Human Capital
Major Human Capital Challenges at SEC and Key Trade Agencies Gao ID: GAO-02-662T April 23, 2002In addition to protecting investors and the integrity of the securities market, the Securities and Exchange Commission (SEC), along with the Department of Commerce, the Office of the U.S. Trade Representative (USTR), and the Department of Agriculture, monitors and enforces the nation's trade agreements. Markets have become more complex, global, and technology-driven. At the same time SEC's workload is growing at a rate much faster than staffing. Workload and staffing imbalances have affected most aspects of SEC's regulatory and supervisory activities, from its inhouse technological capabilities to its enforcement actions against market participants. Other agencies that monitor U.S. trade agreements also face human capital challenges. Since the early 1980s, the United States has entered into several hundred trade agreements that have dramatically increased monitoring and enforcement workloads at USTR, Commerce, and Agriculture. This workload has continued to grow during the past two years as a result of major multilateral, regional, and bilateral trade negotiations. These agencies' efforts to monitor and enforce trade agreements are hampered by a lack of sufficient staff with appropriate expertise. Furthermore, they did not receive adequate support from other agencies and had difficulty obtaining comprehensive input from the private sector.
GAO-02-662T, Human Capital: Major Human Capital Challenges at SEC and Key Trade Agencies
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United States General Accounting Office:
GAO:
Testimony:
Before the Subcommittee on Oversight of Government Management,
Restructuring and the District of Columbia, Committee on Governmental
Affairs, U.S. Senate.
For Release on Delivery:
Expected at 10:00 a.m. EDT:
Tuesday April 23, 2002:
Human Capital:
Major Human Capital Challenges at SEC and Key Trade Agencies:
Statement of Richard J. Hillman:
Director, Financial Markets and Community Investment, and:
Loren Yager:
Director, International Affairs and Trade:
GAO-02-662T:
Mr. Chairman and Members of the Subcommittee:
We appreciate the opportunity to appear here today to discuss the human
capital challenges facing the agencies that play key roles in
monitoring publicly traded companies and enforcing our nation‘s trade
laws. As you are aware, GAO has been a leading promoter of a more
strategic approach to federal human capital issues. We are particularly
gratified to come before this subcommittee, as you have been committed
advocates of our efforts, sponsoring much of our work in this area. The
leadership provided by this subcommittee and the Senate Committee on
Governmental Affairs has been especially important in focusing
attention on the federal government‘s human capital challenges.
Over the past 2 years, our work in the major management challenges and
program risks across the government has identified human capital as a
primary factor affecting current and future agency performance. In
fact, in January 2001, GAO designated strategic human capital
management as a governmentwide high-risk area.[Footnote 1] As our 2001
High-Risk Series and Performance and Accountability Series reports make
clear, serious human capital shortfalls are eroding or threatening to
erode the ability of many agencies to effectively perform their
missions.[Footnote 2] We found that many agencies lack a consistent
strategic approach to marshaling, managing, and maintaining the human
capital needed to maximize performance and ensure accountability. Today
we will discuss the specific challenges faced by the Securities and
Exchange Commission (SEC), whose mission is to protect investors and
the integrity of securities markets, which includes overseeing public
companies. We will also discuss the Department of Commerce, the Office
of the U.S. Trade Representative (USTR), and the U.S. Department of
Agriculture--the key agencies that monitor and enforce our nation‘s
trade agreements.
Although these agencies have diverse responsibilities, our statement
today will address the specific human capital challenges these agencies
face. Specifically, this statement provides information on (1) workload
and staffing challenges, (2) the effects of workload and staffing
imbalances on the agencies‘ ability to fulfill their missions, and (3)
other factors that affect the fulfillment of these agencies‘ respective
missions. Our observations about the challenges faced by SEC and the
key trade agencies are based on three reports issued between 2000 and
2002.[Footnote 3] In addition, we updated our previous work through a
series of meetings with appropriate agency officials. This statement
was completed in accordance with generally accepted government auditing
standards.
In summary, our work at these agencies has resulted in reports that
address the human capital challenges faced by SEC and the key trade
agencies. In our 2002 report on SEC, we found that SEC faces a workload
that is growing at a rate much faster than staffing in an environment
where markets have become more complex, global, and technology-driven.
We found that workload and staffing imbalances have affected most
aspects of SEC‘s regulatory and supervisory activities, from its
inhouse technological capabilities to its ability to take enforcement
actions against market participants. SEC also faces challenges beyond
its resource limitations. For example in our 2001 and 2002 reports on
SEC, we discussed the high staff turnover, which hampers its
effectiveness and efficiency, and a strategic planning process that has
not included a strategic reevaluation of programs and activities in
light of current and emerging challenges.
We also found that the key agencies that monitor U.S. trade agreements
faced human capital challenges. As we reported in March 2000, since the
early 1980s, the United States has entered into several hundred trade
agreements, which has caused dramatic increases in the trade monitoring
and enforcement workloads at USTR, Commerce, and Agriculture. This
workload has continued to grow over the past 2 years as a result of
such factors as the launch of major multilateral, regional, and
bilateral trade negotiations. In our 2000 report, we found that these
agencies‘ efforts to monitor and enforce trade agreements were hampered
because they lacked sufficient staff with appropriate expertise, did
not receive adequate support from other agencies, and had difficulty
obtaining comprehensive input from the private sector. We found that
since our report was issued, staffing for trade compliance efforts has
increased at all three agencies, but we believe it is too early to
predict the impact of these increases. Moreover, the agencies face
other human capital challenges, including problems with recruitment and
high turnover rates.
