SEC and CFTC Fines Follow-Up
Collection Programs Are Improving, but Further Steps Are Warranted Gao ID: GAO-03-795 July 15, 2003Collecting fines ordered for violations of securities and futures laws helps ensure that violators are held accountable for their offenses and may also deter future violations. The requesters asked GAO to evaluate the actions the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have taken to address earlier recommendations for improving their collection programs. The committees also asked GAO to update the fines collection rates from previous reports.
SEC and CFTC have improved their collection programs since GAO issued its 2001 fines report. While it was too early to fully assess the effectiveness of their actions, SEC could be doing more to maximize its use of Treasury's collection services. SEC has implemented regulations, procedures, collections guidelines, and controls for using the Treasury Offset Program (TOP), which applies payments the federal government owes to debtors to their outstanding debts. However, SEC has been focusing on referring to TOP those delinquent cases with amounts levied after its new collections guidelines went into effect. The agency has not developed a formal strategy for referring older cases, reducing the likelihood of collecting monies on what could be more than a billion dollars of delinquent debt. Further impeding collection efforts, SEC does not have a reliable system for tracking monies owed on these older cases and therefore could not determine which cases were not being referred to TOP. SEC has drafted an action plan for a new system to track all cases with a monetary judgment. Once the system is in place, the agency should have a tool for identifying all cases, including older delinquent cases that can be referred to TOP. However, SEC has not established a time frame for fully implementing the plan. GAO's calculations for closed cases (collection actions completed) showed that regulators' collection rates on fines imposed between 1997 and August 2002 equaled or exceeded those from 1992 to 1996. Recalculating the rates to include closed and open cases (collection actions ongoing) affected SEC's and CFTC's collection rates, primarily because of a few large uncollected fines.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-03-795, SEC and CFTC Fines Follow-Up: Collection Programs Are Improving, but Further Steps Are Warranted
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Report to Congressional Requesters:
July 2003:
SEC and CFTC Fines Follow-Up:
Collection Programs Are Improving, but Further Steps Are Warranted:
GAO-03-795:
GAO Highlights:
Highlights of GAO-03-795, a report to House Ranking Minority Members
of congressional committees
Why GAO Did This Study:
Collecting fines ordered for violations of securities and futures laws
helps ensure that violators are held accountable for their offenses
and may also deter future violations. The requesters asked GAO to
evaluate the actions the Securities and Exchange Commission (SEC) and
Commodity Futures Trading Commission (CFTC) have taken to address
earlier recommendations for improving their collection programs. The
committees also asked GAO to update the fines collection rates from
previous reports.
What GAO Found:
SEC and CFTC have improved their collection programs since GAO issued
its 2001 fines report. While it was too early to fully assess the
effectiveness of their actions, SEC could be doing more to maximize
its use of Treasury‘s collection services. SEC has implemented
regulations, procedures, collections guidelines, and controls for
using the Treasury Offset Program (TOP), which applies payments the
federal government owes to debtors to their outstanding debts.
However, SEC has been focusing on referring to TOP those delinquent
cases with amounts levied after its new collections guidelines went
into effect. The agency has not developed a formal strategy for
referring older cases, reducing the likelihood of collecting monies on
what could be more than a billion dollars of delinquent debt. Further
impeding collection efforts, SEC does not have a reliable system for
tracking monies owed on these older cases and therefore could not
determine which cases were not being referred to TOP. SEC has drafted
an action plan for a new system to track all cases with a monetary
judgment. Once the system is in place, the agency should have a tool
for identifying all cases, including older delinquent cases that can
be referred to TOP. However, SEC has not established a time frame for
fully implementing the plan.
GAO‘s calculations for closed cases (collection actions completed)
showed that regulators‘ collection rates on fines imposed between 1997
and August 2002 equaled or exceeded those from 1992 to 1996.
Recalculating the rates to include closed and open cases (collection
actions ongoing) affected SEC‘s and CFTC‘s collection rates, primarily
because of a few large uncollected fines.
What GAO Recommends:
SEC should (1) develop a strategy for referring older cases to
Treasury for collection and (2) implement a reliable system to help
manage all cases. SEC generally agreed with the facts presented and
agreed to implement the recommendations made.
www.gao.gov/cgi-bin/getrpt?GAO-03-795.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Davi D‘Agostino at
(202) 512-8678 or dagostinod@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
SEC and CFTC Have Taken Steps to Improve Their Collection Programs, but
SEC Has Not Ensured That All Eligible Cases Are Referred to FMS and
TOP:
SEC and CFTC Have Taken Steps to Improve Their Oversight of SROs'
Sanctioning Practices, but Some Concerns Remain:
We Calculated Collection Rates in Two Different Ways to Provide a More
Complete Picture of Collection Efforts:
Conclusions:
Recommendations:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Securities and Exchange Commission:
Appendix III: Securities Regulators' Collection Rates for Open and
Closed Cases by Calendar Year:
Appendix IV: Futures Regulators' Collection Rates for Open and Closed
Cases by Calendar Year:
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Acknowledgments:
Tables:
Table 1: Collection Rates for Fines Levied on Closed Cases for 1997-
August 2002 and 1992-96:
Table 2: Collection Rates for Fines Levied on Open and Closed Cases and
Closed Cases for 1997-August 2002:
Table 3: SEC's Collection Rates:
Table 4: The American Stock Exchange's Collection Rates:
Table 5: The Chicago Board Options Exchange's Collection Rates:
Table 6: The Chicago Stock Exchange's Collection Rates:
Table 7: NASD's Collection Rates:
Table 8: NYSE's Collection Rates:
Table 9: CFTC's Collection Rates:
Table 10: The Chicago Board of Trade's Collection Rates:
Table 11: The Chicago Mercantile Exchange's Collection Rates:
Table 12: NFA's Collection Rates:
Table 13: The New York Mercantile Exchange's Collection Rates:
Figures:
Figure 1: SEC's Actual Collection Rates for Open and Closed Cases, 1997-
August 2002, and Adjusted Collection Rates for Selected Years:
Figure 2: CFTC's Actual Collection Rates for Open and Closed Cases,
1997-August 2002, and Adjusted Collection Rates for Selected Years:
Figure 3: NASD's Collection Rates for Open and Closed Cases, 1997-2002:
Abbreviations:
CFTC: Commodity Futures Trading Commission:
DPTS: Disgorgement and Penalties Tracking System:
FBI: Federal Bureau of Investigation:
FMS: Financial Management Service:
NFA: National Futures Association:
NYSE: New York Stock Exchange:
SEC: Securities and Exchange Commission:
SRO: self-regulatory organization:
TOP: Treasury Offset Program:
Letter July 15, 2003:
The Honorable John D. Dingell:
Ranking Minority Member:
Committee on Energy and Commerce:
House of Representatives:
The Honorable Barney Frank:
Ranking Minority Member:
Committee on Financial Services:
House of Representatives:
The Honorable Paul E. Kanjorski:
Ranking Minority Member:
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises:
Committee on Financial Services:
House of Representatives:
Collecting fines ordered for violations of securities and futures laws
helps ensure that violators are held accountable for their offenses and
may also deter future violations. While previous GAO reports[Footnote
1] found that securities and futures regulators collected most of the
fines imposed, the reports also identified weaknesses in the collection
programs of the Securities and Exchange Commission (SEC) and the
Commodity Futures Trading Commission (CFTC). These reports made several
recommendations to help SEC and CFTC improve their collection programs
and their oversight of the sanctioning practices of self-regulatory
organizations (SRO).[Footnote 2]
This report responds to your July 30, 2001, request that we evaluate
the actions that SEC and CFTC have taken in response to the
recommendations made in our earlier fines collection reports. Also, as
agreed in a September 5, 2002, meeting with your staff, we are updating
the collection rates from our earlier reports. Our objectives were to
(1) evaluate SEC's and CFTC's actions to improve their collection
programs, (2) assess these agencies' efforts to enhance their oversight
of the SROs' sanctioning practices, and (3) calculate the fines
collection rates for SEC, CFTC, and nine securities and futures
SROs[Footnote 3] for 1997-2002.[Footnote 4]
To evaluate SEC's and CFTC's actions to improve their collection
programs, we reviewed relevant debt collection regulations, guidelines,
procedures, controls, and laws; analyzed data related to their debt
collection actions; and interviewed officials of these agencies and of
the Financial Management Service (FMS) of the U.S. Department of
Treasury. To assess SEC's and CFTC's efforts to enhance their oversight
of the SROs' sanctioning practices, we interviewed agency officials and
reviewed related data. To calculate the fines collection rates for
1997-2002 for all the SROs except NASD, we used data provided by SEC,
CFTC, and the regulators for fines levied from January 1997 through
August 2002. Because of the way its financial system was designed,
NASD's calculations are based on fines invoiced through December 2002.
Limitations on SEC's data reliability affect the accuracy of
calculations related to its collections activities as well as its
overall fines collection rates. Appendix I contains a full description
of our scope and methodology.
Results in Brief:
SEC and CFTC have continued to improve their collection programs since
we issued our 2001 fines report, but SEC needs to make additional
improvements to its program. First, SEC amended its debt collection
regulations to allow cases to be referred to FMS's Treasury Offset
Program (TOP).[Footnote 5] SEC also implemented procedures, collections
guidelines, and a collections database--the latter to aid in tracking
and referring to FMS, including TOP, those cases with fines and
disgorgements[Footnote 6] levied after the guidelines went into effect.
It was too soon to assess the effectiveness of SEC's strategy related
to these post-guidelines cases, because most of them were not yet
eligible for referral. In contrast, SEC did not have a formal strategy-
-one that prioritized cases based on their collection potential and
established time frames for their referral--for cases with fines and
disgorgements levied before the guidelines went into effect.[Footnote
7] Further impeding collection efforts on these pre-guidelines cases,
SEC's original system for tracking all cases with money judgments, the
Disgorgement and Penalties Tracking System (DPTS), was unreliable.
Because DPTS was unreliable, SEC could not determine which pre-
guidelines cases were not being referred to FMS and TOP or the amounts
associated with them--potentially well over a billion dollars. SEC has
drafted a two-phase action plan for replacing DPTS by the end of fiscal
year 2003 but has not established a time frame for implementing the
computer system for the second phase. In addition, SEC has developed
procedures for making timely responses to offers presented by FMS to
settle a violator's debt, and CFTC has implemented procedures designed
to ensure the timely referral of delinquent cases to FMS. However, only
four cases had been processed under each agency's procedures as of
April 2003, an insufficient number to assess their effectiveness.
SEC and CFTC have also taken some actions to improve their oversight of
the SROs' sanctioning practices, but SEC has not yet used the SROs'
data to analyze these practices. In response to our 1998
recommendation, SEC has been inputting the SROs' data into its database
for use in analyzing violations and disciplinary sanctions. These
analyses should help SEC identify any disparities among SROs and find
ways to improve their disciplinary programs. However, technological
problems have hampered SEC's ability to complete the analyses. SEC
officials told us that the agency expects to initiate its first
analysis during the summer of 2003. They also said that the agency
plans to develop a new disciplinary database to collect and analyze
data on sanctions in a timelier manner but has not established a date
for implementing it. Also, consistent with our 2001 recommendation, SEC
and CFTC have been monitoring readmission applications but have not yet
received any from barred individuals. We found, however, that SEC,
CFTC, the National Futures Association (NFA), and NASD have controls
designed to ensure that inappropriate readmissions of barred
individuals do not occur. Further, while examining the application
review process, we found weaknesses in controls over fingerprinting
that could result in inappropriate admissions to the securities and
futures industries. But we did not determine the extent to which these
weaknesses resulted in inappropriate admissions.
We calculated the fines collection rates in two ways in order to
provide a more complete picture of the regulators' collection
activities. The collection rates for closed cases (those for which all
possible collection actions had been completed) for SEC,[Footnote 8]
CFTC, and the SROs from January 1997 to August 2002 showed that the
regulators had collected between 75 and 100 percent of the fines
imposed and that they had either improved their performance over the
1992-96 period or maintained a 100-percent performance rate.[Footnote
9] Broadening the analysis to include open cases (those for which
collection actions were ongoing) had the greatest impact on SEC's and
CFTC's collection rates. Including open cases, they collected 40 and 45
percent, respectively, of the total dollar amount of fines levied.
