Abot This Report

The U.S. Securities and Exchange Commissions (SEC) FY 2010 Perormance and Accountability Report

provides program perormance and fnancial inormation that enables the 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/secpar2010.shtml provides inormation that satisfes the

requirements contained in the ollowing major legislation:

Accountability o Tax Dollars Act o 2002

Improper Payments Inormation Act o 2002

Reports Consolidation Act o 2000

Government Management Reorm Act o 1994

Government Perormance and Results Act o 1993

Federal Managers Financial Integrity Act o 1982

Dodd-Frank Wall Street Reorm and Consumer Protection Act.

Subtitle F. Sec. 963. Annual Financial Controls Audit

For the ourth year in a row, the SEC received

a Certifcate o Excellence in Accountability

Reporting rom the Association o Government

Accountants. The award is presented to ederal

government agencies whose annual reports

achieve the highest standards demonstrating

accountability and communicating results.
http://www.sec.gov/about/secpar2010.shtmlhttp://www.sec.gov/about/secpar2010.shtmlhttp://www.sec.gov/about/secpar2010.shtmlhttp://www.sec.gov/about/secpar2010.shtml

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Contents

Message rom the Chairman 2

Managements Discssion and Analysis 5

Vision, Mission, Vaues, and Goas 6

Organizationa Structure and Resources 7

FY 2010 Year in Review 10

Financia Highights 21

Perormance Highights 25

Strategic and Perormance Panning Framework 25

Perormance Measures Overview 26

Perormance Resuts Summary 27

Management Assurances 32

Annua Assurance Statement 32Perormance Section 39

Introduction to Perormance 40

Verication and Vaidation o Perormance Data 40

Perormance Resuts by Strategic Goa 41

Program Assessments and Evauations 77

Financial Section 79

Message rom the Chie Financia Ocer 80

Financia Statements 82

Notes to the Financia Statements 87

Required Suppementary Inormation (Unaudited) 110

Report o Independent Auditors 111

Managements Response to Audit Opinion 130

Other Accompanying Inormation 133

Inspector Generas Statement on Management and Perormance Chaenges 134

Managements Response to Inspector Generas Statement 140

Summary o Financia Statement Audit and Management Assurances 146

Improper Payments Inormation Act Reporting Detais 147

Appendixes 148

Appendix A: Chairman and Commissioners 148

Appendix B: Major Enorcement Cases 151

Appendix C: New Perormance Measures and Indicators 162Appendix D: Perormance Measures and Indicators Not Carried Forward 164

Appendix E: SEC Divisions and Oces 165

Appendix F: Acronyms 167

Available on the Web at http://www.sec.gov/about/secpar2010.shtml

To contact the SEC, pease see wwwsecgov or Contact Us athttp://www.sec.gov/contact.shtml For urther inormation

on seected terms and topics, pease see Fast Answers athttp://www.sec.gov/answers.shtml
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Message rom the Chairman

are benetting rom better targeting and technoogy, a more

aggressive outook, and structura reorms that put greate

numbers o experienced peope on the ront ines

Enorcement, in particuar, capped an extensive reorganization

with the creation o speciaized groups dedicated to high-priority

areas The new groups are empoying enhanced training

speciaized industry experience, and targeted investigative

approaches that wi aow them to more eectivey investigate

suspected wrongdoing

And, ater a rigorous se-assessment, OCIE has adopted

a new governance structure that is creating a consistent

nationa examination program; empoying dynamic stang o

examination teams; and depoying risk-ocused strategies tha

improve the targeting o imited resources The resut is an

increased abiity to oster compiance with securities aws and

to root out vioators and raud in the nancia industry

We aso continue to advance a ruemaking agenda that

whie considering the needs o a stakehoders in the nancia

markets ocuses rst on investor protection and on markets

that are air or a investors

In combination with the eorts o a taented and motivated

sta, these changes are strengthening agency perormance

at a time when restoring investor aith and market stabiity is

particuary important to the American economy

I am proud o our perormance ast year And, I expec

that our perormance wi continue to improve Changing

the cuture and the structure o the agency and investing in

technoogy and human capita bring immediate perormance

Over the ast tweve months,

the US Securities and

Exchange Commission has

strengthened its abiity to

protect investors, promote

air, ordery and ecient mar-

kets, and encourage capita

ormation

By impementing a series o

important interna reorms,adding more resources to

our enorcement and examination programs, and embracing

a signicant reguatory agenda, we are heping to restore

investor condence and making the agency more nimbe and

eective a process that is continuing and even acceerating

with passage o the Dodd-Frank Wa Street Reorm and

Consumer Protection Act

Today, our new eadership team is creating a cuture rooted

in coaboration across organizationa ines Were pacing anew emphasis on training and on creating speciaized poos

o expertise, aowing the SEC to keep pace with changing

nancia markets And were upgrading technoogy to improve

data management and encourage communications across

oces and divisions

In the ast year, the two groups charged with carrying out

enorcement and examinations the Division o Enorcement

and the Oce o Compiance Inspections and Examinations

(OCIE) have improved their abiities to protect investors,

to discourage non-compiant or rauduent activity, and to

investigate and punish raud when it occurs These eorts

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transactions, and required suppementary inormation

Strengthening these contros wi continue to be a high

priority during Fisca Year 2011, as we prepare to move to

a new core nancia system oered by a edera Shared

Service Provider designated by the Oce o Management

and Budget This new environment, to which the agency

pans to migrate in Fisca Year 2012, wi aow the SEC to

put in pace stronger protections or its nancia data and to

enhance its nancia reporting processes

I am condent the Commission, aong with the dedicated andtaented sta, wi continue to make great strides on beha o

investors in the year ahead

Mary L. Schapiro

Chairman

November 15, 2010

gains More than that, however, these actions aso create an

inrastructure that wi support the new responsibiities that the

Dodd-Frank Act is bringing

That andmark egisation gives the SEC important toos

to better protect investors, incuding new toos or our

enorcement personne and the authority to create a uniorm

duciary duty or broker-deaers and investment advisers

It provides important new sources o data and inormation

to investors as we as to the SEC by bringing hedge unds

under our oversight and over-the-counter derivatives into thesunight And, it buids on priorities aready embraced by the

SEC, such as enhanced oversight o credit rating agencies

The Act presents the SEC with an opportunity to buid on the

accompishments o the past year and to create an enduring

structure or improved protection o investors and markets

We are peased, as we, to conrm that the nancia and

perormance data we present in this report are undamentay

compete, reiabe, and conorm to Oce o Management

and Budget guidance Our independent auditors, the US

Government Accountabiity Oce, arm that the SECs

nancia statements are presented airy in a materia respects,

in conormity with US generay accepted accounting

principes (US GAAP) We do, however, have two materia

weaknesses in our interna contros over nancia reporting

one in inormation systems and a second in nancia reporting

and accounting processes The second materia weakness

represents a combination o deciencies in nancia reporting,

budgetary resources, ing ees, disgorgement and penaty

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Managements Discussion

and Analysis

The US Securities and Exchange Commissions (SEC)

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

overview o this entire report It provides a concise description

o the agencys perormance measures, nancia statements,

systems and contros, compiance with aws and reguations, and actions taken

or panned It aso provides a baanced assessment o the SEC programs

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

operations

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Vision, Mission, Vales, and Goals

Vision

The SEC strives to promote a market environment

that is worthy o the pubics trust and characterized

by transparency and integrity

Mission

The mission o the SEC is to protect investors;

maintain air, ordery, and ecient markets;

and aciitate capita ormation

Vales

Integrity TeamworkAccountabiity Fairness

Eectiveness Commitment to Exceence

In FY 2010, the Commission approved a new strategic

plan covering FY 2010 - FY 2015. The plan sets out

the agencys mission, vision, values, and strategic

goals through FY 2015. The plan also details the

outcomes the agency is seeking to achieve, the

strategies and initiatives that will be undertaken to

accomplish those outcomes, and the perormance

measures that will be used to gauge the agencys

progress. The plan can be accessed on the SECs

website at www.sec.gov/about/secstratplan1015.pd.

