SUMMARY OF OIG ACTIVITIES [including a description of

significant problems, abuses, and deficiencies and a description of OIG recommendations for corrective action (Mandated by Section 5(a)(1) and (2) of the

Act)] . . . . . . . . . . . . . . . . . . . . . . . . . . 1

AUDITS. . . . . . . . . . . . . . . . . . . . . . . . . . 1

INVESTIGATIONS. . . . . . . . . . . . . . . . . . . . . . 2

LEGISLATIVE AND REGULATORY REVIEWS. . . . . . . . . . . . 3

OIG RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . . . 3

OIG RESOURCES. . . . . . . . . . . . . . . . . . . . . . . . . 4

CFTC PROGRAMS AND OPERATIONS . . . . . . . . . . . . . . . . . 4

COMPLETED WORK . . . . . . . . . . . . . . . . . . . . . . . . 5

AUDITS [including a list of each audit report issued and a summary of each particularly significant report

(Mandated by Section 5(a)(6) and (7) of the Act). . . . . 5 INVESTIGATIONS. . . . . . . . . . . . . . . . . . . . . . 8

LEGISLATIVE AND REGULATORY REVIEWS. . . . . . . . . . . . 10

AUDIT REPORTS OVER SIX MONTHS OLD. . . . . . . . . . . . . . . 12

CORRECTIVE ACTION NOT COMPLETED [including an

identification of each significant recommendation described in previous semiannual reports on which corrective action has not been completed (Mandated

by Section 5(a)(3) of the Act)] . . . . . . . . . . . . . 12

CORRECTIVE ACTION COMPLETED. . . . . . . . . . . . . . . 16

MANAGEMENT DECISION NOT MADE [including a summary of each audit report issued before the commencement of the reporting period for which no management decision has been made by the end of the reporting period (including the date and title of each such report), an explanation of the reasons such a management decision has not been made, and a statement concerning the desired timetable for achieving a management decision on each such report

(Mandated by Section 5(a)(10) of the Act)]. . . . . . . . 16

SUMMARY OF MATTERS REFERRED TO PROSECUTIVE AUTHORITIES and

the prosecutions and convictions which have resulted

(Mandated by Section 5(a)(4) of the Act). . . . . . . . . 16

SUMMARY OF EACH REPORT MADE TO THE AGENCY HEAD under

Section 6(b)(2) concerning information or assistance unreasonably refused or not provided (Mandated by

Section 5(a)(5) of the Act) . . . . . . . . . . . . . . . 16

REVISED MANAGEMENT DECISIONS [including description and explanation of the reasons for any significant revised management decision made during the reporting period

(Mandated by Section 5(a)(11) of the Act)]. . . . . . . . 17

INSPECTOR GENERAL DISAGREEMENT [including information

concerning any significant management decision with which the Inspector General is in disagreement

(Mandated by Section 5(a)(12) of the Act)]. . . . . . . . 17

CURRENT AUDITS . . . . . . . . . . . . . . . . . . . . . . . . 17

GAO LIAISON. . . . . . . . . . . . . . . . . . . . . . . . . . 19

STRATEGIC PLAN . . . . . . . . . . . . . . . . . . . . . . . . 21

CONTACTING THE OFFICE OF THE INSPECTOR GENERAL . . . . . . . . 26

TABLE 1 -- REPORTS ISSUED WITH QUESTIONED COSTS (Mandated

by Section 5(a)(8) of the Act). . . . . . . . . . . . . . 27

TABLE 2 -- REPORTS ISSUED WITH RECOMMENDATIONS THAT FUNDS

BE PUT TO BETTER USE (Mandated by Section 5(a)(9) of

the Act). . . . . . . . . . . . . . . . . . . . . . . . . 28

Section 5(a)(1). . . . . . . . . . . . . . . . . . . . . . . . 1

Section 5(a)(2). . . . . . . . . . . . . . . . . . . . . . . . 1

Section 5(a)(3). . . . . . . . . . . . . . . . . . . . . . . . 12

Section 5(a)(4). . . . . . . . . . . . . . . . . . . . . . . . 16

Section 5(a)(5). . . . . . . . . . . . . . . . . . . . . . . . 16

Section 5(a)(6). . . . . . . . . . . . . . . . . . . . . . . . 5

Section 5(a)(7). . . . . . . . . . . . . . . . . . . . . . . . 5

Section 5(a)(8). . . . . . . . . . . . . . . . . . . . . . . . 27

Section 5(a)(9). . . . . . . . . . . . . . . . . . . . . . . . 28

Section 5(a)(10) . . . . . . . . . . . . . . . . . . . . . . . 16

Section 5(a)(11) . . . . . . . . . . . . . . . . . . . . . . . 17

Section 5(a)(12) . . . . . . . . . . . . . . . . . . . . . . . 17

AUDITS

The primary objectives of the Office of the Inspector General (OIG) are to help promote long-term efficiency and effectiveness in the administration and operation of the Commission and to protect against fraud and abuse. This reporting period's OIG audit activities which are listed below reflect these objectives.

Current Audits

The following are the audits being conducted during the current reporting period and continuing into the next reporting period. (For additional details, see the section on current audits on page 17.)

Audit of the Rule Enforcement Review Program. The audit is designed to determine whether the Division of Trading and Markets rule enforcement review program is operating efficiently and to determine what changes, if any, should be made to the program. (For additional details, see the section on current audits on page 18.)

Audit of Compliance with the Federal Managers' Financial Integrity Act. In accordance with OMB Circular A-123 (Revised), the Inspector General will evaluate, provide technical assistance, and advise the agency head as to whether the agency's review and evaluation process was conducted in accordance with the circular's requirements. (For additional details, see the section on current audits on page 18.)