However, the differences in the rates were largely explained by a few
large uncollected fines. According to regulators, large fines are more
difficult to collect than small ones, and a few large uncollected fines
can significantly affect an agency's collection rate. The rates for the
SROs changed much less when adding open cases because the SROs
generally had fewer and smaller uncollected fines. According to SRO
officials, SROs that were exchanges had higher collection rates in part
because they could sell a member's "seat," or membership, to pay fines,
giving members an incentive to pay their fines quickly. As discussed in
a previous report,[Footnote 10] these results underscore the
limitations of using the collection rate alone to measure the
effectiveness of collection efforts. That is, the rate can be
significantly influenced by factors that are beyond regulators'
control. Nonetheless, examining the rates and the factors influencing
them can be a starting point for obtaining an understanding of
regulators' performance.
This report makes three recommendations to SEC for improving its
tracking and referral of delinquent cases to FMS and TOP and for
completing its analysis of SROs' disciplinary sanctions. It also makes
a recommendation to SEC and CFTC for improving controls over the
fingerprinting of industry applicants. We received comments on a draft
of this report from SEC and CFTC. Both agencies generally agreed with
the facts we presented and agreed to implement the recommendations we
made. SEC's written comments are reprinted in appendix II.
Background:
The regulatory structure of the U.S. securities markets was established
by the Securities Exchange Act of 1934, which created SEC as an
independent agency to oversee the U.S. securities markets and their
participants. Similarly, in 1974 the Commodity Exchange Act established
CFTC as an independent agency to oversee the U.S. commodity futures and
options markets. Both agencies have five-member commissions headed by
chairpersons who are appointed by the President of the United States
for 5-year terms. Among other things, the commissioners approve new SEC
and SRO rules and amendments to existing rules. They also authorize
enforcement actions. SEC and CFTC are headquartered in Washington, D.C.
SEC has a combined total of 11 regional and district offices; CFTC has
5 regional offices.
Within SEC and CFTC, the divisions of enforcement are responsible for
investigating possible violations of the securities and futures laws,
respectively. With their commissions' approval, they litigate or settle
actions against alleged violators in federal civil courts and in
administrative actions. Typically, enforcement staff investigate
alleged violations of law, prepare a memorandum for the commissioners
that describes alleged violations, and, if appropriate, make
recommendations for further action. When the commissions decide that a
case warrants further action, they can authorize filing a civil suit
against the alleged violator in federal district court or instituting a
proceeding before an administrative law judge. If either the court or
the administrative law judge finds that a defendant has violated
securities or futures laws, it can issue a judgment ordering sanctions
such as fines and disgorgements and, in the case of futures violations,
restitution; it can also bar or suspend violators from the securities
and futures industries.
The collection process for delinquent debt begins when all or part of a
fine or disgorgement becomes delinquent because the violator has failed
to pay some or all of the amount due by the date ordered by the court
or administrative law judge. If the court or administrative law judge
has not specified a payment date and no stay has been entered, SEC
considers the debt delinquent 10 days after the court enters the
judgment. CFTC officials told us that absent an appeal, they consider
the debt delinquent 15 or 60 days after the administrative law judge or
court entered the judgment in administrative and civil cases,
respectively. SEC and CFTC collect delinquent monetary judgments
primarily through post-judgment litigation, negotiating payments with
defendants, and making referrals to the Department of Treasury or the
Department of Justice.
In accordance with the Debt Collection Improvement Act of 1996, SEC and
CFTC have each entered into an agreement with the Department of
Treasury to improve collections. Under this act, federal agencies are
required to submit all nontax debts that are 180 days delinquent to
Treasury's FMS.[Footnote 11] The act also requires that FMS either take
appropriate steps to collect the debt or terminate collection actions.
In addition to using traditional methods to collect these debts, such
as sending demand letters and hiring private collection agencies, FMS
can use TOP. Under TOP, FMS identifies federal payments, such as tax
refunds, that are owed to individuals and applies the payments to their
outstanding debt. All cases referred to FMS for collection are also
eligible for referral to and servicing under TOP. FMS also uses
collection agencies to negotiate compromise offers with individual
debtors. A compromise offer is an agreement between a federal agency
and an individual debtor, in which the federal agency agrees to
discharge a debt by accepting less than the full amount. Once the
collection agency negotiates a compromise offer with a debtor, it
forwards the offer to FMS. In the absence of an agreement between FMS
and the federal agency to approve compromise offers on its behalf, FMS
refers the offer to the federal agency for final approval.
The U.S. securities and futures markets are regulated under their
respective statutes through a combination of self-regulation (subject
to federal oversight) and direct federal regulation. This regulatory
scheme was intended to give SROs responsibility for administering their
own operations, including most of the daily oversight of the securities
and futures markets and their participants. Two of the SROs--NASD and
NFA--are associations that regulate registered securities and futures
firms and oversee securities and futures professionals, respectively.
The remaining SROs include national exchanges that operate the markets
where securities and futures are traded. These SROs are primarily
responsible for establishing the standards under which their members
conduct business; monitoring the way that business is conducted; and
bringing disciplinary actions against their members for violating
applicable federal statutes, their own rules, and the rules promulgated
by their federal regulator. SROs can impose fines and other sanctions
against members that violate securities or futures laws or SRO rules,
as applicable, through their enforcement and disciplinary processes.
Some SROs' disciplinary proceedings are decided by a hearing panel,
which examines the evidence and decides on the appropriate sanction.
SROs' actions are usually initiated by a customer complaint, a
compliance examination, market surveillance, regulatory filings, or a
press report.
SEC and CFTC Have Taken Steps to Improve Their Collection Programs, but
SEC Has Not Ensured That All Eligible Cases Are Referred to FMS and
TOP:
SEC and CFTC have taken actions to improve their collection programs,
addressing the three recommendations in our 2001 fines report. However,
it was too early to assess the effectiveness of their actions. After we
made our first recommendation, SEC took various steps, among them,
implementing collections guidelines that were intended to ensure that
eligible delinquent cases are referred to FMS, including TOP. But SEC's
actions have not ensured that all eligible cases are referred. To
address our second recommendation, SEC developed procedures for
responding to compromise offers submitted by FMS within 30 days. To
address our third recommendation, CFTC implemented procedures for
ensuring the timely referral of delinquent cases to FMS for collection.
SEC Has Implemented Regulations, Procedures, Guidelines, and a
Collections Database, but Its Actions Have Not Ensured the Referral of
All Eligible Cases to FMS and TOP:
SEC implemented regulations, related procedures and guidelines, and a
collections database intended to ensure that eligible delinquent cases
are referred to FMS, including TOP, as required by the Debt Collection
Improvement Act of 1996. However, SEC has focused on referring post-
guidelines cases, and it was too early to assess the effectiveness of
SEC's strategy as it related to these cases. In contrast, SEC did not
have a formal strategy for referring pre-guidelines cases and, further
impeding its collection efforts, it did not have a reliable agencywide
system for tracking monies owed in these cases. Recognizing that its
system was unreliable, SEC has drafted a two-phase action plan under
which it will implement a centralized agencywide tracking system for
all delinquent debt. However, it has not established a time frame for
fully implementing the computer system for the second phase of the
plan.
SEC's Strategy Has Focused on Referring Post-Guidelines Cases, but It
Is Too Early to Assess the Effectiveness of This Strategy:
We recommended in our 2001 report that SEC take steps to ensure that
regulations allowing SEC's delinquent fines to be submitted to TOP be
adopted so that SEC would benefit from the associated collection
opportunities. At the time of our review, SEC officials had told us
that they had rewritten their rules for using TOP but that they could
not estimate when the rules would be approved by the commission or
implemented.
After we made our recommendation, SEC amended its debt collection
regulations.[Footnote 12] In April 2002, SEC implemented related
procedures to allow cases to be forwarded to TOP. Consistent with the
Debt Collection Improvement Act of 1996, the procedures required that
cases be referred to FMS after they had been delinquent for more than
180 days. SEC subsequently issued additional guidelines and implemented
a collections database that were intended to ensure that eligible
delinquent post-guidelines cases are referred to FMS, including TOP,
within 180 days of becoming delinquent. SEC imposed the more stringent
requirement on itself in recognition of the enhanced probability of
collecting monies ordered on newer cases.
The guidelines provided more detailed instructions for staff on how to
pursue collections, specifying steps for referring eligible delinquent
cases to FMS, including TOP, within 180 days. According to an agency
official, the guidelines went into effect agencywide on September 2,
2002. SEC also created a collections database for all post-guidelines
fines and disgorgement cases that is maintained by headquarters and
each regional or district office, as applicable. The database tracks
actions that staff have taken to recover debt on delinquent cases,
including preparing cases for referral to FMS, and is used to help
ensure that staff are following the new collections guidelines. SEC
officials told us that the agency was tracking only post-guidelines
cases because the database had limited storage capacity and could
become unstable if too many cases were added. In addition, the agency
has assigned attorneys and administrative staff to every office to
maintain the database and its related collection activities for
delinquent cases, including ensuring that eligible cases are referred
to FMS and TOP in a timely manner. According to an agency official,
these staff received training on using the guidelines in the fall of
2002.
It was too early to fully assess the effectiveness of SEC's strategy
for tracking, collecting, and referring post-guidelines cases, because
most of these cases were not yet 180 days delinquent. Based on a
judgmental sample of 66 cases, we identified 4 delinquent fines and
disgorgement cases valued at $4 million that were eligible for referral
as of March 31, 2003. We found that SEC had referred two of the four
cases within the 180-day time frame and was preparing the other two for
referral.
SEC Did Not Have a Formal Strategy for Referring Pre-Guidelines Cases:
Although SEC had developed controls to better ensure that eligible
post-guidelines cases were promptly referred to FMS and TOP, it had not
developed a formal strategy for referring eligible pre-guidelines
cases. Such a strategy would include prioritizing cases based on their
collection potential and establishing time frames for making the
referrals. Further impeding its collection efforts, SEC's original
system for tracking monies owed in pre-guidelines cases--DPTS--was not
reliable. As a result, SEC could not identify all the cases that had
not been referred to FMS and TOP. SEC officials told us that the
agency's April 2002 procedures applied to the pre-guidelines cases and
that agency attorneys had followed these procedures in referring some
pre-guidelines cases to Treasury. But SEC did not know the extent to
which the procedures were being followed or whether eligible cases were
not being referred. They explained that the attorneys would know the
status of the cases assigned to them but that no agencywide information
was available. They also told us that they expected all eligible cases
to be referred to FMS and TOP eventually but noted that they had not
prioritized the cases for referral or established time frames for
referring them.
Neither we nor SEC could determine with any certainty the extent to
which eligible pre-guidelines cases were not being referred to FMS and
TOP due to the unreliability of DPTS. Using DPTS, the only information
available, we identified about 900 pre-guidelines cases valued at about
$2.8 billion that were 180 days past due and that might be eligible for
referral. As of January 31, 2003, almost 54 percent of these cases were
over 3 years old based on their judgment date, which, in the absence of
better data, we used as a rough proxy for the delinquency date. SEC
officials emphasized that these numbers do not accurately reflect the
number of pre-guidelines cases eligible for referral to FMS and TOP.
They said that some of the cases were ineligible for referral because
they were on appeal, in post-judgment litigation, or had a receiver
appointed to marshal and distribute assets. In addition, many cases
might already have been referred for collection. SEC officials also
pointed out that our calculations of the age of cases were inaccurate
because we relied on the judgment date rather than the delinquency
date, which is not tracked in DPTS. We recognize that many factors
affect the accuracy of DPTS, including some that might not be mentioned
here. However, we are reporting these numbers as the best information
available.
SEC Had an Action Plan for Replacing DPTS but Had Not Established a
Time Frame for Full Implementation of the Plan:
Both GAO and SEC have recognized DPTS's lack of reliability. Our 2002
disgorgement report and a January 2003 report commissioned by the SEC
Inspector General found that DPTS was not complete and accurate and
could not be relied upon for financial accounting and reporting
purposes. Recognizing that the agency did not have a system that
provided an accurate assessment of levied amounts and payments (among
other things), SEC developed a draft action plan for implementing a new
system to replace DPTS. The April 2003 draft plan calls for
implementing a comprehensive centralized system for tracking,
documenting, and reporting on fines and disgorgements ordered, paid,
and disbursed in SEC enforcement actions. The agency had been taking
steps to address the milestones in the plan. If the plan is effectively
implemented, the agency should have a tool for accurately identifying
uncollected pre-guidelines cases for referral to FMS and TOP for
collection.
