U.S. SECURITIES AND EXCHANGE COMMISSION Agency …

U.S. SECURITIES AND EXCHANGE COMMISSION

Agency Financial

Report

FISCAL YEAR 2018

PROTECTING

INVESTORS

MAINTAINING

FAIR, ORDERLY, AND EFFICIENT

MARKETS

FACILITATING

C A P I TA L

FORMATION

MESSAGE FROM THE CHAIRMAN

Chairing the U.S. Securities and Exchange Commission is a great privilege and I am fortunate to be able to observe firsthand the incredible work done by the agency's 4,500 dedicated staff. In the pages that follow, you will find a record of their work in pursuit of the SEC's three-part mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.

The SEC recently released our Strategic Plan for 2018?2022, which outlines three goals that will guide the work of the Commission moving forward. I believe that in the body of this report, you will see we have made meaningful progress over the past year toward satisfying these goals.

The first of our goals is focusing on the long-term interests of our Main Street investors. The past year has presented many opportunities for me, my fellow Commissioners, and SEC staff to travel around the country and interact directly with these investors. Those discussions allowed us to better answer the question we ask ourselves every day: how does our work benefit the retail investor? Each proposal or action we take is guided by that principle. To highlight just a few examples of the progress we've made over the past year: ? We introduced our Regulation Best Interest proposals, which are designed to

serve Main Street investors by updating and enhancing the standards governing broker-dealers and investment advisers to bring them in line with what Main Street investors would expect. ? Our Retail Strategy Task Force, launched last year, continued its work in developing proactive, targeted initiatives to identify misconduct impacting retail investors. ? The Office of Investor Education and Advocacy launched a multimedia campaign warning investors of common hallmarks of fraud. ? Our efforts in the municipal bond market, a largely retail market, are bringing greater transparency to trading and better equip investors to make informed decisions about municipal securities.

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Our second goal--to be innovative and responsive-- reflects the changing nature of our markets. As technological advancements and commercial developments have changed how our securities markets operate, the SEC's ability to remain an effective regulator requires that we continually monitor the market environment and adapt our rules, regulations, and oversight. This maxim applies to nearly every facet of what we do at the SEC, and recently drove us to establish a Cyber Unit in the Division of Enforcement, which enhances our ability to detect and investigate cyber threats and fraud by concentrating expertise in an area that has become increasingly susceptible to misconduct.

The third goal--elevating the agency's performance through technology, data analytics, and human capital--embodies our commitment to maintaining an effective and efficient operation. We are leveraging technology, analyzing data, and promoting information-sharing and collaboration across the agency, while also maintaining the work environment that has led to our consistent high levels of employee satisfaction. Maintaining a high level of staff engagement, performance, and morale is critical to our ability to execute our mission. We are committed to investing in both new technology and human capital.

This FY 2018 Agency Financial Report also includes the results of the independent audit of our FY 2018 financial statements, which I am pleased to announce is an unmodified opinion. The financial and performance data in this report are also complete and accurate under the Office of Management and Budget guidance. As further discussed within the Management Assurances section of Management's Discussion and Analysis, we continue to report a material weakness in cybersecurity risks. We have taken a series of substantive steps designed to better detect and prevent code vulnerabilities over this past year. During the coming year, among other projects designed to improve the security of the agency's information systems and overall cybersecurity risk profile, the SEC will focus on the associated aspects of our system of internal control. The SEC will work to document and test--and, where appropriate, enhance-- controls relating to information technology.

I am proud of what we have accomplished in the past year and look forward to building on these successes as we continually review and recalibrate our approach to accomplishing the SEC's mission.

