Detailed Information on the
Regulation of Securities Trading and Market Participants Assessment

Including more and better monetized estimates of regulatory costs and benefits in the rulemaking process and proposed and final rule notifications.

Incorporating a formal alternative analysis component in the rulemaking process and proposed and final rule notifications.

Modifying the proposed and final rule template to include an explicit and clearly written explanation of the need for regulations promulgated by the SEC.

Further refining 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 cost information.

The Commission is proposing a series of rules affecting the credit rating agencies. As the Commission takes action and the program is staffed, the Division will consider options for assessing and measuring the program's outcomes.

Measure: Percentage of U.S. households investing in the securities market either through direct share ownership or ownership of mutual funds. This is a measure of investor confidence in the markets. Targets are established every three years.

Explanation:The percentage of households that invest in the securities market reflects, among other things, the extent to which the regulatory regime provides a fair, orderly, and efficient market while fostering investor protection and confidence in the markets. Base Period and Target: The base period is 1983 to 1995. The target is the average percentage of households that invested in the securities market during the base period. Data Source: Investment Company Institute and the Securities Industry Association "Equity Ownership in America 2005"

Measure: The dollar amount of foreign ownership of U.S. securities. (investor confidence, fair and orderly markets)

Explanation:The dollar amount of foreign ownership in U.S. securities reflects, among other things, the extent to which the regulatory regime provides a fair, orderly, and efficient market while fostering investor protection and confidence in the markets. Base Period and Target: The base period is 1994 to 2000. The target is the average dollar amount of foreign ownership of U.S. securities during the base period. Data Source: Securities Industry Association "Fact Book". Amount is in billions of dollars.

Measure: Increase in the average daily share volume (in billions of shares) on the New York Stock Exchange and Nasdaq exchanges by fiscal year. (investor confidence, fair and orderly markets, efficient capital formation) Data Format: NYSE/NASDAQ

Explanation:The average daily share volume (in billions of shares) is indicative of investor confidence in the securities market as a flexible and useful investment tool. . It is the Division's goal, regardless of volume levels, to assure that the markets have sufficient capacity to be able to handle effectively and efficiently the volume of message traffic that is directed to those markets. The base period is 2000 to 2004. The target is the average share volume on the New York Stock Exchange and Nasdaq exchange during the base period. Data Source: Bloomberg. Data Format: NYSE/NASDAQ

Measure: Percentage of transaction dollars settled on time each year (fair and orderly markets).

Explanation:Efficient and timely settlement of securities transactions is indicative of a fair and orderly market. About 99.9% of transactions are settled on-time. The percentage of dollar value of transactions settled on time indicates that the relative value of unsettled transactions is decreasing compared to the increasing value of transactions. The base period is 2001 to 2004. The target is the average percentage of transactions settled during the base period. Data Source: The Depository Trust & Clearing Corporation's Annual Report for 2005.

Measure: Number of market outages at Self Regulatory Organizations and Electronic Communication Networks monitored by Automation Review Program desk officers during the fiscal year. (fair and orderly markets)

Explanation:The number of market outages reflects problems incurred in the securities markets that could have an adverse affect on the markets ability to function as required. Source: Dashboard Report, ARP Group Records

Measure: Percentage of market outages at SROs and ECNs that are corrected within targeted timeframes. Targets reflect the percentage of market outages that are corrected within 2 hours, within 4 hours, and within 24 hours.

Explanation:Market outages reflect problems in the systems underlying the securities markets that could have an adverse affect on the markets ability to function as required. This metric gauges how quickly such outages are resolved, so that market activity can resume.

Measure: The number of SIPC (Securities Investor Protection Corporation) customer protection proceedings initiated following the liquidation of a broker-dealer. (investor confidence, fair and orderly markets)

Explanation:The number of SIPC customer protection proceedings initiated following the liquidation of a broker-dealer is indicative of the financial well being and stability of broker-dealers and the markets. Base Period and Target: The base period is 1996 to 2001. The target is the average number of SIPC proceedings during the base period. Source: "2006 SIPC Annual Report".

Measure: The aggregate dollar amount of free credit balances at broker-dealers (in billions of dollars). (investor confidence, fair and orderly markets)

Explanation:The dollar amount of free credit balances at broker-dealers is indicative of the financial well being and stability of broker-dealers and the markets. Base Period and Target: The base period is 1999 to 2003. The target is the average dollar amount of free credit balances at broker-dealers during the base period.