SEC's action plan has been divided into two phases. In the first phase,
SEC is tentatively scheduled to replace DPTS by the end of fiscal year
2003. SEC officials described the replacement system as a comprehensive
case tracking, record-keeping, and reporting system for fines and
disgorgements ordered, paid, and distributed. They said that the system
will be integrated with a database maintained by the Division of
Enforcement. The replacement system is intended to, among other things,
maintain the data on debt needed for general reporting and management
purposes. According to SEC officials, one benefit of the replacement
system will be to assist the agency in managing its delinquent cases.
However, SEC will continue to rely on its new collections database,
which tracks collection efforts on post-guidelines cases, to ensure the
timely referral of these cases to FMS and TOP until phase two of the
action plan is implemented. In phase two, SEC plans a comprehensive
upgrade to its case tracking system, which will be integrated with
several other databases, including the new collections database. SEC
expects to begin the requirements analysis for the phase two computer
system in fiscal year 2004 but has not established a milestone for
completing this analysis. After the requirements analysis is complete,
SEC plans to establish an implementation date for the system.
SEC Has Implemented Procedures for Responding to Compromise Offers in a
Timely Manner:
We recommended in our July 2001 report that SEC continue to work with
FMS to ensure that compromise offers presented by FMS are approved in a
timely manner. Our recommendation resulted from a finding that SEC did
not always respond to compromise offers promptly and that as a result
some debts had never been collected. For example, we reported that FMS
waited from between 42 and 327 days for SEC's decisions on three
compromise offers. But by the time SEC made its decisions, the debtors
no longer had the money to pay the amounts specified in the compromise
offers. To address this concern, in April 2001 FMS proposed securing
delegation authority from SEC--that is, permission to approve
compromise offers that SEC did not respond to within 30 days.
In response to our recommendation, SEC took several steps to ensure
that compromise offers are approved in a timely manner. First, in July
2001 SEC implemented procedures specifying the actions required to
address a compromise offer, including a schedule to ensure that a
decision is made within 30 days. For example, within 5 days of
receiving an offer, SEC staff are to have made a final decision on
whether to recommend the offer to the commission for approval. SEC also
implemented controls to monitor the status of offers. When it receives
a compromise offer from FMS, SEC enters the offer into a system that
tracks information such as the date the offer was made, the name of the
attorney reviewing the offer, the date the offer was referred to the
commission for a final decision, and the date of the final decision.
The Division of Enforcement's chief counsel monitors the status of
offers based on weekly reports generated from this system to ensure
that follow-up action is taken to address any problems. Finally, SEC
has designated two staff to respond to FMS inquiries about the status
of compromise offers.
It is still too early to determine the effectiveness of SEC's actions.
As of April 22, 2003, SEC had received four compromise offers from FMS
under its new procedures. SEC and FMS data showed that SEC had
responded to three of the offers within the 30-day guideline and to one
offer within 40 days. The late offer represented a debt of $1.6
million, and the settlement offer was for $50,000. SEC staff told us
that the agency ultimately rejected the offer, at least in part because
of the disparity between the amount offered and the amount owed. SEC
officials attributed the delay in responding to this offer to
scheduling conflicts caused by the holiday season. The officials told
us that the agency was in touch with FMS before the end of 30 days to
indicate, on an informal basis, that the reply to the compromise offer
would be delayed and that the offer would be rejected. FMS officials
told us that they did not view SEC's late response to this offer as a
problem--that is, the delay did not represent weaknesses in agency
policies, procedures, or controls. They said that SEC had shown marked
improvement in responding to compromise offers and that as a result FMS
was no longer seeking delegation authority from SEC.
CFTC Implemented Procedures for Ensuring the Timely Referral of
Delinquent Debt to FMS:
We recommended in our 2001 report that CFTC take steps to ensure that
delinquent fines were promptly referred to FMS, including creating
formal procedures that addressed both sending debts to FMS within the
required time frames and requiring all of the necessary information
from the Division of Enforcement on these debts. Our recommendation
flowed from a finding in an April 2001 report by CFTC's Inspector
General showing that CFTC staff were not referring delinquent debts to
FMS in a timely manner, potentially limiting FMS's ability to collect
the monies owed. The report also noted that CFTC's collection
procedures had not been updated to address referrals to FMS and, among
other examples, identified a fine in the amount of $7 million that had
not been referred to FMS for more than 2 years because of inadequate
communication between CFTC's Division of Enforcement and its Division
of Trading and Markets.
As we recommended, CFTC has improved its procedures for referring its
debt to FMS in a timely manner and has taken steps to ensure that it
has all the necessary enforcement information before making the
referral. CFTC updated its collection procedures and implemented them
in July 2002. They now include specific requirements for referring debt
to FMS within 180 days of the date that the debt became delinquent.
CFTC also implemented controls to ensure that it has identified all
delinquent debt eligible for referral. For example, CFTC management
reviews quarterly reports on the status of cases to ensure that all
debts are referred to FMS within 180 days. According to CFTC officials,
the agency's shift of all debt collection responsibility from its
Division of Trading and Markets to its Division of Enforcement
streamlined its debt referral process.
Although it is too early to fully assess the effectiveness of CFTC's
actions, our review of CFTC's data on uncollected cases indicated that
the agency had been referring all eligible debt to FMS within 180 days.
As of April 24, 2003, CFTC had had four delinquent cases dating from
the time its procedures went into effect. Using FMS's data, we
confirmed that the cases had been referred to FMS within 123 days.
Also, a review of CFTC's data of all delinquent cases levied before the
procedures went into effect showed that CFTC had referred all eligible
cases to FMS for collection. FMS officials told us that CFTC had been
making debt referrals with complete information on all its cases.
SEC and CFTC Have Taken Steps to Improve Their Oversight of SROs'
Sanctioning Practices, but Some Concerns Remain:
SEC and CFTC have taken steps to address our two recommendations for
improving their oversight of SROs' sanctioning practices. But SEC has
not fully implemented our 1998 recommendation that it analyze
industrywide data on SRO-imposed sanctions to examine disparities and
help improve disciplinary programs. The agency has experienced
technological problems that have hampered its ability to complete these
analyses. In addition--and consistent with our 2001 recommendation--SEC
and CFTC have been monitoring readmission applications to the
securities and futures industries. However, at the time of our review
neither had received any applications since changing their fine
imposition practices. Also, SEC, CFTC, NASD, and NFA have controls
designed to ensure that inappropriate readmissions do not occur.
Further, while examining the application review process, we found
weaknesses in controls over fingerprinting that could result in
inappropriate admissions to the securities and futures industries.
Technological Problems Have Hampered SEC's Ability to Analyze
Disciplinary Actions Across SROs:
In our 1998 report, we recommended that SEC analyze industrywide
information on disciplinary program sanctions, particularly fines, to
identify possible disparities among the SROs and find ways to improve
SROs' disciplinary programs. We concluded that analyzing industrywide
data could provide SEC with an additional tool to identify disparities
among SROs that might require further review. We reported in 2001 that
SEC had developed a database to collect information on SROs'
disciplinary actions.
As of June 30, 2003, according to agency officials, SEC was still
inputting information into its database but had not yet completed any
analyses because technological difficulties had hampered its ability to
collect sufficient data to perform the analyses. First, the database
had a limited number of fields and therefore could not capture multiple
disciplinary violations or multiple parties in a single case. In
October 2002, SEC officials told us that they had addressed this
limitation by enhancing the database to incorporate the required fields
and were continuing to add disciplinary information to the database.
However, in November 2002, the enhanced database failed because it
could not support multiple users. SEC repaired the database, and agency
officials told us that they expected to complete their first data
analyses in the summer of 2003. The analyses are expected to show
whether SROs impose similar fines and sanctions for similar violations.
An SEC official said that the agency expects these analyses to
supplement the information obtained during agency inspections of the
SROs' disciplinary programs.
SEC officials told us that the agency is planning to use funds from its
fiscal year 2003 budget increase to develop a new disciplinary database
that will replace the current one. According to SEC officials, this new
disciplinary database is expected to allow SROs to submit data on-line
rather than having to send it to SEC to be entered by staff. This
streamlined process is expected to reduce data entry errors. An SEC
official told us that while planning had begun for the new disciplinary
database, no completion date had been established.
SEC and CFTC Have Monitored Readmission Applications and Have Controls
Designed to Preclude Inappropriate Readmissions:
In our 2001 report, we recommended that SEC and CFTC periodically
assess the pattern of readmission applications to ensure that the
changes in NASD's and NFA's fine imposition practices do not result in
any unintended consequences, such as inappropriate readmissions. NASD
and NFA had stopped routinely assessing fines when barring individuals
in October 1999 and December 1998, respectively, eliminating the
related requirement that the fines be paid as a condition of reentry to
the securities and futures industries. These fines had rarely been
collected, because few violators ever sought reentry. We were concerned
that because barred individuals were no longer required to pay a fine
before reentry, they might be more willing to seek readmission.
Consistent with our recommendation, SEC and CFTC have monitored
readmission applications. They found, and we confirmed, that no
individuals who were barred after the changes in NASD's and NFA's fine
imposition practices had applied for reentry. Also, NASD's and NFA's
application review processes included controls designed to ensure that
inappropriate applications for reentry are not approved. Officials of
both SROs told us that as part of their background checks they did a
database search against the names of past and current registrants in
both industries to determine whether the applicants had a disciplinary
history. In addition, both SROs submitted applicants' fingerprints to
the Federal Bureau of Investigation (FBI) for a criminal background
check. NASD and NFA required all individuals who had been suspended,
expelled, or barred to be--at a minimum--sponsored by a registered firm
before being considered for readmission. According to a CFTC official,
finding a sponsor is difficult, as most firms would not hire an
individual with a history of serious disciplinary problems, in part due
to increased supervisory requirements and the risk of harming their
reputations.
SEC and CFTC were reviewing the applications of all individuals who had
been statutorily disqualified from registration, including any barred
individuals, and had the authority to reverse an admission decision
made by NASD or NFA, respectively.[Footnote 13] SEC and CFTC officials
told us that they would consider various factors when reviewing a
readmission application, including the facts and circumstances of the
case, the appropriateness of the proposed supervision, and the
prospective employer's ability to provide the proposed supervision.
Officials from both agencies told us that if they were to begin
receiving a large number of applications from barred applicants, they
would reexamine the SROs' fine imposition practices.
Weaknesses in Fingerprinting Controls Could Result in Inappropriate
Admissions to the Securities and Futures Industries:
While examining the application review process, we found that neither
the related statutes, SEC, nor CFTC required the SROs to ensure that
the fingerprints sent to the FBI for use in criminal history checks
belonged to the applicants who submitted them. Further, in the absence
of such a requirement, NASD,[Footnote 14] the New York Stock Exchange
(NYSE),[Footnote 15] and NFA[Footnote 16] lacked related controls over
fingerprinting, potentially allowing inappropriate persons to enter the
securities and futures industries. The securities[Footnote 17] and
futures laws[Footnote 18] require that applicants to these industries
have their fingerprints taken and then sent for review to the FBI as
part of a criminal background check. The goal of the criminal
background check is to ensure that inappropriate individuals are not
granted admission to the securities or futures industries. The statutes
also require SRO member firms to be responsible for assuring that their
personnel are fingerprinted. SEC and CFTC rules provide that applicants
can satisfy this requirement by submitting fingerprints to the SROs who
then send them to the FBI for processing.
However, neither the statutes, SEC, nor CFTC require SROs to ensure
that the fingerprints sent to the FBI for use in criminal history
checks belong to the applicants who submitted them. In the absence of
such a requirement, NASD, NYSE, and NFA have not imposed requirements
on member firms to help ensure that the identity of the person being
fingerprinted matches the fingerprints being submitted for FBI review.
The SROs told us that, consistent with the law, they required their
members to be fingerprinted and that these fingerprints were submitted
to the FBI for assessment. NYSE officials emphasized that their members
were in full compliance with the law and related regulations, which do
not require specific controls.
In the absence of specific requirements, firms have taken a variety of
approaches to fingerprinting applicants. For example, while SEC and
some SROs told us that most firms used their own personnel or police
officers to obtain fingerprints, they said that a small number of firms
may allow applicants to fingerprint themselves, a practice that
provides an opportunity for individuals to perpetrate fraud by
submitting someone else's fingerprints instead of their own. According
to SEC and CFTC officials, their agencies have trained staff in their
headquarters and some regional offices that take fingerprints of their
employees using approved fingerprinting kits. An NFA official also
stated that NFA headquarters has trained staff that take fingerprints
of industry applicants, verifying their identities as part of the
process. The FBI also informed us that it suggests using law
enforcement or other trained personnel to take fingerprints. SEC and
NYSE also said that many reputable businesses provide fingerprinting
services and that SRO member firms could contract with these
businesses.
