Detailed Information on the
Regulation of the Investment Management Industry Assessment

Evaluating the feasibility of a measure that would be related to innovation and new products allowed through the exemptive application process.

Further refine the agency's Budget and Program Performance Analysis System (BPPAS), an activity-based costing and performance-based budgeting system to develop and present integrated budget, performance, and cost information.

Continuing a formal examination of whether proposed rules promote efficiency, competition, and capital formation.

Ensuring that regulations pertaining to mutual fund fees improve disclosure and transparency to investors.

Measure: Percentage of U.S. Households Owning Mutual Fund Shares (investor confidence)

Explanation:The percentage of households that own mutual fund shares reflects, among other things, the extent to which the regulatory regime allows for industry innovation and fosters investor confidence. Base Period and Target: The base period is 1990 to 1999. The target is the average percentage of households that owned mutual fund shares during the base period. The 52% of households that owned funds in May 2001 is a cyclical peak that reflects in part the extraordinary stock market gains of the late 1990s. Data Source: Investment Company Institute annual survey of U.S. households

Measure: Mutual fund share of total retirement assets (marketplace competitiveness)

Explanation:Indicates investor confidence in mutual funds and a flexible regulatory scheme that allows funds to successfully compete in the market with other financial institutions. Target = 1990-1999 average. Source: Investment Company Institute

Measure: Equity portfolio holdings of U.S. investment companies as a percentage of total U.S. stock market capitalization (capital formation)

Explanation:This measure reflects the effectiveness of investment companies as a vehicle for capital formation. Base Period: previous ten years. Target: rolling ten year average. Source: U.S. Federal Reserve Flow of Funds 1945-2005, March 9, 2006, Chart L.213.

Measure: Percentage of investment company initial registration statements reviewed within thirty days

Explanation:Initial registration statements include a fund's prospectus, which provides information about a fund's investment objectives, policies, risks, fees and other important information. The investment management program's goal is to comment within thirty days after the date of filing. Source: SEC 2005 Performance and Accountability Report.

Measure: Percentage of investment company disclosure filings reviewed

Explanation:The Sarbanes-Oxley Act requires the program to review the disclosures of all investment company portfolios at least once every three years.

Measure: Percentage of no-action letters, interpretive requests, and exemptive applications provided with initial comments within targeted timeframes (interpretive and no action requests within three weeks and exemptive applications within 120 days). (New measure, added February 2008)

Explanation:The SEC staff responds to requests for guidance from individuals and companies about specific provisions of the federal securities laws. These queries can ask for proper interpretations of the securities laws or regulations, or for assurances that no enforcement action will be taken in certain circumstances. The staff also reviews applications for exemptions from the securities laws. Written responses to such requests for guidance, when provided, generally are publicly available, as are applications and related notices and orders, when issued. This measure gauges whether the Division of Investment Management is issuing initial comments on these requests on a timely basis. The division aims to provide initial comments on at least 75% of interpretive and no action requests within three weeks of receipt of the letter request, and initial comments on at least 80% of exemptive applications within 120 days after receipt of an application.

Is the program purpose clear?

Explanation: The goal of the Investment Management Program is to minimize the financial risks to investors from fraud, mismanagement, self-dealing and misleading or incomplete disclosure in the investment company and investment adviser segments of the financial services industry, without imposing unnecessary costs and burdens on regulated entities.

Evidence: The Investment Management Program regulates investment companies and investment advisers under two companion statutes, the Investment Company Act of 1940 and the Investment Advisers Act of 1940. Other Federal securities laws that govern certain aspects of the operation of investment companies and investment advisers include the Securities Act of 1933, the Securities Exchange Act of 1934, the National Securities Markets Improvement Act of 1996, and the Sarbanes-Oxley Act of 2002. Also, see Mission Statement in the SEC's Strategic Plan at http://www.sec.gov/about.

Does the program address a specific and existing problem, interest, or need?

Explanation: The program protects investment company investors and investment adviser clients from abusive practices by those who organize, manage or market investment companies or provide investment advisory services. (See explanation for question 1.1 for additional information). The program also promotes the integrity and efficiency of U.S. capital markets. Disruption or loss of confidence in financial markets continues to be a serious concern given its impact on the overall U.S. economy.

Evidence: As of October 2006, investors entrusted over $10.6 trillion in assets with investment companies, 17% more than in October 2005. Investment companies own common stocks with a value equal to 25% of the value of all U.S. common stock. Almost 54 million U.S. households, 48% of all households, own mutual funds, and assets under management total about $10 trillion. The percentage of households that invest in funds has increased from 6% in 1980 to 48% today. The fund industry accounts for 24% of total retirement assets and over half of 401(k) assets. The investment adviser industry has undergone significant growth over the last few years. At the beginning of 2006, over 9,000 investment advisers were registered with the SEC, up from 6,650 in 2000. Their assets under management totaled about $27 trillion, compared to less than $10 trillion at the beginning of 1995.

Is the program designed so that it is not redundant or duplicative of any other Federal, state, local or private effort?

Explanation: The SEC is uniquely charged with administering and enforcing Federal securities laws, including those that relate to the operation of investment companies and investment advisers. Although SROs and state regulators assist the Commission in the oversight of financial markets, the SEC ultimately is responsible for ensuring compliance with Federal securities statutes.