JAY CLAYTON Chairman November 13, 2018

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CONTENTS

Message from the Chairman....................................................................................................................................................i

Introduction.........................................................................................................................................................................................1

Management's Discussion and Analysis........................................................................................................................ 3 Our Mission, Our Vision, Our Values ...................................................................................................................................4 Strategic Goals and Strategic Initiatives...........................................................................................................................4 History and Purpose..........................................................................................................................................................................6 Organizational Structure and Resources .......................................................................................................................8 Year In Review.......................................................................................................................................................................................13 Looking Forward................................................................................................................................................................................ 22 Financial Highlights.........................................................................................................................................................................26 Performance Highlights..............................................................................................................................................................34 Management Assurances and Compliance with Laws....................................................................................41 Annual Assurance Statement......................................................................................................................................................42 Management's Assessment of Internal Control .........................................................................................................43 Material Weakness Related to Cybersecurity Risks ..............................................................................................43 Other Reviews .........................................................................................................................................................................................44 Financial Management System Conformance........................................................................................................... 46 Federal Information Security Modernization Act (FISMA)................................................................................. 46

Financial Section..........................................................................................................................................................................49 Message from the Chief Financial Officer.................................................................................................................. 50 Report of Independent Auditors...........................................................................................................................................51 Enclosure I: Management's Response to Audit Opinion................................................................................57 SEC Financial Statements.........................................................................................................................................................58 Notes to the Financial Statements....................................................................................................................................64 Investor Protection Fund Financial Statements.....................................................................................................97 Notes to the Investor Protection Fund Financial Statements................................................................... 99

Other Information......................................................................................................................................................................107 Inspector General's Statement on Management and Performance Challenges..................108 Management's Response to Inspector General's Statement..................................................................124 Summary of Financial Statement Audit and Management Assurances....................................... 128 Payment Integrity Reporting Details..............................................................................................................................129 Civil Monetary Penalty Adjustment for Inflation................................................................................................... 131

Appendices.................................................................................................................................................................................... 133 Appendix A: Chairman and Commissioner Biographies..............................................................................134 Appendix B: Divisions and Offices.................................................................................................................................. 139 Appendix C: Glossary of Selected Terms ................................................................................................................. 141 Appendix D: Acronyms and Abbreviations .............................................................................................................147

CERTIFICATE OF EXCELLENCE IN ACCOUNTABILITY REPORTING

The SEC's fiscal year 2017 Agency

Financial Report received the

Certificate of Excellence in

Accountability Reporting from

Certificate of Excellence in Accountability Reporting?

presented to the

U.S. Securities and Exchange Commission

in recognition of outstanding effort in preparing the Agency Financial Report for fiscal year 2017

Diane L. Dudley, CGFM, CPA Chair, CEAR Board

Ann M. Ebberts, MS, PMP Chief Executive Officer, AGA

the Association of Government

Accountants. This was the 12th year in a row that the

SEC has won this award, which is presented to federal

government agencies whose annual reports achieve the

highest standards in demonstrating accountability and

communicating results.

INTRODUCTION

The SEC's fiscal year (FY) 2018 Agency Financial Report (AFR) provides detailed financial and performance information that enables the President, Congress, and the public to assess the agency's accomplishments and understand its financial and operational picture. In lieu of a combined Performance and Accountability Report, the SEC will also publish an Annual Performance Report (APR) to provide a more in-depth review of strategic goals and performance results. The APR will be included in the FY 2020 Congressional Budget Justification Report available in 2019.

The FY 2018 AFR satisfies the requirements contained in the Office of Management and Budget (OMB) Circular A-136, Financial Reporting Requirements, and contains three main sections and supplemental appendices.

Management's Discussion and Analysis

Provides a high-level overview of the SEC--its history, mission, and organizational structure--and the agency's FY 2018 overall performance as related to its strategic goals and primary initiatives. Also in this section are management's assurances on internal controls and the agency's forward-looking information.

Financial Section

Contains audited financial statements, accompanying notes, and required supplementary information, as well as the independent auditor's report on these statements and management's response to that report. Also included are comparative financial statements and accompanying notes for the Investor Protection Fund.

Electronic copies of this AFR and prior year budget reports are available at about/ secreports.shtml.

Other Information

Details the agency's compliance with, and commitment to, specific regulations. Included in this section are performance and management analyses and recommendations from the Office of Inspector General and the SEC's response to that information in accordance with the Reports Consolidation Act of 2000; a detailed explanation of any significant erroneous payments and overpayments recaptured as required by the Improper Payments Information Act of 2002, as amended; and a table displaying recent inflationary adjustments made to civil monetary penalties in accordance with the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended.

Appendices

Offers additional resources related to the agency and this report: a glossary of terms, frequently used acronyms and abbreviations, biographies, and contact information.

INTRODUCTION | 1

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