In a 1996 CFTC review of NFA's registration fitness program, CFTC
recommended that NFA conduct a review to determine the feasibility of
adopting controls to ensure that the fingerprints submitted for
criminal history checks belonged to the applicant. NFA found that a
number of obstacles stood in the way of establishing an effective
program to verify fingerprints. According to an NFA official, the
agency examined the procedures of the Bureau of Citizenship and
Immigration Services of the Department of Homeland Security (formerly
the Immigration and Naturalization Service) in responding to CFTC's
recommendation. On the basis of this examination, NFA concluded that it
would not be cost-effective to replicate the bureau's procedures. For
example, unlike NFA, the bureau has fingerprinting sites throughout the
country with trained employees to take fingerprints.[Footnote 19] As
part of its review, NFA considered requiring an attestation form, which
would include the fingerprinter's name and address and the document
used to verify the applicant's identity. Ultimately, however, NFA
concluded that such a form could be subject to forgery and would not
provide assurance that the fingerprints belonged to the applicant. CFTC
accepted NFA's conclusions.
NYSE and NFA officials described other obstacles to establishing
controls over fingerprinting. They explained that space limitations on
the FBI fingerprint card made it difficult to identify the person
taking the fingerprints. Further, they said that the card provided
space for the fingerprinter's signature, which is often illegible, but
not for the fingerprinter's printed name or the name of another contact
who could verify information related to the fingerprints. NYSE
officials also said that the FBI could adjust its fingerprint card so
that it required more complete contact information for the person
taking the fingerprints. An NFA official also told us that because some
SROs process registration applications both nationally and
internationally, these SROs would not be able to establish enforceable
rules regarding who should take fingerprints.
We did not determine the extent to which individuals with a criminal
history could submit someone else's fingerprints and thus enter the
securities or futures industries undetected. However, SEC and CFTC
officials said that the SROs' fingerprinting processes are vulnerable
to such a practice because of the lack of controls for preventing
applicants from using someone else's fingerprints as their own. SRO
officials said that existing systems were reasonably designed to
prevent fraud but were not foolproof, adding that the potential cost of
imposing any unduly restrictive requirements was a concern. Some SRO
officials said that to the extent they are needed, SEC and CFTC should
establish industrywide standards. NFA officials said that since
weaknesses in fingerprinting procedures apply equally to the securities
and futures industries, SEC and CFTC should establish comparable
requirements to ensure that one industry is not at a disadvantage to
the other. NYSE officials said that SEC rulemaking would be the most
appropriate method for changes to fingerprinting procedures in the
securities industry.
We Calculated Collection Rates in Two Different Ways to Provide a More
Complete Picture of Collection Efforts:
To provide a more complete picture of efforts by securities and futures
regulators to collect fines, we calculated the collection rates in two
different ways. The collection rates for closed cases (cases with a
final judgment order for which all collection actions were completed)
for SEC,[Footnote 20]CFTC, and the SROs from January 1997 to August
2002 showed that the regulators collected most of the fines imposed.
Broadening the analysis to include open cases (cases with a final
judgment order that remained open while collection efforts continued)
had the greatest impact on SEC's and CFTC's collection rates because of
a few large uncollected fines. Our analysis of the collection rates
highlights a theme introduced in an earlier report that the collection
rate alone may not be a valid measure of the effectiveness of
collection efforts, because collections can be influenced by factors
that are outside regulators' control.[Footnote 21]
SEC, CFTC, and the SROs Collected Almost All Fines in Closed Cases:
SEC, CFTC, and the SROs collected between 75 and 100 percent of all the
fines imposed in closed cases. For these cases, collection efforts had
ceased either because the fines had been collected in full or in part
or were unlikely to be collected and thus had been written off as bad
debts. As shown in table 1, SEC and CFTC collected about 94 and 99
percent, respectively, of the total dollars levied in cases closed from
January 1997 through August 2002--the period immediately following the
one covered in our 1998 fines report. These amounts represent an 11 and
18 percentage point increase, respectively, over the rates presented in
the 1998 report, which covered the 1992-96 period. CFTC wrote off fewer
fines as uncollectible in the more recent period, and almost all of its
collected fines were paid in full.
Table 1: Collection Rates for Fines Levied on Closed Cases for 1997-
August 2002 and 1992-96:
Agencies and securities and futures SROs: SEC; Total fines on closed
cases for 1997-August 2002: Amount levied: $186,880,769; Total fines on
closed cases for 1997-August 2002: Amount collected: $175,446,541;
Total fines on closed cases for 1997-August 2002: Percentage collected:
94%; Total fines on closed cases for 1992-96: Percentage
collected: 83%.
Agencies and securities and futures SROs: CFTC; Total fines on closed
cases for 1997-August 2002: Amount levied: 163,230,782; Total fines on
closed cases for 1997-August 2002: Amount collected: 161,228,782; Total
fines on closed cases for 1997-August 2002: Percentage collected: 99;
Total fines on closed cases for 1992-96: Percentage collected:
81.
Agencies and securities and futures SROs: American Stock Exchange;
Total fines on closed cases for 1997-August 2002: Amount levied:
2,406,307; Total fines on closed cases for 1997-August 2002: Amount
collected: 2,286,307; Total fines on closed cases for 1997-August 2002:
Percentage collected: 95; Total fines on closed cases for
1992-96: Percentage collected: 75.
Agencies and securities and futures SROs: Chicago Board Options
Exchange; Total fines on closed cases for 1997-August 2002: Amount
levied: 3,153,744; Total fines on closed cases for 1997-August 2002:
Amount collected: 3,109,994; Total fines on closed cases for 1997-
August 2002: Percentage collected: 99; Total fines on closed
cases for 1992-96: Percentage collected: 95.
Agencies and securities and futures SROs: Chicago Board of Trade; Total
fines on closed cases for 1997-August 2002: Amount levied: 3,471,600;
Total fines on closed cases for 1997-August 2002: Amount collected:
3,313,100; Total fines on closed cases for 1997-August 2002: Percentage
collected: 95; Total fines on closed cases for 1992-96:
Percentage collected: 54.
Agencies and securities and futures SROs: Chicago Mercantile Exchange;
Total fines on closed cases for 1997-August 2002: Amount levied:
3,001,000; Total fines on closed cases for 1997-August 2002: Amount
collected: 2,915,000; Total fines on closed cases for 1997-August 2002:
Percentage collected: 97; Total fines on closed cases for
1992-96: Percentage collected: 85.
Agencies and securities and futures SROs: Chicago Stock Exchange; Total
fines on closed cases for 1997-August 2002: Amount levied: 257,500;
Total fines on closed cases for 1997-August 2002: Amount collected:
257,500; Total fines on closed cases for 1997-August 2002: Percentage
collected: 100; Total fines on closed cases for 1992-96:
Percentage collected: 100.
Agencies and securities and futures SROs: NASD; Total fines on closed
cases for 1997-August 2002: Amount levied: 135,401,570[A]; Total fines
on closed cases for 1997-August 2002: Amount collected: 129,027,116;
Total fines on closed cases for 1997-August 2002: Percentage collected:
95; Total fines on closed cases for 1992-96: Percentage
collected: 24[B].
Agencies and securities and futures SROs: NFA; Total fines on closed
cases for 1997-August 2002: Amount levied: 3,449,500; Total fines on
closed cases for 1997-August 2002: Amount collected: 2,569,975; Total
fines on closed cases for 1997-August 2002: Percentage collected: 75;
Total fines on closed cases for 1992-96: Percentage collected:
27.
Agencies and securities and futures SROs: New York Mercantile Exchange;
Total fines on closed cases for 1997-August 2002: Amount levied:
1,163,294; Total fines on closed cases for 1997-August 2002: Amount
collected: 1,163,294; Total fines on closed cases for 1997-August 2002:
Percentage collected: 100; Total fines on closed cases for
1992-96: Percentage collected: Not Available.
Agencies and securities and futures SROs: NYSE; Total fines on closed
cases for 1997-August 2002: Amount levied: 19,150,667; Total fines on
closed cases for 1997-August 2002: Amount collected: 19,145,667; Total
fines on closed cases for 1997-August 2002: Percentage collected: 100;
Total fines on closed cases for 1992-96: Percentage collected:
98.
Source: GAO analysis of SEC, CFTC, and SRO data, except NASD, which
calculated its own rates.
Note: Percentages are rounded to the nearest whole number.
[A] NASD data include cases invoiced from 1997 through 2002.
[B] Calculations may include cases with payment plans, which we were
unable to exclude because of the design of NASD's system.
[End of table]
The eight securities and futures SROs for which data were available had
the same or higher collection rates on closed cases in the most recent
period compared with the earlier period. The Chicago Board of Trade's
collection rate showed significant improvement, increasing from 54 to
95 percent of the total dollars levied. Its collection rate for the
1992-96 period was heavily influenced by two large uncollected fines
totaling $2.25 million. Excluding those two cases, the rate for this
period would have been about 99 percent rather than 54 percent--much
closer to the 95 percent rate for the more recent period. NASD's and
NFA's rates also showed significant improvement, increasing 71 and 48
percentage points, respectively, over the rates presented in the 1998
report, which covered the 1992-96 period. However, NASD's and NFA's
collection rates improved because, as we have noted, the regulators
stopped routinely assessing fines when barring individuals from the
securities and futures industry. These fines had been the most
difficult to collect, because barred individuals had little incentive
to pay them.
Including Open Cases in the Calculations Had the Greatest Impact on
SEC's and CFTC's Collection Rates Because of a Few Large Fines:
SEC's and CFTC's collection rates were affected more than the SROs'
rates when we added open cases to our calculations. As shown in table
2, SEC collected about 40 percent of the total dollars levied in all
cases, open and closed, from January 1997 through August 2002--54
percentage points less than its rate for closed cases.
Table 2: Collection Rates for Fines Levied on Open and Closed Cases and
Closed Cases for 1997-August 2002:
Agencies and securities and futures SROs: SEC; Total fines on open and
closed cases for 1997-August 2002: Amount levied: $480,375,353; Total
fines on open and closed cases for 1997-August 2002: Amount collected:
$190,103,396; Total fines on open and closed cases for 1997-August
2002: Percentage collected: 40%; Total fines on closed cases
for 1997-August 2002: Percentage collected: 94%.
Agencies and securities and futures SROs: CFTC; Total fines on open and
closed cases for 1997-August 2002: Amount levied: 357,832,773; Total
fines on open and closed cases for 1997-August 2002: Amount collected:
161,269,894; Total fines on open and closed cases for 1997-August
2002: Percentage collected: 45; Total fines on closed cases
for 1997-August 2002: Percentage collected: 99.
Agencies and securities and futures SROs: American Stock Exchange;
Total fines on open and closed cases for 1997-August 2002: Amount
levied: 2,631,819; Total fines on open and closed cases for 1997-August
2002: Amount collected: 2,286,307; Total fines on open and closed
cases for 1997-August 2002: Percentage collected: 87; Total
fines on closed cases for 1997-August 2002: Percentage collected: 95.
Agencies and securities and futures SROs: Chicago Board Options
Exchange; Total fines on open and closed cases for 1997-August 2002:
Amount levied: 3,168,744; Total fines on open and closed cases for
1997-August 2002: Amount collected: 3,113,809; Total fines on open and
closed cases for 1997-August 2002: Percentage collected: 98;
Total fines on closed cases for 1997-August 2002: Percentage collected:
99.
Agencies and securities and futures SROs: Chicago Board of Trade; Total
fines on open and closed cases for 1997-August 2002: Amount levied:
3,549,350; Total fines on open and closed cases for 1997-August 2002:
Amount collected: 3,321,600; Total fines on open and closed cases for
1997-August 2002: Percentage collected: 94; Total fines on
closed cases for 1997-August 2002: Percentage collected: 95.
Agencies and securities and futures SROs: Chicago Mercantile Exchange;
Total fines on open and closed cases for 1997-August 2002: Amount
levied: 3,073,585; Total fines on open and closed cases for 1997-August
2002: Amount collected: 2,962,585; Total fines on open and closed
cases for 1997-August 2002: Percentage collected: 96; Total
fines on closed cases for 1997-August 2002: Percentage collected: 97.