Lobbying Restrictions. Public Law 101-121, Section 319, prohibits payment of appropriated funds for lobbying (representation). The law requires that persons receiving federal funds in excess of $100,000 must certify that appropriated funds have not been and will not be used for lobbying activities and disclose when non-appropriated funds are used for lobbying activities. The IG is required to review compliance and report on the implementation and results of the disclosure process. (For additional details, see the section on current audits on page 18.)

Imprest Funds. The OIG will review expenditures from CFTC imprest funds to determine compliance with CFTC Instruction 344-1 and the Department of the Treasury Manual of Procedures and Instructions for Cashiers. Specifically, the audits are designed to verify that all funds are properly accounted for; the amount of each fund is not in excess of the cash requirements; the cashier is following procedures that will adequately protect the funds from loss or misuse; and the cashier is not making unauthorized use of the funds. The imprest funds are maintained in Washington, D.C.; Chicago, Illinois; New York, New York; Los Angeles, California; and Kansas City, Missouri. (For additional details, see the section on current audits on page 19.)

Completed Audits

The following are the audits completed during this reporting period. (For additional details, see the section on completed audits on page 5.)

Review of the Deployment of OIRM Resources. In accordance with its strategic plan, the Office of the Inspector General has been systematically reviewing the information flows of the various organizations of the CFTC. The recommendations coming out of these reviews have a direct impact on the resources of the Office of Information Resources Management (OIRM), and future reviews can be expected to have similar impacts. To provide a context for the Chairman in judging the priority of future OIG automation recommendations, the OIG developed a picture of the deployment of OIRM resources and the priorities inherent in that deployment. (For additional details, see the section on completed audits on page 6.)

Audits of Imprest Funds -- Chicago, Kansas City, and New York. The OIG determined that all funds are properly accounted for, the cashiers are following procedures that will adequately protect the funds from loss or misuse, and the cashiers are not making unauthorized use of the funds. (For additional details, see the section on completed audits on page 7.)

Cash Verification of Imprest Fund. -- Washington, DC. The OIG found that all funds were properly accounted for. (For additional details, see the section on completed audits on page 8.)

INVESTIGATIONS

The Inspector General Act of 1978, as amended, provides that the Inspector General may receive and investigate complaints or information from the Commission's employees concerning the possible existence of an activity constituting a violation of law, rules or regulations, or mismanagement, abuse of authority, or gross waste of funds, or a substantial and specific danger to the public health and safety.

Two investigations were pending as of the opening of the reporting period. The OIG opened three investigations during the reporting period and completed four investigations. One investigation remained open at the end of the period. (For more detailed descriptions of these investigations, see the section on investigations on page 8.)

LEGISLATIVE AND REGULATORY REVIEWS

The OIG reviews proposed and final CFTC regulations and legislation and selected exchange rules using the following basic criteria: Whether the agency: (1) has identified specifically the problem(s) to be addressed by the proposal; (2) has defined through case study or data analysis a clear link between the proposed solution and the identified problem(s); (3) has specified clearly the means to effectively and efficiently enforce the proposal; (4) has assessed the likely efficiency and effectiveness of alternative solutions; (5) can reasonably document that the proposal will yield positive net benefits over the long term; and (6) has met the requirements of the Regulatory Flexibility Act and the Paperwork Reduction Act.

The Regulatory Flexibility Act requires the agency to evaluate the impact of its regulations on small entities. The Paperwork Reduction Act requires the agency to manage effectively and efficiently its information collections so that they are the least burdensome necessary to achieve the stipulated objectives. (For more detailed descriptions of these reviews, see the section on legislative and regulatory reviews on page 10.)

Rules more prominently reviewed during this period include:

Audit Trail Review; and

A proposed investigation.

The Office of the Inspector General in the Commodity Futures Trading Commission (CFTC) was created in accordance with the Inspector General Act of 1978 (P.L. 95-452), as amended by the Inspector General Act Amendments of 1988 (P.L. 100-504). The OIG was established to create an independent unit to:

Promote economy, efficiency, and effectiveness in the administration of CFTC programs and operations and to detect and prevent fraud and abuse in such programs and operations;

Conduct and supervise audits and, where necessary, investigations relating to the administration of CFTC programs and operations;

Review existing and proposed legislation and regulations and to make recommendations concerning their impact on the economy and efficiency of CFTC programs and operations or the prevention and detection of fraud and abuse; and

Keep the Chairman and Congress fully informed about any problems or deficiencies in the administration of CFTC programs and operations and provide recommendations for correction of these problems or deficiencies.

Given that the CFTC does not have extensive contracts or grant making authority, the OIG's efforts have been focused on the review of legislative and regulatory proposals and the monitoring of internal CFTC operations.

The OIG consists of the Inspector General, two professional staff members, and a secretary. The present Inspector General assumed his position on October 7, 1990.

The OIG, on December 4, 1989, signed a Memorandum of Understanding with the Office of General Counsel (OGC). This Memorandum details the procedures that will be used to provide the OIG with OGC legal services. An OGC staff member has been assigned to provide such services to the OIG on an as-needed basis.

The CFTC was established in 1974 as an independent agency to regulate commodity futures and options trading in the United States. The CFTC is headquartered in Washington, D.C., with additional offices in Chicago, New York, Kansas City, Los Angeles, and Minneapolis.

