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Efforts, but Greater SEC Management Attention Is Needed' which was
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Report to Congressional Requesters:
August 2005:
SEC and CFTC Penalties:
Continued Progress Made in Collection Efforts, but Greater SEC
Management Attention Is Needed:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-670]:
GAO Highlights:
Highlights of GAO-05-670, a report to congressional requesters:
Why GAO Did This Study:
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.
What GAO Found:
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.
What GAO Recommends:
In this report, GAO makes six recommendations to SEC, three of which
are designed to ensure that collection staff members have the necessary
tools and support and are used effectively, and the other three are
designed to ensure that SEC’s collection program meets its goal of
deterring securities law violations and returning funds to harmed
investors. SEC agreed with these recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-05-670.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Richard J. Hillman at
(202) 512-8678 or hillmanr@gao.gov.
[End of section]
Contents:
Letter:
Background:
Results in Brief:
SEC Has Made Progress in Improving the Accuracy and Usefulness of Data
It Collects, but Continued Attention Is Needed:
SEC Has Made Progress in Managing Its Collection Program but Needs to
Take Further Steps:
SEC Emphasizes Its Commitment to Implementing the Fair Fund Provision
but Has Been Slow in Distributing Funds and Assessing Results:
CFTC Has Added Controls to Fingerprinting Procedures and Begun Making
Timely Referrals to FMS:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: CFTC's Penalty and Restitution Collection Rates:
Appendix III: Comments from the Securities and Exchange Commission:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Types of Remedies Available for SEC and CFTC Violations:
Table 2: Status of Recommendations Related to SEC's Management of its
Collection Program from 1998 to 2003 GAO reports:
Table 3: SEC's Collection Rates for CMPs Levied on All Cases and Closed
Cases Only, September 2002-December 2004:
Table 4: SEC's Collection Rate for Disgorgement Levied on All Cases and
Closed Cases Only, September 2002-December 2004:
Table 5: CFTC's Collection Rates for CMPs Levied on All Cases and on
Closed Cases Only, September 2002-December 2004:
Table 6: CFTC's Collection Rate for Restitution Levied on All Cases and
on Closed Cases Only, September 2002-December 2004:
Figure:
Figure 1: Overview of SEC's Case Tracking Process:
Abbreviations:
CATS: Case Activity Tracking System:
CFTC: Commodity Futures Trading Commission:
CMP: civil monetary penalties:
CMS: case management specialist:
DCIA: Debt Collection Improvement Act of 1996::
DPTS: Disgorgement Payment Tracking System:
FBI: Federal Bureau of Investigation:
FMS: Financial Management Service:
GAAP: generally accepted accounting principles:
MUI: Matters Under Inquiry:
NASD: National Association of Securities Dealers:
NFA: National Futures Association:
NYSE: New York Stock Exchange:
OCIE: Office of Compliance Inspections and Examinations:
OIG: Office of Inspector General:
OIT: Office of Information Technology:
OMB: Office of Management and Budget:
OFM: Office of Financial Management:
PCA: Private Collection Agency:
SEC: Securities and Exchange Commission:
SOX: Sarbanes-Oxley Act of 2002:
SRO: self-regulatory organizations:
TOP: Treasury Offset Program:
Letter August 31, 2005:
The Honorable John D. Dingell:
Ranking Minority Member:
Committee on Energy and Commerce:
House of Representatives:
The Honorable Barney Frank:
Ranking Minority Member:
Committee on Financial Services:
House of Representatives:
The Honorable Paul E. Kanjorski:
Ranking Minority Member:
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises:
Committee on Financial Services:
House of Representatives:
The Securities and Exchange Commission's (SEC) primary mission is to
protect investors and maintain the integrity of the securities markets.
Similarly, the Commodity Futures Trading Commission (CFTC) protects
market users and the public from fraud, manipulation, and abusive
practices related to the sale of certain commodity interests, including
futures and options. As a part of their responsibility to protect
investors, the agencies seek to ensure that individuals who violate
federal securities or futures laws and regulations take responsibility
for their misdeeds.[Footnote 1] For their enforcement actions to be
successful, however, both agencies must have collection and
distribution programs that function effectively.