Agencies and securities and futures SROs: Chicago Stock Exchange; Total
fines on open and closed cases for 1997-August 2002: Amount levied:
284,500; Total fines on open and closed cases for 1997-August 2002:
Amount collected: 257,500; Total fines on open and closed cases for
1997-August 2002: Percentage collected: 91; Total fines on
closed cases for 1997-August 2002: Percentage collected: 100.
Agencies and securities and futures SROs: NASD; Total fines on open and
closed cases for 1997-August 2002: Amount levied: 210,568,908[A];
Total fines on open and closed cases for 1997-August 2002: Amount
collected: 139,607,518; Total fines on open and closed cases for 1997-
August 2002: Percentage collected: 66; Total fines on closed
cases for 1997-August 2002: Percentage collected: 95.
Agencies and securities and futures SROs: NFA; Total fines on open and
closed cases for 1997-August 2002: Amount levied: 4,021,250; Total
fines on open and closed cases for 1997-August 2002: Amount collected:
2,676,725; Total fines on open and closed cases for 1997-August 2002:
Percentage collected: 67; Total fines on closed cases for
1997-August 2002: Percentage collected: 75.
Agencies and securities and futures SROs: New York Mercantile Exchange;
Total fines on open and closed cases for 1997-August 2002: Amount
levied: 1,422,294; Total fines on open and closed cases for 1997-August
2002: Amount collected: 1,177,294; Total fines on open and closed
cases for 1997-August 2002: Percentage collected: 83; Total
fines on closed cases for 1997-August 2002: Percentage collected: 100.
Agencies and securities and futures SROs: NYSE; Total fines on open and
closed cases for 1997-August 2002: Amount levied: 19,151,667; Total
fines on open and closed cases for 1997-August 2002: Amount collected:
19,146,667; Total fines on open and closed cases for 1997-August 2002:
Percentage collected: 100; Total fines on closed cases for
1997-August 2002: Percentage collected: 100.
Source: GAO analysis of SEC, CFTC, and SRO data, except NASD, which
claculated its own rates.
Note: Percentages are rounded to the nearest whole number.
[A] NASD data include cases invoiced from 1997 through 2002.
[End of table]
We examined SEC's collection rates by year and found that the rates
varied greatly over time because of a few large fines. (See appendix
III for the collection rates of the securities regulators for open and
closed cases by calendar year.) For example, in 1999 SEC collected 26
percent of the total fines levied in that year, but one uncollected
fine of $123 million significantly lowered the rate. Had SEC been able
to collect this one fine, its collection rate for 1999 would have been
89 percent (fig. 1). Also, in 2002, SEC collected 61 percent of all
fines, but approximately half came from two payments made by two
violators. Excluding these payments, the reported collection rate for
2002 would have been about 30 percent (fig. 1).
Figure 1: SEC's Actual Collection Rates for Open and Closed Cases,
1997-August 2002, and Adjusted Collection Rates for Selected Years:
[See PDF for image]
[End of figure]
To help control for the influence of large dollar amounts on SEC's
collection rates, we analyzed the number of cases paid in full and
found that SEC had collected the full amount of the fine in the
majority of cases it levied. For the entire period from 1997 through
2001, 72 percent of the fines levied had been paid in full. In 2002, 55
percent of the fines levied were paid in full. The rate may be lower
for 2002 because SEC has had less time--approximately 4 months--to
collect on cases levied through August 2002.
CFTC collected about 45 percent of the total dollar amount of the fines
it levied over the same period. Like SEC's rate, CFTC's was heavily
influenced by a few large fines. A closer review of CFTC's annual rates
from January 1997 through August 2002 showed that the regulator
collected between 2 and 90 percent of the total fines levied. (See
appendix IV for the collection rates of the futures regulators for open
and closed cases by calendar year.) But in 2000, when CFTC's collection
rate was just 2 percent, our calculations included a single uncollected
fine of $90 million. Had CFTC been able to collect this one fine, its
collection rate would have been 95 percent (fig. 2). Also, in 1998,
when CFTC collected 90 percent of the total dollar amount levied
through August 2002, one payment for $125 million heavily skewed the
rate (fig. 2). Without this one payment and fine, CFTC's reported
collection rate would have been approximately 7 percent (fig. 2).
To help control for the influence that large dollar amounts can have on
the rate, we again analyzed the number of cases paid in full. Over the
entire period of our study, from 1997 through August 2002, CFTC had
collected the full amount in slightly more than 50 percent of the cases
it levied. Although CFTC's collection rates over the entire period of
our study were relatively low, the agency was actively pursuing
collections on all its uncollected cases, primarily through the
Departments of Treasury and Justice. CFTC's Chief of Cooperative
Enforcement told us that the agency would continue to levy large fines
when appropriate, even though large uncollectible amounts could reduce
the agency's collection rate. He said that levying fines that are
commensurate with the related wrongdoing sends a message to the public
that CFTC is serious about enforcing its statutes.
Figure 2: CFTC's Actual Collection Rates for Open and Closed Cases,
1997-August 2002, and Adjusted Collection Rates for Selected Years:
[See PDF for image]
[End of figure]
The collection rates for the nine securities and futures SROs were
comparable in both sets of calculations (see table 2). When we included
open cases in our calculations, these SROs' collection rates decreased
slightly, with all but two (NASD's and the New York Mercantile
Exchange's) declining between 1 and 9 percentage points. One reason for
the relatively small decline was that these SROs generally had fewer
and smaller uncollected fines, suggesting that they had been more
successful in collecting on all cases than SEC and CFTC. According to
an NFA official, one reason that the SROs that operate markets had
higher collection rates was that in their role as exchanges they could
sell a member's "seat," or membership, to pay off the fine, giving
members an incentive to pay their fines. Because other regulators do
not have this type of leverage, their rates are typically lower.
NASD's collection rate for closed cases was 95 percent and its rate for
open and closed cases was 66 percent--a change of 29 percentage points.
NASD's rate for open and closed cases[Footnote 22] was affected by low
collections in 1997 and 1998. As a result, the rates did not
necessarily reflect the effects of the changes NASD made to its fine
imposition practices in October 1999. As indicated in figure 3, NASD's
annual collection rates generally increased from January 1997 through
December 2002. In 1997, NASD collected 26 percent of the total dollars
invoiced. In 2002, it collected 96 percent--a 70 percentage point
increase over 6 years. As we reported earlier, one of the primary
reasons for the increases was a change in the way NASD imposes fines.
Specifically, NASD stopped routinely assessing fines when barring an
individual from the industry, reducing the number of fines it invoiced
each year and improving its overall collection rate. Also, in
calculating its rate, NASD excluded about $137 million in fines that
would be due and payable only if the fined individuals were to reenter
the securities industry. The New York Mercantile Exchange's collection
rate for open and closed cases was 83 percent--a decline of 17
percentage points from its closed case rate. When we excluded one
uncollected $200,000 fine, the collection rate for open and closed
cases declined by only 4 percentage points.
Figure 3: NASD's Collection Rates for Open and Closed Cases, 1997-2002:
[See PDF for image]
[End of figure]
Collection Rates Can Be Influenced by Factors That Are Beyond
Regulators' Control:
Collection rates are the most widely available--and in some cases the
only--measure of regulators' success in collecting fines for violations
of securities and futures laws. But external factors over which
regulators have no control can skew these rates. Nonetheless, examining
the rates and the factors influencing them can be a starting point for
obtaining an understanding of regulators' performance and changes to
it. Also, in exploring these rates regulators can identify cases that
account for a significant share of uncollected debts and decide whether
continuing with collection efforts for these cases is worthwhile.
Primary among the external factors affecting collection rates are the
large fines and payments that we have been discussing. Just one or two
extremely large uncollected fines can lower a collection rate
significantly. Similarly, one or two large payments on such fines can
raise a collection rate. Other external factors that can influence
collection rates include violators' ability to pay and the size of the
fines themselves. For example, an SEC official said that some violators
who have been barred from the industry cannot pay their fines because
their earning capacity has been limited. In discussing CFTC's
relatively low collection rate, an agency official told us that the
courts, in an attempt to match the gravity of the sanction to the
offense, have sometimes imposed fines that are more than what an agency
might realistically be able to collect. This official said that in one
case, a court fined a company $90 million--triple the monetary gain
from its illegal activities. He also said that in another case, a court
assessed fines totaling $4 million against four violators, although
CFTC had sought $660,000.
Conclusions:
Since our last report, SEC and CFTC have made material improvements to
their policies and procedures for collecting delinquent fines that, if
followed, should improve collections on debts owed to the federal
government. Nonetheless, SEC lacks a formal strategy for collecting on
its pre-guidelines delinquent debt. Although the probability of
collecting monies ordered on older cases diminishes over time, some
portion of these pre-guidelines cases may have collection potential
that is being overlooked. Developing a formal strategy that prioritizes
pre-guidelines cases based on their collection potential and
establishes time frames for their referral to FMS and TOP would improve
the likelihood of collecting some portion of the debt associated with
these cases, which could be more than $1 billion.
The success of SEC's efforts to collect this debt will be closely
related to the timely replacement of DPTS. Phase one of SEC's action
plan includes a tentative deadline for replacing DPTS by the end of
fiscal year 2003. At that time, SEC will be able to identify all cases
eligible for referral to FMS and TOP and develop a strategy for making
these referrals. SEC has not yet set a milestone for completing the
requirements analysis for phase two of its action plan or established a
date to fully implement the computer system that will integrate SEC's
now separate databases. We are concerned that, without target dates,
progress in implementing phase two could be slowed, affecting SEC's
ability to more efficiently address all cases that should be referred
to FMS and TOP.
Further, SEC's progress has been slow in the 5 years since we
recommended that the agency analyze industrywide information on SRO
disciplinary program sanctions, in part because technological problems
have hindered its ability to collect sufficient data to perform the
analyses. SEC has not yet completed its first analysis and has no
schedule for implementing the new disciplinary database intended to
replace its current database. Finally, while controls were in place
that should keep barred individuals from being readmitted to the
securities and futures industries, neither the related statutes, SEC,
or CFTC require the SROs to ensure that the fingerprints sent to the
FBI for use in criminal history checks belong to the applicants who
submit them. In the absence of such a requirement, the SROs lacked
related controls that could help prevent inappropriate admissions to
the securities and futures industries. SRO involvement in weighing
alternatives for addressing fingerprinting requirements for the
securities and futures industries would ensure that concerns about
cost-effective solutions are appropriately considered and addressed.
Recommendations:
We recommend that the SEC Chairman:
* develop a formal strategy for referring pre-guidelines cases to FMS
and TOP that prioritizes cases based on collectibility and establishes
implementation time frames;
* take the necessary steps to implement the action plan to replace DPTS
by (1) meeting the fiscal year 2003 milestone for implementing phase
one of the plan, (2) setting a milestone for completing the
requirements analysis for phase two of the plan, and (3) establishing
and meeting the implementation date for phase two; and:
* analyze the data that have been collected on the SROs' disciplinary
programs, address any findings that result, and establish a time frame
for implementing the new disciplinary database that is to replace the
current database.
We also recommend that SEC and CFTC work together and with the
securities and futures SROs to address weaknesses in controls over
fingerprinting procedures that could allow inappropriate persons to be
admitted to the securities and futures industries.
Agency Comments and Our Evaluation:
We requested comments on a draft of this report from the Chairmen, or
their designees, of SEC and CFTC. SEC officials provided written
comments, which are reprinted in appendix II. CFTC provided oral
comments. In general, both agencies agreed with the facts we presented
and also agreed to implement the recommendations we made. SEC
emphasized that it expected to meet its milestone for implementing a
replacement database for DPTS by the end of fiscal year 2003 and said
that once the new system was in place, the agency would be able to
identify delinquent debts that had not been referred to FMS and TOP and
set deadlines for making referrals. While SEC said that further
milestones for phase two of its action plan will be set at some time in
the future, it made no reference to establishing a time frame for
implementing its new disciplinary database. We believe that SEC needs
to move quickly to set time frames for both of these projects, because
in the absence of dates on which to focus, progress may be delayed. SEC
also said that agency staff will contact CFTC to review the possibility
of adopting new industrywide fingerprinting standards, including
procedures to verify the identities of all individuals who are being
fingerprinted. CFTC officials told us that they would work with SEC and
the SROs to address our recommendation. Finally, we also received
technical comments from SEC and CFTC that we incorporated into the
report, as appropriate.