The basic objectives of the CFTC are to prevent manipulation of the markets, abusive trade practices, and fraudulent activities; to maintain effective oversight of the markets and self-regulatory organizations (SROs); and to enforce the Commodity Exchange Act and Commission rules without hindering the futures markets' provision of price discovery and risk shifting services. The CFTC regulates the futures activities of brokerage firms, salespersons, floor brokers, commodity pool operators, commodity trading advisors, introducing brokers, and leverage transaction merchants. In addition, the agency ensures the effective enforcement of exchange rules, reviews the terms and conditions of proposed futures contracts and the registration of firms and individuals who provide advice or handle customer funds, and oversees the activities of the National Futures Association (NFA).

AUDITS

The OIG is required to conduct, supervise and coordinate audits of CFTC programs and operations and to ensure that the audits are conducted in accordance with generally accepted government auditing standards. The OIG is also required to recommend changes to existing and proposed CFTC programs and operations to promote economy, efficiency, and effectiveness and to prevent and detect fraud and abuse.

The purpose of these audits is to ensure that:

Funds have been expended in a manner consistent with related laws, regulations, and policies;

Resources have been managed effectively and efficiently;

Stipulated program objectives have been achieved; and

Resources have been safeguarded.

The following audit reports have been issued during the reporting period.

1. Review of the Deployment of OIRM Resources

Objectives.

In accordance with its strategic plan, the Office of the Inspector General has been systematically reviewing the information flows of the various organizations of the CFTC. The first review dealt with the reparations program and the sharing of information between the Office of Proceedings, the Office of General Counsel, and the Office of the Secretariat. The second dealt with the Market Analysis Section of the Division of Economic Analysis. The recommendations coming out of these reviews have a direct impact on the resources of the Office of Information Resources Management (OIRM), and future reviews can be expected to have similar impacts. To provide a context for the Chairman in judging the priority of future OIG automation recommendations, the OIG sought to develop a picture of the deployment of OIRM resources and the priorities inherent in that deployment.

Results.

In an August 30, 1995 report, the OIG found that, in keeping with developments in the industry, OIRM is moving from a mainframe architecture to a distributed, client-server architecture. If developments proceed according to plan, within five years, CFTC will have no mainframe computer. All of CFTC's information resources will be distributed in a number of high powered servers along a network connected by wide band data transmission lines. CFTC employees anywhere, who can tap into the network, can have instantaneous access to any information stored anywhere on the CFTC network.

Two major developments are driving this change. First, the cost of electronic storage is dropping precipitously and can be expected to continue to do so. This will permit servers on a network to store vast amounts of data which could only be stored on mainframes before. Second, the increase in available bandwidth over which data can be transmitted has been matched by a steady reduction in the cost of that bandwidth. Because the increased bandwidth provides near instantaneous response times regardless of geographical location, data can be stored wherever there is memory available.

Recognizing the coming changes in hardware and configuration and the shift in emphasis from mainframe operations to a more distributed environment, the Executive Director is in the process of replacing the old ADP Steering Committee with an End Users Advisory Committee (EUAC) more attuned to the needs of today and more capable of dealing with the challenges of the future. The ADP Steering Committee focussed all of its energy on the systems development resources of OIRM to the exclusion of the other two thirds of OIRM efforts. The proposed End Users Advisory Committee (EUAC) will deal with the full range of OIRM activities and have a voice in the allocation of all OIRM personnel and dollar resources. The EUAC will be chaired by the Director, OIRM, who will vote only in the case of a tie, and consist of the Executive Assistant to the Chairman, the Executive Director, the Division Directors, the General Counsel, and the Regional Directors of New York and Chicago. The charter formally establishing the EUAC is expected to be produced by the Executive Director in September 1995 with the first, monthly meeting scheduled to take place in October 1995.

OIRM is moving expeditiously to take advantage of technological advances to bring CFTC the computing power it needs to continue to perform its functions in the expected fiscally stringent atmosphere. The Executive Director is moving to insure that the administrative systems supporting the setting of priorities and the allocation of OIRM resources keep pace with the changing environment and constantly reflect the current preferences of the Commission. Indeed, if resources become more scarce in the Commission over the next few years, those scarce resources should be focussed on OIRM to permit the Commission to continually multiply the production of its staff. Without taking advantage of developing technologies, CFTC will not be able to keep pace with the ever growing industry at current resource levels, much less at reduced levels.

Because so many of the OIG review recommendations have an impact on the resources of OIRM, the OIG, as stated earlier, undertook this review as a means of educating itself and the Chairman's office on the deployment of OIRM resources and the priorities inherent in that deployment. This review provides a context in which to judge the reasonableness of future OIG automation recommendations.

2. Audits of Imprest Funds -- Chicago, Kansas City, and New York.

Objectives.

The OIG reviewed expenditures from the Chicago, Kansas City and New York imprest funds over the past year to determine compliance with CFTC Instruction 344-1 and the Department of the Treasury Manual of Procedures and Instructions for Cashiers. Specifically, the audits were designed to verify that all funds are properly accounted for; the amount of each fund is not in excess of the cash requirements; the cashiers are following procedures that adequately protect the funds from loss or misuse; and the cashiers are not making unauthorized use of the funds.

Results.

In reports issued on June 7, 1995 (Kansas City), June 30, 1995 (Chicago), and August 16, 1995 (New York), the OIG determined that all funds are properly accounted for, the cashiers are following procedures that will adequately protect the funds from loss or misuse, and the cashiers are not making unauthorized use of the funds.

3. Cash Verification of Imprest Fund -- Washington, D.C.

Objectives.

The Department of the Treasury Manual of Procedures and Instructions for Cashiers requires CFTC to verify cash balances of imprest funds.

Results.

No deficiencies were noted in the April 27, 1995 cash verification of the Washington, D.C. imprest fund. No recommendations were made to management.