Human Capital Issues at SEC Threaten Its Ability to Fulfill Its
Mission:
Over the last decade, securities markets have experienced unprecedented
growth and change. Moreover, technology has fundamentally changed the
way markets operate and how investors access markets. These changes
have made the markets more complex. In addition, the markets have
become more international, and legislative changes have resulted in a
regulatory framework that requires increased coordination among
financial regulators and requires that SEC regulate a greater range of
products and participants. Moreover, the recent sudden collapse of
Enron and other corporate failures have stimulated an intense debate on
the need for broad-based reform in such areas as financial reporting
and accounting standards, oversight of the accounting profession, and
corporate governance, all of which could have significant repercussions
on SEC‘s role and oversight challenges. At the same time, SEC has been
faced with an ever-increasing workload and ongoing human capital
challenges, most notably high staff turnover and numerous vacancies.
SEC Faces Significant Workload and Staff Challenges:
As stated in our March 2002 report, we found that SEC‘s ability to
fulfill its mission has become increasingly strained due in part to
imbalances between workload and staff resources.[Footnote 4] As
illustrated in figure 1, the larger, more active, and more complex
markets just discussed have resulted in an increased aggregate workload
(e.g., filings, complaints, inquiries, investigations, examinations,
and inspections) for SEC. As the dotted line indicates, SEC‘s workload
has continued to grow at a rapid rate throughout the decade while staff
resources, represented by the solid line, have grown little. As a
result, SEC has been challenged to keep up with its increasing workload
since about 1996.[Footnote 5]
Figure 1: Percent Change in SEC Staff Years and Workload, 1991-2000:
[Refer to PDF for image]
This figure is a multiple line graph depicting percent change in SEC
staff years and workload, 1991-2000. The vertical axis of the graph
represents percent from -10 to 100. The horizontal axis of the graph
represents years from 1991 to 2000. Lines depict the percent change in
two categories:
SEC staff years;
SEC workload.
Source: GAO analysis of SEC data.
[End of figure]
When we reviewed this workload on an activity basis, we found that over
the last decade staffing within the various areas of SEC‘s regulatory
oversight grew between 9 and 166 percent, while workload in those same
areas grew from 60 to 264 percent. As figure 2 illustrates, these
disparities exist across all key SEC activities, as the increase in
SEC‘s workload has substantially outpaced the increases in SEC‘s staff.
For example:
* the number of corporate filings increased almost 60 percent, while
related review staff increased 29 percent;
* the number of complaints and inquiries received increased by 100
percent, while the enforcement staff dedicated to investigate
complaints and other matters increased by only 16 percent;
* the number of market and firm supervision actions increased 137
percent, but the number of staff responsible for these activities
increased 51 percent;[Footnote 6]
* investment company filings increased 108 percent while staff
increased 9 percent; and:
* total assets under management by investment companies (IC) and
investment advisers (IA) increased by about 264 percent, while the
number of IC and IA examination staff increased by 166 percent.
Figure 2: Percent Change in Workload and Staff Years for Selected SEC
Activities, 1991-2000:
[Refer to PDF for image]
This figure is a multiple vertical bar graph depicting the following
data:
Percent Change in Workload and Staff Years for Selected SEC Activities,
1991-2000:
Activity: Review of corporate filings;
Increase in workload: 60%;
Increase in staff years: 29%.
Activity: Complaints and inquiries;
Increase in workload: 100%;
Increase in staff years: 16%.
Activity: Market and firm supervision;
Increase in workload: 137%;
Increase in staff years: 51%.
Activity: Review of investment company filings;
Increase in workload: 108%;
Increase in staff years: 9%.
Activity: IC and IA assets under management;
Increase in workload: 264%;
Increase in staff years: 166%.
Source: GAO analysis of SEC data.
[End of table]
SEC‘s Ability to Fulfill Its Mission Has Become Increasingly Strained:
In our work at SEC, we found that its ability to fulfill its mission
has become increasingly strained due in part to imbalances between
SEC‘s workload (such as filing, complaints, inquiries, investigations,
examinations, and inspections) and staff resources (full-time
equivalent [FTE] staff years). Although industry officials complimented
SEC‘s regulation of the industry given its staff size and budget, both
SEC and industry officials identified several challenges that SEC
faces. First, resource constraints have contributed to substantial
delays in the turnaround time for many SEC regulatory and oversight
activities such as approvals for rule filings and exemptive
applications.[Footnote 7] According to industry officials, such delays
have resulted in forgone revenue and have hampered market innovation.
Second, resource constraints have contributed to bottlenecks in the
examination and inspection area as SEC‘s workload has grown. As a
result, certain examinations and inspections take longer to complete.
