Mr. WHITTEN. I would like for you to take advantage of my request to put other things in the record showing how the Commission operates, and how it would be affected by the reduction. I am asking this so you will be able to testify what the addition of those people would mean in the performance of the Commission's obligation as you see it.

Ms. PHILLIPS. Yes, sir, I would be glad to do that. I appreciate the opportunity. (The information follows:]

BUDGETARY IMPACT ON CFTC OPERATIONS The mission of the Commodity Futures Trading Commission is to regulate and and oversee the commodity futures industry in order to foster an openly competitive market environment that serves the economic functions of risk shifting and price discovery, and to protect the public and the markets from price manipulation and fraud. The Commission oversees twelve exchanges (application for thirteen exchanges pending) with a trading volume of over 150 million futures and options per year, about 71,000 registrants and offexchange trading in other instruments including leverage and dealer options.

In order to carry out these responsibilities, the Commission has three major operating divisions. The Division of Economic Analysis monitors the futures and options markets through daily surveillance in order to detect and prevent threats of price manipulation, reviews the terms and conditions of proposed and existing futures and options contracts to ensure that they minimize the potential for manipulation and that they serve a valid economic purpose, and conducts research to support enforcement and to advise the Commission on the economic impact of Commission policies. During FY 1985, the Division has 105 staff-years to perform its surveillance, analysis and research functions. In our initial budget request, we asked for two additional surveillance economists to maintain a ratio of five active futures and options contracts per surveillance economist and to perform special analyses of agricultural options. At the level in the President's budget, each economist will be re sponsible for surveillance of eight contracts, no special analyses will be performed and attention will be focused only on the most actively traded contracts.

The Commission also requested two additional market analysis staff to meet the statutory deadlines for reviewing the increasing number of designation applications and to allow us to review more existing contracts. Under the President's budget, market analysis will have difficulty in reviewing proposed contracts and rule changes within the statutory time frames and existing contracts will be reviewed only if significant problems occur. The decrease in the research staff will limit the evaluation of the options program and reduce support for enforcement cases. In total, the Division will be reduced by 16 staff-years to a level of 89 staff-years under the FY 1986 budget.

The Division of Trading and Markets proposes, implements and oversees enforcement of rules under the Commodity Exchange Act which protect customer funds, prevent trading abuses and assure the financial integrity of firms holding customer funds and monitors the compliance activities, such as market surveillance and sales practice activities, of exchanges and NFA. During FY 1985, the Division has 104 staff-years. Under our initial budget request, the Division would have increased by three staff-years. One staff-year would have been devoted to rule enforcement re views of exchange and NFA programs. It should be noted that, in their 1982 review of CFTC, GAO recommended that the number of rule enforcement reviews be increased, and the Commission has been trying to move in that direction. In addition, two additional staff-years would have been devoted to audits of comme lity pools. Under the President's budget, the Division would be reduced by 16 staff-years to a level of 88 staff-years. At the reduced level, five staff-years will be eliminated from the rule enforcement review and contract market program which will strain the Commission's ability to review rule changes within statutory time frames and will reduce the number of rule enforcement reviews to five per year. In addition, nine staff-years will be eliminated from the audit programs which will place heavier responsibility on SRO's for audits with less CFTC oversight. Two staff-years will be eliminated from the registration program resulting in delays of registration particularly for floor brokers.

The Division of Enforcement investigates and prosecutes alleged violations of the Commodity Exchange Act and Commission regulations. Under the Commissions'

September budget submission, thirty additional staff-years were requested. In addition to allowing the Commission to bring more cases, particularly in the areas of commodity pool fraud and illegal trade practices, these staff-years would have allowed the Commission to improve coordination with state law enforcement agencies and to provide better enforcement of Commission orders such as payment of civil penalties, cease and desist orders or trading prohibitions. At the level of the President's budget, the Division of Enforcement will be reduced by 19 staff-years to 111 total staff-years. At the reduced level, fewer investigations will be opened and fewer cases brought, there will be less assistance to state enforcement officials and less follow-up work done on enforcement of Commission orders. In addition, two additional staff-years were requested for the Office of Proceedings to provide support for enforcement adjudication. At the FY 1986 level, the Office of Proceedings will be reduced by five staff-years from its current level of 34. This will result in complaints taking an extra 30 to 40 days to process and a 20% slow down the disposition time.

The legal Counsel program requested three additional staff-years in the initial FY 1986 request to handle the increasing workload of litigation matters and appeals of matters adjudicated in the Office of Proceedings. Under the President's FY 1986 request, the Legal Counsel staff will be reduced by five staff-years below its current level of 34. This will limit the Commission's ability to issue opinions in a timely manner and will reduce the Commission's ability to participate as amicus in important commodity law cases.

In the initial FY 1986 request, the Commission requested three additional staffyears for Commission support. Without these staff-years, staff will be allocated from other divisions to assist the Commission with their workload, particularly in view of the demands which the FY 1986 reauthorization activities will place on the Commission. The Commission also requested an additional budget analyst to ensure better cost tracking and control, and requested five new staff for ADP support. At the $27,222,000 level, the administrative staff will be reduced by thirteen staff-years making all functions difficult to perform. In particular, the staff will not be able to respond as quickly to requests from inside and outside (e.g., OPM, OMB) the agency. In addition, less user support will be provided by ADP staff and work on the development of systems will be delayed.

The loss of these 80 staff-years is due to the reduced level of funding combined with rising operating expenses. While the Commission is reviewing operating expenses for possible cuts, most of the increase are in areas which are difficult, if not impossible, to reduce. For example, in all of our locations we have leased space at competitive prices. Nevertheless, rental costs continue to rise. With increased use of ADP, we have also increased our need for telecommunications, another area where costs have risen substantially. Therefore, while we are hopeful that we will find areas in which operating expenses can be cut, we are not expecting to find major cost savings.

