SEC and CFTC Penalties:

Continued Progress Made in Collection Efforts, but Greater SEC Management Attention Is Needed

GAO-05-670: Published: Aug 31, 2005. Publicly Released: Oct 3, 2005.

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The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) impose penalties, disgorgements, and restitution on proven and alleged violators of the securities and futures laws, respectively. GAO has issued a number of previous reports on agency collection efforts and made numerous recommendations for improvement. This report follows up on open issues from the previous reports and (1) discusses SEC's progress in improving its tracking of penalty and disgorgement collection data, (2) assesses the steps SEC has taken to improve collection program management, (3) evaluates SEC's implementation of the Fair Fund provision in the Sarbanes-Oxley Act of 2002, and (4) describes CFTC's actions to address previous GAO recommendations.

In response to GAO's previous recommendations, SEC has taken positive steps to improve its tracking of collection data, such as discontinuing its use of an unreliable tracking system, modifying its existing Case Activity Tracking System (CATS) to capture financial data, and establishing a policy for improved data entry. GAO's review of 45 cases tracked in CATS revealed that SEC complied with its policy for improved data entry, a step that contributes to improving the overall reliability of SEC's collection data. However, GAO identified additional actions that SEC can take to enhance CATS's usefulness for key users, such as attorneys, collection monitors, and case management specialists in the Division of Enforcement. SEC is currently addressing this issue through a multiyear effort to comprehensively upgrade CATS. Agency officials estimate that the upgrade, which will be completed in phases, will be fully complete in 2008. SEC has also addressed some previous recommendations made to strengthen management of its collection program, such as increasing its collection staff and referring eligible delinquent cases to the Department of the Treasury's (Treasury) Financial Management Service (FMS) on a timely basis. However, SEC must take further steps to address other recommendations designed to enhance management's evaluation of program performance. During this review, GAO identified new issues that warrant SEC management attention. For example, although SEC has increased the number of staff devoted to collection efforts, the agency has neither developed a method to ensure that adequate and consistent supervision is provided to them, nor has it formally assessed whether its additional resources are being used effectively. SEC also has not developed a procedure by which to ensure that two key units, both responsible for tracking collection activity, are effectively communicating and coordinating with one another. Since implementing Section 308(a) of the Sarbanes-Oxley Act of 2002, (commonly known as the Fair Fund provision), SEC has instructed its staff to aggressively use the provision and estimates designating over $4.8 billion for return to harmed investors as a result of the provision's enactment. However, to date, only a small amount of the funds have been distributed. According to SEC, distribution is often a lengthy process that can be further complicated by external factors such as a pending criminal indictment on the violator. GAO also found that SEC lacked a reliable method by which to identify and collect data on Fair Fund cases. SEC took action to address this issue, but efforts were still in their early stages. SEC has yet to analyze the data it has collected in order to fully determine the provision's effectiveness in returning an increased fund amount to harmed investors. CFTC implemented both recommendations from previous GAO reports related to controls over fingerprinting procedures and timely referral of eligible delinquent cases to Treasury's FMS.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To continue to ensure that the collection program meets its goal of effectively deterring securities law violations and returning funds to harmed investors, the Chairman, SEC, should ensure that management determines, on an aggregate basis, (1) the amount of disgorgement distributed each year to harmed investors, (2) the amount of civil monetary penalties sent to Treasury, and (3) the amount of receivers' fees and other specialists' fees and that the agency uses this information to more objectively monitor the distribution of monies to harmed investors.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: SEC deployed the Phoenix system in 2006. The Division of Enforcement gathered and provided the business requirements to the SEC's Office of Information Technology that would permit Enforcement to record and monitor distribution related information, including information reported on the newly developed standardized accounting reports for distribution funds. In 2006, SEC developed and included in its PAR a distributions performance measure. The completion of the Collections and Distributions modules necessarily depends on the agency's overall IT efforts. Although these modules have not been rolled out, we consider SEC management to have taken necessary actions to address this recommendation.