Evidence: The SEC has primary jurisdiction for regulating the activities of investment companies. There is no similar federal program. The National Securities Markets Improvement Act of 1996 (NSMIA) divides registration and oversight responsibilities of investment advisers between the SEC and state regulators. Under NSMIA, states have the primary responsibility for supervision of investment advisers that manage less than $25 million in client assets and the SEC has primary responsibility for supervision of investment advisers that advise mutual funds or that manage $25 million or more in client assets.

Is the program design free of major flaws that would limit the program's effectiveness or efficiency?

Explanation: There is no evidence to suggest the investment management program would be more efficient or effective under an alternative approach. The program is designed to maintain flexibility so that emerging issues are addressed appropriately.

Evidence: The program is designed so that it can take a number of steps to address emerging issues such as responding to requests for exemptive relief from statutory provisions and existing rules; proposing new rules to codify exemptive requests; and developing new rules to apply to new activities, operations, or investment techniques undertaken by investment companies or investment advisers.

Is the program design effectively targeted so that resources will address the program's purpose directly and will reach intended beneficiaries?

Explanation: The program has an organizational structure, a risk-based approach to disclosure review, and systems for allocating rulemaking, interpretive advice and exemptive application priorities that are designed to distribute resources in an effective manner.

Evidence: Resources are targeted toward matters with greater significance to investors and industry participants. For example, disclosure reviews are always conducted on new mutual fund portfolios (highly significant) but on a cyclical basis for Sarbanes-Oxley reviews (relatively significant) and on a spot check basis for filings that represent routine annual updates of existing disclosures. Using risk based analysis techniques, mutual funds are screened for unusual returns or features that may signal a higher likelihood of disclosure or regulatory issues. As a result of this screening, funds with unusual characteristics may be recommended for an integrated disclosure review or for inspection. Biweekly meetings are held to discuss new developments in the investment company industry and formulate policy with respect to appropriate disclosures. Rulemaking and regulatory activity includes processes to ensure a focus on protecting investors, while maintaining fair, orderly, and efficient markets and facilitating capital formation. For example, in adopting a rule that requires mutual funds to include in their shareholder reports disclosure of fund expenses borne by shareholders during the reporting period, the program recommended that the Commission strike a balance between investors' need for this information and the costs and burdens that would be associated with providing this information on an individualized basis. In making its recommendation to the Commission, the program acknowledged that individualized expense disclosure in quarterly account statements would have the benefit of providing cost disclosure tailored to each investor. The program nevertheless concluded that the preferred alternative was to provide in shareholder reports the cost in dollars associated with an investment of $1,000 based on (1) a fund's actual expenses and returns for the period, and (2) a fund's actual expenses and an assumed standardized rate of return. When making its recommendation, the program reasoned that disclosing expenses in a fund's shareholder reports would enable investors to evaluate the costs they pay against the services they receive and would avoid the considerable cost and logistical complexity that individualized disclosure in quarterly statements might entail.

Does the program have a limited number of specific long-term performance measures that focus on outcomes and meaningfully reflect the purpose of the program?

Explanation: The SEC's mission is to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation. With respect to the Investment Management program, the SEC's strategic goals focus on promoting legal compliance, flexible regulation, and informed investors. Long-term outcomes that relate to the achievement of these goals include investor confidence, ability of investment companies and investment advisers to compete in the marketplace, and investment company/investment adviser contributions to domestic capital formation. The program has developed three measures that relate to these long-term outcomes (see Measures tab). Another measure relating to minimizing financial risks to the investor is under development.

Evidence: The three measures are: "Percentage of U.S. Households Owning Mutual Fund Shares;" "Mutual fund share of total retirement assets;" and "Equity portfolio holdings of U.S. investment companies as a percentage of total U.S. stock market capitalization." Draft SEC Strategic Plan 2006-2011 and SEC Annual Performance Budget 2008.

Does the program have ambitious targets and timeframes for its long-term measures?

Explanation: Each of the program's long-term measures includes baselines and targets based on quantifiable data. Long-term targets have been established based on historical data trends (ten-year moving averages) and on actual and predicted economic conditions. The program monitors significant deviations and considers whether such changes may signal the need for action to better attain one or more strategic goals. The long-term measures reflect, among other things, the extent to which the regulatory regime allows for innovation, fosters investor confidence, and provides a healthy environment for capital formation. Other factors that may influence changes in the long-term measures include bull and bear markets, technological changes, investor perceptions of industry ethical standards, investor reaction to industry marketing efforts, and competition from other financial products/services. Some of these factors are largely outside of the program's influence. It is not the goal of the program to promote the sale of fund shares. The agency's strategic goals focus on promoting legal compliance, flexible regulation, and informed investors. With these goals in mind, the program monitors the results of the long-term measures and considers whether the results may signal the need for action to better attain one or more strategic goals. (See Measures tab).