:
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies of this report
to the Chairmen and Ranking Minority Members of the Senate Committee on
Banking, Housing, and Urban Affairs and its Subcommittee on Securities
and Investment; the Chairman, House Committee on Energy and Commerce;
the Chairman, House Committee on Financial Services and its
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises; and other interested congressional committees. We will
send copies to the Chairman of SEC, the Chairman of CFTC, and other
interested parties. We also will make copies available to others upon
request. In addition, the report will be available at no charge on the
GAO Web site http://www.gao.gov.
If you have any further questions, please call me at (202) 512-8678,
dagostinod@gao.gov, or Cecile Trop at (312) 220-7705, tropc@gao.gov.
Additional GAO contacts and staff acknowledgments are listed in
appendix V.
Signed by:
Davi M. D'Agostino Director, Financial Markets and Community
Investment:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
To evaluate SEC's and CFTC's actions to improve their collection
programs, we assessed their responses to our 2001 recommendations that
(1) SEC take steps to ensure that regulations allowing SEC fines to be
submitted to TOP are adopted; (2) SEC continue to work with FMS to
ensure that compromise offers presented by FMS are approved in a timely
manner; and (3) CFTC take steps to ensure that delinquent fines are
referred promptly to FMS, including creating formal procedures that
address both sending debts to FMS within the required time frames and
requiring all of the necessary information from the Division of
Enforcement on these debts.
To assess steps SEC took to ensure that regulations allowing SEC fines
to be submitted to TOP were adopted, we reviewed SEC's final
regulations and related procedures and collection guidelines. To
determine compliance with the new collection guidelines for referring
delinquent cases to TOP, we selected a judgmental sample of 66 post-
guidelines fines and disgorgement cases using DPTS and obtained
information from SEC on the referral status of those cases.[Footnote
23] Of the 66 cases, four were eligible for referral at the time of our
review. We selected cases where judgments or orders were entered after
SEC's guidelines took effect, because staff told us they were tracking
the referral of those cases. To determine the number, dollar amount
owing, and age of the delinquent cases at the agency, we identified all
cases with ongoing collections, using DPTS data as of January 31, 2003,
and calculated the age from the judgment date (which in the absence of
better data, we used as a rough proxy for the delinquency date) to
January 31, 2003. Since DPTS was unreliable, the aging analysis
provides only a rough estimate of the total number and age of cases. We
interviewed SEC and FMS officials to obtain their views on SEC's
progress in referring cases to FMS and TOP and information on any
impediments to this progress.
To assess SEC's efforts to continue to work with FMS to ensure that
compromise offers presented by FMS are approved in a timely manner, we
examined SEC's procedures for processing compromise offers. We obtained
data from SEC on the four compromise offers FMS submitted to SEC
between July 1, 2001, and April 22, 2003, and analyzed the length of
time it took for SEC to respond to the compromise offers. We obtained
and used FMS's data to validate SEC's response time. We also
interviewed SEC and FMS officials to discuss SEC's policies,
procedures, and controls and to obtain information on the agencies'
efforts to work together to ensure the timely approval of offers. We
also obtained FMS's views on SEC's progress in responding to offers.
To assess steps CFTC took to ensure that delinquent fines are promptly
referred to FMS, we reviewed CFTC's collection procedures, which it
calls instructions, to ensure that they included time frames for
referring cases to FMS and provisions for obtaining all necessary
enforcement information. We also reviewed related agency controls. To
assess staff's compliance with the revised procedures, we obtained data
from CFTC on its only four delinquent cases and analyzed the length of
time it took to refer them to FMS. We obtained and used FMS's data to
validate that all of CFTC's cases have been transferred within 180
days. We also interviewed CFTC officials to discuss the agency's
procedures and controls and obtained FMS's views on CFTC's progress in
referring fines.
To assess SEC's and CFTC's efforts to enhance their oversight of the
SROs' sanctioning practices, we assessed their responses to our 1998
and 2001 recommendations that (1) SEC analyze industrywide information
on disciplinary program sanctions, particularly fines, to identify
possible disparities among the SROs and find ways to improve the SROs'
programs; and (2) SEC and CFTC periodically assess the pattern of
readmission applications to ensure that the changes in NASD's and NFA's
fine imposition practices do not result in any unintended consequences,
such as inappropriate readmissions.
To assess the status of SEC's efforts to analyze industrywide
information on SROs' disciplinary program sanctions, we interviewed SEC
officials to discuss the types of analyses planned, any obstacles
encountered, and efforts to overcome those obstacles. To assess both
SEC's and CFTC's efforts to periodically assess the pattern of
readmission applications, we interviewed officials of these agencies to
determine the number of readmission applications from barred
individuals and reviewed documentation that described the controls used
to keep barred applicants from reapplying. We focused our review on
permanent bars and application records since NASD and NFA changed their
fine imposition practices in October 1999 and December 1998,
respectively. To validate both agencies' statements that they had not
reviewed any readmission applications from barred individuals since our
2001 report, we obtained the names of barred individuals from NASD and
NFA and verified that each individual had not applied for readmission.
Specifically, for NASD, we compared the names of over 900 barred
applicants who had not been fined against a list of readmission
applications. We focused on these individuals because of concerns that
individuals who had been barred and not fined might be more willing to
seek readmission than those who had been barred and fined. For NFA, we
researched the histories of 32 barred individuals, using NFA's database
to validate that none of the individuals had applied for readmission.
We examined all barred applicants, including both those who had been
fined and those who had not been, because the data did not allow us to
distinguish between these groups. To ensure that NFA's and NASD's data
were sound, we interviewed agency officials to assess the controls
these agencies had over their data systems, such as their processes for
entering and updating data, safeguards for protecting the data against
unauthorized changes, and any tests conducted to verify the accuracy
and completeness of the data. We found that the data were useable for
our purposes.
To address concerns that surfaced during our review about controls over
the fingerprinting procedures used in criminal history checks, we
interviewed officials at NASD, NFA, NYSE, and the FBI and reviewed laws
and regulations related to fingerprinting. In addition to NYSE, other
SROs that operate markets have agreements with the FBI under which they
may submit fingerprints to the FBI for criminal history checks. We
limited our review to NYSE because it is the largest SRO that operates
a market, and we wanted to determine how another SRO's procedures might
differ from those of NASD and NFA.
To calculate the fines collection rates for SEC, CFTC, and nine
securities and futures SROs for 1997 through 2002 (all years were
calendar years), we focused on these regulators' imposition and
collection of fines through their enforcement and disciplinary
programs. The nine SROs[Footnote 24] included the American Stock
Exchange, the Chicago Board Options Exchange, the Chicago Board of
Trade, the Chicago Mercantile Exchange, the Chicago Stock Exchange,
NASD, NFA, the New York Mercantile Exchange, and NYSE. We excluded
fines for minor rule infringements such as floor conduct, decorum, and
record-keeping violations that normally do not undergo disciplinary
proceedings. The exchanges generally referred to these violations as
"traffic ticket" violations, and they are handled through summary
proceedings and involve smaller fine amounts. We excluded amounts owed
for disgorgement and restitution, except for NASD, because these
sanctions are different from fines in that they are imposed to return
illegally made profits or to restore funds illegally taken from
investors. Due to the way NASD tracked its fines and payments, NASD was
unable to exclude disgorgement amounts from its payment data. We also
excluded fines that were not invoiced, because they would not be due
unless the fined individual sought to reenter the securities industry.
All other fines were factored into the rate, including fines dismissed
in bankruptcy,[Footnote 25] to obtain the most complete view possible
of the regulators' efforts to discipline violators.[Footnote 26]
To calculate annual fines collection rates and composite collection
rates, we obtained and analyzed data from SEC, CFTC, and all SROs,
except NASD, on fines levied from January 1997 through August 2002, and
collected through December 2002. NASD's data include fines invoiced
from 1997 through 2002. We limited our review to fines levied through
August 2002 to allow regulators through December 2002 (4 months) to
attempt collections. We calculated the collection rate in two ways.
First, we calculated the rate by including only closed cases--that is,
cases with a final judgment order for which all collection actions were
completed. This approach is consistent with the one used in our 1998
report.[Footnote 27] Second, to provide a more complete view of
regulators' collection activities, we calculated the rate using all
closed and open cases--that is, cases with a final judgment order for
which collections actions were completed and cases with a final
judgment order that remained open while collection efforts continued.
For cases with a payment plan, we adjusted the levy amount to the
amount owed as of December 31, 2002, because a portion of the original
levied amount was not yet due. We could not do this for SEC or NASD
because agency data did not specify the amount owed as of December 31,
2002. As a result, SEC's and NASD's rate may be understated.
We also used NASD's calculations of its collection rates, because the
design of NASD's financial system did not allow us to calculate these
rates with an acceptable degree of accuracy using the approach we
applied to other SROs. First, according to NASD officials, NASD's
calculations used the date a fine was invoiced instead of the date it
was levied. Fines were typically invoiced between 15 and 45 days after
they were levied. This difference may have had a minor effect,
particularly on the annual collection rates. Second, NASD's collection
rates represent the total amount collected up to December 31, 2002, on
fines invoiced from January 1997 through December 2002 (as opposed to
the August 31, 2002, date for the other SROs). Third, because NASD's
system could not identify cases on a payment plan, NASD's calculations
do not adjust the fine amount to the amount owing as of December 31,
2002, exerting a slight bias toward understating the collection rate.
Fourth, NASD's collection rates (1) include disgorgement because NASD
was not able to separate such amounts from its payment data and (2)
exclude fines that were levied but not invoiced because such fines were
not due unless the fined individual sought to reenter the securities
industry.
We also assessed the reliability of the data provided by the 11
regulators by asking officials about agency controls for collecting
fines and payment data, supervising data entry, safeguarding the data
from unauthorized changes, and processing that data. We also asked
whether they performed data verification and testing. Although the
controls varied across the agencies, each one demonstrated a basic
level of system and application controls. We also performed basic tests
of the integrity of the data we received from some of the regulators
that provided us with individual fines data. We concluded that the data
from all of the organizations, except SEC, was sufficiently reliable
for the purposes of this report.
The number of errors we and SEC found in DPTS during the course of our
work and the findings of the January 3, 2003, report to the SEC
Inspector General that the data in DPTS were incomplete and inaccurate
led us to conclude that DPTS fines data remain insufficiently reliable
to calculate an accurate collection rate. While we cannot be sure of
the magnitude or direction of the errors in the DPTS fines data, we are
nevertheless reporting the number and dollar value of cases eligible
for referral to FMS and TOP, the age of this debt, and SEC collection
rates as the best estimates possible at this time.
We did our work in accordance with generally accepted government
auditing standards between August 15, 2002, and July 1, 2003. We
performed our work in Boston, Mass.; Chicago, Ill.; New York, N.Y.; and
Washington, D.C.
[End of section]
Appendix II: Comments from the Securities and Exchange Commission:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C.
20549:
DIVISION OF ENFORCEMENT:
July 1, 2003:
Ms. Davi M. D'Agostino Director:
Financial Markets and Community Investment U.S. General Accounting
Office:
441 G Street, N.W. Washington, D.C. 20548:
Re: Draft Report Entitled "Collection Programs Are Improving, but
Further Steps Are Warranted":
Dear Ms. D'Agostino:
Thank you for providing us with the opportunity to review and comment
on your draft report addressing the Securities and Exchange
Commission's collection of fines. The report discusses the SEC's use of
collection services provided by Treasury's:
Financial Management Service; the use of collection guidelines and the
handling of pre-guideline cases; and the development and timeframe for
implementation of a new system for tracking fines owed to the
government. The report also discusses the SEC's analysis of
disciplinary sanctions imposed by self-regulatory organizations, and
makes a recommendation for improving controls over the fingerprinting
of industry applicants.
As the report recognizes, the SEC has implemented regulations,
procedures, collections guidelines, and controls for using the Treasury
Offset Program (TOP), which applies payments the federal government
owes to debtors to their outstanding debts. In addition, the SEC is in
the process of replacing its current system for tracking amounts
ordered and paid in Commission enforcement actions, with a new system
that will track amounts ordered, paid and disbursed and that is
integrated with the Division of Enforcement's current case tracking
system.
