U.S. Government Securities:

More Transaction Information and Investor Protection Measures Are Needed

GGD-90-114: Published: Sep 14, 1990. Publicly Released: Sep 14, 1990.

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Pursuant to a legislative requirement, GAO evaluated the implementation and effectiveness of the Government Securities Act of 1986.

GAO found that: (1) the Securities and Exchange Commission (SEC) found that the National Association of Securities Dealers (NASD) was ensuring that specialist firms complied with Treasury requirements and regulations; (2) gaps in investor protection could result in investor losses due to abusive dealer practices and lack of SEC-required insurance coverage; (3) the rules imposed the most major costs on dealer operations by requiring dealers to have signed repurchase agreements with all hold-in-custody repurchase counterparties and to issue confirmation to customers of securities held in custody whenever a new transaction occurred or the identity of the securities changed; (4) dealers and brokers believe that the market has been safer for investors since the act's implementation although the act would not entirely prevent fraud; (5) there has been no adverse effect on the market for government-sponsored enterprise securities caused by the act's implementation or Treasury's rules; (6) screen brokers believe that the NASD annual assessment results in excessive examination charges; (7) the SEC database was not completely reliable for determining the number and identity of active broker participants in the government securities market; (8) several organizations examined their institutions less frequently than other organizations and were also slower to issue guidance to examiners; (9) under the act, government securities specialist dealers' customers have no federal protection for their funds; (10) it could not determine whether expanded access would safely be enforced by regulation; and (11) information access would benefit market efficiency, investor protection, and equity without damaging government debt management or monetary policy activities or interdealer brokers' blind trading systems.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: P.L. 103-202 incorporates this provision.

    Matter: Congress should amend Section 15 of the Exchange Act, and any other statutes as may be necessary, to authorize a federal agency to adopt general rules of fair practice applicable to all government securities brokers and dealers. Self-regulatory organizations and bank regulators should also be authorized to develop and enforce specific requirements within the context of general rules. The rules, at a minimum, should cover dealer pricing practices and investor suitability requirements.

  2. Status: Closed - Implemented

    Comments: The Senate bill requires more complete disclosure, rather than extending SIPC. P.L. 103-202 gave SEC the authority to require disclosure of the SIPC status of nonbank specialist dealers that sell government securities to retail customers.

    Matter: Congress should amend the Exchange Act to require that all non-bank government securities specialist dealers provide Securities Investor Protection Corporation (SIPC) coverage if their business with customers is similar to that for which SIPC coverage normally applies in SEC-registered securities markets. Furthermore, the SIPC assessment structure should be modified so that specialist firms covered by SIPC pay their fair share of the assessment burden.

  3. Status: Closed - Implemented

    Comments: Congress may require further study rather than authorize standby regulatory authority. The House version of pending legislation would give SEC the power to require disclosure. P.L. 103-202 requires SEC to report annually, as a part of its annual report to Congress on progress made by market participants in reporting price and quote information on a timely basis.

    Matter: Congress should amend the Exchange Act to require that government securities transaction information from screen brokers and any trading systems that serve a similar function be made available on a real-time basis to those willing to pay appropriate fees. Regulatory authority should be provided at the federal level to prescribe regulations as needed to ensure that transaction information is available.

  4. Status: Closed - Implemented

    Comments: P.L. 103-202 extended Treasury's rulemaking authority.

    Matter: Congress should continue Treasury's current regulatory authority over the activities of government securities brokers and dealers.

  5. Status: Closed - Implemented

    Comments: P.L. 103-202 institutes extensive requirements for consultation among the Treasury, SEC, and the bank regulators. This makes it highly unlikely that any agency can proceed with rules that are strongly objected to by Treasury.

    Matter: Congress should assign Treasury new authority to adopt sales practice rules governing government securities brokers and dealers and to adopt any rules needed to ensure public access to government securities screen brokers' information.

  6. Status: Closed - Not Implemented

    Comments: Because Congress failed to act for two years after the sunset provision in the original 1986 expired in 1991, Congress decided it was safer to make extension permanent. This is understandable and should not be objected to by GAO, but the point of periodically reassessing the respective roles of Treasury, SEC, and the bank regulators in regulating government and other securities markets remains valid.

    Matter: Congress should provide for a sunset on Treasury's authority so that the continued need for Treasury's rulemaking role can be reevaluated.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: SEC has revised its procedures. Every 6 months, the list of registered dealers is sent to the respective supervisory agencies for verification.