Evidence: The target for "Percentage of U.S. Households Owning Mutual Fund Shares" is 48% in 2014. This represents an approximately steady state from 2006 and a 91% increase from 1990. The target for "Mutual fund share of total retirement assets" is 24% in 2014. This represents an approximately steady state from 2005 and a 353% increase from 1990. The target for "Equity portfolio holdings of U.S. investment companies as a percentage of total U.S. stock market capitalization" is 25% in 2014. This represents an approximately steady state from 2005 and a 98% increase from 1995. The 2005/2006 levels for these measures are considered to be at the maximum market penetration level; therefore maintaining the current level in the long-term is an appropriate target. Draft SEC Strategic Plan 2006-2011 and SEC Annual Performance Budget 2008.

Does the program have a limited number of specific annual performance measures that can demonstrate progress toward achieving the program's long-term goals?

Explanation: As stated in question 2.1, the SEC's mission is to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation. With respect to the Investment Management program, the SEC's strategic goals focus on promoting legal compliance, flexible regulation, informed investors, and the efficient use of program resources. Annual performance measures that relate to the achievement of these goals are reflective of investor confidence, competitiveness of regulated entities, effectiveness of the disclosure process, and contributions of regulated entities to U.S. capital formation (see Measures tab). Three of the annual measures serve as long-term measures. The program also has an annual efficiency measure related to the time in which registration statements are reviewed. Another three measures relating to minimizing financial risks to the investor, the review and approval of exemptive applications, and interpretive advice are under development.

Evidence: The five annual measures are: "Percentage of U.S. Households Owning Mutual Fund Shares;" "Mutual fund share of total retirement assets;" "Equity portfolio holdings of U.S. investment companies as a percentage of total U.S. stock market capitalization;" "Percentage of investment company initial registration statements reviewed within thirty days;" and "Percentage of investment company disclosure filings reviewed." Draft SEC Strategic Plan 2006-2011 and SEC Annual Performance Budget 2008.

Does the program have baselines and ambitious targets for its annual measures?

Explanation: Each of the program's annual measures includes baselines and targets based on quantifiable data. Ten years of historical data have been used as a baseline and future targets have been established based on ten-year moving averages and on actual and predicted economic conditions. The annual measures reflect, among other things, the extent to which the regulatory regime allows for innovation, fosters investor confidence, and provides a healthy environment for capital formation. Other factors that may influence changes in the annual measures include bull and bear markets, technological changes, investor perceptions of industry ethical standards, investor reaction to industry marketing efforts, and competition from other financial products/services. It is not the goal of the program to promote the sale of fund shares. The agency's strategic goals focus on promoting legal compliance, flexible regulation, informed investors, and the efficient use of program resources. With these goals in mind, the program monitors the results of its annual measures, considers whether annual results appear to reflect expected variation around long-term trend or a possible change in trend, and considers whether the results may signal the need for action to better attain one or more strategic goals.

Evidence: The target for "Percentage of U.S. Households Owning Mutual Fund Shares" is 48.6% in 2008. This represents an approximately steady state from 2006 and a 91% increase from 1990. The target for "Mutual fund share of total retirement assets" is 22.4% in 2008. This represents an approximately steady state from 2005 and a 353% increase from 1990. The target for "Equity portfolio holdings of U.S. investment companies as a percentage of total U.S. stock market capitalization" is 21.9% in 2008. This represents an approximately steady state from 2005 and a 98% increase from 1995. The 2005/2006 levels for these measures are considered to be at the approximate maximum market penetration level; therefore maintaining the current level is an appropriate target. The target for "Percentage of investment company initial registration statements reviewed within thirty days " is 85% in 2008. This represents an approximately steady state from 2003-2005. The target for "Percentage of investment company disclosure filings reviewed " is 33% in 2008. This represents the legislatively mandated review period (each filing every three years). Draft SEC Strategic Plan 2006-2011 and SEC Annual Performance Budget 2008.

Do all partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) commit to and work toward the annual and/or long-term goals of the program?

Explanation: The program does not have partners as defined by the question.

Evidence:

Are independent evaluations of sufficient scope and quality conducted on a regular basis or as needed to support program improvements and evaluate effectiveness and relevance to the problem, interest, or need?

Explanation: Congress' independent Government Accountability Office routinely evaluates various aspects of the investment management program. The GAO has published 4 reports that pertain significantly to this program since 2001. In addition, the commission's independent Office of the Inspector General (OIG) also audits the investment management program on a routine basis. The OIG has published 3 reports that pertain significantly to this program since 2002.

Evidence: GAO-01-655R, May 2001, Mutual Fund Fees: SEC's Report on Mutual Fund Fees; GAO-02-302, March 2002, SEC Operations: Increased Workload Creates Challenges; GAO-03-763, June 2003, Mutual Funds: Greater Transparency Needed in Disclosures to Investors; and GAO-05-313, April 2005, Mutual Fund Trading Abuses: Lessons Can Be Learned from SEC Not Having Detected Violations at an Earlier Stage. OIG Report 387, March 29, 2005, Planning Investment Management Filing Reviews; OIG Report 372, October 20, 2003, Regulation of Public Utility Holding Companies; and OIG Report 347, July 12, 2002, Rulemaking Process.

Are Budget requests explicitly tied to accomplishment of the annual and long-term performance goals, and are the resource needs presented in a complete and transparent manner in the program's budget?

