OFFICE OF THE INSPECTOR GENERAL

COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT

FOR THE PERIOD FROM

April 1, 1998 THROUGH September 30, 1998

TABLE OF CONTENTS

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. . . . . . . . . . . . 2

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

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

CFTC PROGRAMS AND OPERATIONS . . . . . . . . . . . . . . . . . 5

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. . . . . . . . . . . . . . . . . . . . . . 7

LEGISLATIVE AND REGULATORY REVIEWS. . . . . . . . . . . . 8

AUDIT REPORTS OVER SIX MONTHS OLD. . . . . . . . . . . . . . . 10

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)] . . . . . . . . . . . . . 10

CORRECTIVE ACTION COMPLETED. . . . . . . . . . . . . . . 11

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)]. . . . . . . . 11

SUMMARY OF MATTERS REFERRED TO PROSECUTIVE AUTHORITIES and

the prosecutions and convictions which have resulted

(Mandated by Section 5(a)(4) of the Act). . . . . . . . . 11

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) . . . . . . . . . . . . . . . 11

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)]. . . . . . . . 11

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)]. . . . . . . . 12

CURRENT AUDITS . . . . . . . . . . . . . . . . . . . . . . . . 12

GAO LIAISON. . . . . . . . . . . . . . . . . . . . . . . . . . 15

STRATEGIC PLAN . . . . . . . . . . . . . . . . . . . . . . . . 16

CONTACTING THE OFFICE OF THE INSPECTOR GENERAL . . . . . . . . 22

TABLE 1 -- REPORTS ISSUED WITH QUESTIONED COSTS (Mandated

by Section 5(a)(8) of the Act). . . . . . . . . . . . . . 23

TABLE 2 -- REPORTS ISSUED WITH RECOMMENDATIONS THAT FUNDS

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

the Act). . . . . . . . . . . . . . . . . . . . . . . . . 24

INDEX OF IG ACT REPORTING REQUIREMENTS

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

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

Section 5(a)(3). . . . . . . . . . . . . . . . . . . . . . . . 10

Section 5(a)(4). . . . . . . . . . . . . . . . . . . . . . . . 11

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

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

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

Section 5(a)(8). . . . . . . . . . . . . . . . . . . . . . . . 23

Section 5(a)(9). . . . . . . . . . . . . . . . . . . . . . . . 24

Section 5(a)(10) . . . . . . . . . . . . . . . . . . . . . . . 11

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

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

SUMMARY OF OIG ACTIVITIES

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 beginning on page 12.)

Review of Enforcement Information Requirements. The objectives of this review are to determine what the information needs of all levels in the Division of Enforcement are, whether the information needs are being met, and if the required information can be created, stored, and retrieved in a more effective and efficient manner. (For additional details, see page 13.)

Review of CFTC's Y2K Project. In response to growing Congressional and Office of Management and Budget concern, the OIG will review the agency's response to the difficulties inherent in the approach to the year 2000. This scope of this review will include both the internal and external implications of the Y2K problem. (For additional details, see page 14.)

Completed Audits

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

Final Audit of Imprest Fund -- Chicago. The OIG determined that all funds were properly accounted for, the cashier followed procedures that adequately protected the funds from loss or misuse, and the cashier did not make unauthorized use of the imprest fund. The fund was properly liquidated on September 2, 1997. (For additional details, see page 6.)

Final Audit of Imprest Fund -- Kansas City. The OIG determined that all funds were properly accounted for, the cashier followed procedures that adequately protected the funds from loss or misuse, and the cashier did not make unauthorized use of the imprest fund. The fund was properly liquidated on August 14, 1997. (For additional details, see page 7.)

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.

No investigations were pending as of the beginning of the reporting period. The OIG opened one investigation during the reporting period and completed no investigations. One investigation remained open at the end of the period. (See the section on investigations beginning on page 7.)

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 beginning on page 8.)

Regulations reviewed during this period include:

m Performance Data and Disclosure for Commodity Trading Advisors and Commodity Pools;

m Amendment to CFTC Rule 1.35(a-1); and

m Concept Release on the Placement of a Foreign Board of Trade's Computer Terminals in the U.S.

OIG RESPONSIBILITIES

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:

m 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;

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

m Review existing and proposed legislation and regulations and 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

m 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.

OIG RESOURCES

The OIG consists of the Inspector General, two professional staff members, and a secretary. One professional position has been vacant since October 1997. 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.

CFTC PROGRAMS AND OPERATIONS

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; 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, floor traders, 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.

COMPLETED WORK

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:

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

m Resources have been managed effectively and efficiently;

m Stipulated program objectives have been achieved; and

m Resources have been safeguarded.

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

1. Final Audit of Imprest Fund -- Chicago.

Objectives.