Measure: Number of Self Regulatory Organization rule filings closed each fiscal year. (fair and orderly markets)

Explanation:The number of Self Regulatory Organization rule filings closed annually is indicative of the regulatory regime's ability to review and approve requested changes to the rules that govern the SROs' oversight and operations of the securities markets and that promote fair, orderly, and efficient markets. Target: 2001-2004 average. Source: SEC SRTS Database.

Measure: The dollar amount of foreign ownership of U.S. securities. (investor confidence, fair and orderly markets)

Explanation:The dollar amount of foreign ownership in U.S. securities reflects, among other things, the extent to which the regulatory regime provides a fair, orderly, and efficient market while fostering investor protection and confidence in the markets. Base Period and Target: The base period is 1994 to 2000. The target is the average dollar amount of foreign ownership of U.S. securities during the base period. Data Source: Securities Industry Association "Fact Book". Amount is in billions of dollars.

Measure: Percentage of SRO rule filings closed in less than 60 days from filing. (In years 2001 through 2007, this measure tracked the percentage of rule filings closed in less than 6 months.)

Explanation:The SEC reviews SRO rule proposals for consistency with investor protection and market operation and structure rules that govern the operation of registered national securities exchanges, clearing agencies, the NASD, and the Municipal Securities Rulemaking Board. This metric gauges the how quickly the SEC completes these reviews after each amendment is filed by the SRO.

Measure: Number of no-action, exemptive, and interpretive requests closed each fiscal year. (fair and orderly markets)

Explanation:The number of no-action, exemptive, and interpretive requests closed annually is indicative of the regulatory regime's flexibility to respond to requests for relief from, or interpretation of the securities regulations that affect one, some, or all participants in the securities markets. Accordingly, the number of no-action, exemptive, and interpretive requests closed annually is a measure of the Division's commitment to achieving its program objectives of promoting fair, orderly, and efficient markets, protecting investors, and fostering investor confidence in the markets. Source: SEC Dashboard Reports and SEC Congressional Budgets.

Measure: Percentage of no-action, exemptive, and interpretive requests completed within 60 days. (In years 2001 through 2007, this measure tracked the percentage of requests completed in less than 6 months.)

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 Trading and Markets is completing these requests on a timely basis. The division aims to complete 85% of all responses within 60 days.

Is the program purpose clear?

Explanation: The purpose and mission of the Division of Market Regulation is to establish and maintain standards for fair, orderly, and efficient securities markets while fostering investor protection and confidence in the markets. The Division regulates the major securities market participants, including: broker-dealers; self-regulatory organizations, which include the stock exchanges and the National Association of Securities Dealers (NASD), Municipal Securities Rulemaking Board (MSRB), and clearing agencies (SROs that help facilitate trade settlement); transfer agents (parties that maintain records of stock and bond owners); municipal securities dealers; and securities information processors.

Evidence: As envisioned by the Securities Exchange Act of 1934, the Commission relies on self-regulation of the securities industry as the primary method for promoting fair dealing and investor protection, but directly regulates markets and market participants where Commission rulemaking is more effective than self-regulation.

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

Explanation: The program addresses several economic needs, which are related, including: investor confidence in financial markets; fair and orderly markets; protection of investor funds against losses associated with failure of a financial institution; protection of the securities markets and investors from abusive sales practices or manipulation by market participants; and the integrity and efficiency of U.S. capital markets. Disruption or loss of confidence in financial markets harms investors and negatively impacts the overall U.S. economy.

Evidence: The program was initially established in 1928 to address the nation's concerns arising out of the stock market crash and has further evolved as markets, market intermediaries, and market practices have changed, and as market contingencies have arisen. Extreme fluctuations in securities markets have continued since 1929, e.g. "Black Monday" in 1987, when the Dow Jones Industrial Average lost over 20% value in one day. Such events show that the need for fair and orderly markets and investor protection continues today. Approximately 56.9 million or 50% of U.S. households are invested in the markets as of 2005.

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

Explanation: This program shares responsibility for regulating and/or oversees securities markets and/or market participants with the Self-Regulated Organizations (SROs), state securities regulators, international regulators, and with the SEC itself. The responsibilities of each have been established through practice to minimize duplication. Some overlap exists among the organizations, which is necessary to maintain effective oversight.