Third, limited resources have forced SEC to be selective in its
enforcement activities and have lengthened the time required to complete
certain enforcement investigations.[Footnote 8] Fourth, SEC staff have
reviewed certain filings less frequently and completely as workloads
increased. Fifth, today‘s technology-driven markets have created
ongoing budgetary and staff challenges. Finally, SEC and industry
officials said that SEC has been increasingly challenged in addressing
emerging issues, such as the ongoing internationalization of securities
markets and technology-driven innovations like alternative trading
systems[Footnote 9] and exchange-traded funds. Although we address the
implications of all of these challenges in our 2002 report, today we
will focus our discussion on two critical aspects of SEC‘s
operations”its reviews of corporate filings and enforcement activities.
Certain Financial Statement and Other Filings Are Subject to Less
Frequent Review by SEC Staff:
Like other aspects of SEC‘s workload, the number of corporate filings
has grown at an unprecedented rate. For example, from 1991 to 2000, the
number of corporate filings increased 60 percent. During this same
period, the percent of all corporate filings that received some type
of review by SEC decreased from about 21 percent to 8 percent.
[Footnote 10] We found that SEC‘s 2001 goal was to complete a full
financial review of each issuer‘s annual filings in 1 of every 3
years”a review goal of about 30 to 35 percent of annual filings per
year. According to SEC, this level of review was expected to ’ensure
that material issues are disclosed clearly and completely and that
possible fraudulent activities are addressed promptly.“ However, in
2001, SEC completed full or full financial reviews of only 16 percent
of the annual reports filed or about half of its annual goal.
In November 2001, the Division of Corporation Finance announced that
staffing levels were expected to remain flat while filings were
expected to continue to increase in number and complexity. In this post-
Enron environment, SEC plans to reconsider how it will select filings
for review and how it will review the filings selected. Rather than
conducting full reviews of fewer firms, SEC officials said SEC may
limit its review to a specific disclosure issue and review more filings
for that issue. For example, SEC may choose to focus on off-balance
sheet activities and work with the companies to improve disclosure.
However, SEC officials said that full reviews will not be completely
abandoned, but the revised approach should help SEC better deploy
limited staff resources and enable it to have a greater review presence
across all types of corporate filings in the future. Further, in
December 2001, in response to the disclosure and accounting problems of
Enron, SEC began to review the annual filings of the 500 largest U.S.
companies.
Workload Growth and Limited Staffing Raise Concerns about Enforcement:
In the 2002 report, we also reported that delays in closing cases and a
growing backlog of smaller investigations presented ongoing challenges
for SEC. Over the past decade, SEC‘s Division of Enforcement staff
devoted to investigations increased 16 percent to about 482 staff
years, while the number of cases opened increased 65 percent to 558.
Although increased staff has allowed more work to be initiated, delays
in completion of individual cases persist. Moreover, the number of
cases pending at the end of the year increased 77 percent over this
same time period. SEC officials said the increase in the number of
cases pending was due in part to high staff turnover, which has
resulted in old cases not being closed or ongoing cases being delayed
until other staff can take over. For example, SEC officials reported
that in 2000 alone, over 58 experienced staff left the division.
As this subcommittee recognizes, enforcement activities are important
for carrying out SEC‘s mandate to protect investors and deter fraud and
abuse. Because SEC has limited resources and cannot prosecute every
case, SEC officials said they must prioritize the cases they will
pursue. According to SEC officials, SEC generally prioritizes the cases
in terms of (1) the message delivered to the industry and public about
the reach of SEC‘s enforcement efforts, (2) the amount of investor harm
done, (3) the deterrent value of the action, and (4) SEC‘s visibility
in certain areas such as insider trading and financial fraud. Except
for the length of time taken to complete an investigation, most
industry officials said that SEC was effective in this area. Although
SEC data show that the average length of time to complete an
investigation has decreased, we did not perform a detailed review of
the individual investigations to determine whether this was an
improvement or whether SEC on average pursued less time-consuming
matters for investigation.
SEC Faces Other Human Capital Challenges:
In addition to the staff and workload imbalances, other factors also
contribute to the challenges SEC currently faces. SEC officials said
that although additional resources could help SEC do more, additional
resources alone would not help SEC address its high turnover, which
continues to be a challenge for the agency. As we discussed in our 2001
report on SEC‘s human capital practices, about one-third of SEC‘s staff
left the agency from 1998 to 2000.[Footnote 11] By 2001, this number
had increased to 40 percent. SEC‘s turnover rate for attorneys,
accountants, and examiners averaged 15 percent in 2000, more than twice
the rate for comparable positions governmentwide. Although the rate had
decreased to 9 percent in 2001, turnover at SEC was still higher than
the rate governmentwide. Further, because of its high turnover and
inability to hire new staff quickly, about 250 positions remained
unfilled in September 2001, which represents about 8.5 percent of SEC‘s
authorized positions. Likewise, industry officials agreed that many of
the challenges SEC faces today are exacerbated by its high turnover
rate, which results in more inexperienced staff and slower, often less
efficient, regulatory processes. SEC and industry officials alike
recognize that SEC will always have a certain amount of turnover
because staff can significantly increase their salaries in the private
sector, and some staff plan to stay at SEC for only a limited period of
time. Many officials said pay parity with other financial regulators
could enable SEC to attract and retain staff for a few additional years.