The purpose of the audit was to determine whether the

imprest fund was liquidated in compliance with the

Department of the Treasury Manual of Procedures and Instructions for Cashiers (Treasury Manual), and the Treasury Financial Manual

(I TFM 4-3000). The audit was designed to ensure that all funds were properly accounted for, the cashier followed procedures that adequately protected the funds from loss or misuse, and the cashier did not make unauthorized use of the funds during the period that the imprest fund was in operation. The audit covered the period from April 7, 1997 through September 2, 1997.

Results.

A report issued on June 5, 1998 disclosed that all funds were properly accounted for, the cashier followed procedures that adequately protected the funds from loss or misuse, and the cashier did not make unauthorized use of the imprest fund. On September 2, 1997, the Chicago Imprest Fund of $3,000 was liquidated, the total amount of the Fund was deposited to CFTC's account, and the designations of the principal cashier and alternate were revoked. As part of the liquidation of the fund, the Office of the Inspector General reviewed all travel and miscellaneous payment subvouchers issued in the Chicago office since the date of the last audit.

2. Final Audit of Imprest Fund -- Kansas City.

Objectives.

The purpose of the audit was to determine whether the

imprest fund was liquidated in compliance with the

Department of the Treasury Manual of Procedures and Instructions for Cashiers (Treasury Manual), and the Treasury Financial Manual

Results.

A report issued on August 21, 1998 disclosed that all funds were properly accounted for. By a document dated August 14, 1997, the Kansas City Imprest Fund of $1,000 was liquidated and the designations of the principal cashier and alternate were revoked. The total amount of the Fund was deposited to CFTC's account on August 27, 1998. No travel and miscellaneous payment subvouchers were issued in the Kansas City office since the date of the last audit.

INVESTIGATIONS

There were no investigations pending as of the beginning of the reporting period. The OIG opened one investigation during the reporting period and closed no investigations. One investigation remained open at the end of the period.

In September, in response to an anonymous written allegation that an employee was wasting Government travel funds for his own personal benefit, the OIG opened an investigation. At the end of the reporting period, this investigation was still open.

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 legislation, rules or investigations listed below. Formal comments were not filed with the Commission. A summary of the principal legislation, regulations and investigations reviewed and the OIG review results follows.

RULE REVIEWS INITIATED IN PREVIOUS REPORTING PERIODS

1. 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. The Commission has approved unconditional exemptions for the COMEX Division of the New York Mercantile Exchange, the New York Cotton Exchange, and the Coffee Sugar & Cocoa Exchange. The Commission is currently considering exemptions for the Chicago Board of Trade and the Chicago Mercantile Exchange.

The Division of Trading and Markets is analyzing additional data submitted by the Chicago Board of Trade and Chicago Mercantile Exchange to assist the Commission in finalizing the disposition of both exchanges' dual trading exemption petitions, and the Division will draft appropriate documents. The Division of Trading and Markets is also considering an updated petition from the Coffee, Sugar and Cocoa Exchange for an exemption for its cocoa futures market.

RULE REVIEWS INITIATED THIS REPORTING PERIOD

1. Performance Data and Disclosure for Commodity Trading Advisors and Commodity Pools.

Summary of Action

The CFTC sought comments regarding computational and disclosure matters for participants in programs offered by commodity trading advisors and commodity pool operators.

OIG Review

The OIG offered specific suggestions to the proposals, but, more generally, suggested the use of focus groups to ascertain the impact of suggested disclosures. Staff said they would consider such use.

2. Amendment to CFTC Rule 1.35 (a-1)

Summary of Rule

The amendment allowed eligible customer orders to be placed on a contract market without specific customer account identification either at the time of the order placement or at the time of execution.

OIG Review

The OIG suggested certain clarifications of the explanatory material which staff adopted.

3. Concept Release on the Placement of a Foreign Board of Trade's Computer Terminals in the U.S.

Summary of Action

The concept release sought comment on issues relating to the placement by foreign boards of trade of computer terminals in the U.S. that would be used in trading the boards of trade contracts.

OIG Review

The OIG suggested comments and raised questions which the staff addressed.

AUDIT REPORTS OVER SIX MONTHS OLD

CORRECTIVE ACTION NOT COMPLETED

There were no instances of audit reports over six months old where corrective action had not been completed.

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.

SUMMARY OF MATTERS REFERRED TO PROSECUTIVE AUTHORITIES

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

SUMMARY OF EACH REPORT MADE TO 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.

REVISED MANAGEMENT DECISIONS

No management decisions were revised during the reporting period.

INSPECTOR GENERAL DISAGREEMENT

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

CURRENT AUDITS

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

m Statutory and regulatory requirements;

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

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

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

m Management priorities and improvements that may be possible;

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

m 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. Review of Enforcement Information Requirements

Objectives.