Evidence: The Division has worked to reduce and eliminate duplication with State regulators and SROs in that the SEC, States and SROs now provide a single form for the registration of broker-dealers and their personnel as well as a single form for reporting broker-dealer financial information. One example where the program coordinates with other regulators to maintain effecctive oversight while minimizing redundancy is in the area of market surveillance. In this area, the SEC is responsible for surveilling securities markets as a whole, and does its analysis accordingly, while the SRO for each exchange is responsible for surveilling its own exchange.

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

Explanation: The Securities Exchange Act of 1934 designed the Market Regulation program in a way that promotes efficiency: the Commission relies on self-regulation of the securities industry as the primary method for promoting fair dealing and investor protection, but has the authority to directly regulate markets and market participants where Commission rulemaking is more effective than self-regulation. There is no evidence to suggest this program would be more efficient or effective under an alternative approach. The program itself is designed and managed to maintain flexibility and agility so that emerging issues can be addressed appropriately.

Evidence: The program is designed so that the Commission and the staff can effectively respond to emerging issues using appropriate, available resources. For example, the staff can issue no-action or interpretive positions to provide markets and market participants additional information, which provides legal certainty, in connection with new products or practices. The Commission (or the staff, using delegated authority) can also issue individual exemptions to rules to provide practical, targeted, and efficient solutions to particular business problems. In appropriate circumstances, the Division may recommend that the Commission engage in direct rulemaking. The program also relies on the self-regulation of the industry to achieve program objectives.

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

Explanation: The Division of Market Regulation has an organizational structure and operating practices that enable it to be reactive and proactive. The program is able to address specific requests and issues from securities market participants as well as broader issues affecting investor protection and confidence and the promotion of fair, orderly, and efficient markets. Unintended beneficiaries or subsidies are not an issue for this program.

Evidence: While the Division attempts to address all areas of concern regarding market integrity and investor protection, resources are targeted toward matters with greater impact on investors and industry participants and that will advance program goals. Staffing allocations of existing FTE are decided upon on a continual basis. The majority of the staff of approximately 160 are lawyers and are able to be assigned and reassigned to issue areas and projects as needed. As issues arise, the program uses weekly meetings, monthly progress reports, twice-annual staffing evaluations, and an annual office structure review to ensure that adequate staffing is available address the issue. Increases in staff allotments are decided upon by the Executive Director of the agency when resources become available--on an annual basis for the most part--as a function of relative program need and resource availability.

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 Market Regulation program supports one of the SEC's strategic goals most directly: "Contribute to Healthy Capital Markets." Long-term outcomes for this program that relate to the achievement of this goal include: 1) "Eliminate unnecessary impediments to capital formation and support industry efforts to provide innovative and competitive products and trading platforms;" and 2) "Investors are protected through rules and regulations that promote high quality financial reporting standards worldwide, prevent abusive practices in the investment management industry, and maintain fair and financially sound markets." Progress made toward these outcomes is measured by analyzing five long-term indicators and twelve short-term indicators.

Evidence: The five long-term indicators are 1) percentage of households investing in the market either through direct share ownership or ownership of mutual funds; 2) amount of foreign ownership of securities; 3) change in average daily shares on the NYSE and NASDAQ; 4) number of SIPC customer protection proceedings following the liquidation of a broker-dealer; and 5) amount of customer free credit balances held at broker-dealers and protected under the Commission's customer protection Rule (15c3-3). Measure number three listed above (average daily share volume on NSYE and NASDAQ) supports the outcome related to impediments to capital formation and the other measures support the outcome related to investor protrection and fair and financially sound markets. For further explanation of the measures, please refer to the measures tab of this evaluation.

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

Explanation: Each of the five long-term measures includes baselines and long-term targets based on quantifiable data. Long-term targets have been established based on historical data trends and on actual and predicted economic conditions of sustained growth in securities markets. The program monitors significant deviations from the long-term targets and considers whether any deviations signal the need for the program to take action.