Strategic Goals and Otcomes

Goal 1: Foster and enorce compliance with

the ederal secrities laws

Otcome 1.1: The SEC osters compiance with the

edera securities aws

Otcome 1.2: The SEC prompty detects vioationso the edera securities aws

Otcome 1.3: The SEC prosecutes vioations o edera

securities aws and hods vioators accountabe

Goal 2: Establish an eective reglatory

environment

Otcome 2.1: The SEC estabishes and maintains

a reguatory environment that promotes high-quaity

discosure, nancia reporting, and governance, and

that prevents abusive practices by registrants, nancia

intermediaries, and other market participants

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

ecient, transparent, and competitive manner, ostering

capita ormation and useu innovation

Otcome 2.3: The SEC adopts and administers rues and

reguations that enabe market participants to understand

ceary their obigations under the securities aws

Goal 3: Facilitate access to the inormation

investors need to make inormed investment

decisions

Otcome 3.1: Investors have access to high-quaity disco-

sure materias that are useu to investment decision making

Otcome 3.2: Agency ruemaking 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 nancial capital

Otcome 4.1: The SEC maintains a work environment

that attracts, engages, and retains a technicay procient

and diverse workorce that can exce and meet the

dynamic chaenges o market oversight

Otcome 4.2: The SEC retains a diverse team o

word-cass eaders who provide motivation andstrategic direction to the SEC workorce

Otcome 4.3: Inormation within and avaiabe to the

SEC becomes a Commission-wide shared resource,

appropriatey protected, that enabes a coaborative

and knowedge-based working environment

Otcome 4.4: Resource decisions and operations

refect sound nancia and risk management principes


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Organizational Strctre and Resorces

The SEC is an independent edera agency estabished pursuant to the Securities Exchange Act o 1934 (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 by the Senate (see Appendix A: Chairman and Commissioners) The Chairman serves as the

Chie Executive Ocer (CEO) The SEC is organized into ve main divisions: Enorcement; Corporation Finance; Investment

Management; Trading and Markets; and Risk, Strategy, and Financia Innovation The SECs headquarters are in Washington,

DC, and it has 11 regiona oces ocated throughout the country In Fisca Year (FY) 2010, the SEC received budget authority o

$1,571 miion consisting o current-year osetting coections in the amount o $1,095 miion, $452 miion or the SEC Investor

Protection Fund, and $24 miion in unds carried over rom prior sca years In FY 2010, the agency empoyed 3,748 Fu-time

Equivaents (FTE), incuding 3,664 permanent and 84 temporary FTEs

SEC ORGANIZATION CHART

CHART 1.1


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

and Program Descriptions

TABLE 1.1SEC PROGRAMS AND PROGRAM DESCRIPTIONS

Program Divisions and Oces Program Descriptions

Enorcement Division o Enorcement and enorcement

sta within the SECs regiona oces

This program investigates and brings civi charges in edera district

court or in administrative proceedings based on vioations o the edera

securities aws An integra part o the programs unction is to seek

penaties and the disgorgement o i-gotten gains in order to return

unds to harmed investors

Compiance

Inspections and

Examinations

Oce o Compiance Inspections and

Examinations sta within the SECs

regiona oces

This program conducts the SECs examinations o registrants such

as investment advisers, investment companies, broker-deaers, se-

reguatory organizations, credit rating agencies, transer agents, and

cearing agencies

Corporation Finance Division o Corporation Finance This program perorms unctions to assure that investors have access

to materiay compete and accurate inormation, and to deter raud and

misrepresentation in the pubic oering, trading, voting, and tendering

o securities

Trading and Markets Division o Trading and Markets This program conducts activities to estabish and maintain standards

or air, ordery and ecient markets, whie ostering investor protection

and condence in the markets

Investment

Management

Division o Investment Management This program seeks to minimize the nancia risks to investors rom

raud, mismanagement, se-deaing, and miseading or incompete

discosure in the investment company and investment adviser

segments o the nancia services industry

Risk, Strategy, and

Financia Innovation

Division o Risk, Strategy, and Financia

Innovation

This programs responsibiities cover three broad areas: risk and

economic anaysis, strategic research, and nancia innovation

Its activities reate to poicymaking, ruemaking, examination and

enorcement matters agency-wide

Genera Counse Oce o the Genera Counse OGC serves as the chie ega ocer o the Commission and

provides independent ega anaysis and advice to the Chairman,

Commissioners, and operating divisions on a aspects o the

Commissions activities The Genera Counse aso deends the

Commission in edera district courts, represents the Commission in a

appeate matters andamicus curiae ings, and oversees the SECs

bankruptcy program

(Continued on next page)


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TABLE 1.1 Continued rom previous page

Program Divisions and Oces Program Descriptions

Other ProgramOces

Oce o Chie Accountant;

Oce o Investor Education and

Advocacy;

Oce o Internationa Aairs; and

Oce o Administrative law Judges

These oces are responsibe or:

serving as the chie advisor on a accounting and auditing poicy

and overseeing private sector standards setting;

serving investors who contact the SEC, ensuring that retai

investors perspectives inorm the Commissions reguatory poicies

and discosure programs; and improving investors nancia

iteracy;

advancing internationa reguatory and enorcement cooperation,

promoting converged high reguatory standards wordwide, and

aciitating technica assistance programs in oreign countries; and

adjudicating aegations o securities aw vioations

Agency Direction

and Administrative

Support

The Chairman and Commission;

Oce o legisative and

Intergovernmenta Aairs;

Oce o Pubic Aairs;

Oce o the Secretary;

Oce o the Chie Operating Ocer;

Oce o Inormation Technoogy;

Oce o Freedom o Inormation Act

and Records Management Services;

Oce o Financia Management;

Oce o the Executive Director;

Oce o Human Resources;

Oce o Administrative Services; and

Oce o Equa Empoyment

Opportunity

The Chairman is responsibe or overseeing a aspects o agency

operations, and the Chairman and Commissioners are responsibe

or the review and approva o enorcement cases and orma orders

o investigation and the deveopment, consideration, and execution

o poicies and rues The other oces in Agency Direction and

Administrative Support are responsibe or:

working with Members o Congress on issues that aect the

Commission;

coordinating the SECs communications with the media, the

genera pubic, and oreign visitors;

reviewing a documents issued by the Commission, and preparing

and maintaining records o Commission actions;

maximizing the use o SEC resources by overseeing the strategic

panning, inormation technoogy program, nancia management,

records management, human resources, and administrative

unctions o the agency; and

ensuring that the SEC is an equa opportunity empoyer in u

compiance with a edera EEO aws

Inspector Genera Oce o the Inspector Genera OIG is an independent oce that conducts audits o programs and

operations o the SEC and investigations into aegations 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 83, the SEC presents its net costs o operations by the programs outined

above, consistent with the presentation used by the agency in submitting its budget requests A detaied discussion o program

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


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FY 2010 Year in Review

Opening: Contining the Path o Reorm

Over the past year, the SEC continued its eorts to reorm its

operations and ocus on its core mission o protecting investors

During that time, it aso began preparing to impement the

mandates o the newy-enacted Dodd-Frank Wa Street

Reorm and Consumer Protection Act (Dodd-Frank)

The agency continued its interna reorm eorts by competing

the restructuring o its enorcement division and aunching a

reorganization o its inspection unit with the intention o more

aggressivey and eectivey spotting vioations and pursuing

raud The agency aso continued to recruit individuas

with a range o ski-sets, increase sta training, upgrade its

technoogy, and oster a cuture o coaboration among the

various divisions and oces

On the rue-making ront, the SEC adopted regua-

tions designed to better protect investors rom raud

and abusive practices, assure investors have access to

timey and accurate inormation, incuding with regard to

corporate governance at the companies in which they invest

The agencys new structures and approaches were tested by

the events o May 6, when a voatie market sent the Dow

Jones down more than 500 points in a matter o minutes and back up amost as rapidy In response, Chairman