In 2002, Congress passed the Sarbanes-Oxley Act (SOX) to address
corporate malfeasance and restore investor confidence in the U.S.
securities markets. This legislation established numerous reforms to
increase investor protection, including Section 308(a), the Federal
Account for Investor Restitution provision, commonly known as the Fair
Fund provision. This provision allows SEC to combine civil monetary
penalties (CMP) and disgorgement amounts collected in enforcement cases
to establish a fund for the benefit of victims of securities law
violations. Disgorgement is a remedy designed to deprive defendants of
their ill-gotten gains derived from their illegal activities. Before
the law was implemented, any CMPs collected were remitted directly to
the Department of the Treasury (Treasury), and only the amount of the
actual disgorgement was available to establish a fund for the benefit
of victims. The new provision reinforces the need for SEC to have an
effective collection and distribution program for both CMPs and
disgorgement so that additional funds collected as a result of the Fair
Fund provision can benefit harmed investors.
GAO has issued a number of reports, including follow-up reports, on SEC
and CFTC's collection efforts and has made numerous recommendations
designed to help the agencies optimize their collection
programs.[Footnote 2] Our previous studies have shown that each agency
continues to make refinements and improvements in many areas but that
some recommendations designed to further strengthen their collection
efforts remained open. This study, responds to your requests that we
reexamine SEC and CFTC's actions to address 12 recommendations that
remained open from prior studies, but focuses primarily on SEC's
activities because SEC handles significantly more cases than CFTC and
had the majority of open recommendations. Specifically, this report (1)
discusses SEC's progress in addressing recommendations aimed at
improving the tracking of penalty and disgorgement collection data, (2)
assesses the steps SEC has taken to address recommendations on its
management of the collection program and other related issues, (3)
evaluates SEC's implementation of the Fair Fund provision, and (4)
describes the actions CFTC has taken to address previous
recommendations.
To evaluate SEC and CFTC's efforts to enhance their tracking of
collection data, we conducted a case file review at SEC to test the
accuracy and completeness of their data and reviewed CFTC's process for
tracking and managing its data. To obtain additional insight into each
agency's collection program, we reviewed pertinent documents, including
flowcharts, collection guidelines, position descriptions, court
dockets, computer-generated documents, memorandums of understanding,
and related laws. Further, we interviewed the appropriate management
and staff members at SEC and CFTC on their respective agency's
collection and data tracking processes. We also obtained and reviewed
documents on delinquent case referrals from Treasury's Financial
Management Services (FMS). To assess SEC's efforts regarding
performance measures and oversight of self-regulatory organizations
(SRO) and SEC and CFTC's fingerprinting initiatives, we interviewed key
officials at both agencies regarding actions they were taking to
address the weaknesses identified and reviewed relevant documents. In
regard to the Fair Fund provision in SOX, we obtained relevant
documentation and discussed SEC's implementation approach with the
appropriate officials. To calculate each agency's penalty and
disgorgement collection rate, we obtained information on monies ordered
and collected from SEC and CFTC for the period beginning September 1,
2002, and ending December 31, 2004. We conducted our work from August
2004 to August 2005 in Washington, D.C., in accordance with generally
accepted government auditing standards. Appendix I describes the
objectives, scope, and methodology of our review in more detail.
Background:
SEC was created in 1934 to protect investors and maintain the integrity
of the securities market. To accomplish its mission, the agency
established four strategic goals: (1) to enforce compliance with
federal securities laws, (2) to sustain an effective and flexible
regulatory environment, (3) to encourage and promote informed
investment decision making, and (4) to maximize the use of SEC's
resources.
CFTC, established in 1974, performs a comparable role in the futures
industry. Its primary mission is to protect market users and the public
from fraud, manipulation, and abusive practices related to the sale of
commodity futures and options and to foster open, competitive, and
financially sound commodity futures and options markets. CFTC has set
three strategic goals to support its mission: (1) to ensure the
economic vitality of the commodity futures and option markets; (2) to
protect market users and the public; and (3) to ensure market integrity
in order to foster open, competitive, and financially sound markets.
Both SEC and CFTC are independent agencies that have five-member
presidentially-appointed commissions that are led by chairmen who are
designated by the President. SEC and CFTC's headquarters are located in
Washington, D.C. SEC has a combination of 11 regional and district
offices; CFTC has 5 regional offices.
