SEC and CFTC:

Most Fines Collected, but Improvements Needed in the Use of Treasury's Collection Service

GAO-01-900: Published: Jul 13, 2001. Publicly Released: Jul 30, 2001.

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Fines are one way for regulators to sanction those who violate securities and futures industry rules. However, for fines to be effective, regulators must collect them. This report reviews fine collection by the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and nine exchanges and industry associations that act as self-regulatory organizations (SRO) in the securities and futures industries. GAO (1) compares how the securities and futures regulators' current collection rates have changed since GAO's November 1998 report 1998 and assesses the changes they made in their fine imposition practices; (2) discusses the steps taken by SEC and CFTC to oversee the SROs' fine imposition activities, including the actions they have recently taken to improve this oversight; and (3) assesses the effectiveness of actions taken by SEC and CFTC to refer unpaid fines to the Financial Management Services (FMS). GAO found that collection rates at SEC, CFTC, and the SROs were generally comparable to, or higher than, their rates at the time of GAO's earlier report. Among the SROs, the National Association of Securities Dealers (NASD) and the National Futures Association (NFA) had the lowest collection rates between 1992 and 1996. However, fine collection rates for both organizations improved after they changed their fine imposition practices. SEC has begun to collect data that would allow it to analyze securities sanctions throughout the industry. Similarly, CFTC has begun to document the results of its review of industrywide futures sanctions. Both SEC and CFTC have reviewed the extent to which their respective SROs maintain automated fine collection records. FMS' efforts to collect SEC's fines have been hampered by SEC's delays in approving compromise offers, delays by SEC's Commissioners in responding to FMS' requests for more timely action, and by SEC's failure thus far to adopt the regulations it needs to again submit its fines to the Treasury Offset Program to benefit from the associated collection opportunities. Although CFTC has only recently begun submitting fines to FMS for collection, concerns about the timeliness of these submissions already exist. The agency's Inspector General staff has recommended steps to ensure that CFTC fines are submitted more timely to FMS, but these steps have yet to be implemented. Weaknesses in procedures for ensuring that CFTC submits all needed information to FMS to collect its unpaid fines also appear to have caused further delays in FMS' collection efforts.

Status Legend:

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  • 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: The Acting Chairman, CFTC, should periodically assess the pattern of readmission applications to ensure that the changes in NFA's fine imposition practices do not result in any unintended consequences, such as inappropriate readmissions.

    Agency Affected: Commodity Futures Trading Commission

    Status: Closed - Implemented

    Comments: CFTC has been monitoring applications for readmission to the futures industry. The agency found, and GAO confirmed, that no individuals barred since NFA's rule change have applied for reentry to the industry. Also NFA's application review process includes controls designed to ensure that inappropriate applications for reentry are not approved. CFTC officials told GAO that if the number of applications from barred applicants were to increase significantly, they would reexamine NFA's sanctioning practices.

    Recommendation: The Acting Chairman, SEC, should take steps to ensure that regulations allowing SEC fines to be submitted to the Treasury Offset Program are adopted.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: SEC amended its debt collections regulations to permit the agency's use of the Treasury Offset Program. The amended regulations were effective on November 26, 2001.

    Recommendation: The Acting Chairman, SEC, should continue working with FMS to ensure that compromise offers presented by FMS are approved in a timely manner.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: SEC implemented procedures on July 19, 2001, that identify the specific actions required to address a compromise offer, and that provide a schedule to ensure that a decision is made on the offer within 30 days.

    Recommendation: The Acting Chairman, SEC, should periodically assess the pattern of readmission applications to ensure that the changes in NASD's fine imposition points do not result in any unintended consequences, such as inappropriate readmissions.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: SEC has been monitoring applications for readmission to the securities industry. The agency found, and GAO confirmed, that no individuals barred since NASD's rule change have applied for reentry to the industry. Also NASD's application review process includes controls designed to ensure that inappropriate applications for reentry are not approved. SEC officials told GAO that if the number of applications from barred applicants were to increase significantly, they would reexamine NASD's sanctioning practices.

    Recommendation: The Acting Chairman, CFTC, should take steps to ensure that delinquent fines are promptly referred to FMS, including creating formal procedures that address both sending debts to FMS within the required timeframes and requiring all necessary information from Division of Enforcement on these debts.

    Agency Affected: Commodity Futures Trading Commission

    Status: Closed - Implemented

    Comments: CFTC updated its collection procedures and implemented them in July 2002. They now include specific requirements for referring debt to FMS within 180 days from the data that the debt became delinquent. CFTC also implemented controls to ensure that it has identified all delinquent debt eligible for referral, and that all necessary enforcement information is included with the referral.

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