Schapiro immediatey brought together representatives o

the exchanges and se-reguatory organizations to identiy

measures that coud reduce the risk o another simiar

disruption Within weeks, the SEC had approved new rues

that pause trading when stock prices experience steep,

rapid movements Additionay, the SEC together with the

Commodity Futures Trading Commission (CFTC) aunched

an extensive review that utimatey determined the cause and

exacerbating actors o that days market voatiity

Finay, when Dodd-Frank became aw, the SEC was ready

with a detaied interna agenda, cross-agency working groups,

and a comprehensive strategy or aciitating pubic input as

the agency deveops the rues required by the new aw

In short, the SEC continued to work toward becoming a more

responsive and eective agency, committed to protecting

investors and restoring condence in the markets

Internal Reorms

In the past 12 months, the agency has continued its eorts

to improve its operationa capacity working to transorm

the cuture, breaking down sios, investing in human and

technoogica capita, and adopting new procedures tha

broady encourage individua initiative and improve agency

perormance

Consistent with its increasingy coaborative cuture, the

agency created interdiscipinary groups that worked togethe

on a host o specic issues incuding ie settements and the

deveopment o a consoidated audit trai

The agency increased unding or training that aows agency

sta to buid skis and keep current with acceerating ega

technica and nancia changes New hires are being seected

or their industry knowedge and their varied backgrounds

bringing new expertise into the agency and a sharper ocus

on emerging products and areas in need o speciaized

oversight

The SEC aso has begun a ong-term eort to improve its

technoogy, beginning with a system designed to bette

track, store, and compare tips, compaints, and reerras

Another key area o investment has been in workfow anddocument management systems that are aready improving

the management o enorcement cases and the consistency

o inspections and examinations These systems are a being

buit on the same sotware patorm so that inormation can be

easiy researched and shared across organizationa ines

Reinvigorating the Enorcement Program

In 2010, the Division o Enorcement competed its

comprehensive interna review and subsequent structura

reorms the most signicant in our decades As a resu

o the restructuring, the division has redepoyed hundredso experienced attorneys to ront-ine investigations and

created nationwide speciaized units to concentrate on high-

priority areas o enorcement The units wi ocus on Asse

Management (hedge unds and investment advisers), Market

Abuse (arge-scae insider trading and market manipuation)

Structured and New Products (various derivative products)


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Foreign Corrupt Practices Act vioations, and Municipa

Securities and Pubic Pensions They wi rey on enhanced

training, industry experience and skis, and targeted

investigative approaches to better detect inks and patterns

suggesting wrongdoing Each o the units is in the process o

hiring additiona proessionas with speciaized experience to

assist in investigative and enorcement eorts

In addition, the Division estabished an Oce o Market

Inteigence to serve as a centra oce or handing tips,

compaints, and reerras This oce wi enabe enorcement

sta to provide a coherent and coordinated response to the

huge voume o potentia eads the agency receives every day

OMI aso wi house the new whistebower oce created by

Dodd-Frank

OMI wi aso benet rom the agency-wide technoogy initiative

The rst phase o the initiative successuy consoidated the

mutipe, dispersed repositories or tips and compaints into a

singe, searchabe database In the second phase, the agency

wi depoy a new intake and resoution system that wi aow

the agency to capture more and more vauabe inormation

And in the third phase, the agency wi add risk anaytics toos

that hep to ecienty identiy high-vaue tips and to search or

trends and patterns across the database

Enorcement Cases

Despite the demands invoved in making these important

changes, the Divisions enorcement eorts continued to

bring exceent resuts The numbers do not te the whoe

story, but the Division obtained $28 biion in penaties and

disgorgement; barred numerous wrongdoers rom engaging in

improper business practices in the uture; required companies

to institute interna contros to prevent uture harm rom such

practices; and obtained other remedies that send a strong

deterrent message

Key Enorcement Cases

In FY 2010, the SEC brought 681 enorcement cases covering

a broad spectrum o nancial wrongdoing. What ollows is a

selection o some o those enorcement actions.

Financial Crisis

In the atermath o the nancial crisis, the SEC led many cases

involving mortgage-related securities and mortgage-related

products linked to the crisis. In three such cases, involvingCountrywide, American Home Mortgage and Evergreen, the

SEC led charges in FY 2009. In 2010, the SEC continued to

pursue cases related to the nancial crisis, including:

Goldman Sachs. In Apri 2010, in an action ed by the agencys

Structured and New Products Unit, the Commission charged

Godman Sachs and one o its vice presidents with derauding

investors by misstating and omitting key acts regarding a

nancia product tied to subprime mortgages Godman Sachs

aied to discose to investors that Pauson & Co, a major

hedge und payer, had taken a signicant roe in assembing a

synthetic coateraized debt obigation tied to the perormance

o subprime residentia mortgage-backed securities, and had

taken a short position against it Godman Sachs setted

with the SEC in Juy, paying $550 miion in penaties and

disgorgement and agreeing to reorm its business practices

Citigrop. In Juy 2010, Citigroup and two senior executives

agreed to sette charges that it had mised investors about the

companys exposure to subprime mortgage-reated assets,

making miseading statements in earnings cas and pubic

ings about the extent o its hodings o assets backed by

subprime mortgages Between Juy and mid-October 2007,

Citigroup represented that subprime exposure in its investment

banking unit was $13 biion or ess when, in act, it was more

than $50 biion

New Centry. In Juy 2010, three ormer ocers o New Century

Financia Corporation agreed to pay more than $15 miion in

disgorgement, interest and nes to sette charges that they

derauded investors In December 2009, the SEC aeged

that Brad A Morrice, the ormer CEO and co-ounder; Patti

M Dodge, the ormer chie nancia ocer (CFO); and David

N Kenneay, the ormer controer had asey assured New

Century investors that a was we, whie aiing to discosekey negative inormation known to them, incuding a dramatic

increase in oan deauts, oan repurchases and oan repurchase

requests New Century had been, at one point, one o the

argest subprime mortgage enders in the nation


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ICP Asset Management. In June 2010, the SEC charged New

York-based ICP Asset Management, its president, Thomas

Priore, and two aiated rms with derauding our muti-biion-

doar coateraized debt obigations (CDOs) by engaging in

rauduent practices and misrepresentations that caused

the CDOs to ose tens o miions o doars Priore and his

companies aso impropery obtained tens o miions o doars

in advisory ees and undiscosed prots at the expense o their

cients and investors

Taylor, Bean & Whitaker. In June 2010, the SEC charged

the ormer chairman and majority owner o what was once

the nations argest non-depository mortgage ender with

orchestrating a arge-scae securities raud scheme and

attempting to scam the US Treasurys Troubed Asset Reie

Program (TARP) The SEC aeged that lee B Farkas, throughhis company, Tayor, Bean & Whitaker Mortgage Corp,

sod more than $15 biion worth o abricated or impaired

mortgage oans and securities to Coonia Bank Farkas aso

was responsibe or a bogus equity investment that caused

Coonia Bank to misrepresent that it had satised a prerequisite

necessary to quaiy or TARP unds

Morgan Keegan. In Apri 2010, the SEC brought administrative

proceedings against Morgan Keegan & Company, Morgan

Asset Management and two empoyees or aegedy

overstating the vaue o securities backed by subprime

mortgages The SEC aeged that Morgan Keegan aied toempoy reasonabe procedures to internay price the portoio

securities in ve unds and sod shares to investors based on

the infated prices

Brookstreet Secrities. In December 2009, CEO Staney C

Brooks and Brookstreet Securities were charged with raud

or aegedy systematicay seing approximatey $300 miion

worth o risky and iiquid coateraized mortgage obigations

(CMOs) to more than 1,000 seniors and retirees with conser-

vative investment goas Additionay, in a aied ast-ditch

eort to stave o bankruptcy, Brooks directed the unauthor-

ized sae o CMOs rom Brookstreet customers cash-ony

accounts, causing substantia investor osses

Return of Monies to Harmed Investors

FY 2010 also saw several SEC-ordered distributions to share-

holders harmed by misleading statements and material omis-

sions regarding deendants exposures to subprime mortgages

and other investments. The agency also returned approx

mately $2.2 billion dollars to investors as a result o SEC en

orcement actions.

State Street Bank and Trst. In February 2010, State StreeBank and Trust agreed to distribute more than $300 miion

to investors who ost money during the subprime market

metdown The distribution resuted rom State Streets

settement o SEC charges that it mised investors about thei

exposure to subprime investments whie seectivey discosing

more compete inormation to avored investors

Reserve Primary Fnd. In January 2010, the Reserve Primary

Fund competed the distribution o $34 biion in assets to

investors who hed shares o the und when its net asset vaue

e beow $1 per share in September 2008 In May 2009

the SEC brought charges against entities and individuas who

operated the Reserve Fund or aiing to provide materia acts

regarding exposure o the und to lehman Brothers, whose

bankruptcy et the und unabe to meet investor requests

or redemptions In November 2009, the court adopted the

SECs proposed distribution pan, which resuted in investors

recovering more than 98 cents on the doar

Pay-to-Play

Another enorcement ocus was on pay-to-play arrange

ments, in which lucrative nancial management deals ar

struck between municipalities and rms who reward the well-

connected individuals who arrange those deals with cash

campaign contributions or other avors. Contracts based on

connections rather than competence potentially harm both

taxpayers and the beneciaries o these unds, through highe

ees and lower perormance.

