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U.S. SEC 2008 Performance and Accountability Report
 The Securities and Exchange Commission (SEC) aims to be the standard against which federal agencies are measured. The SEC’s vision is to strengthen the integrity and soundness of U.S. securities markets for the benefit of investors and other market participants, and to conduct its work in a manner that is as sophisticated, flexible, and dynamic as the securities markets it regulates.
FY 2008 Highlights
Responses to Market Turmoil
In 2008, the subprime mortgage crisis and the resulting turmoil in the credit markets led to rapid and dramatic changes in U.S. financial markets.
Once the crisis began with the deterioration of mortgage origination standards, the rise of abusive lending practices, and the spillover into the capital markets through securitization, the SEC used its law enforcement and regulatory powers to combat fraud and market manipulation and sustain orderly and liquid markets.
During 2008 the agency moved aggressively in four main areas: investigating and prosecuting violations of the securities laws; releasing accounting and disclosure guidance to uncover hidden risk; using recent authority granted by Congress to regulate credit rating agencies; and using emergency and permanent rulemaking authority to maintain orderly markets. The SEC’s work in these areas has been both national and international.
Among its many areas of focus, the SEC worked to oversee the financial markets and protect investors. The SEC continued to pursue those who would use hidden manipulation, illegal naked short selling, or illegitimate trading tactics to drive market behavior and undermine confidence. And the Commission used its regulatory authority to strengthen disclosure, provide needed accounting guidance, and prevent market manipulation.
Key examples of the agency’s actions during the subprime mortgage crisis include:
Investigating fraud and market manipulation. The SEC devoted significant resources to hold accountable
those whose violations of the law contributed to the subprime crisis and the loss of confidence in the markets.
Led by the Division of Enforcement’s subprime working group, which was formed in 2007, the agency aggressively investigated possible fraud, market manipulation, and breaches of fiduciary duty. For example, in 2008 the enforcement staff launched investigations into whether mortgage lenders properly accounted for the loans in their portfolios and established appropriate loan loss reserves.
The division also began investigating the role of the various parties involved in the securitization of mortgagebacked securities and collateralized debt obligations.
Enforcement staff also worked to determine whether investment banks and broker-dealers defrauded retail customers by making false representations, or by putting investors into unsuitable mortgage-backed investments. As of the end of FY 2008, the SEC had over 50 pending law enforcement investigations in the subprime area.
The Enforcement Division undertook a sweeping investigation into market manipulation of financial institutions, focusing on broker-dealers and institutional investors with significant trading activity in financial issuers and with positions in credit default swaps. The division reached the largest settlements in the SEC’s history—over $50 billion— on behalf of investors in auction rate securities (ARS) from Merrill Lynch, Wachovia, UBS, Citigroup, Bank of America and RBC Capital Markets. The division also brought a landmark enforcement action against a trader who spread false rumors designed to drive down the price of stock, and charged two Wall Street brokers with defrauding their customers when making more than $1 billion in unauthorized purchases of subprime-related auction rate securities.
In July 2008, the Office of Compliance Inspections and Examinations (OCIE) conducted examinations to prevent the spread of false information intended to manipulate securities prices. Examiners focused on the supervisory and compliance controls of broker-dealers and investment advisers.
Penalties against naked short selling. The Commission adopted new rules that strictly enforce the ban on abusive naked short selling contained in Regulation SHO, and impose significant penalties for its violation. A broker-dealer that does not deliver securities by the close of business on the settlement date (three days after the sale transaction date, or T+3) is banned from any short sales in that issuer until the failure is cured.
New antifraud Rule 10b-21 expressly targets fraudulent short selling transactions. The Commission unanimously approved an additional measure to make it easier for issuers to repurchase their own shares on the open market, in order to provide liquidity in fragile market conditions. The Commission also voted unanimously to require weekly reporting by hedge funds and other large investment managers of their daily short positions, as part of a comprehensive investigation of possible market manipulation.
Guidance to support money market funds. In September 2008, the Office of the Chief Accountant (OCA) provided guidance to clarify how banks should treat, for purposes of their balance sheets, the financial support they provide to money market funds within the same financial services complex. This helped clarify for banks the appropriate accounting treatment for any assistance they render to money market funds, helping to protect investors in these funds. ...
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U.S. Securities and Exchange Commission
100 F Street, NE, Washington, DC 20549
Contents
Message from the Chairman 2
Management’s Discussion and Analysis 7
Vision, Mission, Values, and Goals .......................................................................................... 8
Organizational Structure and Resources .................................................................................. 9
FY 2008 Highlights ...............................................................................................................10
Financial and Performance Highlights.....................................................................................16
Limitations of the Financial Statements ..................................................................................18
Performance Results Summary...............................................................................................19
Management Assurances ......................................................................................................21
Performance Section 25
Performance Results by Strategic Goal .................................................................................. 26
Program Assessments and Evaluations .................................................................................. 56
Financial Section 57
Message from the Chief Financial Officer.............................................................................. 58
Financial Statements............................................................................................................. 59
Notes to Financial Statements............................................................................................... 64
Report of Independent Auditors ........................................................................................... 80
Management’s Response to Audit Opinion ........................................................................... 92
Other Accompanying Information 94
Inspector General’s Statement on Management and Performance Challenges........................ 95
Management’s Response to Inspector General’s Statement ................................................... 99
Summary of Financial Statement Audit and Management Assurances.................................. 104
Improper Payments Information Act Reporting Details .........................................................105
Appendixes 107
Appendix A: Chairman and Commissioners..........................................................................107
Appendix B: Major Enforcement Cases................................................................................. 110
Appendix C: SEC Divisions and Offices................................................................................. 113
Appendix D: Acronyms ........................................................................................................ 114
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