Evidence: The target for "Percentage of U.S. Households Owning Mutual Fund Shares" is 51% in 2014. This represents a steady, but slowing increase from 2005 and a 168% increase from 1983. The 2002 (49.5%) and 2005 (48%) levels are considered to be near the maximum market penetration level; therefore small increases in the long-term is an appropriate target. The target for "Dollar amount of foreign ownership of U.S. securities" is $13 billion in 2012, a 63% increase over 2007 targets, which is ambitious given the increasing competitiveness of foreign securities markets. The target for "Percent Change in the Average Daily Share Volume on the NYSE and NASDAQ" is 2.1% for the NYSE and 2.6% for the NASDAQ in 2014. This represents approximately 10% cumulative growth for the NYSE and 14% growth for the NASDAQ from 2007 through 2014, which is ambitious given the competition amount and between U.S. and global securities exchanges. The long-term target for the number of SIPC customer protection proceedings initiated following the liquidation of a broker-dealer is 5 in 2012. This represents a straight-line from the current running average, which is acceptable. The long-term target for the aggregate dollar amount of free credit balances at broker-dealers is $525 billion in 2012, a 16% cumulative increase from 2007 targets, which is a reasonble rate of growth.

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: The Market Regulation program supports one of the SEC's strategic goals most directly: "Contribute to Healthy Capital Markets." Long-term outcomes for this program that relate to the achievement of this goal include: 1) "Eliminate unnecessary impediments to capital formation and support industry efforts to provide innovative and competitive products and trading platforms;" and 2) "Investors are protected through rules and regulations that promote high quality financial reporting standards worldwide, prevent abusive practices in the investment management industry, and maintain fair and financially sound markets." Progress made toward these outcomes is measured by analyzing five long-term indicators and twelve short-term indicators.

Evidence: The twelve annual measures are: 1) percentage of households investing in the market either through direct share ownership or ownership of mutual funds; 2) amount of foreign ownership of securities; 3) change in average daily shares on the NYSE and NASDAQ; 4) percentage of transaction dollars settled on time; 5) the number of market outages during a fiscal year; 6) percentage of market outages that are corrected within targeted timeframes; 7) number of SIPC customer protection proceedings following the liquidation of a broker-dealer; 8) amount of customer free credit balances held at broker-dealers; 9) number of SRO rule filings reviewed and approved each fiscal year; 10) percentage of SRO rule filings closed within 6 months of receipt; 11) the number of no-action, exemptive, and interpretative requests closed; and 12) the percentage of no-action, exemptive, and interpretative requests closed within six months. Measure number three listed above (average daily share volume on NSYE and NASDAQ) supports the outcome related to impediments to capital formation and the other measures support the outcome related to investor protrection and fair and financially sound markets. For further explanation of the measures, please refer to the measures tab of this evaluation.

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

Explanation: Each of the twelve annual measures includes baselines and ambitious targets and are based on quantifiable data.

Evidence: The target for "Percent Change in the Average Daily Share Volume on the NYSE and NASDAQ" is 1.8% for the NYSE and 2.4% for the NASDAQ in 2009. The target for "Percent of Transaction Dollars Settled on Time Each Year" is 99% for 2009. This represents approximately a 1% growth over 2006-2008 targets. If attained it would be the highest level of transaction dollars settled on time since 2001. The target for "Number of Market Outages at SROs and ECNs" is no more than 200 for each year from 2006 through 2012. Until 2006, the number of outages was less than 200, ranging from 128 in 2002 to 199 in 2005. In 2006, the number of outages was 208, indicating that the 2009 target will require a reduction from 2006 levels. The target for "Number of SIPC customer protection proceedings" is no more than 5 for each year from 2006 through 2009. The target for "Dollar amount of foreign ownership of U.S. securities" is $10 trillion in 2009, which represents an increase of 25% since 2007. The target for "Aggregate dollar amount of free credit balances at broker-dealers" is $500 billion in 2009, which represents an increase of 11% since 2007. The program aims to increase or maintain the number of rule filings and no-action, exemptive, and interpretive requests closed each year and within six months. This will require the program staff to be more efficient each year and to ensure that the regulated industry submits such requests for review in the most efficent manner.

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: There is no formal commitment by the SROs to work toward the specific goals of this program, but there are several ways in which the SROs work toward the annual and/or long-term goals of the Market Regulation program.