Our specific comments as to the recommendations in the draft report
follow:
1. Developing a Strategy for Referral of Pre-Guidelines Cases:
The draft report recommends that the SEC develop a strategy for
referring pre-guidelines cases to FMS and TOP that prioritizes cases
based on collectibility and establishes implementation time frames. The
Division of Enforcement's collection guidelines require recording in
the collection system, and set out a timeline for (i)
sending the notices required for TOP, (ii) making determinations as to
collection through additional litigation, and (iii) referring debts to
FMS. Those guidelines are necessarily forward looking. The Division's
policy continues to be that all disgorgement and civil penalties that
remain unpaid for more than 180 days, and that are not being pursued in
litigation, must be referred to FMS for collection. In the future, the
replacement database will ensure that we can identify outstanding and
delinquent debts that have not yet been referred to FMS and TOP. At
that time, we will be in a position to set deadlines for mailing TOP
notices and making referrals.
II. Meet Milestone for Replacement Database, and Establish Phase Two
Milestones:
The draft report recommends that the SEC take necessary steps to
implement plans for replacing the existing Disgorgement and Penalties
Tracking System by (i) meeting the fiscal year 2003 milestone for
implementing phase one of the action plan; (ii) setting a milestone for
completing the requirements analysis for phase two of the plan; and
(iii) establishing and meeting the implementation date for phase two.
We are working aggressively to meet the milestone for implementation of
a replacement database, and to date we are on track for meeting that
milestone. We recognize the critical importance of this replacement
database, both to our preparation of auditable financial statements and
to collection of delinquent debts. The database will provide
information on amounts ordered, paid and disbursed in our open cases
and will, we anticipate, provide comprehensive, reliable data necessary
to track these debts.
What your report calls phase two of our plan is a long anticipated
comprehensive upgrade of the Division's current case tracking system.
Again, we emphasize that we intend that the debt tracking system to be
completed by the end of fiscal 2003 will meet current needs for
tracking these debts; phase two is not intended to make major changes
to the new system now being put in place. We anticipate that one of the
enhancements of the new system will be to integrate a number of now
separate databases into the case tracking system, including the now
separate databases devoted to tracking collections. As your report
indicates, the requirements phase of this project is scheduled to begin
in fiscal 2004. Because of the scope of this project (of which debt
tracking is only a part), further milestones have not been set, but
will be set in the future.
III. Analyze Data from SRO Disciplinary Programs:
The draft report recommends that the SEC analyze the data that has been
collected on the SRO's disciplinary programs, address any findings that
result, and establish time frames for implementing the electronic
system that is to replace the current database system. As always,
Commission staff review and analyze SRO disciplinary sanctions and
fines during inspections of each of the SRO's disciplinary programs.
The staff, however, is inputting the SRO Rule 19d-1 disciplinary data
into the disciplinary database. Once the database contains sufficient
disciplinary information, the staff will analyze the data and address
any findings that result. The staff also is working to develop a new
enhanced disciplinary database that will replace the existing database.
The draft report also recommends that the SEC, CFTC and the self
regulatory organizations work together to address weaknesses in
fingerprinting procedures. SEC staff in the Division of Market
Regulation will contact the CFTC to review the possibility of adopting
new industry-wide fingerprint standards, including procedures to verify
that each individual who is being fingerprinted is the individual named
on the fingerprint card.
We appreciate the care and thought that is evident throughout your
report and recommendations. If we can be of further assistance, please
contact me at (202) 942-4540 or Joan McKown at (202) 942-4530.
Yours truly,
Stephen M. Cutler
Director:
Signed by Stephen M. Cutler:
[End of section]
Appendix III: Securities Regulators' Collection Rates for Open and
Closed Cases by Calendar Year:
We calculated the collection rates using data from SEC and the SROs,
except for NASD, which calculated its own rates (see appendix I for
further details). The rates are based on fines levied from January 1997
through August 2002 and include all amounts collected on those fines
through December 2002, except for NASD. The fines data listed for each
year represent collection activity on the fines levied in each of those
years. Percentages were rounded to the nearest whole number.
Table 3: SEC's Collection Rates:
Year: 1997; Number of fines levied: 233; Percentage of fines paid in
full: 80%; Amount levied: $56,302,014; Amount collected: $18,360,390;
Percentage of dollars collected: 33%.
Year: 1998; Number of fines levied: 291; Percentage of fines paid in
full: 72; Amount levied: 47,688,706; Amount collected: 26,530,896;
Percentage of dollars collected: 56.
Year: 1999; Number of fines levied: 444; Percentage of fines paid in
full: 76; Amount levied: 195,173,240; Amount collected: 50,111,404;
Percentage of dollars collected: 26.
Year: 2000; Number of fines levied: 347; Percentage of fines paid in
full: 74; Amount levied: 38,390,286; Amount collected: 21,188,325;
Percentage of dollars collected: 55.
Year: 2001; Number of fines levied: 300; Percentage of fines paid in
full: 72; Amount levied: 61,205,291; Amount collected: 24,108,247;
Percentage of dollars collected: 39.
Year: 2002; Number of fines levied: 215; Percentage of fines paid in
full: 55; Amount levied: 81,615,816; Amount collected: 49,804,134;
Percentage of dollars collected: 61.
Year: Total; Number of fines levied: 1,830; Percentage of fines paid in
full: 72%; Amount levied: $480,375,353; Amount collected: $190,103,396;
Percentage of dollars collected: 40%.
Source: GAO analysis of SEC's data.
[End of table]
Table 4: The American Stock Exchange's Collection Rates:
Year: 1997; Number of fines levied: 17; Percentage of fines paid in
full: 88%; Amount levied: $310,000; Amount collected: $237,500;
Percentage of dollars collected: 77%.
Year: 1998; Number of fines levied: 13; Percentage of fines paid in
full: 85; Amount levied: 341,500; Amount collected: 309,640; Percentage
of dollars collected: 91.
Year: 1999; Number of fines levied: 8; Percentage of fines paid in
full: 63; Amount levied: 355,000; Amount collected: 260,000; Percentage
of dollars collected: 73.
Year: 2000; Number of fines levied: 5; Percentage of fines paid in
full: 80; Amount levied: 217,243; Amount collected: 204,167; Percentage
of dollars collected: 94.
Year: 2001; Number of fines levied: 8; Percentage of fines paid in
full: 88; Amount levied: 1,300,000; Amount collected: 1,200,000;
Percentage of dollars collected: 92.
Year: 2002; Number of fines levied: 7; Percentage of fines paid in
full: 71; Amount levied: 108,076; Amount collected: 75,000; Percentage
of dollars collected: 69.
Year: Total; Number of fines levied: 58; Percentage of fines paid in
full: 81%; Amount levied: $2,631,819; Amount collected: $2,286,307;
Percentage of dollars collected: 87%.
Source: GAO analysis of the American Stock Exchange's data.
[End of table]
Table 5: The Chicago Board Options Exchange's Collection Rates:
Year: 1997; Number of fines levied: 70; Percentage of fines paid in
full: 99%; Amount levied: $1,048,401; Amount collected: $1,044,901;
Percentage of dollars collected: 100%.
Year: 1998; Number of fines levied: 38; Percentage of fines paid in
full: 97; Amount levied: 463,278; Amount collected: 453,278; Percentage
of dollars collected: 98.
Year: 1999; Number of fines levied: 50; Percentage of fines paid in
full: 96; Amount levied: 569,165; Amount collected: 561,565; Percentage
of dollars collected: 99.
Year: 2000; Number of fines levied: 38; Percentage of fines paid in
full: 92; Amount levied: 659,400; Amount collected: 633,065; Percentage
of dollars collected: 96.
Year: 2001; Number of fines levied: 16; Percentage of fines paid in
full: 94; Amount levied: 340,000; Amount collected: 332,500; Percentage
of dollars collected: 98.
Year: 2002; Number of fines levied: 7; Percentage of fines paid in
full: 100; Amount levied: 88,500; Amount collected: 88,500; Percentage
of dollars collected: 100.
Year: Total; Number of fines levied: 219; Percentage of fines paid in
full: 96%; Amount levied: $3,168,744; Amount collected: $3,113,809;
Percentage of dollars collected: 98%.
Source: GAO analysis of the Chicago Board Options Exchange's data.
[End of table]
Table 6: The Chicago Stock Exchange's Collection Rates:
Year: 1997; Number of fines levied: 3; Percentage of fines paid in
full: 100%; Amount levied: $11,000; Amount collected: $11,000;
Percentage of dollars collected: 100%.
Year: 1998; Number of fines levied: 6; Percentage of fines paid in
full: 100; Amount levied: 39,500; Amount collected: 39,500; Percentage
of dollars collected: 100.
Year: 1999; Number of fines levied: 8; Percentage of fines paid in
full: 88; Amount levied: 125,000; Amount collected: 100,000; Percentage
of dollars collected: 80.
Year: 2000; Number of fines levied: 6; Percentage of fines paid in
full: 67; Amount levied: 87,000; Amount collected: 85,000; Percentage
of dollars collected: 98.
Year: 2001; Number of fines levied: 1; Percentage of fines paid in
full: 100; Amount levied: 20,000; Amount collected: 20,000; Percentage
of dollars collected: 100.
Year: 2002; Number of fines levied: 1; Percentage of fines paid in
full: 100; Amount levied: 2,000; Amount collected: 2,000; Percentage of
dollars collected: 100.
Year: Total; Number of fines levied: 25; Percentage of fines paid in
full: 88%; Amount levied: $284,500; Amount collected: $257,500;
Percentage of dollars collected: 91%.
Source: GAO analysis of the Chicago Stock Exchange's data.
[End of table]
Table 7: NASD's Collection Rates:
Year: 1997; Number of fines levied: 881; Percentage of fines paid in
full: 64%; Amount levied[A]: $38,782,000; Amount collected:
$10,189,309; Percentage of dollars collected: 26%.
Year: 1998; Number of fines levied: 916; Percentage of fines paid in
full: 65; Amount levied[A]: 27,933,000; Amount collected: 11,032,446;
Percentage of dollars collected: 39.
Year: 1999; Number of fines levied: 901; Percentage of fines paid in
full: 66; Amount levied[A]: 42,714,100; Amount collected: 26,817,300;
Percentage of dollars collected: 63.
Year: 2000; Number of fines levied: 701; Percentage of fines paid in
full: 70; Amount levied[A]: 14,292,808; Amount collected: 11,979,986;
Percentage of dollars collected: 84.
Year: 2001; Number of fines levied: 657; Percentage of fines paid in
full: 76; Amount levied[A]: 16,677,000; Amount collected: 12,376,818;
Percentage of dollars collected: 74.
Year: 2002; Number of fines levied: 659; Percentage of fines paid in
full: 72; Amount levied[A]: 70,170,000; Amount collected: 67,211,659;
Percentage of dollars collected: 96.
Year: Total; Number of fines levied: 4,715; Percentage of fines paid in
full: 68%; Amount levied[A]: $210,568,908; Amount collected:
$139,607,518; Percentage of dollars collected: 66%.
Source: NASD.
[A] NASD data include fines invoiced from 1997 through 2002. See
appendix I for the potential impact of NASD's invoicing procedures on
the amounts collected.
[End of table]
Table 8: NYSE's Collection Rates:
Year: 1997; Number of fines levied: 37; Percentage of fines paid in
full: 100%; Amount levied: $1,637,500; Amount collected: $1,637,500;
Percentage of dollars collected: 100%.
Year: 1998; Number of fines levied: 38; Percentage of fines paid in
full: 100; Amount levied: 3,345,000; Amount collected: 3,345,000;
Percentage of dollars collected: 100.
Year: 1999; Number of fines levied: 50; Percentage of fines paid in
full: 100; Amount levied: 4,365,000; Amount collected: 4,365,000;
Percentage of dollars collected: 100.
Year: 2000; Number of fines levied: 54; Percentage of fines paid in
full: 100; Amount levied: 4,953,667; Amount collected: 4,953,667;
Percentage of dollars collected: 100.
Year: 2001; Number of fines levied: 55; Percentage of fines paid in
full: 98; Amount levied: 3,981,500; Amount collected: 3,976,500;
Percentage of dollars collected: 100.
Year: 2002; Number of fines levied: 22; Percentage of fines paid in
full: 100; Amount levied: 869,000; Amount collected: 869,000;
Percentage of dollars collected: 100.
Year: Total; Number of fines levied: 256; Percentage of fines paid in
full: 100%; Amount levied: $19,151,667; Amount collected: $19,146,667;
Percentage of dollars collected: 100%.
Source: GAO analysis of NYSE's data.
[End of table]
[End of section]
Appendix IV: Futures Regulators' Collection Rates for Open and Closed
Cases by Calendar Year:
We calculated the collection rates using data from CFTC and the SROs.