SEC estimates that a new employee generally takes about 2 years to
become fully productive; in some divisions, junior staff were staying 2
years on average. We found that from 1992 to 1999, the average tenure
of an examiner decreased from 2.9 to 1.9 years and the average tenure
for attorneys leaving SEC had decreased from 3.4 years to 2.5 years.
Moreover in 2000, 76 percent of SEC examiners had been with the agency
less than 3 years. We explored the reasons for SEC‘s high turnover
among its professional ranks and actions taken to address this problem
in our 2001 human capital report.[Footnote 12] To do this, we surveyed
current and former SEC attorneys, accountants, and examiners to
determine why they had left or would consider leaving SEC.
Overwhelmingly, compensation was cited as the primary reason for
leaving SEC. However, respondents also identified other nonpay factors
that had affected or would affect their decisions to leave, such as the
lack of opportunities for advancement, the amount of uncompensated
overtime, and the quality of administrative support. As illustrated in
figure 3, these factors also had a generally or very negative effect on
morale. This graphic also illustrates that 20 percent or more of
current staff identified other aspects of work at SEC that could
negatively affect staff morale, including the quality of communication,
training, and supervision; the appraisal process; and the
organizational structure. Among other things, in our 2001 report we
recommended that the chairman SEC identify ways to involve human capital
leaders in decision making and establish a practice that requires
management to continually monitor and refine SEC‘s human capital
approaches to ensure their ongoing effectiveness.
Figure 3: Percentage of Staff Indicating Certain Aspects of Their Job
Had a Generally or Very Negative Effect on Morale:
[Refer to PDF for image]
This figure is a multiple vertical bar graph depicting the following
data:
Percentage of Staff Indicating Certain Aspects of Their Job Had a
Generally or Very Negative Effect on Morale:
Job aspect: Level of compensation;
Current Staff: 82%;
Former staff: 76%.
Job aspect: Uncompensated overtime;
Current Staff: 57%;
Former staff: 51%.
Job aspect: Quality of support;
Current Staff: 56%;
Former staff: 72%.
Job aspect: Opportunities for advancement;
Current Staff: 45%;
Former staff: 46%.
Job aspect: Quality of communication;
Current Staff: 33%;
Former staff: 45%.
Job aspect: Quality of training;
Current Staff: 25%;
Former staff: 26%.
Job aspect: Appraisal process;
Current Staff: 24%;
Former staff: 32%.
Job aspect: Organizational structure;
Current Staff: 24%;
Former staff: 33%.
Job aspect: Quality of supervision;
Current Staff: 23%;
Former staff: 42%.
Job aspect: Meaningfulness of work;
Current Staff: 8%;
Former staff: 12%.
Job aspect: Ability to balance work/personal life;
Current Staff: 7%;
Former staff: 8%.
Source: GAO survey of current and former SEC attorneys, accountants,
and examiners.
[End of figure]
Although SEC has taken numerous actions to address its high turnover
including use of special pay rates and retention bonuses, its turnover
rate remains higher than the governmentwide rate. The compensation
challenges that SEC faces are indicative of the pay issues that some
other agencies face as well, and underscore the need to consider
governmentwide pay reform that needs to make a more direct link between
pay and individual knowledge, skills, abilities, and performance.
Aside from special pay rates for certain professional staff, SEC
employees are paid according to general government pay rates. However,
on January 16, 2002, legislation was enacted that exempted SEC from
federal pay restrictions and provided it with the authority necessary
to bring salaries in line with those of other federal financial
regulators, but to date SEC has not received any additional
appropriations to fund higher salaries. SEC estimates that an
additional $76 million is needed to provide pay parity for the agency
in 2003. For 2003, SEC also is seeking from its congressional
appropriators an additional 100 staff positions. It requested 30
accountants, lawyers, and other professionals in the Division of
Corporation Finance to enhance its capability to review periodic
disclosure filings of public companies. It requested 35 accountants and
lawyers in the Division of Enforcement to deal with an increasing
workload of financial fraud and reporting enforcement cases. It also
requested 35 accountants, lawyers, and other professionals in other
divisions including the Office of the Chief Accountant”to deal with
evolving needs and policy development. Without these requested
increases for pay parity and additional staff, SEC says that it will
continue to be restrained from retaining and attracting experienced
staff and from fully addressing the new regulatory challenges and
growth of workload that it faces.
Although SEC‘s workload and staffing imbalances have challenged SEC‘s
ability to protect investors and maintain the integrity of securities
markets, SEC has generally managed the gap between workload and staff
by determining what basic, statutorily mandated duties it could
accomplish with existing resource levels. This approach, while
practical, has forced SEC‘s activities to be largely reactive rather
than proactive. For instance, SEC has not put mechanisms in place to
identify what it must do to address emerging and evolving issues.
Although SEC has a strategic plan and has periodically adjusted
staffing or program priorities to fulfill basic obligations, SEC has
not engaged in a much needed, systematic reevaluation of its programs
and activities in light of current and emerging challenges. Given the
regulatory pressures facing SEC and its ongoing human capital
challenges, it is clear that SEC could benefit from some additional
funding. However, a comprehensive, agencywide planning effort,
including planning for use of technology to leverage available
resources, could help SEC better determine the optimum human capital
and funding needed to fulfill its mission. On March 20, 2002, SEC
announced that it had undertaken a special study of the agency‘s
operations and resources intended, in part, to implement a
recommendation in our report.