Evidence: The SROs are responsible for regulating their members, and the rules they promulgate to do so have to be approved by the Market Regulation program. In this way, the program assures that the SROs are performing their oversight in a manner that supports the goals of the program. The SROs themselves compete for industry business by being the most effective and efficient regulators, and to do so they must be in a state of compliance with this program's rules and regulations, which support the goals of the program. The SEC also has the authority to shut down the exchanges, and could do so if an exchange was not in compliance with the rules and regulations of this program.

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: The Government Accountability Office (GAO) routinely evaluates various aspects of the Market Regulation program. The GAO has published 10 reports that pertain significantly to this program since 2001. In addition, the Commission's Office of the Inspector General (OIG) also audits the Market Regulation program on a routine basis. The OIG has published 9 reports that pertain significantly to this program since 2001. These reports have covered a sufficient scope of this program's activities, including market infrastructure, SIPC processes, fines collection, investor confidence, and the rulemaking process.

Evidence: GAO -01-653, May 2001 , Securities Investor Protection: Steps Needed to Better Disclose SIPC Policies to Investors; GAO-01-858, July 2001, On-Line Trading: Investor Protections Have Improved but Continued Attention Is Needed; GAO-01-863, July 2001, Information Systems: Opportunities Exist to Strengthen SEC's Oversight of Capacity and Security; GAO-03-251, February 2003, Potential Terrorist Attacks: Additional Actions Needed to Better Prepare Critical Financial Market Participants; GAO-03-763, June 2003, Mutual Funds: Greater Transparency Needed in Disclosures to Investors; GAO-03-811, July 2003, Securities Investor Protection: Update on Matters Related to the Securities Investor Protection Corporation;GAO-03-795, July 2003, SEC and CFTC Fines Follow-Up: Collection Programs Are Improving, but Further Steps Are Warranted; GAO-03-790, August 2003, Employment Disputes: Recommendations to Better Ensure That Securities Arbitrators Are Qualified; GAO-04-75, April 2004, Securities Markets: Opportunities Exist to Enhance Investor Confidence and Improve listing Program Oversight; GAO-04-984, September 2004, Financial Markets Preparedness: Improvements Made, But More Action Needed to Prepare for Wide-Scale Disasters; OIG, #413, April 2006, Continuity of Operations Planning; OIG # 377, March 2004, Lost and Stolen Securities Program; OIG # 363, Statutory Disqualification Program; OIG # 355, January 2003, Bankruptcy Program; OIG # 359, January 03, Market Continuity Preparedness; OIG #26, September 02, Continuity of Operations Planning; OIG #354, August 2002, Broker-Dealer Risk Assessment Program, OIG #347, August 2002, Rulemaking Process; OIG #341, September 2001, Broker-Dealer Registration 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 program currently uses an activity-based costing and performance based budgeting system. The Budget request for 2009 will be the first budget to use this new system to tie resource needs with the accomplishment of performance goals.

Evidence: In July 2006 the Commission launched the first phase of an activity based costing and performance based budgeting system that will enable the Commission to allocate direct and indirect costs among major program activities and workloads. In the spring of 2007, the SEC will survey all of its programs to ensure that their costs accurately reflect their activities. This information gathering effort will lead to a FY 2009 budget request that links program resources with more aggressive program performance targets. This program will also use activity-based costing to analyze how it meets its efficiency measure targets.

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

Explanation: Since FY 2003, the agency and this program have implemented new management reporting activities including performance Dashboards, comprehensive risk assessment practices, and regular organizational reviews targeted at aligning human resource requirements with Commission priorities. The program has also addressed and implemented all recommendations of all GAO and OIG audits. Market Regulation has made significant investments in, and closely monitors the development of, specialized IT infrastructure and systems that assist in the improvement and accuracy of program workloads. The Market Regulation program has recently developed new measures with long term outcomes, as well as measures that gauge the output and efficiency of certain work that it performs.

Evidence: Market Regulation senior staff are active participants in the FY 2007 update of the SEC's Strategic Plan. In addition, Market Regulation also participates in both the Agency-level Information Officers Council and Human Capital Resource Board. These groups help assure that resources are allocated in a manner that support the agency's goals. Market Regulation, working with the Office of Risk Assessment, participated in a pilot program utilizing the RADAR risk management software, which will summarize each participant's assessment of the risks facing their programs on an ongoing basis. Market Regulation has implemented suggested changes resulting from this pilot program in the form of a road map. Finally, in June 2006, the Agency inaugurated its Budget and Program Performance Analysis System (BPPAS) to automate and improve the integration of budget, planning, and evaluation functions. This will help the program to better align its resources with its goals.