The mission of the Division of Enforcement is to investigate and prosecute fairly and effectively violations of the Commodity Exchange Act and the Commission's regulations in order to safeguard the integrity of U.S. futures and options markets and to protect market participants and futures and options customers. In the course of its activities, the division, with headquarters and regional components, plans and follows an often complex course to achieve its objectives and receives and creates a huge volume of documents which must be logically stored and regularly accessed. To support the accomplishment of these tasks, the division is relying on a collection of very old manual and automated systems to track the progress of activities and to store and retrieve documents. The objectives of this review are to determine what the information needs of all levels in the division are, whether the information needs are being met, and if the required information can be created, stored, and retrieved in a more effective and efficient manner.

Status.

The joint OIG/Enforcement team produced extensive and detailed narrative flow charts of the current operational and administrative functions and processes of the Division of Enforcement and delivered them to the Division of Enforcement and the Office of Information Resources Management (OIRM). These products were designed to inform the analysts of OIRM of the inner workings of the Division of Enforcement and to serve as the base on which the information requirements of the Division of Enforcement will be defined.

In September 1997, in a joint meeting of representatives of the Division of Enforcement, the Office of the Inspector General, and the Office of Information Resources Management (OIRM), the principals made commitments of six staff years of effort from OIRM and approximately three staff years of effort from Enforcement to define the system requirements of Enforcement.

The Division of Enforcement and OIRM have agreed that the first priority is the development of a system to track documents in the Division in accordance with the Division's Enforcement Procedure Number 3. The second phase is devoted to installing a system to track production within the Division and to report that information in the required formats to management of the Division. Phase three will concentrate on moving the functions of the attorneys and investigators from paper to computer screen and using the resulting information to improve the tracking of productivity information and the sharing of information within the Division.

The final version of the first phase of what is now being called "the Enforcement Modernization Project" was delivered to the Division of Enforcement in May 1998. This Enforcement Procedure Number 3 System is now being used at all locations of the Division. The second phase, designing reports and data gathering mechanisms to track production within the Division, is currently under way. Test versions of the phase two system have been delivered to the Division. Review and updating are a constant process. Finalization of Phase two is currently projected for the end of 1998.

2. Review of CFTC's Y2K Project

Objectives.

In response to growing Congressional and Office of Management and Budget concern, the OIG will review the agency's response to the difficulties inherent in the approach to the year 2000. This scope of this review will include both the internal and external implications of the Y2K problem.

Status.

The OIG has interviewed the Director, Office of Information Resources Management and his Deputy about their activities in dealing with any Y2K issues for all CFTC internal systems and any systems which feed data to those systems. The OIG has also spoken with the Deputy Director, Division of Trading and Markets and members of his staff in Washington and in the field offices to keep abreast of the progress of the staff in dealing with the futures industry and the industry's efforts to insure that their systems and any systems which feed data to their systems are Y2K compliant. Trading and Markets has supplied the OIG with a briefing book on the steps taken to date and the schedule of expected actions designed to bring the industry systems into full compliance in a timely fashion.

GAO LIAISON

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.

STRATEGIC PLAN

FOR THE

OFFICE OF THE INSPECTOR GENERAL

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:

m 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;

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

m 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

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 difficulty in many instances in tracking the progress of a particular action across organizational lines within the Commission.

A simple example is the Reparations Program prior to the installation of an OIG recommended unified, Commission-wide tracking system. 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 had a separate tracking system without ties to the tracking systems in the offices preceding them or following them in the process. Each office treated the case as if it were brand new to the Commission when they received it. As a result, there was 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 was unavailable without an extensive expenditure of manual labor.

A related problem is the difficulty the Commission has in associating 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 may have 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 judgments. 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.

In addition to our efforts to bring technology to bear on the information requirements of the Commission, the OIG has been following the Commission's development of measures and systems of measurement in response to the Government Performance and Results Act (GPRA). As the Commission implements GPRA, the OIG will devote significant resources to monitoring agency performance to insure that the data is accurately gathered and that the measures reported are the best available for demonstrating program performance.

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 chiefly 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 insure that employee complaints could easily reach the OIG, a 24 hour hotline was established in February 1993 to receive complaints. The hotline's existence is publicized on the back cover of the agency-wide telephone book and in this semiannual report.

Because of the reactive nature of the OIG's investigative program, 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.

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.

AUDIT AGENDA

ANNUAL AUDITS

The following audit is performed on an annual basis.

Audit of Compliance with the Federal Managers' Financial Integrity Act

In support of 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.

OTHER AUDITS

The OIG intends to focus the balance of its audit resources on insuring that the Chairperson, 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 nine-tenths 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-tenth staff year per year.

CONTACTING OFFICE OF THE INSPECTOR GENERAL

The OIG is located 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. Regular business hours are between 8:30 AM and 5:00 PM, Monday through Friday, except Federal holidays.

Table 1

Reports Issued with Questioned Costs

(April 1, 1998 - September 30, 1998)

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

Table 2

Reports Issued with Recommendations

That Funds be Put to Better Use

(April 1, 1998 - September 30, 1998)

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 30, 1998

TO: Brooksley Born

Chairperson

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, 1998 through September 30, 1998. 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