Explanation: The SEC and the investment management program are continuing to develop a more comprehensive approach to presenting information that links budget data with performance information. In July 2006 the agency launched the first phase of an activity-based costing/performance based budgeting system that will enable the agency to allocate direct and indirect costs among major program activities and integrate those costs with performance budget submission. The system's activity-based module will be rolled out in early calendar 2007 and the investment management program will refine the module's data over the course of 2007. As a result of these efforts, in the 2009 budget cycle, this activity-based costing system is expected to be used by the program, in conjunction with the Office of the Executive Director, to tie its budget request more directly to the program's performance.

Evidence: SEC Budget and Program Performance Analysis System.

Has the program taken meaningful steps to correct its strategic planning deficiencies?

Explanation: Since 2003 the SEC has implemented new management reporting activities including performance dashboards, comprehensive risk assessment practices, and regular organizational reviews targeted at aligning human resource requirements with agency priorities. The investment management program monitors and reports its performance measures on a monthly basis in the dashboard report which is submitted to the Chairman. The program's director is an active member of the agency's human capital review board which recommends staffing priorities throughout the agency to the Chairman. Further, the program has implemented parallel practices to further develop its planning and management activities. In 2004, the program identified its own measures, outcomes, priorities, and initiatives that were then incorporated into an agency-wide strategic plan which was finalized with participation throughout the Commission. In July 2006, the agency inaugurated a budget performance and program analysis system to better integrate budget, planning, and evaluation functions. This year, the program is evaluating and reformulating its strategic priorities to include in the updated agency-wide strategic plan.

Evidence: Chairman's Dashboard reports, SEC Strategic Plan, and SEC Budget and Program Performance Analysis System.

Are all regulations issued by the program/agency necessary to meet the stated goals of the program, and do all regulations clearly indicate how the rules contribute to achievement of the goals?

Explanation: In recent years, rulemaking has focused on achieving two priority outcomes: "Investors are protected by regulations that strengthen corporate and fund governance and adhere to high quality financial reporting standards worldwide" and "Investors have accurate, adequate and timely public access to disclosure materials that are useful, and can be easily understood and analyzed across companies, industries, and funds." Per the first outcome, rule proposals and adoptions address market timing and selective disclosure abuses; establish a code of ethics for investment advisers; and require funds and advisers to implement compliance policies and procedures and designate a chief compliance officer. Per the second outcome, proposals and adoptions provide investors with more information about fund portfolio investments, fund fees and expenses, sales load breakpoints, the reasons why the board of directors approved the fund's advisory contract and fees. Rule releases include a specific purpose related to statutory requirement or to the SEC's mission to protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation.

Evidence: SEC 2004-2009 Strategic Plan, pages 37, 38 and 44. Release 33-8713, Sep. 27, 2006 (adoption of rule amendments governing fund-of-fund arrangements), "Discussion" section and "Consideration of Promotion of Efficiency, Competition, and Capital Formation" section; Release IC-26647, Nov. 1, 2004 (proposed amendments to Small Business Incentive Act of 1980 to modernize the definition of eligible portfolio company and permit certain follow-on investments), "Background" section. The following rules have been proposed, adopted, or are being developed to meet statutory requirements. ?? Sarbanes-Oxley Act of 2002 o Certification of Management Investment Company Shareholder Reports and Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002, Release No. IC-25914, Jan. 27, 2003 o Strengthening the Commission's Requirements Regarding Auditor Independence (Tailored investment company rules), Release No. IC-25915, January 28, 2003 ?? Gramm-Leach-Bliley Act of 1999 o Privacy of Consumer Financial Information (Regulation S-P), Release No. IC- 24543, June 22, 2000 ?? The National Securities Markets Improvement Act of 1996 (NSMIA) o Rules Implementing Amendments to the Investment Advisers Act of 1940, Release No. IA-1633, May 15, 1997. o Amendments to Investment Company Advertising Rules, Release No. IC- 26195, Sept. 29, 2003 ?? USA PATRIOT Act o Joint Final Rule: Customer Identification Programs for Mutual Funds, Release No. IC-26031, April 29, 2003 ?? Electronic Signatures in Global and National Commerce Act (ESIGN) o Electronic Recordkeeping by Investment Companies and Investment Advisers, Release No. IC-24991, May 22, 2001 ?? Fair and Accurate Credit Transactions Act of 2003 (FACT Act) o Disposal of Consumer Report Information, Release No. IC-26685, December 2, 2004 ?? The Financial Services Regulatory Relief Act of 2006 o Requires the Commission (along with other federal financial regulators) to adopt a model notice that will be a safe harbor for financial institutions to use for their privacy notices.

Does the agency regularly collect timely and credible performance information, including information from key program partners, and use it to manage the program and improve performance?

Explanation: The program collects information with respect to output and activity levels from internal management information systems and reports them on a monthly basis in the Chairman's dashboard report. The report is reviewed by the Chairman and by senior management in the investment management program. With respect to measures of program outcomes, the program collects information from public sources annually and semi-annually, including Federal Reserve Board flow-of-funds data and survey data published by the Investment Company Institute. The output, activity and outcome information is used to manage performance against targets, evaluate the efficiency and effectiveness of the program, and identify possible changes to better meet program goals.