INVESTIGATIONS

The Inspector General Act of 1978, as amended, provides that the Inspector General may receive and investigate complaints or information from the Commission's employees concerning the possible existence of an activity constituting a violation of law, rules or regulations, or mismanagement, abuse of authority, or gross waste of funds, or a substantial and specific danger to the public health and safety.

Two investigations were pending as of the opening of the reporting period. The OIG opened three investigations during the reporting period and completed four investigations. One investigation remained open at the end of the period.

One of the investigations which was open at the beginning of the period related to a worker's compensation case where the OIG questioned the amounts and duration of payments to an ex-employee. Contacts with the Office of Workers' Compensation Programs have led to an oral assurance that the ex-employee's entitlement to payments was terminated. Contacts with CFTC's Office of Budget and Fiscal Operations have indicated that payments to the subject ex-employee have ceased. The investigation was therefore closed.

The second investigation which was pending at the beginning of the period related to allegations in the press that the Director, Division of Enforcement was being transferred to the New York office in retaliation for his contacts with the Whitewater independent counsel. In response to a request from the Chairman, the OIG interviewed all CFTC employees who were identified as having a part in the decision to transfer the Director and examined relevant documents that were provided in the course of the investigation to discover if there was any impermissible taint to the decision. As a result of this investigation, the OIG determined that the Chairman did not remove the Director, Division of Enforcement because of his contact with the independent counsel. Accordingly, this investigation was closed.

On May 31, 1995, the Division of Enforcement provided the OIG a letter addressed to a federal district judge transmitting letters authored by a CFTC ex-employee raising concerns about four matters which occurred during that ex-employee's tenure at the CFTC. Specifically the ex-employee questioned the propriety of the appointment of a particular receiver and receiver's representative in an Enforcement case, the acceptance of meals paid for by the receiver's representative by another CFTC employee, the receiver's representative's handling of cash and checks, and the ex-employee's training and legal authority to conduct an undercover investigation. The investigation consisted of personal interviews of the involved CFTC employees in the regional office, the relevant deputy director, the program coordinator, and the ex-employee and a review of relevant documents. The OIG found no fault with the appointment of the receiver or the receiver's representative. Since, after consultation with his supervisor, the ex-employee had reimbursed the receiver's representative for the cost of his meals and since the other employee's acceptance of the lower cost meals was in accordance with the Office of Government Ethics regulations, the OIG found no violation of the ethics rules. Since the cash and checks alluded to by the ex-employee were handled in accordance with the directions of the receiver and no cash or checks appear to be unaccounted for, the OIG found no merit in suggestions to the contrary. Since the ex-employee was pursuing a fairly common assignment at the CFTC and since his supervisors believed that he had the knowledge and ability to perform the assignment, the OIG found no grounds to validate his concerns. The OIG closed the investigation.

In a July 3, 1995 letter, referred to the OIG by the Executive Director, an anonymous complainant alleged that a particular CFTC employee was not qualified for the position to which she had recently been appointed and that another employee had been preselected for the position vacated by the first employee. The complaint went on to note that a former employee had filed a formal complaint of discrimination. Our review of the recruitment file and the official personnel file of the first employee revealed no reason to question the correctness of the recruitment process in this case. On the allegation of preselection, our review indicated that, although the named preselectee had applied for the position and her name was forwarded to the selecting official along with two other names, the named preselectee was not selected for the position. The position was filled by another applicant. As a result of this investigation, we have uncovered no support for the allegations of improper selection contained in the anonymous complaint. On the matter of the formal EEO complaint of the former employee, we have been advised by the Equal Employment Opportunity Officer that a number of complaints have been filed by this former employee and that the formal investigations of all of the claims have not yet been completed. Since this matter is following the officially established EEO procedures, the OIG will not involve itself in this matter. Accordingly, this investigation was closed.

LEGISLATIVE AND REGULATORY REVIEWS

As specified in Section 4(a)(2) of the Inspector General Act of 1978, the OIG reviews the impact of existing and proposed legislation and regulations on CFTC programs and operations and makes recommendations regarding more effective or efficient alternatives or protections against fraud and abuse. The OIG also reviews exchange rule proposals and changes.

The OIG has notified the responsible Division as to any concerns with draft and final documents for the rules or investigations listed below. Formal comments were not filed with the Commission. A summary of the principal regulations and investigations reviewed and the OIG review results follows.

RULE REVIEWS INITIATED IN PREVIOUS REPORTING PERIODS

1. Proposed amendments to allow certain customer orders to be placed without specified customer account identification. (CFTC Rule 1.35(a-1)).

Summary of Rule.

The CFTC proposed amendments to Regulation 1.35 that would permit orders submitted on behalf of multiple customer accounts not to have individual identifying account numbers if the person placing the orders has investment discretion as to each account and the executing FCM has a single series designation for all the accounts. The designation has to contain a predetermined order allocation applicable to all listed individual accounts.

The amendments would also permit specified institutional accounts for certain futures and options orders to be exempt from the account identification requirement if executed as part of an intermarket strategy involving securities. Such orders would have to be allocated no later than the deadline for final submission of trade data to clearing on the day the order is executed.

OIG Review.

OIG commented on various sections of the rule and its accompanying explanation. The comments focussed on the coverage of the institutional accounts and the reach of disqualifying interest in the specified accounts. The proposed rule was published for comment in the Federal Register on May 3, 1993 with comments due by June 17, 1993. Staff continues to consider all comments received.

2. Exemption from Dual Trading Prohibition (CFTC Rule 155.5(d))

Summary of Rule

Several exchanges submitted petitions for exemptions for various contracts from the dual trading prohibitions in Commission Regulation 155.5. The prohibition prevents a broker from trading for his own account and other specified accounts during the same trading session in which he has executed customers orders in an affected contract market.