ADJUDICATING CUSTOMER COMPLAINTS

Mr. WHITTEN. Your opening statement indicates that this austere budget may result in a reverse of the progress the Commission has made in streamlining its reparations operations as a result of new procedures and rules. Would you give us some indication as to what this streamlining process has done, such as it took X number of days prior to streamlining and now it takes Y number of days? In other words, how long did it take to adjudicate customer complaints?

Ms. PHILLIPS. FY 1984 was the first year the Commission has been able to make a significant reduction in the reparations backlog. At the end of FY 1984, 590 cases were pending on the dockets of the Presiding Officers compared to 920 in 1983 and 893 in 1982. The 590 cases at the end of FY 1984 were pending on the dockets of four ALJ's and two Judgment Officers which gives an average of almost 100 cases per decisionmaker. That average is still a very heavy burden but a vast improvement over the previous two years and shows that cases can now be decided in a shorter period of time than in the past.

Although the new procedures and rules have been in effect for less than a year, fifteen cases that were filed under the new rules have been disposed of in less than one year, which is within the time frames anticipated under the new rules. Understandably, a complex extensive reparation case would be very difficult to dispose of in a short period of time and a two-year time period would not be unheard of but, with the current level of staffing, cases generally should be able to be disposed of in a one-year time period.

RESOURCE IMPACT OF LEVERAGE REGULATION

Mr. WHITTEN. Again, you state in your opening statement that because of this reduced budget, the Commission will not in all like lihood lift the moratoria on new leverage entrants, new leverage products, or dealer options. What is your best estimate of the impact leverage regulation had on fiscal year 1985 resources and what is your estimate for fiscal year 1986 resources?

Ms. PHILLIPS. Based on information from the first-quarter of FY 1985, the Commission expects to devote 11 staff-years to activities associated with the regulation of leverage. These activities include registration of the existing firms and their salespeople, financial and sales practice audits, reviewing disclosure documents, registration of leverage commodities, enforcement, processing of complaints, litigation, amending the leverage rules and considering petitions for exemption from the rules. The Commission expects that 10 to 11 staff-years will be required to continue regulating leverage in FY 1986 without lifting the moratoria.

IMPACT OF NFA REGISTRATION STAFF Mr. WHITTEN. You state that the transfer of registration functions to the National Futures Association will save the Commission considerable resources. However, you further state that it has cost the Commission a great deal in staff resources to oversee the startup of NFA and prepare for transfer of registration. Would you give us what the difference is, whether you are plus or minus resources because of this transfer?

Ms. PHILLIPS. As a result of the transfer of registration, the Commission expects to reduce the registration staff from 16 to 10 staffyears.

NFA AUDIT STAFF

Mr. WHITTEN. The NFA has assumed substantial responsibility for auditing commodity professionals. What information can you provide regarding their resource commitment to this workload?

Ms. PHILLIPS. NFA had 107 people working in its compliance department as of the end of February. NFA has budgeted $6,762,000 for compliance for the fiscal year ending June 30, 1985, by which time NFA plans to have compliance staff of approximately 140 per

sons.

NFA ACCOMPLISHMENTS

Mr. WHITTEN. As a result of transfer of some work to NFA, what accomplishments can you cite for NFA for fiscal year 1984?

Ms. PHILLIPS. During fiscal year 1984, NFA expanded its AP testing requirement to require all APs of FCMs, CPOs, and CTAs to take and pass the National Commodity Futures Examination. This rule change, which was approved by the Commission, effectively extends this requirement to include APs who were not formerly covered by exchange rules in this area.

NFA has also taken over from the Commission the task of auditing those futures commission merchants which are not a member of any of the contract markets, allowing the Commission to focus more of its energies on oversight of the futures industry. NFA also has begun to conduct sales practice audits of those FCMs which are not members of any exchange. Unlike the financial audit program, however, NFA has a responsibility in this area to cover the entire futures industry, a standard it simply has not begun to approach. NFA also audits commodity pool operators and commodity trading advisors on a selective basis. Because NFA had all of these latter programs underway in fiscal year 1983, however, it is difficult to characterize them exclusively as accomplishments during fiscal year 1984. As a result of these activities, it should be noted that NFA was able to identify certain violations of the Act and Commission regulations and join with the Commission in obtaining injunctions in federal court against the violators.

NFA RESOURCE COMMITMENT

Mr. WHITTEN. What is NFA's estimated resource commitment for 1985 and 1986?

Ms. PHILLIPS. NFA has advised us that it expects to have a staff of approximately 286 individuals by the end of June, 1985 which concludes its fiscal year. NFA has not made any formal projections beyond that point. This staffing level, however, would represent a 35% increase from a year earlier. With regard to its budget, NFA has projected revenues of $14.3 million and expenditures of $16.5 million for the fiscal year ending June 30, 1985. Again, we do not yet have a budget estimate for NFA's 1986 fiscal year. Revenues for prior years have outpaced expenditures. Surplus funds also generate investment income.

SOURCE AND AMOUNT OF NFA'S REVENUE Mr. WHITTEN. What is NFA's source of revenue and how much is it?

Ms. PHILLIPS. NFA's budget for their fiscal year, which ends June 30, 1985, is $16.5 million. They expect to collect revenues of $14.3 million with 86% derived from assessment fees, 5% from membership fees, 5% from interest and 4% from registration fees.

NFA STATUS REPORT

Mr. WHITTEN. Please provide, for the record, a copy of NFA's most recent monthly progress report submitted to the Commission staff.

Ms. PHILLIPS. I will provide a copy of the February 1985 report. [The information follows:)