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Office of Audits Pending Audits

Assessment of the SEC Division of Corporation Finance’s Confidential Treatment Processes and Procedures

The federal securities laws generally require any company that is publicly held or is registering its securities for public sale to disclose a broad range of financial and non-financial information in registration statements, annual reports and other filings made with the Commission.

Sometimes disclosure of the information required to be disclosed by the applicable laws or implementing regulations can adversely affect a company’s business and financial condition because of the competitive harm that could result from the disclosure. Such a concern frequently arises in connection with the requirement that a registrant publicly file all contracts material to its business other than those it enters into in the ordinary course of business. To address the potential disclosure hardship, the Commission has implemented a system for allowing companies to request confidential treatment of information filed under the Securities Act of 1933 (the Securities Act) and the Securities Exchange Act of 1934 (the Exchange Act).

Specifically, Rule 406 under the Securities Act, 17 C.F.R. § 230.406, and Rule 24b-2 under the Exchange Act, 17 C.F.R. § 240.24b-2, set forth the exclusive means for obtaining confidential treatment of information that is contained in documents filed under the Securities Act and the Exchange Act, respectively, that would be exempt from disclosure under the Freedom of Information Act (FOIA), 5 U.S.C. § 552.

The OIG is conducting an audit of the Division of Corporation Finance’s policies and procedures pertaining to confidential treatment requests. Specifically, the audit will examine the Commission’s procedures for granting confidential treatment requests to determine whether improvements are needed and best practices can be implemented for the confidential treatment process. We will also examine whether registrants to which the Division of Corporation Finance granted confidential treatment requests adhered to the applicable rules and requirements.

Review of the SEC’s Section 13(f) Reporting Requirements

In 1975, Congress enacted Section 13(f) of the Exchange Act, 15 U.S.C. § 78m(f), to increase the public availability of information regarding the purchase, sale and holdings of securities by institutional investors. Congress’s intent was for Section 13(f) information to be promptly disseminated to the public through the creation of a central depository of historical and current data about the investment activities of institutional investment managers in order to assist investors and government regulators. Section 13(f) requires institutional investment managers who exercise investment discretion with respect to accounts holding certain equity securities having an aggregate fair market value of $100 million or more on the last trading day in a calendar year to file quarterly reports of their holdings with the SEC on Form 13F. Under Commission Rule 13f-1, 17 C.F.R. § 240.13f-1, the reports on Form 13F must be filed within 45 days after the last day of such calendar year and within 45 days after the last day of each of the first three calendar quarters of the subsequent calendar year. Section 13(f) mandates that the Commission tabulate the information contained in the quarterly reports and disseminate the information to the public.

The securities that must be reported under Section 13(f) generally include equity securities that are traded on an exchange or quoted on NASDAQ, equity options and warrants, shares of closed-end investment companies, and some convertible debt securities. Form 13F requires disclosure of the name and address of the institutional investment manager filing the report and, for each security being reported, specific information, including the name of the issuer, the class, the Committee on Uniform Security Identification Procedures (CUSIP) number, the number of shares or principal amount, and the aggregate fair market value.

Pursuant to Commission Rule 24b-2, 17 C.F.R. § 240.24b-2, an institutional investment manager may request confidential treatment of information reported on Form 13F. Under Section 13(f)(3) of the Exchange Act, 15 U.S.C. § 78m(f)(3), the Commission may prevent or delay the public disclosure of the information reported on Form 13F in accordance with the FOIA, and shall not disclose information identifying securities held by the account of a natural person or an estate or trust (other than a business trust or investment company).

The OIG is conducting an audit of the Commission’s policies and procedures with respect to the requirements of Section 13(f) of the Exchange Act to examine whether the Commission’s implementation and practices are consistent with Congress’s intent. We will also examine the sufficiency of the Commission’s existing policies and procedures that implement Section 13(f) and whether the reporting by institutional investment managers covered by Section 13(f) is appropriately designed to comply with the requirements of that Section. The audit will also include an examination of whether the Commission’s policies and procedures for reviewing and processing requests for confidential treatment of information reported under Section 13(f) are adequate or require improvement.

Exemptive Orders and No-Action Letters Assessment

The SEC has authority to provide firms with exemptions to the requirements of the federal securities laws through the issuance of exemptive orders. Firms request exemptions from the SEC for proposed transactions, products or services that might not comply with current securities law requirements. If the SEC grants an application for an exemption, the requestor must adhere to the terms and conditions of the exemptive order issued by the Commission. Additionally, the SEC staff may provide relief to firms in the form of a “no-action” letter. A staff no-action letter includes the specific terms and conditions of a firm’s request, and advises the firm that if it proceeds as described in the request for no-action relief, the SEC staff will not recommend an enforcement action against the firm.