OIG Review

OIG discussed the issue with relevant staff and made comments and raised questions. Staff is examining a submission from the NYCE. Disposition of the dual trading petitions has been deferred pending resolution of audit trail issues.

RULE REVIEWS INITIATED THIS REPORTING PERIOD

1. Audit Trail Review

Summary of Action

The CFTC has been conducting tests of the sufficiency of four exchanges' audit trail constructions as contemplated by the Futures Trading Practices Act of 1992.

OIG Review

OIG had extensive discussions with relevant staff and made several comments and raised questions about the tests.

2. Proposed Investigation

Summary of Investigation

A proposed investigation sought to determine if an individual was operating as a commodity trading advisor by publishing a newsletter providing advice on trading commodity contracts.

OIG Review

OIG suggested amplification of the possible constitutional issues raised by the four concurring judges in Lowe v. SEC, 472 U.S. 181 (1985).

CORRECTIVE ACTION NOT COMPLETED

1. Review of the CFTC Recruitment Process

Findings and Recommendations.

The OIG issued a report on May 8, 1992. The report recommended that the Chairman request that the Office of Personnel Management (OPM) delegate nation-wide examining authority to the Commission for all of the non-status applicants for all Futures Trading Specialist and Futures Trading Investigator vacancy announcements. (This delegation could be supplemented with delegated authority to hire economists and/or others at a future date.) The report recommended that the Director, Office of Personnel arrange that she, or a member of her staff, travel at least once each year to each Commission regional office to insure that all supervisors are aware of the recruitment options available to them. These trips should also be used to give supervisors feedback concerning the results of their decisions concerning selective placement factors, geographic limitations, and sources of recruitment. The report also recommended that the Director, Office of Personnel establish a position, within the Office of Personnel, devoted to carrying out the functions required by the delegation of examining authority from OPM.

Status.

Based on the findings of the National Performance Review (NPR), substantial changes are due to take place in the civil service recruiting process. The NPR recommended that agencies be given the authority to conduct their own recruiting and examinations for all positions. Legislation has been proposed to implement the delegation. The recommendations of the OIG report are being held pending the outcome of the proposals.

When and if new delegations of authority are made under the proposed legislation, the Director will arrange to travel to all of the regions to discuss the new systems with agency managers. In the years following the delegation, the Director, Office of Personnel will continue to visit the regions regularly.

2. Review of Reparations Case Processing

Findings and Recommendations.

In an April 19, 1993 report, the OIG determined that: excessive backlogs of reparations cases have not, during the period of the review, existed in the Office of Proceedings; excessive backlogs of appealed reparations cases developed in the Office of General Counsel and the Offices of the Chairman and the Commissioners through the beginning of Fiscal Year 1992; backlogs in the Office of General Counsel and the Offices of the Chairman and the Commissioners were reduced significantly during FY 1992 as the result of high level attention to the problem; the Office of Proceedings and the Office of General Counsel count the number of appeals differently and these differences result in the reporting of inconsistent data; the reparations process can be improved by changes in the rules relating to timing of the filing of the response and the initiation of the discovery process; the automated systems available to track the progress of reparations cases in the Office of Proceedings, while labor intensive, costly to maintain, and antiquated, still function to produce accurate individual case and summary information; the overall automated systems available to track the progress of cases from receipt to completion are insufficient to provide all relevant program managers with the information necessary to determine if their programs are being operated effectively and efficiently.

As a result of this review, the Office of the Inspector General recommended that: subject to the availability of resources and in consideration of existing Office of Information Resources Management priorities, the Executive Director instruct the Director, OIRM to develop a unified reparations case tracking system to replace the existing jumble of systems; the Chairman, based upon advice from the General Counsel and the Executive Director, decide on a single method of counting appeals for management reporting purposes to insure consistency of reporting to the Commission, Congress, and the public and as a precursor to the development of a unified system; the Chairman authorize the Office of General Counsel to prepare a Commission sign-off sheet recommending changes in the reparations rules, relating to the time for filing a response to a complaint and the initiation of discovery, along with the necessary documents for notice and comment for publication in the Federal Register; and the Chairman regularly monitor the level of the backlog of reparation appeals to insure that excessive backlogs do not reappear.

Status.

A systems prototype has been developed and is currently being tested by staff of the Office of Proceedings. It is anticipated that testing will identify any system problems, preferences for change, and potential enhancements of functionality. The Reparations Case System will be completed and implemented in the Office of Proceedings during the first quarter of FY 1996 and in the Office of the General Counsel and Office of the Secretariat during the second quarter of FY 1996.

3. Review of Information Systems of the Division of Economic Analysis

Findings and Recommendations.

On August 31, 1994, the OIG submitted a report entitled, "Review of the Information Systems of the Division of Economic Analysis -- Market Analysis Section" to the Chairman.

The report stated that the OIG had determined that the staff of the Market Analysis Section is using the manual and automated information resources and technology available to them to best advantage in carrying out their responsibilities. However, the OIG also found that in situations where the standard retrieval system does not provide adequate information the staff of the Market Analysis Section relies on the sometimes fallible memories of long-time staff members to recall instances of the agency's past handling of issues in designations and rule reviews similar to those now being received by the Commission. These memories are then used to trudge through paper files of past designations and rule reviews to find first the files, then the appropriate documents, and then the appropriate analyses and conclusions which may be relevant to the identification and resolution of current issues. The staff absorbs all of the successfully identified information and often uses the same approach to the analysis and sometimes the same reasoning and the same language to deal with current issues.