Commerce and Other Agencies that Oversee Trade Agreements Face Human
Capital Challenges:
Trade‘s influence on the U.S. economy has increased dramatically over
the past decade, with exports growing more than twice as fast as U.S.
output (figure 4). Most of the growing volume of U.S. exports is
governed by the terms of trade agreements. U.S. government efforts to
monitor and enforce these agreements involve at least 17 federal
agencies, with three key agencies, USTR and the Departments of Commerce
and Agriculture, having significant roles.
Figure 4: Growth of U.S. Exports as Compared to Overall U.S. Output,
1970-2000:
[Refer to PDF for image]
This figure is a multiple line graph depicting percent the growth of
U.S. exports as compared to overall U.S. output, 1970-2000. The
vertical axis of the graph represents Index from 0 to 550 (1970 = 100).
The horizontal axis of the graph represents years from 1970 to 2000.
Lines depict the following:
Exports;
GDP.
Source: GAO calculation based on IMF data.
[End of figure]
In March 2000, we reported that the creation of a vast array of U.S.
trade agreements since the early 1980s had caused dramatic increases in
the trade monitoring and enforcement workloads at USTR, Commerce, and
Agriculture. Further, we found that these agencies‘ ability to monitor
and enforce trade agreements was limited due to a lack of sufficient
staff with appropriate expertise, inadequate support from other
agencies, and difficulty obtaining comprehensive input from the private
sector. Since our report was issued, staffing for trade compliance
activities has increased at all three agencies, although the impact of
these increases is uncertain. Moreover, the agencies face other human
capital challenges, such as problems with recruitment and high
turnover rates.
Trade Agencies Face Workload and Staffing Challenges:
USTR‘s, Commerce‘s, and Agriculture‘s trade monitoring and enforcement
workload has increased substantially in the last few years. While the
number of staff performing these functions at the three agencies has
also increased, their workload continues to grow in volume and
complexity. Therefore, human capital challenges remain. Some important
reasons for the growing workload include the rising number of U.S.
trade agreements, the increasing number of countries that are party to
these agreements, and the growing number of active trade disputes
involving the United States.
Agencies‘ Workload Is Increasing in Volume and Complexity:
In recent years, the number of trade agreements has grown
substantially. Since the early 1980s, the United States has entered
into more than 400 trade-related agreements. USTR negotiated about 300
of these, over 70 percent of which entered into force after 1992.
According to USTR, the majority of these agreements have increased U.S.
exporters‘ access to foreign markets. Figure 5 depicts the growth in
the number of trade agreements that USTR negotiated since 1984.
Figure 5: Number of USTR-Negotiated Trade Agreements in Force, 1984-
2002:
[Refer to PDF for image]
This figure is a line graph depicting the number of USTR-negotiated
trade agreements in force, 1984-2002. The vertical axis of the graph
represents the number of trade agreements currently in force from 0 to
350. The horizontal axis of the graph represents years from 1984
through 2002.
Source: USTR, 2001 Trade Policy Agenda and 2001 Annual Report.
[End of figure]
At the same time, the number of nations that participate in key trade
agreements has grown, further expanding the federal monitoring and
enforcement workload. For example, when the Uruguay Round of
multilateral trade negotiations was launched in 1986, 90 countries were
members of the General Agreement on Tariffs and Trade, the
organizational structure that preceded the World Trade Organization
(WTO). By the time that the WTO agreements were signed in 1994, the
number of WTO members had expanded to 123. An additional 21 countries
have joined the WTO since then, including China. China‘s WTO
membership, in particular, will increase the agencies‘ monitoring and
enforcement workload given that the terms of its accession are
extremely complex, totaling about 1000 pages. Figure 6 depicts the
growth in WTO membership since 1986.
Figure 6: World Trade Organization Membership, 1986-2002:
[Refer to PDF for image]
This figure is a vertical bar graph depicting the growth in WTO
membership since 1986.
Year: 1986;
Number of WTO members (approximated from graph): 50.
Year: 1994;
Number of WTO members (approximated from graph): 125.
Year: 2002;
Number of WTO members (approximated from graph): 145.
Sources: Data for 1986 and 1994 from GAO/NSIAD-00-76. Data for 2002
from WTO.
[End of figure]
Further, while these far-reaching agreements have substantially
increased U.S. trade agreement rights, they have also increased U.S.
trade agreement obligations to other nations. As a result, the
agencies‘ dispute settlement caseload has continued to grow. This
situation has affected USTR‘s workload in particular because the agency
is responsible for advocating and defending U.S. trade agreement rights
and obligations within North American Free Trade Agreement (NAFTA) and
WTO. The number of active cases involving the United States has
increased from 39 in 2000 to 46 in 2002 even as the number of resolved
cases has grown. Moreover, a growing focus of U.S. dispute settlement
efforts is responding to cases brought against the United States by
other nations. More than half of these cases have focused on U.S. use
of trade remedy laws, particularly U.S. actions taken against steel
imports. USTR relies on support from Commerce for these cases.