Qadrangle. In Apri 2010, Quadrange Group llC and

Quadrange GP Investors II, lP setted charges that they had

participated in a kickback scheme to obtain a $100 miion

investment rom the New York State Common Retiremen

Fund, the states argest pubic pension und The investmencame ony ater a then-executive at Quadrange arranged

or an aiate to distribute the DVD o a ow-budget m that

ormer New York State Deputy Comptroer David logisci and

his brothers had produced

The SEC urther charged that the Quadrange executive agreed

to pay more than $1 miion in purported nder ees to Henry

Morris, the top poitica advisor and chie undraiser or orme

New York State Comptroer Aan Hevesi


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Quadrange agreed to sette the SECs charges and to pay a

$5 miion penaty The SECs investigation continues

JP Morgan. In November 2009, JP Morgan Securities Inc

setted charges springing rom an unawu payment schemethat enabed them to win business invoving municipa bond

oerings and swap agreement transactions with Jeerson

County, Aa by agreeing to pay a penaty o $25 miion, make

a payment o $50 miion to Jeerson County, and oreit more

than $647 miion in caimed termination ees

The SEC aso brought charges against two ormer managing

directors, aeging that Chares leCroy and Dougas MacFaddin

made more than $8 miion in undiscosed payments to cose

riends o certain Jeerson County commissioners

Auditors

Investors rely on accurate nancial inormation to make critical

nancial decisions. By ocusing on the auditors who sign o

on companies reporting, the SEC helps deter Enron-type

accounting raud that might cost investors billions.

Ernst & Yong LLP. In December 2009, Ernst & Young llP,

independent auditor o Chicago-based Bay Tota Fitness,

paid $85 miion to sette charges that it knew or shoud

have known about Bays rauduent nancia accounting and

discosures In addition, six current and ormer Ernst & Young

partners setted with the SEC The SEC ound that Ernst &Young issued ase and miseading audit opinions stating that

Bays 2001 to 2003 nancia statements were presented in

conormity with generay accepted accounting principes and

that Ernest & Youngs audits were conducted in accordance

with Generay Accepted Auditing Standards

Insider Trading

The SEC continues to ocus on insider trading both by

individuals and by large-scale institutional traders through its

new Market Abuse Unit.

Galleon. In October 2009, the SEC charged biionaire Raj

Rajaratnam and his New York-based hedge und advisory rm

Gaeon Management lP with engaging in an insider trading

scheme that generated more than $33 miion in iicit gains

The SEC aso charged six others invoved in the scheme,

incuding senior executives at IBM, Inte, and McKinsey

& Company

In November, the SEC broadened its case, charging

13 additiona individuas and entities, incuding three hedge

und managers, three proessiona traders at New York-

based Schottened Group, and a senior executive at Atheros

Communications, a Caiornia-based deveoper o networking

technoogies This is the argest hedge und insider trading

investigation to date

Ctillo. In November 2009, the SEC charged Arthur J

Cutio and Jason Godarb with trading inside inormation in

exchange or kickbacks, as we as six Wa Street traders

and a proprietary trading rm who were aso invoved in a

$20 miion insider trading scheme

The SEC aeged that Cutio, an attorney in the New York

oce o aw rm Ropes & Gray llP, had access to condentia

inormation about at east our major proposed corporate

transactions in which his rms cients participated

Offering Frauds/Ponzi Schemes

The SECs eorts to hold accountable perpetrators o

oering rauds and Ponzi schemes aided by the adoption

o signicant post-Mado reorms and the establishment o

the Asset Management Unit continue to uncover numerous

large-scale rauds.

Meredon Mining. In June 2010, the SEC charged our Canadian

men and two others iving in Forida with perpetrating a $300miion internationa Ponzi scheme on investors in a purportedy

successu god mining operation The SEC aeged that

Miowe Aen Brost and Gary Aen Sorenson, o Cagary, were

the primary architects and beneciaries o a scheme that

persuaded more than 3,000 investors across the US and

Canada to invest their savings, retirement unds and even

home equity, in she companies owned or controed by Brost

or Sorenson

Foreign Corrupt Practices Act

The SEC continues to prosecute companies that make illegal

payments to win business overseas. A renewed ocus on

these practices in recent years, coupled with the eorts o the

FCPA Unit, continues to yield signicant settlements.

ENI. In Juy 2010, the SEC charged an Itaian company,

ENI, SpA and its ormer Dutch subsidiary, Snamprogetti

Netherands BV, with vioations o the Foreign Corrupt


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Practices Act or providing cash-ed briecases and vehices

to Nigerian government ocias in an eort to win ucrative

construction contracts ENI agreed to pay $125 miion to

sette the SECs charges, and Snamprogetti paid an additiona

$240 miion penaty to sette separate crimina proceedings

announced by the US Department o Justice According

to the SECs compaint, senior executives at Snamprogetti

and the other joint venture companies authorized the hiring

o two agents who unneed more than $180 miion in bribes

to Nigerian government ocias to obtain severa contracts to

buid iqueed natura gas aciities in Nigeria

Daimler. In March 2010, Daimer AG agreed to pay $914 miion

in disgorgement to sette charges that it engaged in a repeated

and systematic practice o paying bribes to oreign government

ocias to secure business in Asia, Arica, Eastern Europe,and the Midde East Daimer aso agreed to pay $936 miion

in nes to sette charges in separate crimina proceedings by

the US Department o Justice

Financial Fraud

Financial raud can cost investors billions in lost equity.

Both companies and corporate ocers are accountable to

shareholders or timely and, especially, honest reporting.

Dell. In Juy 2010, the SEC charged De Inc with aiing to

discose materia inormation to investors and using rauduentaccounting to make it asey appear that the company was

consistenty meeting Wa Street earnings targets and reducing

its operating expenses Among others, De Chairman and

CEO Michae De, ormer CEO Kevin Roins, and ormer CFO

James Schneider were charged by the SEC or their roes in

the discosure vioations De Inc agreed to pay a $100 miion

penaty to sette the SECs charges Michae De and Roins

each agreed to pay a $4 miion penaty, and Schneider agreed

to pay $3 miion, to sette the SECs charges against them

Municipal Securities and Public Pensions

As the nancial health o municipalities and its eect on the

securities they issue become a matter o greater concern,

the SEC has ocused on ensuring that investors are aware o

actors which could aect the ability o municipalities to meet

their nancial obligations.

New Jersey. In August 2010, in an investigation handed by

the Municipa Securities and Pubic Pensions Unit, New

Jersey became the rst state ever charged by the SEC or

vioations o edera securities aws, when it was charged with

aiing to discose that it was underunding the states two

argest pension pans, to investors in biions o doars worth

o municipa bonds As a resut, investors were not provided

adequate inormation to evauate the states abiity to und

the pensions or to assess their impact on the states nancia

condition New Jersey agreed to sette the case withou

admitting or denying the SECs ndings

Strengthening Examinations and Oversight

like the Enorcement Division, the Oce o Compiance

Inspections and Examinations (OCIE) engaged in a comprehensive se-examination to improve its examination program

in critica areas o strategy, structure, peope, processes, and

technoogy

During FY 2010, OCIE estabished a new, nationa governance

structure designed to break down sios and increase consis-

tency among regiona oces, and to improve coaboration

with other divisions For the rst time, eaders rom across

the country began working together to deveop an integrated

strategy and impement enhanced poicies, procedures

and toos to drive consistency and eectiveness across the

nationa exam program

Stang strategies are changing, as we Instead o creating

xed examination teams that remain together over time, OCIE

wi now customize teams or each examination, matching the

strengths o individua examiners to the unique chaenges

oered by the entity being examined And managers are

spending more time in the ed, eading their teams on-site

Vasty outnumbered by the entities it is charged with oversee

ing, OCIE aso is increasingy utiizing a risk-based inspection

strategy that reies on a variety o data points to determine

which entities pose the greater risk to investors To thisend, OCIE has created a centraized Risk Assessment and

Surveiance Unit, which is working with the agencys recenty

created Division o Risk, Strategy, and Financia Innovation

to deveop new risk assessment toos that wi aow OCIE

to engage in more sophisticated risk assessment and earie

action Finay, OCIE is pacing greater emphasis on hiring

sta with strong industry experience, as we as training and


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certiying examiners In support o these unctions, OCIE is

depoying a new suite o technoogy toos to more uy equip

examiners in the ed

Investor-Focsed Rlemaking

In 2010, the SEC continued to engage in one o the most

active investor-ocused reguatory agendas in the agencys

history The rues refect the agencys eorts to create a more

secure marketpace, assure that investors have the timey and

accurate inormation they need, and support eective and

responsive governance

A More Secre Marketplace

One key SEC ocus has been on creating toos and procedures

that hep protect investors rom raud and manipuation, and

which enhance the abiity o the SEC to investigate when

maeasance is suspected To make the markets saer or

investors, the SEC proposed or adopted the oowing rues:

Cstody Controls. The SEC adopted a rue designed to

provide greater protections to investors who entrust their

assets to investment advisers The rue requires that

independent pubic accountants conrm in the course

o a surprise exam the existence and vaue o the assets

a cient has paced in an investment adviser account,

and to review custody contros in situations where the

possibiity or misappropriation o cient assets is most

acute These rues wi diminish the abiity o dishonest

advisers to distribute ase account statements purporting

to document assets that do not exist, or or the adviser to

misappropriate assets under their contro

Consolidated Adit Trail. The SEC proposed a rue that

woud require se-reguatory organizations to estabish a

consoidated audit trai system which wi aow reguators

to track inormation about orders received and executed

across the securities markets Currenty, there is no

singe database o comprehensive and readiy accessibedata regarding orders and executions across markets

I adopted, or the rst time ever, this data coud be tracked

across mutipe markets, products and participants in rea

time, aowing more rapid reconstruction o trading activity

and to better anaysis o both suspicious trading behavior

and unusua market events

Short Selling/Fails-to-Deliver. The SEC adopted a rue

designed to imit the downward price pressure appied

by short-seing to a stock that has dropped more than

10 percent in one day, promoting market stabiity and

preserving investor condence This rue aso enabes

ong seers to stand in the ront o the ine once the 10

percent benchmark is breached and to se their shares

beore any short seers In addition, the SEC addressed

the potentiay harmu eects o abusive naked short

seing, adopting rues that require that ais-to-deiver

resuting rom short saes be cosed out immediatey ater

they occur Since this rue was adopted, the number o

aiures to deiver securities has dropped signicanty

Sponsored Access. The SEC proposed a new rue that woud

eectivey prohibit broker-deaers rom providing customerswith untered or naked access to an exchange or

ATS The rue woud require those with market access to

put in pace risk management contros and supervisory

procedures, in order to minimize the chances that a cient

with untered access wi enter erroneous orders, ai to

compy with various reguatory requirements, or breach a

credit or capita imit

Money Market Fnds. In the wake o the nancia crisis,

the SEC adopted rues strengthening the oversight and

resiiency o money market unds by requiring, among

other things, higher credit quaity, greater iquidity, shortermaturities, stress testing and the discosure o the unds

actua mark-to-market net asset vaue

Pay-to-Play. The SEC adopted rues prohibiting an

investment adviser rom providing advisory services or

compensation within two years ater contributing to the

campaigns o eected ocias in a position to infuence

seection o managers or pubic unds The rues aso

restricted the bunding by an adviser o contributions rom

others The rues wi hep prevent pay-to-pay arrange-

ments and assure investors and taxpayers that advisers to

pubic accounts such as pubic empoyee pension unds are seected on merit, rather than poitica avor


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Better Inormation

Another important principe is that a investors shoud have

access to timey and accurate inormation To aciitate better

discosure, the SEC took the oowing actions:

Mnicipal Secrities Disclosre. The SEC adopted rues

improving the quaity and timeiness o the discosure

o materia events reated to municipa securities

These events, which coud aect the risk and vaue o a

municipa security, incude such occurrences as payment

deauts, rating changes and tender oers The rues wi

aow investors to make more knowedgeabe decisions

about municipa securities

Form ADV Part 2. The SEC updated the principa invest-

ment adviser discosure document, Form ADV Part 2, toimprove the quaity o the inormation investors receive

regarding their advisers conficts, compensation strategy,

business activities and discipinary history The new orm

wi oer detaied, reevant inormation in pain Engish, on

both advisory rms and individua advisers The brochure

wi provide improved and expanded inormation in a

more user-riendy ormat describing advisers quaica-

tions, investment strategies and business practices in

pain Engish

12b-1 Fees. The SEC proposed rues that woud create a

new and more equitabe ramework governing the way inwhich mutua unds are marketed and sod to investors

The rues woud imit the amount o asset-based saes

charges that individua investors pay and woud improve

the inormation provided to investors regarding ees

deducted rom mutua unds to compensate those who

se the unds

Target Date Fnds. The SEC proposed rues to hep cariy

the meaning o a date in a target date unds name and

to enhance the inormation in target date und advertising

and marketing materias Inormation woud be provided

in chart, tabe, or graph ormat in order to enhance

investor understanding o a unds asset mix and how the

mix is expected to change as the investors retirement

approaches and thereater

Asset-Backed Secrities. The SEC proposed new rues

that woud signicanty improve the discosure and oering

process or asset-backed securities The new rues woud

require reporting o detaied data on each oan in the poo

both at the time o securitization and on an ongoing basis

In addition, the rue woud require that a computer program

be ed with the SEC that demonstrated the eect o the

watera how oan payments and osses are distributed

among dierent tranches o the security The rue aso

woud assure that investors have enough time to utiize

this enhanced inormation by imposing a minimum oering

period For expedited o the she oerings, sponsors

woud be required to retain some interest in the securities

better aigning interests o sponsors and investors by

keeping skin in the game Since the SEC proposed its

rue, Congress passed Dodd-Frank, which aso imposes

an asset-backed securities risk retention requirement to be

adopted by nancia reguators

Dark Pools.

The growth o private trading systems knownas dark poos in which participants can execute trades

without dispaying pubic quotations threatens to create

a two-tiered market, in which ony privieged investors have

u price and iquidity inormation The SEC proposed rues

to generay require that inormation about an investors

interest in buying or seing a stock be made pubicy avai

abe, instead o avaiabe ony to a seect group operating

within a dark poo

Market Strctre Concept Release. US equity markets

are changing signicanty as trading speed acceerates

aternative trading centers emerge and iquidity and pricinginormation disperses across many exchanges In igh

o these changes, the SEC aunched a broad review o

equities market structure, issuing a concept reease

seeking pubic comment on issues such as high-requency

trading, co-ocating trading terminas, and markets that do

not pubicy dispay price quotations In conducting this

review, which was aunched severa months ahead o the

May 6 disruptions, the Commission has sought to earn

how a types o, and a sizes o, individua investors are

aring in the current market structure

Corporate Governance

The SEC is committed to supporting eective corporat

governance that benets both sharehoders and companies

It is working to see that proxy and discosure rues give marke

participants access to the u, timey, and accurate inormation

they need


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Proxy Enhancements. The SEC adopted rues that aow

sharehoders to better evauate the eadership o pubic

companies by requiring companies to provide more

meaningu and detaied inormation about the eadership

structure o boards, the quaications o board nominees,

potentia conficts o interest aced by compensation con-

sutants, and the reationship between a companys overa

compensation poicies and risk taking In pace or just a

singe proxy season so ar, this reguation has substan-

tiay increased the quaity o many ings, giving investors

much greater insight into the taents and quaications o

the men and women who run their companies

Proxy Access. The SEC adopted rues designed to aciitate

the abiity o sharehoders to exercise their traditiona rights

under state aw to nominate and eect members to companyboards o directors Under the rues, sharehoders wi be

eigibe to have their nominees incuded in a companys

proxy materias i they meet certain requirements, incuding

owning at east 3 percent o the companys shares

continuousy or at east the prior three years

Voting Inrastrctre Concept Release. Every year, more

than 600 biion shares are voted at more than 13,000

sharehoder meetings The proxy is the principa means

through which sharehoders and pubic companies

communicate around these eections Yet it has been 30

years since the Commission has conducted a thoroughreview o this inrastructure In ight o the vast changes

in the intervening decades, the SEC issued a concept

reease reated to the state o proxy inrastructure and

how it might be improved The goa is to hear whether the

US proxy system as a whoe operates with the accuracy,

reiabiity, transparency, accountabiity, and integrity that

sharehoders and issuers expect

May 6 Market Disrption

On May 6, 2010, the Dow Jones Industria Average dropped

more than 500 points in under ve minutes o trading It thendramaticay reversed itse, recovering most o the oss in the

oowing ve minutes These gyrations deprived investors o

essentia price discovery unction, and brought uncertainty to

investors counting on sae and stabe markets

With the markets unsetted, the SEC moved immediatey

to search or causes and to prevent a simiar situation rom

occurring again Within hours, cross-unctiona SEC teams

were coaborating with exchange representatives, the Financia

Industry Reguatory Authority (FINRA) and CFTC, discussing a

coordinated response

Within two weeks, the stas o the SEC and CFTC reeaseda preiminary report on the events o May 6 In addition, the