    Recommendation: To continue to ensure that the collection program meets its goal of effectively deterring securities law violations and returning funds to harmed investors, the Chairman, SEC, should continue to identify and establish appropriate performance measures to gauge the effectiveness of collection activities and begin collecting and tracking data to implement the timeliness measure presented in SEC's 2004 annual performance plan, if SEC still considers that measure appropriate.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: In 2006, SEC developed and included in its PAR a distributions performance measure. After SEC deployed the Phoenix system in 2006, to further refine the performance measure, the Division of Enforcement gathered and provided the business requirements to the SEC's Office of Information Technology that would permit Enforcement to record and monitor distribution related information, including information reported on the newly developed standardized accounting reports for distribution funds. For FY 2008, SEC reported the measure in its PAR for the first time by using manually prepared reports and information provided by the Phoenix and CATS systems.

    Recommendation: SEC has taken actions to strengthen its data tracking and management practices for its penalty and disgorgement collection program. However, the agency could take additional steps to ensure that collection staff members have the necessary tools and support to carry out their responsibilities efficiently and are being used effectively. Therefore, the Chairman, SEC, should determine the effectiveness of new case management specialists, collection monitors, and collection attorneys by using formal approaches such as periodically surveying staff attorneys that interact with collection staff to evaluate the assistance the staff provides.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: SEC has created the Office of Collections and Distributions. It is currently establishing collections procedures and developing an alternate structure to the office in response to two subsequent GAO reports (GAO-07-830 and GAO-09-358).

    Recommendation: SEC has taken actions to strengthen its data tracking and management practices for its penalty and disgorgement collection program. However, the agency could take additional steps to ensure that collection staff members have the necessary tools and support to carry out their responsibilities efficiently and are being used effectively. Therefore, the Chairman, SEC, should establish procedures for staff in the Office of Financial Management to notify Enforcement staff on a timely basis about data entered into CATS.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: SEC has created electronic notification procedure for Office of Financial Management staff to notify Enforcement staff when data is entered into CATS. The "procedure" is embedded in computer code. When OFM posts a disgorgement or penalty cash receipt, an automatic email is generated which is sent to both the branch chief and case management specialist assigned to the matter. Also, SEC has deployed the Phoenix system and has created a working group.

    Recommendation: SEC has taken actions to strengthen its data tracking and management practices for its penalty and disgorgement collection program. However, the agency could take additional steps to ensure that collection staff members have the necessary tools and support to carry out their responsibilities efficiently and are being used effectively. Therefore, the Chairman, SEC, should develop a method to ensure that case management specialists and collection monitors in Enforcement receive consistent supervision and the necessary monitoring and guidance to carry out their duties and that SEC management can ensure that staff are following the collection guidelines.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: SEC has been providing routine training to case management specialists and collection monitors. Training included topics related to CATS 2000 and Phoenix. The branch chief for the case management specialists holds monthly conference calls at which the following topics are discussed: current issues, new protocols, the review or clarification of existing protocols, and upcoming reporting deadlines. In addition, SEC created a management position in the Office of Collections and Distributions (OCD) to provide oversight of collections staff. An assistant director in OCD also holds monthly conference calls with the case management specialists to discuss similar topics. SEC has also created a debt collection status report to ensure that collections staff are following guidelines.

    Recommendation: To continue to ensure that the collection program meets its goal of effectively deterring securities law violations and returning funds to harmed investors, the Chairman, SEC, should ensure that management establishes a procedure for consistently collecting and aggregating its Fair Funds data to assist in the monitoring and managing of the distribution of monies to harmed investors and establishes measures to evaluate the timeliness and completeness of distribution efforts.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: After SEC deployed the Phoenix system in 2006, the Division of Enforcement gathered and provided the business requirements to the SEC's Office of Information Technology that would permit the Division to record and monitor distribution related information, including information reported on the newly developed standardized accounting reports for distribution funds. The completion of these Collections and Distributions modules necessarily depends on the agency's IT efforts. Meanwhile, the Office of Collections and Distributions maintains a spreadsheet to track the Fair Funds data. We consider that SEC management has taken actions to address this recommendation.

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