An Audit Report on the State Securities Board
August 2010
Report Number 10-042
Overall Conclusion
The State Securities Board (Board) effectively carried out its statutory duties in core areas. Specifically, the Board:
- Processed securities registrations in accordance with the Texas Securities Act, the Texas Administrative Code, and internal policies and procedures. In fiscal year 2009, the Board processed 108 new or renewal securities registrations (0.4 percent) and 26,021 new or renewal notice filings (99.6 percent).
- Collected registration fees during the first two quarters of fiscal year 2010 that were substantially correct according to its established fee schedule. The Board collected all but $1,740 of the $39.2 million (99.9 percent) of funds that auditors calculated were due to the State.
- Conducted inspections and investigations in accordance with its policies and procedures. The Board's Inspections and Compliance Division investigated complaints against 383 registered firms or individuals and performed 606 inspections of registrants between September 1, 2007, and February 28, 2010. Its Enforcement Division reported that it opened 932 investigations during the same time period.
While the Board conducted its inspections in a consistent manner, it did not have a policy or goal for how long it should take to resolve inspections. The Board had not resolved 33.0 percent of its fiscal year 2008 and fiscal year 2009 inspections; not resolving inspections may reduce the inspections' effectiveness.
The Board also should increase the effectiveness of its monitoring of investment advisers and brokers by incorporating a formal, risk-based process when selecting entities for inspection. While the Board's inspections provided good geographic coverage of several areas of Texas in which the Board does not have a branch office, the Board used an informal, undocumented risk assessment process to select registrants for inspection. In addition, the Board did not meet its internal goal of inspecting all registrants for which it has primary oversight responsibility within a five-year cycle. Having a formalized risk assessment could help the Board focus its resources on registrants that present the most risk to investors. The Board could consider other approaches for selecting registrants for inspection that may enable the Board to more effectively select registrants for inspection.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which the Board's analysis indicates will increase the number of investment advisers that the Board is responsible for monitoring. The Dodd-Frank Act increases the threshold for federal registration of investment advisers from $25 million in assets under management to $100 million in assets under management. As a result of this change, the Board estimates that the number of investment advisers that it regulates will increase from 1,205 as of July 23, 2010, to approximately 2,450, an increase of 103.3 percent. The Board's legislative appropriations for the 2010-2011 biennium contained a contingency appropriation that may apply if federal regulatory oversight is reduced. If applicable, the Board may receive up to an additional $934,072 in annual appropriations and 10 full-time equivalent (FTE) positions. The Board must successfully file a finding of fact and support that it will achieve revenue targets in the legislative appropriations request it submits to the Legislative Budget Board and the Governor's Office before those funds can be appropriated.
Although the Board's receipting process has some strong controls, the overall integrity of its receipting process is weakened by deficiencies in controls over its mail distribution, payment tracking and reconciliation, and segregation of duties. These weaknesses expose the Board to the risk of lost revenue through fraud or error. Auditors gained assurance through testing of deposit vouchers that the Board did not lose funds during fiscal year 2009, but the risk of loss remains. The Board could reduce this risk by reducing the amount of checks and cash processed in the mailroom by increasing the use of electronic payments and/or having a third party process payments received through the mail.
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