Exemptive orders and no-action letters provide the industry with the flexibility to introduce new and novel products and services to the security markets without risking an SEC enforcement action for violating the securities laws, provided that the firm adheres to the terms of the exemptive order or no-action relief.

The OIG will conduct an audit of exemptive orders and no-action letters to assess the SEC’s processes for ensuring adherence to the conditions under which exemptive orders and no-action letters are issued to applicants.

Review of SEC’s Personally Identifiable Information and Privacy Program

The SEC is responsible for ensuring the privacy and confidential treatment of information it collects pertaining to members of the public and its employees. These individuals have a right to expect the SEC to collect, maintain, use, and disseminate Personally Identifiable Information (PII) only as authorized by law and as necessary to carry out the agency’s responsibilities. Access to PII is restricted to those SEC staff members who have a need to access the data to perform their official duties and to those persons who are responsible for ensuring the privacy and confidentiality of the data.

The OIG has contracted the services of the C5i Federal, Inc., to conduct an independent evaluation of the adequacy of the SEC Privacy Office’s policies and procedures, as well as its interaction and involvement with the Commission’s divisions and offices, to ensure that PII is properly controlled, maintained and secured.

Audit of the SEC’s Real Property Leasing Procurement Process

Pursuant to Section 103 of the Securities Act Amendments of 1990 (Public Law 101-550), 15 U.S.C. § 78d(b)(3), the SEC has independent authority to lease space directly, without using the services of the General Services Administration (GSA). Under this Section, the SEC is exempt from any GSA space management regulations or directives. The Government Accountability Office (GAO) has previously identified federal real property, including costly space challenges, as a high risk area

The OIG has commenced an audit to determine whether the SEC’s lease acquisition policies, practices and procedures comply with applicable requirements and are consistently followed. The OIG also plans to identify areas of possible improvement within the SEC’s real property leasing program.

Review of the Effectiveness of the FedTraveler Travel System

In 2008, the SEC began implementation of a contract with FedTraveler to provide online travel services to SEC employees as part of the federal government’s “E-Gov” initiatives. FedTraveler is a web-based system for managing the official travel of federal employees and is used by many federal agencies in addition to the SEC. FedTraveler provides an automated approach that incorporates the requirements of the Federal Travel Regulation and is designed to operate efficiently to reduce agencies’ travel processing costs. When fully implemented, the system is intended to satisfy the President’s E-Gov travel initiative. The FedTraveler online E-Gov Travel Service provides a comprehensive, end-to-end service to plan, book, track, approve, and request reimbursement for travel services for federal employees.

The OIG is conducting an audit to assess the adequacy, efficiency and effectiveness of the services provided by FedTraveler and to identify areas of possible improvement.

Review of PRISM Support Contracts

In September 2008, the SEC acquired PRISM, which is a web-based, commercial-off-the-shelf procurement and contract management system. PRISM is designed to provide a streamlined, end-to-end procurement cycle that integrates and tracks information from a single point of entry, i.e., from the initiation of the requirement, through the solicitation, award and contract administration, to contact close-out and document archive. The SEC has also procured project management and integration support to assist with implementation and oversight of the daily management of the PRISM system.

The OIG has contracted the services of Regis & Associates, PC, to perform an audit that assesses the adequacy of the award process and contract administration activities related to the integration support and project management for the PRISM system.

Audit of Time-and-Materials and Labor-Hour Contracts

A time-and-materials contract provides for acquiring supplies or services on the basis of (1) direct labor hours at specified fixed hourly rates, including wages, overhead, general and administrative expenses, and profit; and (2) materials at cost, including material handling costs if appropriate. A labor-hour contract is a variation of a time-and-materials contract, differing only in that materials are not supplied by the contractor. The GAO has recognized the risks inherent in these types of contracts because the government bears the risk of cost overruns.

The OIG has contracted the services of Regis & Associates, PC, to conduct an audit of the SEC’s procurement activities related to time-and-materials and labor-hour contracts. The overall objectives of the audit are to assess whether the SEC’s contract monitoring procedures for these types of contracts are adequate and comply with applicable regulations, contractor performance is in accordance with the contract terms and conditions, and contract costs incurred are allowable, allocable, reasonable and adequately supported.