Money Penalties:

Securities and Futures Regulators Collect Many Fines But Need to Better Use Industrywide Data

GGD-99-8: Published: Nov 2, 1998. Publicly Released: Nov 2, 1998.

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GAO reviewed the fine imposition and collection activities by the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and securities and futures self-regulatory organizations (SRO), focusing on the: (1) extent to which SEC, CFTC, and SROs collected fines; (2) guidance they used to determine fine amounts; and (3) how SEC and CFTC assess the appropriateness of fines across their respective industries.

GAO noted that: (1) SEC, CFTC, and securities and futures SROs collected most of the over $400 million in fines imposed for disciplinary cases closed from January 1992 through December 1996; (2) however, the percent of fine amounts collected and the percent of fines paid in full varied among these agencies; (3) SEC and CFTC, with federal regulatory authority, both collected over 80 percent of the total amount of fines for the cases closed during this period; (4) securities and futures SROs that operate exchanges collected over 75 percent of the fines for the cases they closed; (5) the National Association of Securities Dealers (NASD) and the National Futures Association collected less than 30 percent of fines for the cases they closed; (6) SEC and CFTC had statutorily established maximum fines for civil actions and administrative proceedings; (7) all the securities and futures exchanges had prescribed fine amounts for minor violations of exchange rules and policies; (8) NASD was the only SRO that had written guidance specifying ranges of fine amounts for more serious violations; (9) despite the differences in guidance, SEC, CFTC, and SRO officials told GAO they considered specific factors in setting fine amounts; (10) these factors included the seriousness of the violation, the number of repeat violations, and the precedent set by similar cases; (11) SEC and CFTC reviewed the adequacy of sanctions at their respective SROs as part of their regular oversight; (12) when they found inadequate sanctions, including fines, they recommended actions meant to ensure that future sanctions would be appropriate; (13) however, each takes a different approach to analyzing the comparative adequacy of SRO sanctions across their respective industries; (14) SEC officials told GAO that they did not analyze industrywide sanctions data because such data are not easily quantified and are not meaningful without additional review; (15) the officials said that they evaluate the comparative adequacy of SRO sanctions through their routine inspections and regular meetings with senior SRO officials; (16) however, GAO's analysis of industrywide sanctions data for the time period GAO examined showed large differences in the average fine amounts and number of cases closed among securities SROs and among futures SROs; and (17) in contrast, CFTC maintained data and produced reports that could be used to analyze industrywide sanctions.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: SEC staff have been entering Self Regulatory Organizations' (SROs) disciplinary (19d-1) actions into a database. They have entered all actions from 2002, and are partially complete with 2003 and 2004. They already have run some reports from this information to analyze it and used the data to identify actions that seem like outliers for a particular violation. However, these turned out to be multi-violation cases and thus the lower penalties for the particular violation were made up for by other charges. They are also using reports from the database in their current round of examinations at one SRO's district offices. Although no set schedule for conducting analysis of this data has been proposed, the staff indicated that it will be reviewed periodically. SEC also has recently received approval internally for funding for a new system that will allow the SROs to input or upload their actions directly into the SEC's database. The development of the system is expected to occur in the fall of 2004.

    Recommendation: The Chairman, SEC, should analyze industrywide information on disciplinary program sanctions, particularly fines, to understand possible disparities among the SROs and identify ways to improve SRO disciplinary programs.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Implemented

    Comments: This recommendation is closed. CFTC now documents its analyses in quarterly reports, as well as in an annual report on civil monetary penalties.

    Recommendation: The Chairpersons, SEC and CFTC, should require that the results of these analyses be appropriately documented.

    Agency Affected: Commodity Futures Trading Commission

  3. 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. The analyses to date 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. OCIE has plans to conduct additional analyses and to use the findings from its analyses to determine the scope and timing of future SRO inspections.

    Recommendation: The Chairpersons, SEC and CFTC, should require that the results of these analyses be appropriately documented.

    Agency Affected: United States Securities and Exchange Commission

  4. Status: Closed - Implemented

    Comments: This recommendation is closed. CFTC sent SROs a letter requiring them to automate their fine collection activity, and all SROs with sufficient volume to warrant automation have automated systems.

    Recommendation: The Chairpersons, SEC and CFTC, should encourage SROs to maintain automated records of their fine collection activities that are appropriate for the number of fines they impose.

    Agency Affected: Commodity Futures Trading Commission

  5. 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 31st 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 Chairpersons, SEC and CFTC, should encourage SROs to maintain automated records of their fine collection activities that are appropriate for the number of fines they impose.

    Agency Affected: United States Securities and Exchange Commission

 

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