Evidence: The program employs management information systems to track disclosure, interpretive advice/no-action, and exemptive application filings, and for other program activities. These systems track, among other things, the receipt, review, and disposition of filings. The tracking systems produce management reports on program performance and workload levels. Data can be analyzed across issues, managers, and staff performance. Regular reviews of results at the branch and staff level are used to manage performance against targets. Analysis of data results in changes to program activities. For example, in response to the Sarbanes-Oxley Act of 2002 the program used registrant and filing data from the disclosure tracking system to estimate the amount of additional staff resources that would be needed to review investment company financial statements. Based on this estimate, the program hired additional staff, reallocated current staff, and met the Sarbanes-Oxley Act requirement to review investment company issuer filings at least once during a three-year period.

Are Federal managers and program partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) held accountable for cost, schedule and performance results?

Explanation: In 2003, the SEC implemented a pay for performance program for its staff. The merit-based component of this program links annual evaluation to employee performance. The program's senior officers and supervisors are evaluated and held accountable for performance and program management through performance standards and annual performance reviews. Managers also are rated on the following criteria: knowledge of field or occupation, planning and organizing of work, execution of duties, and communications. However, it is unclear that managers are accountable for program performance, cost, or schedule results. Annual pay for performance policy guidance is provided to managers and staff according to established employee performance review cycles. Merit pay awards and special act awards are given to supervisors based on their performance during the evaluation cycle.

Evidence: Office of Human Resources, "Performance Management Process" memo dated April 28, 2006; Employee and Labor Relations internal web page; Senior Officer Performance Plan/Rating document; and Supervisory Performance Plan and Evaluation form (SEC 2495).

Are funds (Federal and partners') obligated in a timely manner, spent for the intended purpose and accurately reported?

Explanation: Most program funding is associated with compensation, benefits, and travel, and is obligated for those purposes. Budget execution of program funds is timely and monitored on a monthly basis by senior program and agency officials. In 2006, the program's budget plan was estimated at $30.343 million. At the end of the year, the actual amount obligated was approximately $26.489 million, or 87.3% of all funds. The SEC's Human Capital Review Board oversees compensation and benefits. Budget performance comparison to operating budget estimates (based on the annual program plan) is reported on a monthly basis in the Chairman's Dashboard report. This report is reviewed by the Chairman, as well as all division directors and office heads, including those at our regional and district offices. In addition, travel is governed by SEC-wide policies.

Evidence: Annual program plan, end of year spending report, Department of Interior payroll data, SEC travel policy memos, Chairman's Dashboard, and budget submission to Congress.

Does the program have procedures (e.g. competitive sourcing/cost comparisons, IT improvements, appropriate incentives) to measure and achieve efficiencies and cost effectiveness in program execution?

Explanation: The program has an efficiency measure with targets and actual performance data. The efficiency measure concerns the length in time in which the program reviews registration statements.

Evidence: See measures tab. Also, the program continuously evaluates ways to better utilize technology - including electronic filings and interactive data - to enable staff and investors to search for and use individual items of information from fund reports. On June 12, 2006, the Commission held a roundtable devoted to this topic. Attendees included representatives of consumer organizations, the mutual fund industry, and Commission officials.

Does the program collaborate and coordinate effectively with related programs?

Explanation: The program communicates with other SEC components on rulemaking and recommendations to the commissioners. The program refers to the Enforcement Division or to the Office of Compliance Inspections and Examinations, matters uncovered during disclosure reviews, in the course of responding to exemptive applications or requests for interpretive advice, and as a result of screening registered entities for unusual returns or features that may signal a higher likelihood of disclosure or regulatory issues. Program staff meet on a periodic basis with staff of the other agencies (Department of the Treasury, Federal Reserve Board, and Commodity Futures Trading Commission) that comprise the President's Working Group on Financial Markets. The primary topics on which program staff collaborates with the President's Working Group involve hedge funds and the oversight of hedge funds' managers under the Investment Advisers Act. In addition to discussing hedge fund related issues of mutual interest, program staff shares relevant hedge fund adviser data with counterparts at the President's Working Group agencies. The program has effective working relationships with securities industry groups (e.g., Investment Company Institute, Investment Adviser Association, National Association of Securities Dealers, Securities Industry Association), state regulators (individual states and the North American Securities Administrators Association) and other Federal regulators (e.g., Department of Labor, Department of the Treasury).

Evidence: Program staff frequently participate in conferences sponsored by industry organizations and service providers (Investment Company Institute, Financial Accounting Standards Board, American Bar Association-Practicing Law Institute, National Investment Company Service Association), with state securities regulators, North American Securities Administrators Association 19D conferences, small business, etc.

Does the program use strong financial management practices?

Explanation: The SEC's financial statements were first audited in 2004 and again in 2005. Although the SEC received an unqualified opinion in both years, GAO identified three material weaknesses: the reporting and recording of disgorgement and penalties; preparation and reporting of financial statements; and information security. In the agency's 2006 audit, GAO gave the SEC's financial statements an unqualified opinion and stated that these statements are presented fairly in conformity with the U.S. generally accepted accounting principles. In addition, the auditor reported that material weaknesses previously identified have been resolved.

Evidence: SEC's 2006 Performance and Accountability Report, http://www.sec.gov/about/secpar/secpar2006.pdf.

Has the program taken meaningful steps to address its management deficiencies?