SEC posted or comment proposed rues that woud require

or the rst time that FINRA and the exchanges impose

a uniorm circuit-breaker system to hat trading or certain

securities i their price moved 10 percent in a ve minute

period These pauses are designed to give market participants

time to provide iquidity and or the aected security to attract

new trading interest, so that trading can resume in a air and

ordery ashion

By June, sighty more than six weeks ater the event, FINRA

and the exchanges began putting in pace a piot circuit breaker

program or S&P 500 stocks In September, the program was

expanded to incude stocks isted in the Russe 1000 and to

cover severa hundred exchange-traded unds, or ETFs

Aso in September, the SEC approved new rues submitted by

the exchanges and FINRA cariying the process or breaking

ceary erroneous trades On May 6, neary 20,000 trades were

invaidated but ony or those stocks that traded 60 percent or

more away rom their price at 2:40 PM, a benchmark that was

set ater the act The new rue reduces investor uncertainty by

more uy dening the conditions under which the exchanges

and FINRA may cance erroneous trades

In September, the Commission aso posted or comment

proposed exchange rues that woud eectivey eiminate

the practice by market makers o submitting stub quotes

to exchanges when they do not want to participate in the

markets Stub quotes are priced ar away rom the prevaiing

market price (e.g., a buy order at a penny or a se order at

$100,000) and are not intended to be executed; however, the

extraordinary voatiity on May 6 caused a arge number o

stub quotes to be executed, thereby generating a substantia

portion o the trades that needed to be brokenAt the end o September, the stas o the SEC and CFTC

reeased a report o their ndings regarding the events o

May 6 The report describes what occurred that aternoon

as the resut o two iquidity crises one at the broad index

eve in the E-mini S&P utures contract, the other with respect

to individua stocks The report detais how a arge trade in

the E-Mini S&P utures contract ed to a oss o iquidity in that


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instrument and how a simiar oss o iquidity occurred in the

equity markets, as many providers o iquidity curtaied their

activity or temporariy withdrew, eading to some trades being

executed at absurdy ow or high prices

Wall Street Reorm

On Juy 21, President Obama signed into aw Dodd-Frank, the

most signicant piece o nancia reorm egisation since the

1930s Dodd-Frank gives the SEC signicant new investor

protection responsibiities and provides new toos with which

to carry out agency responsibiities, od and new

Over the two years oowing the bi-signing, the SEC wi be

responsibe or more than 100 new ruemakings, 20 reports

and ve new oces to be created within the agency Whie

this is a signicant task, the SEC continues to u both its

mandates under the Act and its pre-existing responsibiities

The SEC began panning or the demands o the new

egisation months beore passage Interna processes and

cross-discipinary working groups panned beore the bis

signing or each o the major ruemakings and studies came

on-ine immediatey ater the bis signing, and continue to drive

the process Rue writing divisions and oces meet weeky

to review the status o ruemakings and studies, and to pan

or the upcoming weeks SEC sta aso meet reguary with

other nancia reguators charged with bringing Dodd-Frank

to ie The SECs Oce o Internationa Aairs meets weeky

with ruewriting sta to ensure appropriate coordination with

oreign reguators

One key goa during Dodd-Frank ruemaking is to maximize

the opportunity or pubic comment against a background o

compete transparency

The SEC opened a series o e-mai boxes ess than a week

ater President Obama signed the Act, to encourage pubic

comment even beore the various rues were proposed and

the ocia comment periods began

As the ruemakings progress, the SEC is making an eort not

ony to meet with every party who expresses interest, but aso

to reach out to stakehoders whose interests are aected but

whose views do not appear to be uy represented The SEC

is aso hoding pubic roundtabes and hearings on seected

topics

In the interest o u transparency, the SEC is posting on

its website both the transcripts o these roundtabes, and

the written comments it receives Additionay, the SEC is

posting descriptions o any rue-reated meetings between

sta and outside parties incuding participants, agendas and

materias distributed

The Act wi resut in a number o important SEC action

incuding:

Over-the-Conter Derivatives. Dodd-Frank provides a compre

hensive ramework or the reguation o the over-the-counte

derivatives market bringing dayight into an opaque market

that contributed to the economic crisis o recent years In

directing the SEC and CFTC to create a comprehensive reg

uatory ramework where none currenty exists, Dodd-Frank

imposes a number o substantia tasks The SEC and CFTC

must distinguish between swaps and security-based swaps

and decide how to reguate mixed swaps that are security-

based swaps with a commodity component The agencies

aso must work together to dene other key terms They are

writing rues that address, among other issues, mandatory

cearing, the end-user exception to mandatory cearing and

transactiona inormation transparency

The SEC and CFTC are aso charged with designating and

dening new casses o market participants And they mus

register and oversee these market participants

Exective Compensation. In 2011, the SEC wi naize a

number o corporate governance rues, with a particua

ocus on executive compensation Dodd-Frank requires tha

sharehoders have advisory say-on-pay votes on executive

compensation non-binding up-or-down votes on executive

pay packages at a companies at east once every three

years Sharehoders wi aso vote on the requency o the

say-on-pay vote, and wi have a simiar say on goden

parachutes

Companies wi be required to cacuate and discose themedian tota compensation o a empoyees, and the ratio

o CEO compensation to that gure Companies wi aso be

required to discose the reationship between senior executives

compensation and the companys nancia perormance, as

we as whether empoyees or directors are permitted to hedge

against a decrease in vaue o equity securities granted as par

o their compensation


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In addition, the SEC is creating standards under which isted

companies wi be required to deveop cawback poicies or

recaiming incentive-based compensation rom current and or-

mer executive ocers ater a materia nancia restatement

The SEC wi aso adopt rues requiring stock exchanges to set

orth isting standards or compensation committees incuding

independence requirements In addition, the Commission

wi adopt discosure requirements addressing compensation

consutant conficts o interest

Fidciary Dty. Currenty, registered investment advisers are

hed to what is known as a duciary standard o conduct,

meaning they must put their cients interests beore their

own, and avoid or revea any conficts o interest Registered

broker-deaers, however, are hed to a suitabiity standard,

that does not necessariy require the broker-deaer to discose

a conficts or put investors needs rst This distinction is

ost on many investors, who do not reaize that they can be

treated dierenty based on who is advising them Dodd-Frank

requires that the SEC conduct a study o the eectiveness o

existing disparate standards o conduct

Ater competion o the study, the egisation aso gives the

SEC authority to write rues that woud impose a harmonized

duciary standard on broker-deaers and investment

advisers providing personaized investment advice and

recommendations about securities to retai customers (andother customers as determined by the SEC) The Act requires

that this standard be no ess stringent than the standard

appicabe to investment advisers and urther gives the SEC

the abiity to better harmonize the reguatory requirements

appicabe to broker-deaers and investment advisers

Private Fnd Adviser Registration. Dodd-Frank requires advisers

to most private unds incuding hedge unds with assets

under management o more than $150 miion to register with

the SEC The Act eiminates the so-caed 15 cient provision

which aows advisers to avoid registration whie managing

substantia amounts o assets on beha o a arge numbero utimate investors It aso authorizes the Commission

to require advisers to maintain records o and e reports

regarding the private unds they advise The arge number

o unregistered private und advisers presented signicant

potentia or raud and questionabe practices In addition, the

ack o a comprehensive database or private unds has made

it virtuay impossibe to monitor them or systemic risk

Asset-backed Secrities. Dodd-Frank requires the SEC to issue

rues designed to improve the asset-backed securitization

process

Dodd-Frank requires the SEC to work with eow reguatorsto adopt rues requiring certain parties who put together