In keeping with its mission, each agency has a regulatory
responsibility to protect investors by ensuring the integrity of the
securities and commodity futures markets. Once SEC or CFTC staff
conducts an investigation and determines that a person or company has
violated the law and should be charged, the agency authorizes a civil
suit against the alleged violator in federal district court or a
proceeding before an administrative law judge. On finding that a
defendant has violated securities or futures laws, the court or the
administrative law judge can issue a judgment ordering sanctions such
as CMPs, disgorgement, and/or restitution.[Footnote 3] However, the
agencies may decide not to seek disgorgement or restitution because it
is found to be unwarranted--for example, if a violator did not make a
profit from the illegal activity. Table 1 provides more information on
some of the remedies available to a federal district court or an
administrative law judge.
Table 1: Types of Remedies Available for SEC and CFTC Violations:
Remedy: Civil monetary penalty: A remedial measure aimed at deterring
future misconduct;
Available to SEC, Available to CFTC.
Remedy: Disgorgement: An equitable remedy aimed at preventing a
wrongdoer from unjustly enriching himself from his wrongs; deprives
violators of "ill-gotten gains" linked to the wrongdoing. SEC/CFTC do
not have to prove an exact amount but must show the estimate is
reasonable;
Available to SEC, Available to CFTC.
Remedy: Disgorgement Fund: A fund created for the benefit of harmed
investors from the collection of a disgorgement order imposed on a
securities law violator. If a disgorgement fund is not created, the
proceeds from disgorgement are remitted to the Treasury;
Available to SEC, Available to CFTC.
Remedy: Fair Fund: A disgorgement fund that also includes a civil
monetary penalty imposed on the disgorged violator;
Available to SEC.
Remedy: Restitution: An equitable remedy to attempt to make the victims
whole. Requires proof of specific damages to the victims;
Available to SEC[A], Available to CFTC.
Remedy: Reparation: A compensatory award to harmed investors in a
private proceeding before CFTC hearing officials;
Available to CFTC.
Sources: GAO analysis of SEC and CFTC data.
[A] Although restitution is available to SEC, the agency typically
imposes CMPs and disgorgement.
[End of table]
SEC and CFTC both have collection programs and designated staff to
track, collect, and manage CMPs and disgorgement or restitution orders.
Specifically, as shown in figure 1, staff in SEC's Division of
Enforcement (Enforcement) use the Case Activity Tracking System (CATS)
to track investigations, enforcement actions, and matters under inquiry
(issues that have the potential to turn into investigations).[Footnote
4]
Figure 1: Overview of SEC's Case Tracking Process:
[See PDF for image]
[End of figure]
When a case has been delinquent for at least 10 days, SEC and CFTC
staff can send a demand letter to a violator. The Debt Collection
Improvement Act of 1996 (DCIA)[Footnote 5] requires all federal
agencies, including SEC and CFTC, to refer non-tax debt more than 180
days delinquent to the Secretary of the Treasury for purposes of
centralized administrative offset. Once such a referral is received,
Treasury's FMS activates the Treasury Offset Program (TOP), under which
outstanding debts, including amounts due to SEC or CFTC as a result of
judgments or settlement agreements, are collected by the withholding of
federal payments that the government owes the debtor, such as tax
refunds.[Footnote 6] During its collection efforts, FMS may negotiate
compromise offers with debtors unable to pay the entire amount of a
judgment and may accept less than the full amount if doing so is the
only way to ensure that the violator pays at least some of the debt
owed.[Footnote 7] SEC and CFTC must approve such offers for violators
under their purview and may reject an offer or ask for further
information if the supporting documentation is not satisfactory.
In general, when a disgorgement fund is established, SEC attorneys can
propose appointing a receiver to develop and administer a distribution
plan to facilitate the collection of disgorgement and, in the case of
Fair Funds, both CMPs and disgorgement, and the distribution of those
funds to harmed investors.[Footnote 8] Receivers act independently of
SEC and defendants in conducting their prescribed duties. They have
primary responsibility for establishing the distribution plan,
including a description of the actions that will be taken to identify
harmed investors, and for ensuring that the appropriate taxes are
deducted from the monies collected.
Before Congress passed SOX, SEC could return only funds collected from
disgorgement to persons who had suffered financial harm from securities
violations. However, Section 308 (a) of the act allows SEC to add CMPs
to disgorgement funds. Section 308 (c) of the act also requires SEC to
report on the approaches the agency used, before the Fair Fund
provision, to (1) provide compensation to harmed investors and (2) to
improve the collection rates for CMPs and disgorgement, in order to
establish a benchmark for further action.