Explanation: Activity levels and timeliness of disclosure, interpretive, exemptive and rulemaking actions are regularly reported through monthly dashboard reports. Changes needed to address any program deficiencies are initiated based on periodic review of dashboard data, other workload data, economic and financial market conditions, regulatory need, trend analysis, and on review of recommendations from GAO and OIG reports. The program conducts regular management and performance reviews. The agency's Human Capital Review Board meets as needed to consider the organizational structure of agency problems to ensure that resources are optimally allocated to meet agency goals.

Evidence: In 2002 and 2003, the program responded to workload data showing a decline in the number of new investment company portfolios filed for review by redirecting resources to conduct an increased number of integrated reviews of existing investment company portfolios. An integrated review focuses on whether a fund is investing in accordance with stated objectives and policies. During such a review, the staff examines a fund's annual report, financial statements and prospectus to compare its stated investment objectives and policies with actual investments made. Funds that appear to be acting in a manner inconsistent with their investment policies or taking positions that are not disclosed in accordance with applicable risks are given comments detailing the staff's questions or, in appropriate circumstances, referred to the inspection staff for possible on-site review. A 2002 GAO report noted that while the number of investment company filings more than doubled between 1991 and 2000 and the number of disclosure review staff increased by only 9%, the staff was able to increase the percentage of filings reviewed by electing not to review certain routine filings and by focusing staff time on filings that present new issues or contain information that differs materially from information presented in previous filings. A 2005 GAO report on mutual fund trading abuses focused primarily on the role of the SEC's examining compliance with securities laws program. With respect to the investment management program, the 2005 report noted that the program was aware of market timing risks and had attempted to mitigate them through the issuance of interpretive letters, and dialogue with the investment company industry. The 2005 report also noted that the program responded to the market timing and other abuses by proposing a number of rules and rule amendments to help improve fund operations and better protect investors. The rules and rule amendments, which were subsequently adopted by the Commission, included rules designed to enhance the independence of fund boards and rules that require mutual funds and investment advisers to designate chief compliance officers whose duties include preparing annual reports on the adequacy of policies and procedures to ensure compliance with federal securities laws. Finally, the 2005 report noted that the investment management program took steps to strengthen the process for collecting and analyzing tips received from the public or referrals of potential violations received from other SEC offices or regulatory agencies. The Commission's independent Office of the Inspector General (OIG) also audits the investment management program. Recent reviews have included evaluations of activities performed within the program's disclosure review, insurance products, rulemaking, and former public utility regulation offices. With respect to the disclosure review function, OIG found that the program planned filing reviews by setting general goals and defining specific objectives for review timeliness and compliance with Sarbanes-Oxley Act requirements. With respect to the rulemaking function, OIG found that (1) the rulemaking process employed by the program and by other units within the SEC was generally effective and in compliance with statutes, regulations and Commission policies; and (2) consideration of public comments and communication and coordination with outside parties were effective. The program promptly resolved matters identified by the OIG that required management focus, such as the need to develop an improved database for tracking issues and trends associated with the review of disclosure filings and the need to update procedures for processing no-action letter documents.

Did the program seek and take into account the views of all affected parties (e.g., consumers; large and small businesses; State, local and tribal governments; beneficiaries; and the general public) when developing significant regulations?

Explanation: The program has a formal process for rulemakings, which includes a public proposal and request for comment in order to solicit views of affected parties. Intended rulemaking activities are identified in the semi-annual Unified Agenda publications, which list ongoing rulemaking projects. Notices of Commission meetings and the results of open meetings are published in the daily SEC News Digest, which is available on the Commission's website. In addition to the formal rulemaking process, the program utilizes concept releases, roundtables, focus groups, and a variety of other formal and informal contacts to gather information about the likely impact of alternative rulemaking approaches.

Evidence: Agency releases are published in the Federal Register and are made available on the SEC's website. Releases proposing rules and rule amendments formally solicit public views. The views of all public commentators are summarized, analyzed and fully considered. They are available on the Commission's web site. Revisions to proposed rulemakings are made as appropriate in response to public comment. Most proposed rulemakings are considered at Commission open meetings, which may be attended by members of the public. All Commission open meetings can be accessed through a live or archived webcast. The unified agenda contains information on SEC rulemaking activities, as well. Depending on the nature of the issue, selected audiences (e.g., consumer groups, investment company or investment adviser industry representatives, other financial market participants, financial media and data providers, software venders, academics) are contacted for feedback on possible rulemaking initiatives. When appropriate, the program may issue a concept release that describes a broad issue and solicits public and industry input in order to determine whether rulemaking may be appropriate. Topics covered by recent concept releases include: how to improve disclosure of the transaction costs that mutual funds incur when they purchase or sell securities for their investment portfolios; and how to make corporate and investment company disclosure filings more useful through the use of tagged data. Public comments on proposed rules or concept releases are gathered electronically via the SEC's website. Public hearings and roundtables often are held in connection with comprehensive or controversial rulemaking initiatives. For example, on June 12, 2006 the Commission followed-up the tagged data concept release by holding the first in a series of roundtables on the benefits and challenges associated with the use of XBRL and other forms of interactive data to present financial and other information. Interactive data permits Internet users to search for and use individual items of information from financial reports, such as net income, executive compensation, or mutual fund expenses. The morning session of the roundtable featured an exchange of views on how to improve the quality of mutual fund disclosures, what types of information are most useful to mutual fund investors, and how the Commission can leverage the power of interactive data and other technology to provide fund investors with better information. The Roundtable was videocast live and is available as an archived webcast. Public hearings and roundtables provide the opportunity for comments from a wide variety of sources in advance of any formal rulemaking. Individual investor feedback may be gathered through work with groups representing investing communities. Also the public may petition the Commission to adopt or rescind rules. The program occasionally will seek the assistance of industry and investor groups, the financial media, or other organizations to help ensure broad dissemination of requests for public comment.