    Recommendation: SEC should develop a procedure for ensuring the accuracy of dealer registration data by, at a minimum, reviewing broker/dealer submissions for obvious omissions and inconsistencies and periodically (at least annually) having the self-regulatory agencies and bank regulators review SEC lists of registrants to identify discrepancies for follow-up by either SEC or the regulator.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Implemented

    Comments: The Joint Report, issued in 1990, did not contain recommendations in this area. Treasury has encouraged all the bank regulators to improve their supervision and believes progress has been made. Without further audit work at this point, it is hard for GAO to continue to press for changes. GAO can revisit the status as part of larger jobs on supervision of investments. The issue is also similar to disclosure of mutual fund risks to customers. In practice, consultation on proposed rulemaking mandated by P.L. 103-202 may spill over into development of greater consistency in the supervision of government securities activities by banks and securities firms.

    Recommendation: The Secretary of the Treasury, SEC, and the Federal Reserve System, as part of their required study of the act's effectiveness, should develop recommendations to ensure that bank dealers' government securities activities, including advertising, are provided oversight comparable to the activities of NASD-regulated firms.

    Agency Affected: Department of the Treasury

  3. Status: Closed - Implemented

    Comments: The Joint Report, issued in 1990, did not contain recommendations in this area. Treasury has encouraged all the bank regulators to improve their supervision and believes progress has been made. Without further audit work at this point, it is hard for GAO to continue to press for changes. GAO can revisit the status as part of larger jobs on supervision of investments. The issue is also similar to disclosure of mutual fund risks to customers. In practice, consultation on proposed rulemaking mandated by P.L. 103-202 may spill over into development of greater consistency in the supervision of government securities activities by banks and securities firms.

    Recommendation: The Secretary of the Treasury, SEC, and the Federal Reserve System, as part of their required study of the act's effectiveness, should develop recommendations to ensure that bank dealers' government securities activities, including advertising, are provided oversight comparable to the activities of NASD-regulated firms.

    Agency Affected: Federal Reserve System

  4. Status: Closed - Implemented

    Comments: The Joint Report, issued in 1990, did not contain recommendations in this area. Treasury has encouraged all the bank regulators to improve their supervision and believes progress has been made. Without further audit work at this point, it is hard for GAO to continue to press for changes. GAO can revisit the status as part of larger jobs on supervision of investments. The issue is also similar to disclosure of mutual fund risks to customers. In practice, consultation on proposed rulemaking mandated by P.L. 103-202 may spill over into development of greater consistency in the supervision of government securities activities by banks and securities firms.

    Recommendation: The Secretary of the Treasury, SEC, and the Federal Reserve System, as part of their required study of the act's effectiveness, should develop recommendations to ensure that bank dealers' government securities activities, including advertising, are provided oversight comparable to the activities of NASD-regulated firms.

    Agency Affected: United States Securities and Exchange Commission

  5. Status: Closed - Not Implemented

    Comments: The number of specialist dealers to which Treasury capital rules apply separately from SEC's continues to decline, from about 61 with 9 primary dealers in 1990, to about 14 with only 1 primary dealer in 1999, and more mergers are in process. In addition, SEC is revising its capital rules, with several new proposals being prepared for industry comment, and Treasury believes it should not try to modify its rules to match SEC rules that will be changed. Further, Treasury believes its rules function well for the specialist dealers.

    Recommendation: Unless the Department of the Treasury can demonstrate that a common approach results in capital requirements that are inappropriate for specialist firms, the Secretary of the Treasury and SEC should work together in developing a plan to phase out Treasury's unique capital requirements for specialist dealers.

    Agency Affected: Department of the Treasury

  6. Status: Closed - Not Implemented

    Comments: The number of specialist dealers to which Treasury capital rules apply separately from SEC's continues to decline, from about 61 with 9 primary dealers in 1990, to about 14 with only 1 primary dealer in 1999, and more mergers are in process. In addition, SEC is revising its capital rules, with several new proposals being prepared for industry comment, and Treasury believes it should not try to modify its rules to match SEC rules that will be changed. Further, Treasury believes its rules function well for the specialist dealers.

    Recommendation: Unless the Department of the Treasury can demonstrate that a common approach results in capital requirements that are inappropriate for specialist firms, the Secretary of the Treasury and SEC should work together in developing a plan to phase out Treasury's unique capital requirements for specialist dealers.

    Agency Affected: United States Securities and Exchange Commission

 

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