securitizations to retain an economic interest in a materia

portion o the credit risk in assets transerred or sod in

connection with securitizations Dodd-Frank incudes this

provision known as risk retention or skin in the game in

order to aign the economic interests o securitizers with those

o investors in asset-backed securities

The SEC aso expects to naize rues in 2011 requiring that

securitizers provide enhanced discosure about representa-

tions and warranties, as we as ued and unued asset

repurchase requests These rues wi aow investors to

identiy asset originators with cear underwriting deciencies

Dodd-Frank aso requires the SEC to issue rues requiring any

issuer o an asset-backed security to perorm a review o the

assets underying the security and to discose the nature o

this anaysis

The egisation aso directs the SEC to promugate rues

requiring asset-eve or oan-eve data about the under-

ying assets, i individua oan data are necessary or

investors to independenty perorm due diigence Dodd-

Frank requires specic types o data to be discosed, many

o which were incuded in the SECs 2010 proposas to revise

Reguation AB

Finay, Dodd-Frank requires the SEC to adopt rues to

address materia conficts o interest in connection with

securitizations Specicay, Dodd-Frank mandates rues to

prohibit underwriters, pacement agents, initia purchasers

or sponsors o an asset-backed security (or their aiates or

subsidiaries) rom engaging in any transaction within one year

o the date o the rst cosing o the sae o an asset-backed

security that woud constitute a materia confict o interest

with respect to any investor in a transaction arising out osuch activity

Credit Rating Agencies. The Act buids on existing SEC

authority to designate Nationay Recognized Statistica

Rating Organizations (NRSROs), requiring the Commission

to adopt rues designed both to improve the accuracy o

individua ratings, and to give investors greater insight into the


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actors behind those ratings New reguations wi address

potentia conficts o interest with respect to NRSRO saes and

marketing practices They wi aso require annua reports on

interna contros designed to eiminate bias in avor o issuer/

cients; prescribe ook-back anayses when an anayst eaves

an organization searching or patterns o bias; and grant the

SEC authority to impose nes and penaties

New rues wi aso require that NRSROs discose perormance

statistics, revea their rating methodoogies and discose in an

easiy accessibe ormat the data and assumptions undery

ing credit ratings In addition, new reguations wi estabish an

anayst training and testing regime and consistent appication

o rating symbos and denitions, creating a carity o com-

munication that aows investors to easiy understand rating

agency opinions, regardess o their source, and to compare

perormance o one agency against another


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Financial Highlights

This section provides key nancia inormation or FY 2010 It summarizes the SECs eorts to manage resources ecienty and

responsiby whie accompishing the agencys mission

In FY 2010, the SECs tota budgetary authority equaed

$1,571 miion, a 62 percent increase over the FY 2009 eve

o $970 miion The argest contributor o the increase is the

estabishment o Investor Protection Fund authorized in Dodd-

Frank The unding authority in FY 2010 incuded $1,095

miion in osetting coections (X0100), $452 miion or the

Investor Protection Fund (X5567), and $24 miion in carry-

over o unobigated baances and recoveries rom prior-year

obigations In FY 2009, the unding incuded $894 miion in

osetting coections (X0100), $10 miion in a suppementa

appropriation (09/10 0100) issued by Congress to use or

investigating securities raud, and $66 miion in carry-over o

unobigated baances and recoveries rom prior-year obiga-

tions This is iustrated in Chart 1.2, Spending Authority by

Source.

The SEC empoyed a tota o 3,748 FTE in FY 2010

This represents an increase o 106 FTE over FY 2009

The increase in FTE rom FY 2009 to FY 2010 is due to the

increase in unding and the agencys ocus on hiring new sta

with the requisite skis and experience to urther the SECsmission

NOTE: The Investor Protection Fund (X5567) was established in FY 2010.

The SEC has steadiy reduced the Unobigated Baance

Brought Forward, October 1 ine o the Statement o

Budgetary Resources, as iustrated in Chart 1.3,Unobligated

Balance, Brought Forward In FY 2010, o the $27 miion

brought orward, $78 miion was reated to a $10 miion

suppementa appropriation or investigations o securities

raud

$0

$400

$800

$1,200

$1,600

FY 2009

Appropriation X0100 Appropriation 09/10 0100

Appropria tion X5567 Carry-Over

(DOLLARSINMILLIONS)

CHART 1.2

SPENDING AUTHORITY BY SOURCE

$66 $10

$894

$452

$1,095

General Fund Investor Protection Fund

FY 2010 FY 2009 FY 2010

$24


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O the $10 miion suppementa appropriation, $107 thousand

remains unobigated as o September 30, 2010 This suppe-

menta appropriation is aso refected on the Unexpended

Appropriations Other Funds ine o the Baance Sheet

The status o unds or the suppementa appropriation is ius-

trated in Chart 1.4,Status o the Supplemental Fund

The Commission adjusts the rates (doars per miion

doars transacted) or Section 31 transaction ees

periodicay in accordance with the Investor and Capita

Markets Fee Reie Act o 2002 As shown in Chart 1.5,

Section 31 Exchange Fee Rate, the rst ha o FY 2009,

the Section 31 Fee rate was $560 It was subsequenty

increased to $2570 or the second ha o FY 2009

through the rst quarter o FY 2010 The rate was

then reduced to $1270 on January 15, 2010, and then

increased to $1690 on Apri 1, 2010 The overa securities transactions voume subject to

Section 31 Fees was neary unchanged between FY

2009 and FY 2010 However, the monthy voume

fuctuations appied to the varying ee rates produced

average weighted ee rates o $1434 and $1833 or FY

2009 and FY 2010, respectivey As a resut, there was

approximatey a 26 percent increase in Section 31 Fee

revenues


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Chart 1.6, Osetting Collections vs. New Budgetary

Authority1, presents the budget authority and osetting

coections reated to transactions ees and ing ees

rom FYs 2002 through 2010 The sum o the osetting

coections targets or Section 31 Fees and ing ees

in FY 2010 was $1,495 miion The actua osetting

coections or FY 2010 was $1,443 miion

In FY 2010, there was a $273 miion decrease to the

accounts receivabe baance The decrease was primariy

due to a $155 miion increase in the Aowance or loss

on Accounts Receivabe or disgorgement and penaties

Secondy, receivabes or Section 31 Fees decined by $60

miion, comprised o $48 miion due to ee rate changes,

and $12 miion due to adjustments rom prior year ees

owed in FY 2009 that were paid in FY 2010 Finay, therewas a $58 miion decrease in gross disgorgement and

penaties receivabes

1 The above chart only refects osetting collections related to ees collected on Section 31 securities transactions and Section 6(b), 13(e),

14(g), and 24-2 lings and does not include reimbursable type collections and reunds as reported on the Osetting Collections line o the

Statement o Budgetary Resources.

As o September 30, 2010, Tota Assets decreased by $401

miion compared to the September 30, 2009 baance, as

iustrated in Chart 1.7,Assets, Liabilities, and Net Position

This decrease is primariy due to a $1,035 miion decine in

Investments, stemming rom the SECs continued eorts to

acceerate distributions to harmed investors This decine

was oset by a $906 miion increase in Fund Baance with

Treasury (FBWT), due argey to $452 miion in unding or the

new Investor Protection Fund authorized by Dodd-Frank and

an increase o $348 miion in ing ees and Section 31 ees

The decrease o $1,213 miion in Tota liabiities is mosty due

to distributions to harmed investors and a ower accounts

receivabe baance

The SEC does not record on its nancia statements any asset

amounts that another government entity such as a court, or a

non-governmenta entity, such as a receiver, has coected or

wi coect and wi subsequenty disburse


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Limitations o the Financial Statements

The principa nancia statements incuded in this report have

been prepared by SEC Management to report the nancia

position and resuts o operations o the SEC, pursuant to

the requirements o 31 US Code Section 3515(b) Whie the

statements have been prepared rom the books and records o

the SEC in accordance with GAAP or edera entities and the

ormats prescribed by the Oce o Management and Budget

(OMB), the statements are in addition to the nancia reports

used to monitor and contro budgetary resources, which are

prepared rom the same books and records The statements

shoud be read with the understanding that they are or a

component o the US Government, a sovereign entity

The Tota Program Costs ine on the Statement o Net Cost

and the Gross Outays ine on the Statement o Budgetary

Resources increased primariy as a resut o increases in saaries

and benets In FY 2010, the SEC incurred costs resuting rom

an increase in stang eves and cost o iving adjustments

The increase in the SECs saary and benets reated costs is

evidenced in Chart 1.8,Expense Comparison


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Perormance Highlights

This section provides key perormance inormation or FY 2010 It outines the SECs strategic and perormance panning

ramework and progress toward reaching panned perormance targets Additionay, this section incudes a ist o perormance

indicators that provide useu inormation or understanding the agencys activities

Strategic and Perormance Planning Framework

The FY 2010 strategic and perormance panning ramework

is based on the SECs new strategic pan covering FY 2010

FY 2015, avaiabe at www.sec.gov/about/secstratplan1015.