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: Rules promulgated by the SROs include a statement of purpose of and statutory basis for the proposed rule change. Regulations tend to state the need for the regulation in the section devoted to "purpose." There is no evidence that SROs over- or under-regulate their responsibilities. Rules promulgated by the SEC orginating in this division state the purpose of and statutory authority for the rules. The need for the regulation is also stated and debated in the notice of rule-making. There is no evidence that this program has over- or under-regulated its responsibilities. It is a recommendation of this PART that the SEC explain the need for each regulation -- both those promulgated by SROs and the SEC itself -- in an explicit component of the rule proumlgation materials. This would be helpful so that stakeholders understand clearly why the rule is necessary.

Evidence: Section 3(f) of the Exchange Act requires the Commission, whenever it engages in rulemaking and must consider or determine if an action is necessary or appropriate in the public interest, also to consider whether the action would promote efficiency, competition, and capital formation. Section 15A of the Securities Exchange Act of 1934 requires that the rules of SROs "are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers, to fix minimum profits, to impose any schedule or fix rates of commissions, allowances, discounts, or other fees to be charged by its members, or to regulate by virtue of any authority conferred by this title matters not related to the purposes of this title or the administration of the association." A review of sample final and proposed rules indicated that the rules did provide information on the purpose, need, and statutory authority for the regulations.

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 Market Regulation program. The program also collects information from public sources on economic indicators annually and semi-annually. 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 interpretive, no-action, and exemptive requests and rule proposals. 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, the Division determined that the efficiency with which the Division was achieving the program objectives with respect to SRO rule change proposals under Rule 19b-4 under the Securities Exchange Act of 1934 was not sufficient. Therefore, to expedite processing of SRO rule change proposals, the Commission adopted amendments to Rule 19b-4 to require the electronic filing and processing of SRO rule change proposals. These amendments have significantly streamlined processing of SRO rule change proposals and increased program efficiency in the SRO rule proposal process.

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: The SEC uses a pay for performance system that holds managers accountable for achieving the objectives of the agency and making efficient use of resources.

Evidence: In 2003, the SEC implemented a pay for performance program for its staff. Managers are evaluated and considered for performance pay based on their attainment of Agency Success Factors, which are performance standards for managers. Success Factors pertaining to performance results include specifically that managers must focus on achieving results while adapting to the agency's changing priorities, Division/Office goals and objectives, and future challenges in support of the mission of the SEC. The Success Factors pertaining to cost and schedule results include: managers must identify, prioritize, and manage the use of resources to increase productivity and effectiveness; managers are held accountable for making sound and timely decisions, balancing costs, risks, and/or benefits; for adapting to changing work priorities and addressing them to ensure timely delivery of information, products, and/or services; producing information, products, and/or services that are accurate, objective, fact-based, fair and balanced, clear, candid, timely, and useful.

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

Explanation: A majority of the program's direct funding is for compensation, benefits, and travel. Obligation of funds is regularly monitored by budget staff, senior officers and other Agency officials. A comparison of budget execution to the Division's operating budget plan is reported on a monthly basis, most prominently in the Chairman's Dashboard report. This program has overbudgeted non-personnel expenses in the past, but has corrected these errors in the 2007 and 2008 budget estimates.

Evidence: In 2006, actual total program obligations were 16.7% less than budgeted. Salaries and Benefits were 3.1% less and non-personnel expenses were 35% less. The program has implemented a new activity-based costing mechanism in 2006 and 2007 that will help monitor obligations and improve budget formulation. Travel expenditures are governed by SEC-wide policies.

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 and acts on rule proposals and no-action, interpretive, and exemptive requests. Also, the program collects information with respect to output and activity levels from internal management information systems and uses the information to change staffing or operations to ensure that program goals are met.

Evidence: See measures tab for description of efficiency measure and targets. 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 Market Regulation program and is used to manage performance against targets, evaluate the efficiency and effectiveness of the program, and identify possible changes to better meet program goals. In addition, the program employs management information systems to track interpretive, no-action, and exemptive requests and rule proposals. For example, the SRTS system tracks, among other things, the receipt, review, amendment and disposition of rule proposals. The program also has a Chairman's Correspondence log to process and track correspondence from the Chairman's office. In addition, the Division's Office of Trading Practices and Processing is piloting a new log to track correspondence dealing with the Commission's rules regarding trading practices. The tracking systems produce management reports on program performance and workload levels.

