Securities Enforcement:

Improvements Needed in SEC Controls Over Disgorgement Cases

GGD-94-188: Published: Aug 23, 1994. Publicly Released: Aug 23, 1994.

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Pursuant to a congressional request, GAO reviewed the Securities and Exchange Commission's (SEC) procedures for the handling and disposition of disgorged funds, focusing on whether: (1) the individuals appointed to manage the funds are benefitting from prior SEC employment; (2) SEC disgorgement collection and distribution efforts preclude favoritism or minimize any appearance of favoritism in recommending individuals as receivers; and (3) SEC provides adequate oversight of receivers and funds in their possession.

GAO found that: (1) SEC can improve its management control systems for governing its disgorgement efforts; (2) SEC maintains its information on a case-by-case basis, although aggregate information could help it better assess the effectiveness of its disgorgement efforts; (3) SEC does not provide its attorneys formal written policies or procedures to guide them in assisting the federal courts to select individuals as receivers and ensure adequate oversight of receivers' activities and requests for compensation; and (4) without formalizing its policies and procedures, SEC cannot adequately ensure that any appearance of favoritism in its receiver recommendations is precluded or that funds managed by receivers are safeguarded until disbursed.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: SEC has explored a number of options to track the disgorgement process. SEC has installed new software to better manage and access the information maintained in its Disgorgement Payment Tracking System. It has worked on implementing a new case tracking system that will provide aggregate reporting to improve managers' ability to assess the effectiveness of enforcement efforts.

    Recommendation: To help SEC better assess the effectiveness of disgorgement collection and distribution efforts, the Chairman, SEC, should ensure that systems used to manage disgorgement cases include aggregate and individual case information on disgorgement ordered, disgorgement collected, amount and recipients of disgorgement distributed, and information about receivers and funds in their possession.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Implemented

    Comments: SEC pointed out that the court, not SEC, selects the receiver. However, SEC noted that if the court wants a recommendation from SEC, trial attorneys have been instructed to contact at least three qualified individuals and obtain written proposals from them. The candidate recommended to the court will normally be the one offering the lowest cost.

    Recommendation: To help SEC preclude favoritism or minimize any appearance of favoritism in selecting individuals to recommend as receivers, the Chairman, SEC, should establish formal guidelines for SEC attorneys to use for recommending individuals as receivers. In establishing such guidelines, SEC should consider issuing criteria that receivers must meet and allowing interested parties whom SEC determines meet these criteria to place their names on a roster from which a receiver could be chosen for a particular case.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Not Implemented

    Comments: The agency intends no action. Although GAO found no cases of fraud or mismanagement in reviewers' handling of disgorged funds, these are basic internal controls that could prevent future abuse.

    Recommendation: To help ensure adequate oversight of receivers and the funds in their possession, the Chairman, SEC, should establish a standard format for fee applications submitted by receivers. The Chairman should also establish formal written guidelines for SEC attorneys to use for monitoring receivers' activities and the funds they handle. In establishing such procedures, SEC should recommend, where appropriate, that the court orders include requirements that: (1) receivers file periodic reports with SEC on the funds they hold; and (2) the funds may be subject to an audit if SEC believes it necessary after reviewing the periodic reports.

    Agency Affected: United States Securities and Exchange Commission

 

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