Did the program prepare adequate regulatory impact analyses if required by Executive Order 12866, regulatory flexibility analyses if required by the Regulatory Flexibility Act and SBREFA, and cost-benefit analyses if required under the Unfunded Mandates Reform Act; and did those analyses comply with OMB guidelines?

Explanation: SEC rulemaking follows a formal process to ensure that requirements are met in both the proposing and adopting stages. Regulatory Flexibility Act (RFA), SBREFA, and cost analyses are conducted on all rulemaking activities, although most of the work associated with the SBREFA analysis is required only at the adopting stage. These documents are reviewed by the Office of Economic Analysis and the Office of the General Counsel at the proposing and adopting stages. Internal controls are in place to ensure that rulemaking packages are complete before being issued and distributed outside the agency. The Office of Economic Analysis issues formal memos regarding its review of the RFA, cost-benefit, and SBREFA analyses. Chairman Cox recently (as of 2006) asked the General Counsel's Office to do a top-to-bottom-review of how the Commission complies with Section 2(c) of the Investment Company Act, which requires the Commission to consider whether proposed rules will promote efficiency, competition, and capital formation.

Evidence: The SEC's Office of General Counsel maintains a guide on rulemaking requirements (SEC Compliance Handbook). In addition the program has developed rulemaking manuals that provide guidance to staff to ensure compliance with Federal Requirements (e.g., Office of Regulatory Policy Rulemaking Manual). Program rulemakers compile a closing binder that contains documents and memos evidencing compliance with the RFA, Paperwork Reduction Act (PRA), and SBREFA requirements. GAO-94-105 (Regulatory Flexibility Act Compliance) SBA Annual Report on RFA Compliance, 2004, at 50.

Are the regulations designed to achieve program goals, to the extent practicable, by maximizing the net benefits of its regulatory activity?

Explanation: The program's primary regulatory activity is to establish new requirements or eliminate obsolete requirements in order to minimize financial risks to investors from fraud, mismanagement, self-dealing and misleading or incomplete disclosure in the investment company and investment adviser segments of the financial services industry, without imposing unnecessary costs and burdens on regulated entities. Rulemaking proposals identify proposed new requirements -- or outline exemptions from requirements, conditioned on investor protections -- and request comment on implementation benefits and costs. Alternatives are addressed and cost-benefit analyses are prepared in accordance with rulemaking and cost-benefit analysis guidance. To collect and verify data on potential costs and benefits, companies may be contacted to ask for estimates (provided the activity is undertaken consistent with Paperwork Reduction Act requirements). Both qualitative and quantitative benefits are evaluated against the potential cost of regulations. The agency attempts to maximize the benefit while minimizing the burden of its regulatory activity to the extent practicable. As a result of cost benefit analysis and in response to industry comment the program recommended and the Commission revised the redemption fee rule to make the fee voluntary, proposed other revisions designed to reduce compliance costs, and met with a variety of industry groups and data venders to discuss logistical issues. With respect to disclosure of fund portfolio holdings, the agency replaced a one-size-fits all approach to portfolio holdings disclosure, where all funds deliver their full portfolio schedules to all their shareholders twice a year, with a layered approach. The layered approach is designed to make more information available while permitting funds to tailor their shareholder reports to their particular circumstances and investors to tailor the amount of information they receive to meet their particular needs. The result is the availability of enhanced portfolio information at reduced cost. (For more information, see note in evidence section.) With respect to mutual fund advertising, the agency has simplified and clarified relevant rules to enable funds to provide more timely, informative, and balanced information, while continuing to protect investors against false or misleading claims. With respect to investment advisers, the agency modernized requirements related to custody of client assets to conform with current custodial practices, reduce advisers' compliance burden, and enhance protections afforded to advisory clients' assets. The agency also tries to ensure that Investment Company Act regulations do not impede businesses that may superficially resemble investment companies, but whose investors do not need the Investment Company Act protections. For example, the agency adopted a rule to clarify that biotechnology and other research and development companies that may have few assets other than investment securities and little operating income, do not fall within the definition of investment company under the Investment Company Act. The agency also has taken steps to increase the benefit and decrease the burden of required disclosure filings by making incremental improvements to the system for electronic filing of corporate and investment company disclosure documents (EDGAR), expanding the number of forms that can be filed electronically, establishing an electronic system for receiving and disseminating investment adviser registration and disclosure material, and exploring ways to utilize interactive data to present financial and other information.