Does the program collaborate and coordinate effectively with related programs?

Explanation: The program collaborates with other SEC components on rulemaking and other management or policy recommendations made to the Chairman and Commissioners. Program staff meet on a periodic basis with staff of the other agencies (Department of the Treasury, Board of Governors of the Federal Reserve System Board, and Commodity Futures Trading Commission) that comprise the President's Working Group on Financial Markets (PWG) on such matters as financial market preparedness for a catastrophic event, hedge funds and pending legislation. The program has also worked with other organizations on isolated issues that have resulted in new developments in the program's strategic planning or operations.

Evidence: In February 2007, program staff participated with other PWG agencies in a joint financial market preparedness exercise with PWG's United Kingdom counterparts (Financial Services Authority, HM Treasury, and Bank of England) on February 20, 2007. This program developed and implemented an anti-money laundering program while working with the Department of the Treasury and other USG delegates to the Financial Action Task Force on Money Laundering. The program also established and implemented policies and programs with the North American Securities Administrators Association to address common concerns including registration of broker-dealers and their personnel.

Does the program use strong financial management practices?

Explanation: The agency's financial statements were audited in fiscal years 2004, 2005 and 2006, with the Agency receiving unqualified opinions. The agency currently has no material weaknesses in internal controls. The program is also implementing a new financial management, budgeting, and activity-based costing system that will improve dailiy financial management.

Evidence: GAO identified three material weaknesses in 2004; and the agency took action and downgraded or resolved all of them. None of these weaknesses were attributed to the Market Regulation program.

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

Explanation: Question 3.1 explains the performance information that the program collects regularly. Management deficiencies perceived by analyzing workload data, economic and financial market conditions, regulatory need, trend analysis, and recommendations from GAO and OIG reports are reviewed regularly and program changes are initiated when any deficiencies are perceived.

Evidence: The program responds to all recommendations made by the Government Accountability Office and the Commission's Office of the Inspector General. In two previous reports, GAO recommended that the Division expand the Automation Review Policy (ARP) program by hiring additional qualified staff to enable the Division to better conduct oversight of the information technology programs operated by the SROs. The Division responded quickly to the GAO's recommendation, increasing the ARP staff from nine to 13 staff members. GAO is currently drafting a third report, which will not contain any recommendations regarding the ARP program.

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 SEC has a formal process for rulemaking, which includes a public proposal and request for comment in order to solicit views of interested parties. 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. The views of all affected parties are sought and taken into account in the rule-making processes of the SROs as well.

Evidence: 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. Public comments on concept releases are gathered electronically via the SEC's website. Topics covered by recent concept releases include the role and operation of SROs in today's markets. Public hearings and roundtables often are held in connection with comprehensive or controversial rulemaking initiatives. For instance, the Commission held a Roundtable on the pilot elimination of the short sale price test. Public hearings and roundtables provide the opportunity for comments from a wide variety of sources in advance of any formal rulemaking. Releases proposing rules and rule amendments formally solicit public views. The program will occasionally seek the assistance of industry and investor groups, the financial media, or other organizations to help ensure broad dissemination of requests for public comment. In certain occasions, selected audiences such as consumer groups, investment companies, other financial market participants, financial media and data providers, software vendors, academics are contacted for feedback on possible rulemaking initiatives. The views of all public commentators are summarized, made available on the Commission's web site, analyzed, and fully considered by the program. The program does make revisions to proposed rulemakings as appropriate in response to public comments. Most proposed rulemakings are considered at Commission open meetings, which may be attended by members of the public. Also the public may petition the Commission to adopt or rescind rules through the web site, mail, or telephone.

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: Cost and benefit analyses are conducted on all rulemaking activities, but some rulemaking activities provide general cost and benefit statements (e.g. "the proposed rule would impose/reduce costs") and some actually monetize estimated costs. It is not clear that benefits are frequently monetized. In many instances, the program relies on public comments to enhance the cost and benefit analyses of proposed regulations. It is not clear that formal alternative analyses are conducted on a routine basis. The agency has performed alternative analyses in an ad hoc manner, and it is a recommendation of this PART that the program implement a formal alternative analysis component in its rulemaking process and justification. Last, there is no evidence that the program routinely analyzes the costs, benefits, or alternatives to SRO rulemaking activities.