According to Commerce officials, WTO dispute settlement cases are
especially time consuming because of the tight deadlines and numerous
filings required. Figure 7 depicts the status of WTO dispute settlement
cases involving the United States in 2000 and 2002.
Figure 7: WTO Dispute Settlement Cases Involving the United States,
2000 and 2002:
[Refer to PDF for image]
This figure is a vertical bar graph depicting the WTO Dispute
Settlement Cases Involving the United States, 2000 and 2002, as
follows:
Resolved cases:
2000: 42;
2002: 69.
Active cases:
2000: 39;
2002: 46.
Source: USTR data.
[End of figure]
U.S. Trade Agencies Have Recently Increased Staffing in Key Areas, but
Impact of Additions Is Uncertain:
Human resources are the single most important asset of the agencies
responsible for monitoring and enforcing the growing volume of trade
agreements. This work requires country, industry, and functional
expertise, and a mixture of economic, technical, and legal analysis. In
March 2000, we reported that the three key trade agencies‘ human
capital capabilities had not kept pace with their increased monitoring
and enforcement workload. Specifically, staff levels at the three key
agencies were flat or declining.
Since our March 2000 report, USTR, the Foreign Agricultural Service
(FAS), and two of the three divisions in Commerce‘s International Trade
Administration have received significant increases in funding for staff
to monitor and enforce trade agreements. However, due to the recent
nature of the increases, we believe it is too early to determine fully
whether these additions have been effective in resolving the human
capital issues that we cited in our report.
These increases involved the following groups:
* In 2001, USTR received funding to add 25 new positions, which
increased the agency‘s total FTE staff level to 203. All 25 positions
have been filled. Thirteen of the new positions were in the area of
trade enforcement, 11 were in negotiations, and one was administrative.
* In 2001, Commerce‘s ITA received increased funding for staff, but not
all of ITA‘s divisions with monitoring and enforcement responsibilities
have actually added resources.
- ITA‘s Market Access and Compliance (MAC) Division”one of ITA‘s two
main divisions with export-related trade agreement monitoring
responsibilities”was funded for an additional 35 positions. As of the
end of 2001, MAC had filled 31 of these authorized positions. MAC‘s new
positions filled in 2001 included nine staff to work specifically on
China issues and four to work on general issues involving compliance
with trade agreement provisions.
- ITA‘s Trade Development (TD) Division, which has responsibility for
monitoring export-related trade agreements in sectors such as
automobiles, aerospace, and telecommunications, was funded for one
additional position in 2001. However, the division‘s actual staff
levels declined from 380 to 363 that year. Staff levels at Commerce‘s
Office of Automotive Affairs have remained flat at 16 full-time
employees for the past 4 years.
- ITA‘s Import Administration Division hired 27 additional staff in
2001. This division administers U.S. trade laws on antidumping and
countervailing duties and monitors enforcement of sector-specific
agreements governing U.S. imports. Most of the new positions were for
enforcing subsidies agreements and monitoring China‘s and Japan‘s
compliance with trade agreements.
* The FAS, which handles most of Agriculture‘s trade policy and
promotion responsibilities, was funded for a total of 18 new staff
years in 2001 and 2002. This increase in staff was for activities
related to monitoring countries‘ technical trade barriers and foreign
regulatory measures regarding imports of products with a biotechnology
component.
With increased staff levels in 2001, officials at the three agencies
generally believe they now have adequate capacity to monitor and
enforce trade agreements. However, we believe it is too early to tell
if the new staff will enable the agencies to fulfill their mission of
monitoring and enforcing trade agreements. One reason is that most of
the new staff have been on board for a year or less, so the impact of
these new additions is uncertain. Another reason it may be difficult
to judge the effectiveness of the staff increases is the continuing
growth in the agencies‘ workload, which could potentially cause a shift
in resources intended for trade compliance activities. According to
USTR‘s 2003 budget justification, never in history have so many
countries participated in global trade negotiations.[Footnote 13]
To handle the expected increase in the negotiations workload, USTR is
requesting authority for six new negotiator positions. The MAC unit in
ITA, which will support USTR in all the negotiations, is requesting 33
new FTEs in its 2003 budget, 21 of whom will provide support for WTO
and FTAA negotiations. Without additional resources for negotiations,
agency officials told us they may have to shift resources away from
trade compliance to meet the increased workload in conducting
negotiations.
Past Workload Imbalances Hindered Trade Agencies‘ Ability to Fulfill
Their Missions:
Past staffing and workload imbalances hindered the three trade
agencies‘ abilities to fulfill their trade monitoring and enforcement
missions. As we reported in March 2000, agency officials stated that
gaps in staff expertise had hindered their efforts to analyze and
respond to compliance problems. In addition, officials at all three
agencies said that steady declines in staff resources had limited the
level of support they provide to each other. Finally, we also cited
challenges at the three agencies in coordinating their efforts with the
private sector.
While trade agreements in the past focused primarily on tariffs, they
now address a broader range of trade issues, such as product standards
and food safety measures, making the task of monitoring and enforcing
trade agreements more challenging. Given these developments, agencies
need staff with the ability to perform a mixture of economic,
technical, and legal analysis. However, most of the agencies we
examined in our 2000 report did not have the capability to do all types
of analysis themselves, and they required input from other offices and
agencies.