Evidence: The Office of General Counsel provides guidance on developing regulations and the Office of Economic Analysis provides a manual containing guidance on preparing a cost-benefit analysis. The program routinely considers possible means to lessen burdens on small issuers. Note: Mutual funds are required to provide their shareholders with semiannual reports that include financial information, investment performance information, and a management discussion of investment performance. Among other things, the amended rules and forms permit stock and bond funds to list in their shareholder reports the top 50 portfolio holdings in lieu of listing all holdings. (Money market funds, because their portfolios are constantly turning over, no longer need to list any individual portfolio holdings.) If a shareholder requests a full portfolio listing, the fund must provide it free of charge. The use of a summary to replace a full portfolio listing (which for very large funds may be 35 to 40 pages) may significantly reduce printing and mailing costs. To provide additional information to those investors who wish to better monitor their portfolios for overlapping securities, style drift, window dressing, and other issues, the amendments continue to require funds to file a complete portfolio listing with the Commission electronically via EDGAR for the second and fourth fiscal quarter, and impose a new requirement to file a complete portfolio listing for the first and third fiscal quarter.

Has the program demonstrated adequate progress in achieving its long-term performance goals?

Explanation: The program has met or exceeded its targets for its three long-term outcome goals.

Evidence: SEC Annual Performance Budget 2008 and and internal documentation of prior year results.

Does the program (including program partners) achieve its annual performance goals?

Explanation: The program has met or exceeded its annual output goal, its efficiency goal, and its three outcome goals.

Evidence: SEC Annual Performance Budget 2008 and internal documentation of prior year results.

Does the program demonstrate improved efficiencies or cost effectiveness in achieving program goals each year?

Explanation: The program has demonstrated improvement for three consecutive years on the percentage of time it takes to review registration statements (see Measures tab).

Evidence: SEC Annual Performance Budget 2008 and internal documentation of prior year results.

Does the performance of this program compare favorably to other programs, including government, private, etc., with similar purpose and goals?

Explanation: It is difficult to compare program performance between the financial regulatory agencies because of differences in mission and mode of operation, different outcome measures and differences in regulated entities.

Evidence: As stated in Question 1.3, SEC is uniquely charged with administering and enforcing Federal securities laws.

Do independent evaluations of sufficient scope and quality indicate that the program is effective and achieving results?

Explanation: GAO and OIG have conducted regular reviews of the investment management program, as described in question 2.6. The reviews have not indicated any significant problems with the program. While these reviews have not focused on the effectiveness of the program overall, generally they support the effectiveness of various aspects of this program.

Evidence: A 2005 GAO report on mutual fund trading abuses focused primarily on the role of the SEC's examining compliance with securities laws program. With respect to the investment management program, the 2005 report noted that the program was aware of market timing risks and had attempted to mitigate them through the issuance of interpretive letters, and dialogue with the investment company industry. The 2005 report also noted that the program responded to the market timing and other abuses by proposing a number of rules and rule amendments to help improve fund operations and better protect investors. Finally, the 2005 report noted that the investment management program took steps to strengthen the process for collecting and analyzing tips received from the public or referrals of potential violations received from other SEC offices or regulatory agencies. The Commission's independent Office of the Inspector General (OIG) also audits the investment management program. Recent reviews have included evaluations of activities performed within the program's disclosure review, insurance products, rulemaking, and former public utility regulation offices. With respect to the disclosure review function, OIG found that the program planned filing reviews by setting general goals and defining specific objectives for review timeliness and compliance with Sarbanes-Oxley Act requirements. With respect to the rulemaking function, OIG found that (1) the rulemaking process employed by the program and by other units within the SEC was generally effective and in compliance with statutes, regulations and Commission policies; and (2) consideration of public comments and communication and coordination with outside parties were effective. The program promptly resolved matters identified by the OIG that required management focus, such as the need to develop an improved database for tracking issues and trends associated with the review of disclosure filings and the need to update procedures for processing no-action letter documents. GAO-01-655R, May 2001, Mutual Fund Fees: SEC's Report on Mutual Fund Fees - GAO-02-302, March 2002, SEC Operations: Increased Workload Creates Challenges - GAO-03-763, June 2003, Mutual Funds: Greater Transparency Needed in Disclosures to Investors - GAO-05-313, April 2005, Mutual Fund Trading Abuses: Lessons Can Be Learned from SEC Not Having Detected Violations at an Earlier Stage. OIG Report 387, March 29, 2005, Planning Investment Management Filing Reviews - 372, October 20, 2003, Regulation of Public Utility Holding Companies - 347, July 12, 2002, Rulemaking Process.

Were programmatic goals (and benefits) achieved at the least incremental societal cost and did the program maximize net benefits?

Explanation: With respect to investment companies and investment advisers, the SEC's strategic goals focus on promoting legal compliance, flexible regulation, and informed investors. These programmatic goals have been accomplished each year. The program views as societal costs the annual cost of the program and compliance costs borne in the first place by funds and advisers and ultimately by their shareholders and clients. Balanced against these costs are the benefits of an honest, ethical industry that enjoys the confidence of savers, investors and other financial market participants. The program has minimized the financial risks to investment company investors and investment advisory clients from fraud, mismanagement, self-dealing and misleading or incomplete disclosure while providing a flexible, innovative regulatory environment. Accomplishment of programmatic goals is demonstrated by substantial long-term increases in assets under management by investment companies and advisers, number of fund investors, range of available products and services, share of market for personal savings of all types and share for retirement savings.

Evidence: SEC Annual Performance Budget 2008 and internal documentation of prior year results.