Evidence: The SEC is an independent regulatory agency and must comply with the Regulatory Flexibility Act (RFA) and the Small Business Regulatory Fairness Act (SBREFA). It is not required to comply with EO 12866. Through its authorization, the SEC must consider whether its regulatory actions will promote efficiency, competition, capital formation. This has been interpreted as a requirement to conduct cost-benefit analyses. Program rulemakers compile a closing binder that contains documents and memos evidencing compliance with the RFA, Paperwork Reduction Act (PRA), and SBREFA requirements.

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

Explanation: The program considers possible means to lessen burdens on regulated entities, and provides opportunities for the public to comment on the benefit and burdenof proposed rules. For some regulations, the costs and benefits of alternative approaches are thoroughly considered and the program acts to maximize benefit and minimize costs. However, the program does not routinely engage in formal alternative analyses and does not routinely provide the monetized costs and benefits of alternatives, so it cannot be judged that each rule promulgated maximizes net benefits. Studies on the economic impact of regulations are conducted after regulations are in place by retrospective reviews of the impact of the regulatory changes.

Evidence: The final rule document for Regulation NMS, for example, provides monetized cost and benefit information for several alternative regulatory proposals. The program justifies its final rule promulgation using these analyses.

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

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

Evidence: See measures tab.

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

Explanation: The program has met or exceeded ten out of eleven targets for its annual outcome goals. In 2006, the program did not meet its target to close 600 no-action, exemptive, and interpretive requests.

Evidence: See measures tab.

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

Explanation: The program has exceeded targets and demonstrated improvement in the amount of time it takes to review and approve SRO rule filings. In 2001, the program was able to close 80% of SRO rule filings in six months and in 2006, the program was able to close 88% within six months. The program has exceeded its target for completion of of no-action, exemptive, and interpretive requests each year, but in 2005 the percentage of requests completed in less than six months fell from 97.1% in 2005 to 95.4% in 2006.

Evidence: See measures tab.

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 U.S. financial regulatory agencies because of differences in mission and mode of operation, different outcome measures, and differences in regulated entities. On an international scale, however, the program routinely receives high marks as one of the preeminent regulatory programs for markets and market professionals. The competitiveness of the U.S. financial markets is affected by its regulatory regime, and the program works to ensure that its regulatory regime continues to compare favorably with international counterparts.

Evidence: Internationally, the market regulation program's preeminence is illustrated by the large number of officials from foreign market regulators who come to the SEC every year to learn more about the program. For example, in April 2006 the SEC conducted its 16th annual International Institute for Securities Market Development. The two-week, senior-level program is the SEC's flagship global training program. It provided a wide ranging group of participants from countries with emerging markets an opportunity to discuss the core principles of securities regulation and features lectures, panels, and workshops that focus on the development, operation, and regulation of securities markets. The Institute's faculty included senior Market Regulation officials as well as representatives of other governmental agencies, securities exchanges and other key securities industry participants. In 2006, the Institute audience totaled 148 senior securities officials from 68 emerging market countries. Prior Institutes have provided training for a total of nearly 1,400 officials from five continents.

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 market regulation 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: The program responds to all recommendations made by the Government Accountability Office and the Commission's Office of the Inspector General. The Commission is routinely ranked among the top Federal agencies in terms of quality of work environment by www.bestplacestowork.org, frequently appearing in the top ten.

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

Explanation: While it is difficult to compare the monetized cost of this program to the regulated industry with monetized benefits to society, the program has been perceived to have lessened the financial risks to investors from fraud, mismanagement, self-dealing and misleading or incomplete disclosure.

Evidence: Accomplishment of programmatic goals related to fair, orderly, efficient markets and investor protection shows that the cost of compliance with this program's activities is not too great and some benefit of the program's activities exists. Long-term increases in the overall average daily share volume of U.S. securities markets bears some indication that the cost of compliance has not been great enough to negatively affect participation in the markets. The steadily increasing number of American households investing in the securities markets either through direct share ownership or ownership of mutual funds that invest in the U.S. securities market indicates indirectly that society is benefiting from a level of investor confidence in the markets.