Document management technology currently available in the Commission provides an opportunity to greatly improve on this time-consuming and imperfect process. Accordingly, the OIG recommended that the Chairman direct the Director, Office of Information Resources Management, subject to the availability of resources and in consideration of existing OIRM priorities, to use available technology to provide the Market Analysis staff with access on their personal computers: to optical images of all paper contract market designation and rule review documents which can be searched by categories or key words input by Market Analysis staff at the time the documents were scanned; to optical character recognition (OCR) scans of all paper documents which can be searched by other words not identified at the time of scanning; to machine-readable, internally created, contract market designation and rule review documents which can be searched by categories or key words input by Market Analysis staff or by other words not identified at the time of scanning; and to the currently available machine-readable version of the Commodity Exchange Act. The OIG recommended that the Director, Division of Economic Analysis assign staff to scan the old, current, and prospective paper documents relating to designations and rule reviews and store them in the optical system; assign staff to associate categories or key words with each of the old, current, and prospective paper documents relating to designations and rule reviews which are scanned and stored in the optical system; and establish a system for insuring that newly created, internal contract market designation and rule review documents are transmitted in machine-readable form to OIRM for inclusion in an automated system which can be accessed by Market Analysis staff. If, at some future time, the exchanges and/or the Commission produce their rules and the updates to those rules in machine-readable form, the OIG recommended that they too be incorporated into the document management system and made available to the Market Analysis staff.

Status.

In a memorandum dated March 27, 1995, the Chairman concurred with the recommendations of the report and directed implementation of those recommendations.

Office of Information Resources Management staff began development of the Market Designation and Rule Review Retrieval System during the fourth quarter of 1995. In order to realize the full potential of this new system, it is essential that the more than 50,000 historical documents related to designations and rule reviews be scanned, stored, and indexed for use by the retrieval system. While the analysis and programming for the system will be completed during the first quarter of FY 1996, it is estimated that the scanning will not be completed until late in the second quarter of FY 1996.

CORRECTIVE ACTION COMPLETED

There were no instances of reports issued before the commencement of the reporting period for which corrective action had been completed by the end of the reporting period.

MANAGEMENT DECISION NOT MADE

There were no instances of reports issued before the commencement of the reporting period for which a management decision had not been made by the end of the reporting period.

No matters were referred to prosecutive authorities during the reporting period.

SUMMARY OF EACH REPORT MADETO THE AGENCY HEAD

No reports were made to the agency head under section 6(b)(2) concerning information or assistance unreasonably refused or not provided.

No management decisions were revised during the reporting period.

The Inspector General does not disagree with any management decisions on OIG recommendations.

The audit agenda and priorities for the OIG are determined based on the following factors:

Statutory and regulatory requirements;

Adequacy of internal control systems as indicated by vulnerability assessments and internal control reviews recommended by OMB Circular A-123;

Changes in the program conditions or particular vulnerability of the organization, program, activity, or function to problems or deficiencies;

Current and potential dollar magnitude and likely benefits of a review on the efficiency or effectiveness of CFTC programs and operations;

Management priorities and improvements that may be possible;

Results of audits of CFTC programs and operations by other Federal agencies; and

Availability of audit resources and the potential opportunity costs to the agency.

The audit agenda and summary of progress for each audit which has not yet been completed is summarized below. New agenda items periodically will be added, as appropriate, along with a description of the audit objective for each.

1. Audit of the Rule Enforcement Review Program

Objectives.

The audit is designed to determine whether the Division of Trading and Markets rule enforcement review program is operating efficiently and to determine what changes, if any, should be made to the program.

Status.

The OIG has confined its review of the Rule Enforcement Review program to that part administered by the Contract Markets Section. OIG has interviewed Commissioners and their staffs and regional office Trading and Markets staff for their view of the process. The recently revised Compliance Manual, the completed rule enforcement review of the Kansas City Board of Trade, and the 1994 internal control review of the Contract Markets Section have all been examined. Headquarters staff remain to be interviewed. The current process will then be documented and analyzed, conclusions reached, and recommendations for improvement made.

2. Audit of Compliance with the Federal Managers' Financial Integrity Act

Objectives.

In accordance with OMB Circular A-123 (Revised), the Inspector General will evaluate, provide technical assistance, and advise the agency head as to whether the agency's review and evaluation process was conducted in accordance with the circular's requirements.

Status.

The OIG has reviewed all of the draft internal control reviews produced by the Commission. At the completion of the audit, the OIG will report the results of its review to the Chairman in its annual assurance letters. The OIG will also attend the 1996 planning meeting of the CFTC Internal Control Committee and offer its services as advisor and consultant on conducting and reporting on internal control reviews.

3. Lobbying Restrictions

Objectives.

Public Law 101-121, Section 319, prohibits payment of appropriated funds for lobbying (representation). The law requires that persons receiving government funds in excess of $100,000 certify that appropriated funds were not and will not be used for lobbying activities and disclose when non-appropriated funds are used for lobbying activities. The IG is required to review compliance and report on the implementation and results of the disclosure process.

Status.

The OIG will begin this review during the first quarter of FY 1996. It is scheduled for completion by March 31, 1996.

4. Imprest Funds

Objectives.

The OIG will review expenditures from CFTC imprest funds to determine compliance with CFTC Instruction 344-1 and the Department of the Treasury Manual of Procedures and Instructions for Cashiers. Specifically, the audits are designed to verify that all funds are properly accounted for; the amount of each fund is not in excess of the cash requirements; the cashier is following procedures that will adequately protect the funds from loss or misuse; and the cashier is not making unauthorized use of the funds. The imprest funds are maintained in Washington, D.C.; Chicago, Illinois; New York, New York; Los Angeles, California; and Kansas City, Missouri.

In addition, the Department of the Treasury Manual of Procedures and Instructions for Cashiers requires CFTC to verify cash balances of imprest funds at least once each quarter.