pd. This updated pan addresses the agencys mission,

vision, vaues, and revised strategic goas The pan urther

detais the outcomes the agency is seeking to achieve, the

strategies and initiatives that wi be undertaken to accompishthose outcomes, and the perormance measures that wi be

used to gauge the agencys progress

The SECs goas and priorities in the Strategic Pan are infu-

enced by a number o externa environmenta actors, incuding

the demands o uing the agency mission in compex and

goba nancia markets and changes in egisation aecting

the agency During the past two years, this environment has

changed dramaticay Whie the Strategic Pan attempts to

anticipate various ways in which markets, reguated industries,

and egisative underpinnings may transorm over time, no pan

can anticipate a possibe scenarios Because the accompa-

nying perormance measures were signicanty revised in theFY 2010 FY 2015 strategic pan, there is imited prior year

perormance inormation provided in this report

The SECs work is structured around our strategic goas and

12 outcomes that gauge the SECs perormance within each

strategic goa

TABLE 1.2

Strategic Goals with

Resorces InvestedOtcomes

Foster and enorce compliance with theederal secrities laws

Cost: $641.7 million

The SEC osters compiance with the edera securities awsThe SEC prompty detects vioations o the edera securities aws

The SEC prosecutes vioations o edera securities aws and hods vioators accountabe

Establish an eective reglatoryenvironment


The SEC estabishes and maintains a reguatory environment that promotes high-quaity discosure,nancia reporting, and governance, and prevents abusive practices by registrants, nanciaintermediaries, and other market participants

The US capita markets operate in a air, ecient, transparent, and competitive manner, osteringcapita ormation and useu innovation

The SEC adopts and administers rues and reguations that enabe market participants to understandceary their obigations under the securities aws

Facilitate access to the inormationinvestors need to make inormed

investment decisions


Investors have access to high-quaity discosure materias that are useu to investment decisionmaking

Agency ruemaking and investor education programs are inormed by an understanding o the widerange o investor needs

Enhance the Commissions perormancethrogh eective alignment and

management o hman, inormation,and nancial capital


The SEC maintains a work environment that attracts, engages, and retains a technicay procientand diverse workorce that can exce and meet the dynamic chaenges o market oversight

The SEC retains a diverse team o word-cass eaders who provide motivation and strategic directionto the SEC workorce

Inormation within and avaiabe to the SEC becomes a Commission-wide shared resource,appropriatey protected, that enabes a coaborative and knowedge-based working environment

Resource decisions and operations refect sound nancia and risk management principes


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Perormance Measres Overview

To assess the SECs perormance resuts against the Strategic

Pans estabished targets, a resuts rating methodoogy is

used to assign one o the oowing three perormance ratings

or a given resut:

Below Target On Target Above Target

Not Met Met Exceeded

The new strategic pan identied 51 perormance measures

Severa o these perormance measures track mutipe

perormance targets, and Chart 1.9, Summary o FY 2010

Perormance Results shows the perormance resuts or each

o the 70 perormance targets Twenty-seven o these targets

have not yet been estabished or FY 2010 data is not avaiabe

(categorized as not appicabe (N/A)) As the agency renes

its processes or coecting the inormation, targets wi be

estabished and data wi be reported

Perormance indicators, outined in Table 1.4, Perormance

Indicators Results Summary, do not incude panned targets

because it woud be inappropriate or the agency to conduct

certain activities with an eye towards meeting predetermined

targets Thereore, resuts or perormance indicators are not

incuded in Chart 1.9, Summary o FY 2010 Perormance

Results


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Perormance Reslts Smmary

The SEC has estabished various perormance measures or assessing program perormance against strategic goas

and panned outcomes For each perormance measure, one or more perormance targets have been estabished

Table 1.3, Perormance Measures Results Summary provides a summary o actua perormance resuts during FY 2009 and

FY 2010 or each perormance measure, and Table 1.4, Perormance Indicators Results Summary provides a summary o

indicators by outcome within each strategic goa A detaied discussion o the agencys program achievements and perormance

resuts is ocated in the Perormance Section

TABLE 1.3

PERFORMANCE MEASuRES RESuLTS SuMMARY

GOAL 1: Foster and Enorce Compliance with the Federal Secrities Laws

OuTCOME 1.1: The SEC osters compliance with the ederal secrities laws.FY 2009Actal

FY 2010Target

FY 2010Actal

FY 2010Reslts

MEASuRE 1: Number o new investor education materias designed specicayto hep investors protect themseves rom raud N/A N/A 16 N/A

MEASuRE 2: Number o industry outreach and education programs targeted toareas identied as raising particuar compiance risks

N/A N/A 6 N/A

MEASuRE 3: Percentage o rms receiving deciency etters that take correctiveaction in response to a exam ndings

94% 95% 90% Not Met

MEASuRE 4: Percentage o attendees at CCOutreach that rated the program asUseu or Extremey Useu in their compiance eorts

84% 92% 77% Not Met

OuTCOME 1.2: The SEC promptly detects violations o the ederal secrities laws.FY 2009Actal

FY 2010Target

FY 2010Actal

FY 2010Reslts

MEASuRE 5: Percentage o cause and specia exams (sweeps) conducted as aresut o risk assessment process that incudes muti-divisiona input

N/A N/A N/A N/A

MEASuRE 6: Percentage o advisers deemed high risk examined during the year 22% 33% N/A N/AMEASuRE 7: Percentage o registrant popuation examined during the year:

Investment advisers 10% 9% 9% Met

Investment companies 29% 15% 10% Not Met

Broker-deaers (exams by SEC and SROs) 54% 55% 44% Not Met

MEASuRE 8: Percentage o non-sweep and non-cause exams that areconcuded within 120 days

65% 75% 48% Not Met

OuTCOME 1.3: The SEC prosectes violation o ederal secrities laws and holdsviolators accontable.

FY 2009Actal

FY 2010Target

FY 2010Actal

FY 2010Reslts

MEASuRE 9: Percentage o enorcement actions successuy resoved 92% 90% 92% Exceeded

MEASuRE 10: Percentage o rst enorcement actions ed within two years 70% 65% 67% Exceeded

MEASuRE 11: Percentage o debts where either a payment has been made or acoection activity has been initiated within six months o the due date o the debt

90% 92% 86% Not Met

MEASuRE 12: Percentage o Fair Fund and disgorgement und pans thatdistributed the na tranche o unds to injured investors within 24 months o theorder appointing the und administrator

N/A N/A N/A N/A

MEASuRE 13: Percentage o Fair Fund and disgorgement und pans approvedby na order within the prior sca year which had a rst tranche o undsdistributed under those pans within 12 months o such approva date

N/A 60% N/A N/A

N/A Signifes data does not currently exist or targets were not established

(Continued on next page)


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TABLE 1.3 Continued rom previous page

PERFORMANCE MEASuRES RESuLTS SuMMARY (continued)

GOAL 2: Establish an Eective Reglatory Environment

OuTCOME 2.1: The SEC establishes and maintains a reglatory environment thatpromotes high-qality disclosre, nancial reporting, and governance, and thatprevents absive practices by registrants, nancial intermediaries, and other marketparticipants.

FY 2009Actal

FY 2010Target

FY 2010Actal

FY 2010Reslts

MEASuRE 1: Survey on quaity o discosure N/A N/A N/A N/A

MEASuRE 2: Number o consutations; joint events, reports, or initiatives; andjoint examinations and other mutua supervisory eorts with SROs and otheredera, state, and non-US reguators

N/A N/A N/A N/A

MEASuRE 3: Number o non-US reguators trained N/A 1,905 1,997 Exceeded

OuTCOME 2.2: The u.S. capital markets operate in a air, ecient, transparent, andcompetitive manner, ostering capital ormation and sel innovation.

FY 2009Actal

FY 2010Target

FY 2010Actal

FY 2010Reslts

MEASuRE 4: Percentage o transaction doars setted on time each year 99% 99% 99% MetMEASuRE 5: Average institutiona transaction costs or exchange isted stocks ona monthy basis

N/A N/A N/A N/A

MEASuRE 6: Percentage o market outages at SROs and eectroniccommunications networks (ECNs) that are corrected within targeted timerames:

Within 2 hours 87% 60% 74% Exceeded



OuTCOME 2.3: The SEC adopts and administers rles and reglations that enablemarket participants to nderstand clearly their obligations nder the secrities laws.

FY 2009Actal

FY 2010Target

FY 2010Actal

FY 2010Reslts

MEASuRE 7: length o time to respond to written requests or no-action etters,exemptive appications, and written

Documents

SEC USA 2010[1]