SEC and CFTC Fines Follow-Up:

Collection Programs Are Improving, but Further Steps Are Warranted

GAO-03-795: Published: Jul 15, 2003. Publicly Released: Aug 14, 2003.

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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.

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.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In response to our recommendation, since July 2004, CFTC worked with futures and securities regulators such as National Futures Association (NFA) to develop suggested best practices for fingerprinting procedures for the futures industry. According to Mr. Nathan, NFA made some adjustments to the fingerprinting guidance developed by the task force to tailor the suggested best practices to the futures industry. The guidance became available to NFA members on July 29, 2005.

    Recommendation: SEC and CFTC should 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 Affected: United States Securities and Exchange Commission

  2. Status: Closed - Implemented

    Comments: SEC's Office of Compliance Inspections and Examinations (OCIE), which has oversight responsibility over securities SROs and routinely inspects their disciplinary programs, has begun to analyze data on the SROs' disciplinary actions. On January 31, 2005, OCIE staff provided GAO with copies of analyses conducted to date. The analyses focused on six commonly-cited SRO rule violations and covered the following: misrepresentation or material omissions of fact, failure to respond truthfully and completely, outside business activities, net capital violations, conversion, and continuing education requirements. A senior OCIE official, Helene McGee, told GAO during a May 5, 2005, follow-up interview that OCIE had not conducted any additional analyses since the January 31 meeting but plans to do so. She said OCIE also plans to use the findings from its analyses to determine the scope and timing of future SRO inspections. SEC's Office of Information Technology has also established a September 2005 time frame for implementing a new Web-based SRO database to replace the current database. As of May 2005, OIT was on schedule to meet all of its internal goals for a successful September 2005 deployment.

    Recommendation: The SEC Chairman should analyze the data that have been collected on the Staff Regulatory Organizations' 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.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Implemented

    Comments: Since we made this recommendation in 2003, SEC's planned solutions to address the deficiencies in its tracking of investigations and enforcement actions have continued to evolve. In 2004, as reported in GAO-05-670, SEC discontinued its use of the Disgorgement and Penalties Tracking System and modified its existing Case Activity Tracking System (CATS) to capture financial data. Since 2004 SEC has continued to upgrade CATS to improve the system's capabilities. Despite these efforts, CATS remains severely limited and virtually unusable as a management tool. Therefore, as reported in GAO-07-830, SEC is developing a new investigation information management system, known as the Hub, which is scheduled to be in use by the Enforcement Division by the end of fiscal year 2007. According to Enforcement officials, the Hub will significantly enhance the division's capacity to manage the investigative process and it is designed to be generally accessible to all division staff, user-friendly, searchable, and allows for new data fields to be added. Although SEC has deviated from implementing the action plan noted in this recommendation, the agency has taken steps to address the intent of the recommendation. As such, we determined that SEC has implemented the recommendation.

    Recommendation: The SEC Chairman should take the necessary steps to implement the action plan to replace the Disgorgement and Penalties Tracking System 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.

    Agency Affected: United States Securities and Exchange Commission

  4. Status: Closed - Implemented

    Comments: SEC Enforcement Division staff are working with SEC's Office of Information Technology staff to extract a listing of cases that are eligible to be transferred to Treasury for subsequent collection activities. Once they are able to determine how many cases there actually are, they will determine what the appropriate strategy for proceeding with processing them for this transfer.

    Recommendation: The SEC Chairman should develop a formal strategy for referring pre-guidelines cases to the Financial Management Service and TOP that prioritizes cases based on collectability and establishes implementation time frames.

    Agency Affected: United States Securities and Exchange Commission

  5. Status: Closed - Implemented

    Comments: Since July 2004, SEC has worked on a task force with CFTC, and several of their SROs to develop suggested best practices for fingerprinting procedures for the securities industry. The task force used the FBI's fingerprinting guidance for preventing fingerprinting fraud in civil and criminal cases. According to Mr. Etter, SEC's suggested best practices for fingerprinting procedures became effective on May 26, 2005, after NASD published a "Notice to Members" reminding its members to review and update their fingerprinting procedures so that the identity of persons submitting their fingerprints can be identified.

    Recommendation: SEC and CFTC should 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 Affected: United States Securities and Exchange Commission

 

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