Status.

The OIG has scheduled audits of all five imprest funds during FY 1996. Additionally, verifications of cash balances are scheduled for each fund during each quarter.

The OIG is charged with providing policy direction for, and conducting, supervising, and coordinating audits and investigations relating to CFTC programs and operations. In addition, the OIG is required to recommend policies for, and conduct, supervise, and coordinate with other Federal agencies, state and local Governmental agencies, and nongovernmental entities, audits, investigations, and evaluations regarding the economy, efficiency, and effectiveness of CFTC programs and operations.

GAO also conducts audits of CFTC activities, and OIG plans its audits so as not to duplicate GAO's efforts. Moreover, OIG in its audit activities identifies the goals of each audit and the methods of reaching the goals so as to minimize the requirements placed on CFTC resources.

INTRODUCTION

The Office of the Inspector General (OIG) in the Commodity Futures Trading Commission (CFTC) was created in accordance with the Inspector General Act of 1978 (P.L. 95-452), as amended by the Inspector General Act Amendments of 1988 (P.L. 100-504). The OIG was established to create an independent unit to:

. Promote economy, efficiency, and effectiveness in the administration of CFTC programs and operations and to detect and prevent fraud and abuse in such programs and operations;

. Conduct and supervise audits and investigations relating to the administration of CFTC programs and operations;

. Review existing and proposed legislation and regulations and to make recommendations concerning their impact on the economy and efficiency of CFTC programs and operations or the prevention and detection of fraud and abuse; and

. Keep the Chairman and Congress fully informed about any problems or deficiencies in the administration of CFTC programs and operations and provide recommendations for correction of these problems or deficiencies.

Accordingly, the OIG has established three programs to carry out its responsibilities: audit, investigation, and legislative and regulatory review. A summary of those programs follows.

AUDIT

The primary objectives of the OIG are to promote long-term efficiency and effectiveness in the administration and operation of the Commission and to protect against fraud and abuse.

The key to effectively and efficiently managing the Commodity Futures Trading Commission is information. Top level managers and decision makers require a steady stream of organized data on the effects of their policy decisions and resource allocations on the operations of the Commission. Once having made the decision to change resource levels or policy, managers must receive accurate and timely reports of the operational effects of their decision so they can determine if the change is in the direction and of the magnitude predicted. In the absence of such information, top level managers cannot adequately perform their jobs.

A number of obstacles to acquiring and transmitting the desired information to decision makers may exist in some programs. Principal among them is the Commission's apparent inability in many instances to track the progress of a particular action across organizational lines within the Commission.

A simple example is the Reparations Program. Complaints are received and processed and hearings are held in the Office of Proceedings; appeals of initial decisions in reparations cases are transmitted to the Office of General Counsel where proposed Commission opinions are drafted; and appeals are decided by the Commission with the paperwork being handled by the Office of the Secretariat. Each office involved in the process has a separate tracking system without ties to the tracking systems in the offices preceding them or following them in the process. Each office treats the case as if it is brand new to the Commission when they receive it. As a result, there is no provision for tracking information across organizational lines. If the Chairman wanted to know how much time was spent on the average reparations case of a particular description at each stage in the process, that information is unavailable without an extensive expenditure of manual labor.

A related problem is the inability of the Commission to associate resources devoted to an activity with the results of that activity. The Commission does a good job of tracking resources expended. It can determine how much staff time and material at what cost was spent in a particular activity. Some Commission organizations can even associate costs with particular projects. What a program manager has great difficulty doing, however, is telling a decision maker that for a specific level of increase in resources, the program manager will deliver a specific level of increased output. Without this information from all programs competing for limited resources, decision makers cannot make reasoned resource allocation judgements. Decision makers are forced to rely on intuition and anecdotal evidence.

To increase the efficiency and the effectiveness of the management of CFTC programs and operations, the OIG will, in addition to the conduct of mandatory audits, concentrate its audit resources on the identification of information voids and the lack of continuity in the flow of information across organizational lines from the beginning of a process until its conclusion. The OIG will recommend the implementation of any system improvements where the benefits of implementing the changes exceed the costs.

INVESTIGATION

The Inspector General Act of 1978, as amended, provides that the Inspector General may receive and investigate complaints or information from the Commission's employees concerning the possible existence of an activity constituting a violation of law, rules or regulations, or mismanagement, gross waste of funds, abuse of authority or a substantial and specific danger to the public health and safety.

The OIG has to date conducted only a reactive investigative program relying on unsolicited employee complaints as the source of investigative leads. This reactive program has resulted in only a handful of investigations per year. This strategy was followed because the OIG believed that an independent regulatory agency such as CFTC without grant money or substantial contracts to award was not likely to generate a substantial investigative workload.

To test the validity of this belief, the OIG, in February 1993, instituted a 24 hour hotline to receive complaints. The hotline's existence was publicized on the back cover of the agency-wide telephone book and in this semiannual report. After two year's experience with the hotline, the OIG is reviewing its results to determine if it is cost effective to continue the hotline.

Because of the reactive nature of the OIG's investigative program, even with a hotline, no investigative agenda has been established.

LEGISLATIVE AND REGULATORY REVIEW

Because of the importance of this activity in an economic regulatory agency, the OIG reviews proposed and final CFTC regulations and legislation and selected exchange rules using five basic criteria: Whether the agency: (1) has identified specifically the problem(s) to be addressed by the proposal; (2) has defined through case study or data analysis a clear link between the proposed solution and the identified problem(s); (3) has specified clearly the means to effectively and efficiently enforce the proposal; (4) has assessed the likely efficiency and effectiveness of alternative solutions; (5) can reasonably document that the proposal will yield positive net benefits over the long term; and (6) has met the requirements of the Regulatory Flexibility Act and the Paperwork Reduction Act.