The rates are based on fines levied from January 1997 through August
2002 and include all amounts collected on those fines through December
2002. The fines data listed for each year represent collection activity
on the fines levied in each of those years. Percentages were rounded to
the nearest whole number.
Table 9: CFTC's Collection Rates:
Year: 1997; Number of fines levied: 18; Percentage of fines paid in
full: 67%; Amount levied: $2,767,000; Amount collected: $1,590,000;
Percentage of dollars collected: 57%.
Year: 1998; Number of fines levied: 25; Percentage of fines paid in
full: 44; Amount levied: 140,507,176; Amount collected: 126,078,305;
Percentage of dollars collected: 90.
Year: 1999; Number of fines levied: 40; Percentage of fines paid in
full: 38; Amount levied: 86,192,731; Amount collected: 22,955,045;
Percentage of dollars collected: 27.
Year: 2000; Number of fines levied: 40; Percentage of fines paid in
full: 80; Amount levied: 97,321,467; Amount collected: 2,255,255;
Percentage of dollars collected: 2.
Year: 2001; Number of fines levied: 39; Percentage of fines paid in
full: 44; Amount levied: 15,689,399; Amount collected: 7,886,289;
Percentage of dollars collected: 50.
Year: 2002; Number of fines levied: 25; Percentage of fines paid in
full: 44; Amount levied: 15,355,000; Amount collected: 505,000;
Percentage of dollars collected: 3.
Year: Total; Number of fines levied: 187; Percentage of fines paid in
full: 52%; Amount levied: $357,832,773; Amount collected: $161,269,894;
Percentage of dollars collected: 45%.
Source: GAO analysis of CFTC's data.
[End of table]
Table 10: The Chicago Board of Trade's Collection Rates:
Year: 1997; Number of fines levied: 53; Percentage of fines paid in
full: 98%; Amount levied: $334,500; Amount collected: $334,000;
Percentage of dollars collected: 100%.
Year: 1998; Number of fines levied: 31; Percentage of fines paid in
full: 90; Amount levied: 162,000; Amount collected: 141,500; Percentage
of dollars collected: 87.
Year: 1999; Number of fines levied: 38; Percentage of fines paid in
full: 95; Amount levied: 1,570,500; Amount collected: 1,545,500;
Percentage of dollars collected: 98.
Year: 2000; Number of fines levied: 53; Percentage of fines paid in
full: 92; Amount levied: 545,125; Amount collected: 497,125; Percentage
of dollars collected: 91.
Year: 2001; Number of fines levied: 39; Percentage of fines paid in
full: 90; Amount levied: 306,175; Amount collected: 273,925; Percentage
of dollars collected: 89.
Year: 2002; Number of fines levied: 42; Percentage of fines paid in
full: 88; Amount levied: 631,050; Amount collected: 529,550; Percentage
of dollars collected: 84.
Year: Total; Number of fines levied: 256; Percentage of fines paid in
full: 93%; Amount levied: $3,549,350; Amount collected: $3,321,600;
Percentage of dollars collected: 94%.
Source: GAO analysis of the Chicago Board of Trade's data.
[End of table]
Table 11: The Chicago Mercantile Exchange's Collection Rates:
Year: 1997; Number of fines levied: 16; Percentage of fines paid in
full: 94%; Amount levied: $811,500; Amount collected: $801,500;
Percentage of dollars collected: 99%.
Year: 1998; Number of fines levied: 21; Percentage of fines paid in
full: 86; Amount levied: 1,053,000; Amount collected: 1,032,000;
Percentage of dollars collected: 98.
Year: 1999; Number of fines levied: 25; Percentage of fines paid in
full: 100; Amount levied: 349,500; Amount collected: 349,500;
Percentage of dollars collected: 100.
Year: 2000; Number of fines levied: 16; Percentage of fines paid in
full: 81; Amount levied: 183,000; Amount collected: 138,000; Percentage
of dollars collected: 75.
Year: 2001; Number of fines levied: 31; Percentage of fines paid in
full: 97; Amount levied: 443,250; Amount collected: 433,250; Percentage
of dollars collected: 98.
Year: 2002; Number of fines levied: 11; Percentage of fines paid in
full: 91; Amount levied: 233,335; Amount collected: 208,335; Percentage
of dollars collected: 89.
Year: Total.
Source: GAO analysis of the Chicago Mercantile Exchange's data.
[End of table]
Table 12: NFA's Collection Rates:
Year: 1997; Number of fines levied: 16; Percentage of fines paid in
full: 94%; Amount levied: $426,500; Amount collected: $401,500;
Percentage of dollars collected: 94%.
Year: 1998; Number of fines levied: 32; Percentage of fines paid in
full: 47; Amount levied: 962,500; Amount collected: 450,000; Percentage
of dollars collected: 47.
Year: 1999; Number of fines levied: 21; Percentage of fines paid in
full: 90; Amount levied: 760,500; Amount collected: 733,000; Percentage
of dollars collected: 96.
Year: 2000; Number of fines levied: 28; Percentage of fines paid in
full: 57; Amount levied: 1,269,000; Amount collected: 638,375;
Percentage of dollars collected: 50.
Year: 2001; Number of fines levied: 24; Percentage of fines paid in
full: 54; Amount levied: 304,250; Amount collected: 239,250; Percentage
of dollars collected: 79.
Year: 2002; Number of fines levied: 14; Percentage of fines paid in
full: 29; Amount levied: 298,500; Amount collected: 214,600; Percentage
of dollars collected: 72.
Year: Total; Number of fines levied: 135; Percentage of fines paid in
full: 61%; Amount levied: $4,021,250; Amount collected: $2,676,725;
Percentage of dollars collected: 67%.
Source: GAO analysis of NFA's data.
[End of table]
Table 13: The New York Mercantile Exchange's Collection Rates:
Year: 1997; Number of fines levied: 18; Percentage of fines paid in
full: 100%; Amount levied: $186,100; Amount collected: $186,100;
Percentage of dollars collected: 100%.
Year: 1998; Number of fines levied: 8; Percentage of fines paid in
full: 75; Amount levied: 79,000; Amount collected: 39,000; Percentage
of dollars collected: 49.
Year: 1999; Number of fines levied: 15; Percentage of fines paid in
full: 100; Amount levied: 141,000; Amount collected: 141,000;
Percentage of dollars collected: 100.
Year: 2000; Number of fines levied: 22; Percentage of fines paid in
full: 91; Amount levied: 396,000; Amount collected: 191,000; Percentage
of dollars collected: 48.
Year: 2001; Number of fines levied: 20; Percentage of fines paid in
full: 95; Amount levied: 224,194; Amount collected: 224,194; Percentage
of dollars collected: 100.
Year: 2002; Number of fines levied: 14; Percentage of fines paid in
full: 100; Amount levied: 396,000; Amount collected: 396,000;
Percentage of dollars collected: 100.
Year: Total; Number of fines levied: 97; Percentage of fines paid in
full: 95%; Amount levied: $1,422,294; Amount collected: $1,177,294;
Percentage of dollars collected: 83%.
Source: GAO analysis of the New York Mercantile Exchange's data.
[End of table]
[End of section]
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Davi D'Agostino, (202) 512-8678 Cecile Trop, (312) 220-7705:
Acknowledgments:
In addition to those named above, Emily Chalmers, Marc Molino, Carl
Ramirez, Jerome Sandau, Michele Tong, Sindy Udell, and Anita
Zagraniczny made key contributions to this report.
(250092):
FOOTNOTES
[1] U.S. General Accounting Office, Money Penalties: Securities and
Futures Regulators Collect Many Fines but Need to Better Use
Industrywide Data, GAO/GGD-99-8 (Washington, D.C. Nov. 2, 1998) and
SEC and CFTC: Most Fines Collected, but Improvements Needed in the Use
of Treasury's Collection Service, GAO-01-900 (Washington, D.C. July
16, 2001).
[2] SROs have an extensive role in regulating the U.S. securities and
futures markets, including ensuring that members comply with federal
securities and futures laws and SRO rules. SROs include the national
securities and futures exchanges, registered securities and futures
associations, registered clearing agencies, and the Municipal
Securities Rulemaking Board.
[3] The nine SROs include the American Stock Exchange, Chicago Board
Options Exchange, Chicago Board of Trade, Chicago Mercantile Exchange,
Chicago Stock Exchange, NASD, National Futures Association, New York
Mercantile Exchange, and New York Stock Exchange.
[4] All years in this report are calendar years.
[5] Under TOP, FMS identifies federal payments, such as tax refunds,
that are owed to individuals and applies the payments to their
outstanding debt. All cases referred to FMS for collection are also
eligible for referral to and servicing under TOP.
[6] Disgorgement is a type of sanction that requires violators to give
up profits obtained as a result of violating the law.
[7] According to SEC officials, although SEC currently has no formal
strategy regarding pre-guidelines cases, all eligible debts will
ultimately be referred to FMS and TOP.
[8] Although DPTS was unreliable, we used the system because it was the
only available source of data on SEC's collection efforts.
[9] The closed case collection rate for 1992-96 appeared in our 1998
fines report (GAO/GGD-99-8).
[10] U.S. General Accounting Office, SEC Enforcement: More Actions
Needed to Improve Oversight of Disgorgement Collections, GAO-02-771
(Washington, D.C. July 12, 2002).
[11] 31 U.S.C. § 3711 (g)(1).
[12] "Debt Collection--Amendments to Collection Rules and Adoption of
Wage Garnishments Rules," Securities and Exchange Commission, Release
No. 34-44965, 66 Fed. Reg. 54125 (Oct. 26, 2001).
[13] Individuals who have been statutorily disqualified have been
expelled or suspended from membership or participation in an SRO or
barred and suspended from associating with a member of any SRO.
[14] Although several securities SROs have formal agreements with the
FBI under which they may submit fingerprints for a criminal history
check, according to an SEC official, the firms typically submit
fingerprints to NASD because all industry registrants that do business
with the public--the majority of registrants--must also be NASD
members.
[15] According to an SEC official, all the securities SROs have similar
fingerprinting procedures for accepting and processing fingerprints.
Because NYSE is the largest securities SRO that operates a market, and
because we wanted to determine how another SRO's procedures might
differ from those of NASD and NFA, we included NYSE in our review.
According to an SEC official, NASD sends about 300,000 fingerprints to
the FBI each year. A NYSE official told us that NYSE sends
approximately 40,000.
[16] NFA is responsible for submitting the fingerprints of all futures
industry applicants to the FBI. According to an NFA official, for the
12-month period ending June 30, 2003, NFA sent approximately 11,000
fingerprints to the FBI.
[17] 15 U.S.C. § 78g (f)(2).
[18] 7 U.S.C. § 6n and 17 C.F.R. § 3.10 (1997).
[19] As of February 19, 2003, the bureau had 76 freestanding
fingerprinting sites, 54 sites located in its offices, and 46 locations
served by mobile routes. It had also designated 45 law enforcement
agencies to take fingerprints. NFA officials told us that futures
industry applicants were too widely dispersed to travel to the bureau's
sites to be fingerprinted, precluding a contractual arrangement with
the bureau.
[20] Due to the unreliability of DPTS data, we could not accurately
calculate SEC's collection rates.
[21] GAO-02-771.
[22] Because of the way NASD's financial system was designed, we could
not calculate the collection rate with an acceptable degree of accuracy
using the approach we applied to other SROs. As a result, we relied on
summary information that NASD provided. NASD's calculations use cases
invoiced from January 1997 through December 2002; for the other SROs,
we used cases levied through August 31, 2002. See appendix I for the
potential impact of NASD's invoicing procedures on the amounts
collected.
[23] We included both fines and disgorgement cases, because the
collection guidelines apply equally to both.
[24] As in our previous reports, we excluded regional securities
exchanges that delegated their broker-dealer examination authority to
the American Stock Exchange, Chicago Board Options Exchange, NASD, or
NYSE because they administered few disciplinary actions. We also
excluded some futures exchanges based on the same rationale.
[25] Provisions of the Sarbanes-Oxley Act of 2002 have amended the
federal Bankruptcy Code to prevent individual debtors from discharging
in bankruptcy court certain debts, including judgments and settlements
that result from violations of federal and state securities laws or
regulations. Sarbanes-Oxley Act § 803, amending 11 U.S.C. 523(a).
[26] To the extent that cases were dismissed through bankruptcy
proceedings, these cases would be included in the closed case analysis.
[27] GAO/GGD-99-8.
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