As we reported in March 2000, insufficient staff resources limited the
agencies‘ ability to provide each other the needed input and support.
USTR, in particular, requires support from other agencies, as it was
created to coordinate federal trade efforts; its staff was not intended
to have expertise on every area covered by trade agreements. USTR
officials as well as those at Commerce and Agriculture often stated
that they had difficulty obtaining needed analytical support from
offices within their own agency or from other agencies.[Footnote 14]
USTR and Agriculture officials also reported that insufficient staff at
other agencies limited the extent to which these agencies had supported
their monitoring and enforcement efforts. Since our March 2000 report,
however, USTR officials noted that the level of support they receive
from other agencies, particularly Commerce, has improved as a result of
increased staff levels.
In our 2000 report, we also found that the three agencies identified
challenges in coordinating with the private sector. We found that the
agencies were not always able to obtain comprehensive private sector
input and unified positions on pending trade issues. As a result, we
recommended that USTR assess whether existing mechanisms for obtaining
private sector input are adequate. USTR did undertake a self-assessment
on one aspect of this issue in 2000 that resulted in a January 19,
2001, report that recommended some improvements. The current
administration is now considering these and other recommendations for
improvement. At the request of the Senate Finance Committee‘s ranking
minority member, we are currently studying whether the statutorily
mandated private sector advisory committee system that USTR chairs
adequately supports U.S. trade policy.
Recruiting and Retention Issues Present Other Challenges:
There are several other human capital challenges facing the agencies
that monitor and enforce trade agreements. In particular, the need for
specialized knowledge and demand for individuals with experience in
trade compliance and litigation creates challenges in recruiting and
retaining staff.
While staff levels for monitoring and enforcing trade agreements have
increased at the three key agencies, officials noted that the hiring
process has often been slow. For example, at USTR it took most of 2001
to hire the 25 new staff that the agency had been authorized at the
beginning of the year. Factors that contributed to the hiring delays
included difficulties attracting individuals with the requisite skills
and experience. In addition, the agency needed to hire specialists for
many of the positions, including economists, attorneys with litigation
experience, and individuals with industry and regional expertise.
Because of its small size, USTR does not have a formal recruitment
program. The agency reports attracting numerous applicants for each
position. However, finding individuals with specialized experience can
be difficult. FAS officials also told us that in some cases it took up
to a year to hire staff because of difficulty finding applicants with
the needed technical skills. Commerce‘s ITA has a formal recruitment
program and did not experience difficulty attracting applicants. In
addition, in 2001 they began using OPM‘s Outstanding Scholarship
Program as a recruitment tool. However, ITA officials noted that since
September 11, there have been significant delays in obtaining security
clearances for staff hired to fill trade compliance positions overseas,
which in turn has delayed bringing the staff on board.
Turnover at the three trade agencies has remained high, particularly at
USTR and Commerce. For example, while comparisons must be made with
caution, USTR‘s attrition rate was almost 17 percent in 2001, more than
triple the government wide rate of 5.4 percent that year. Attrition has
also been relatively high at Commerce‘s Import Administration Division,
reaching 11 percent in 2001, or more than double the government wide
rate.
Attrition at both USTR and Commerce‘s Import Administration Division
historically has been high. Reasons include the intensity of work and
the long hours required to handle caseloads. In addition, as with the
SEC, staff often leave government as they receive lucrative offers from
the private sector due to their highly technical areas of expertise,
such as experience with trade litigation. USTR has devoted additional
resources to training and performance bonuses in an effort to improve
retention. Because persons leaving USTR for jobs in the private sector
often receive offers that are $50,000 to $100,000 higher than their
government salary, USTR has not pursued retention bonuses as a strategy
for stemming attrition. Commerce‘s ITA has also taken a number of steps
to increase retention, including expanding their award and training
programs and conducting surveys on employee satisfaction. The agency is
working to have career ladders for non-supervisory personnel extend
more routinely to the GS-14 level. For example, Import Administration
Division officials worked with ITA management to retain current staff
through flexibility in using promotions, such as upgrading certain
specialized positions based on increased duties and responsibilities.
According to ITA‘s deputy undersecretary, the two biggest human capital
challenges facing ITA are turnover rates and succession planning. He
noted that almost 60 percent of ITA‘s senior executive service will be
eligible to retire by 2007.
Concluding Remarks:
We will end as we began, serious human capital shortfalls are eroding
the capacity of many agencies, and threatening the ability of others,
to economically, efficiently, and effectively perform their missions.
Many of the challenges that we discussed today are not unique to SEC
or the key trade agencies but reflect governmentwide issues this
subcommittee has been grappling with for years. The federal
government‘s human capital weaknesses did not emerge overnight and will
not be quickly or easily addressed. Committed, sustained inspired
leadership and persistent attention on the behalf of all interested
parties will be essential if lasting changes are to be made and the
challenges we face successfully addressed. Although we are seeing
positive changes and developments overall, including some positive
steps at the agencies we discussed here today, there continues to be
much work to be done.