The Regulatory Flexibility Act requires the agency to evaluate the impact of its regulations on small entities. The Paperwork Reduction Act requires the agency to manage effectively and efficiently its information collections so that they are the least burdensome necessary to achieve the stipulated objectives.

Because the OIG does not initiate legislation or, generally, regulations, the OIG legislative and regulatory review program is reactive to the legislative and regulatory proposals developed by others. Accordingly, no independent legislative and regulatory review agenda has been established.

ANNUAL AUDITS

The Inspector General is required to complete annually the first two audits listed. Others listed in this annual audit section are those which the OIG believes are best accomplished on an annual basis.

1. Audit of Compliance with the Federal Managers' Financial Integrity Act

In accordance with OMB Circular A-123 (Revised), the Inspector General will evaluate, provide technical assistance, and advise the agency head as to whether the agency's review and evaluation process was conducted in accordance with the circular's requirements.

2. Lobbying Restrictions

Public Law 101-121, Section 319, prohibits payment of appropriated funds for lobbying (representation). The law requires that disclosure forms be filed with contracts, grants, cooperative agreements and other forms of government awards. The IG is required to review compliance and report on the implementation and results of the disclosure process.

3. Audit of Imprest Funds -- New York, Chicago, Kansas City, Los Angeles, and Washington.

CFTC maintains imprest funds in Washington D.C., Chicago, Illinois, New York, N.Y., Kansas City, Missouri, and Los Angeles, California. These funds have been established primarily to make small purchases and travel advances. OIG has determined that an annual audit of funds is appropriate because of the detailed accountability requirements of the Treasury Manual, the personal risk of each cashier, and the potential for errors and irregularities.

4. Cash Verifications of Imprest Funds -- New York, Chicago, Kansas City, Los Angeles, and Washington.

Treasury requires that unannounced verifications of cash balances in imprest funds be made at least quarterly. Only the cash verifications of the imprest funds in Washington, D.C. will be completed by the Office of the Inspector General. Quarterly cash verifications at other locations will be completed by on site regional CFTC personnel who will send reports of their findings to the Office of the Inspector General.

OTHER AUDITS

The OIG intends to focus the balance of its audit resources on insuring that the Chairman, the Commissioners, and program managers have timely, useful information on the progress of CFTC's programs in meeting their goals and objectives. For example, emphasis will be placed on determining whether all managerial levels engaged in a process can track the progress of their various programs. The tracking systems required in many, though not all, programs will cross formal organizational lines.

These audits will entail a cataloging and description of all of the manual and automated systems used by an organization to gather information on its use of resources, the results of the devotion of those resources (including definitions of measurements of accomplishment), and the reporting of results and associated costs to the upper level managers in the Division and to the Chairman and the Commissioners. Cataloging of these decision support systems will be followed by an assessment of whether all concerned officials are timely receiving the information they require to efficiently allocate resources to those uses which best accomplish the priorities of the Commission. If any elements are lacking in the information systems, they will be identified and improvements will be recommended if they can be implemented in a cost/beneficial manner.

If recommendations are successfully implemented, the proposed systems should allow the Chairman, the Commissioners, and concerned program managers to track progress of a particular program across organizational lines and to quickly determine the effects, if any, of changes in policy, procedure, or staffing.

The first step in accomplishing this goal will be to concentrate on documenting, and recommending the improvement and/or development of tracking systems in every program element throughout the Commission.

RESOURCES REQUIRED

The OIG estimates that approximately one and one-half staff years of effort will be devoted over each of the next five years to the audits described in "Other Audits" above. The "Annual Audits" are expected to consume approximately one-half staff year per year.

The OIG is located in Room 4092 at 1155 21st Street N.W., Washington, D.C. 20581. The telephone number is (202)418-5110. The facsimile number is (202)418-5522. The hotline number is (202)418-5510. Confidential mail may be sent to P.O. Box 33906, Washington, D.C. 20033-0906. Regular business hours are between 8:30 AM and 5:00 PM, Monday through Friday, except Federal holidays.

Dollar Value

Number (Thousands)

------- --------------------- Questioned Unsupported Costs Costs

---------- -----------

A. For which no management decision

has been made by the commencement

of the reporting period............... 0 0 0

B. Which were issued during the

reporting period...................... 0 0 0

Subtotals (A + B)..................... 0 0 0

C. For which a management decision

was made during the reporting

period................................ 0 0 0

(i) dollar value of

disallowed costs................. 0 0

(ii) dollar value of

costs not disallowed............. 0 0

D. For which no management decision

has been made by the end of the

reporting period...................... 0 0 0

Dollar Value

Number (Thousands)

------ ------------

A. For which no management decision

has been made by the commencement

of the reporting period............... 0 0

B. Which were issued during the

reporting period...................... 0 0

Subtotals (A + B)..................... 0 0

C. For which a management decision

was made during the reporting

period................................ 0 0

(i) dollar value of

recommendations that

were agreed to by

management........................ 0 0

(ii) dollar value of

recommendations that

were not agreed to by

management........................ 0 0

D. For which no management decision

has been made by the end of the

reporting period...................... 0 0

October 31, 1995

TO: Mary L. Schapiro

Chairman

FROM: A. Roy Lavik

Inspector General

SUBJECT: Semiannual Report of the Office of the Inspector General

Attached is the Semiannual Report of the Office of the Inspector General for the period from April 1, 1995 through September 30, 1995. This report is submitted to you in accordance with the requirements of Section 5 of the Inspector General Act of 1978, as amended.

I appreciate your continuing support of this office.

Attachment