As the Comptroller General recently testified before this subcommittee,
the proposed Federal Human Capital Act of 2001 (S. 1603) represents an
important next step to helping agencies address their human capital
management challenges.[Footnote 15] In that testimony, we also
discussed our model of strategic human capital management, released
last month as an exposure draft to assist in transforming the human
capital cultures of federal agencies. These important new developments
have important implications for the agencies discussed today. [Footnote
16]
Thank you again for your continuing attention to human capital reform.
The leadership shown by this subcommittee, by holding this and related
hearings and in its oversight generally, has both helped to create and
increase the needed momentum for change and highlight the need for, and
direction of, possible solutions. We would be pleased to respond to any
questions you or other Members of the subcommittee may have.
[End of section]
Footnotes:
[1] See U.S. General Accounting Office, High-Risk Series: An Update,
[hyperlink, http://www.gao.gov/products/GAO-01-263] (Washington, D.C.:
Jan. 2001).
[2] U.S. General Accounting Office, Performance and Accountability
Series”Major Management Challenges and Program Risks: A Governmentwide
Perspective, [hyperlink, http://www.gao.gov/products/GAO-01-241]
(Washington, D.C.: Jan. 2001). In addition, see the accompanying 21
reports (numbered GAO-01-242 through GAO-01-262) on specific agencies.
[3] See U.S. General Accounting Office, SEC Operations: Increased
Workload Creates Challenges, [hyperlink,
http://www.gao.gov/products/GAO-02-302] (Washington D.C.: Mar. 5,
2002); International Trade: Strategy Needed to Better Monitor and
Enforce Trade Agreements, [hyperlink,
http://www.gao.gov/products/GAO/NSIAD-00-76] (Washington, D.C.: Mar.14,
2000); and Securities and Exchange Commission: Human Capital Challenges
Require Management Attention, [hyperlink,
http://www.gao.gov/products/GAO-01-947] (Washington D.C.: Sept.17,
2001).
[4] Staff resources are measured in terms of full-time equivalent staff
years.
[5] All years are fiscal years unless otherwise noted.
[6] Market and firm supervision actions include: self-regulatory
organization and SEC rule proposals; interpretive guidance and
exemptive applications; analyses of proposed enforcement actions,
disclosure documents, and risk assessment reports; automated trading
system analyses and automation reviews of self-regulatory organization
systems; policy papers; Congressional, governmental, industry, and
public correspondence; and other reports and analyses of SEC‘s Division
of Market Regulation.
[7] A company files an exemptive application when it seeks an SEC
decision to exempt a new activity from existing rules and laws.
[8] The SEC chairman has recently announced an initiative called real-
time enforcement, which is intended to protect investors by (1)
obtaining emergency relief in federal court to stop illegal conduct
expeditiously; (2) filing enforcement actions more quickly, thereby
compelling disclosure of questionable conduct so that the public can
make informed investment decisions; (3) deterring future misconduct
through imposing swift and stiff sanctions on those who commit
egregious frauds, repeatedly abuse investor trust, or attempt to impede
the SEC‘s investigatory processes. According to the SEC, insufficient
resources may inhibit the effectiveness of this initiative, which
depends upon prompt action by enforcement staff.
[9] An alternative trading system is an entity that performs the
functions commonly performed by a stock exchange.
[10] SEC‘s review of corporate filings may involve a full review, a
full financial review, or monitoring for specific disclosure items. A
full review involves an in-depth examination of the accounting,
financial, and legal aspects of an issuer‘s filing. A full financial
review involves an in-depth accounting analysis of an issuer‘s
financial statements and management‘s discussion and analysis or
business plan disclosure.
[11] [hyperlink, http://www.gao.gov/products/GAO-01-947].
[12] [hyperlink, http://www.gao.gov/products/GAO-01-947].
[13] The WTO Ministerial Declaration that launched new multilateral
trade negotiations in 2002 sets an ambitious timetable, with the
negotiations scheduled for completion by 2005. At the same time, USTR
is pursuing another major negotiating initiative, the Free Trade Area
of the Americas (FTAA), which would establish the largest free trade
zone in the world. In addition to these multilateral negotiations, the
United States intends to complete bilateral free trade agreements with
Chile and Singapore this year. Further, the United States is exploring
a free trade agreement with five countries of Central America.
[14] Although USTR is the lead trade agency and was intended to
coordinate federal trade efforts, the multiple agencies responsible for
monitoring and helping USTR enforce trade agreements still
independently estimate their staffing and budget needs, and USTR has no
input into their staffing or budget requests. However, officials are
making efforts at the operational level within the agencies to
coordinate on staffing needs. For example, Commerce and State co-chair
an Interagency Compliance Coordination Committee that is focused on
determining whether the trade-related agencies have adequate staff with
the right skills working on trade agreement compliance issues at U.S.
posts overseas and at headquarters in Washington, D.C.
[15] U.S. General Accounting Office, Managing for Results: Building on
the Momentum for Strategic Human Capital Reform, [hyperlink,
http://www.gao.gov/products/GAO-02-528T] (Washington, D.C.: Mar. 18,
2002).
[16] U.S. General Accounting Office, A Model of Strategic Human Capital
Management, Exposure Draft, [hyperlink,
http://www.gao.gov/products/GAO-02-373SP] (Washington, D.C.: Mar.
2002).
[End of section]
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