Results in Brief:
SEC has made a variety of improvements to its system for tracking data
on penalty and disgorgement collections, consistent with our previous
two recommendations. However, the agency could take additional actions
to improve its financial reporting controls and the usefulness of its
system for key users. Since our last report in 2003, SEC has stopped
using an unreliable tracking system, modified CATS to capture penalty
and disgorgement financial data, and established and implemented a
policy designed to make data entry into CATS more accurate. Although
SEC has made progress in addressing data reliability concerns we had in
the past, it must take additional steps to improve inadequate controls
in the recording and reporting of penalty and disgorgement
transactions, as discussed in our recent audit of SEC's financial
statements for fiscal year 2004.[Footnote 9] SEC plans to strengthen
internal controls and policies over its existing recording and
reporting process and is beginning a multiyear project to replace CATS.
Furthermore, we found--and SEC agreed--that it could take additional
action to ensure that CATS better meets the needs of key users, such as
attorneys and other collection staff. The agency is in the process of
upgrading CATS to address the needs of a broader range of users, and
expects the project to be complete in 2008.
SEC has taken actions addressing five open recommendations made in
prior studies that were designed to improve some collection activities
but has not fully addressed three remaining recommendations regarding
management's evaluation of program performance. Specifically, SEC has
(1) referred eligible delinquent cases to FMS in a more timely manner,
(2) established controls for fingerprinting procedures to help prevent
inappropriate persons from being admitted to the securities industry,
(3) begun to review the consistency of disciplinary actions taken by
SROs, (4) made more timely decisions on compromise offers, and (5)
increased the number of staff devoted to ensuring timely and successful
collection efforts.[Footnote 10] However, SEC is still working to
address one long-standing open recommendation related to improving the
tracking of the amounts of disgorgement ordered, collected, and
distributed, and the appropriateness of receiver fees on both an
aggregate and individual basis. During this review, we found that SEC
had recently expanded its CATS database to begin capturing the
necessary information but had yet to centrally monitor subsequent
distribution activities. Similarly, SEC has not fully addressed an open
recommendation that it implement alternative performance measures for
evaluating its overall collection program. The agency continues to rely
on its collection rate as a measure of success; however, SEC itself
acknowledges this measure does not effectively demonstrate the
effectiveness of its collection program. The collection rate can be
significantly affected by factors such as the agency's success or
failure to collect on a few large cases. In addition, SEC has responded
to an earlier recommendation by establishing policies and procedures to
provide collection staff with guidance on the type, timing, and
frequency of collection activities they should follow. Despite this,
the agency has not effectively monitored staff's implementation of
these guidelines, partly because collection staff in regional offices
have been supervised by regional managers who are not always familiar
with the collection process. As a result, SEC management cannot readily
determine whether sufficient and appropriate collection efforts are
being made. Finally, we identified new concerns related to some of the
changes SEC had made to its collection program. First, SEC does not
have a formal mechanism to assess whether its additional collection
resources are being used effectively. Although SEC management believes
that the new resources have alleviated the need for staff attorneys to
do some of the administrative duties related to collections, SEC cannot
validate such benefits without more formal evaluation. SEC staff said
that they plan to direct more attention to this issue once the
collection program becomes more stabilized after a year of changes made
in preparation for the agency's first external financial audit. Second,
some of the collection staff pointed to the need for management to
provide them with more guidance or training on new collection
procedures and data entry protocols to help them better perform their
duties and thus improve the program's effectiveness. Third, we found
that the two SEC units that are responsible for tracking and
maintaining the collection data in CATS did not always communicate and
coordinate with one another on a timely basis, potentially leading to
inefficiencies that could affect the collection process.
We also found that while SEC emphasizes its commitment to implementing
the Fair Fund provision of SOX, the agency has not formally assessed
the impact of the provision. In particular, SEC staff demonstrated
support for the provision by promoting an aggressive approach in
seeking, where appropriate, disgorgement orders in cases where CMPs are
also being sought. For example, attorneys have obtained disgorgement
for as little as $1 in settlements in order to obtain authorization
from the SEC Commission to create a Fair Fund. SEC estimates that, as
of April 2005, it had designated over $4.8 billion in CMPs and
disgorgement to be returned to harmed investors. Nevertheless, SEC did
not have a reliable method to identify these monies because CATS
predates the Fair Fund provision and thus cannot readily identify Fair
Fund cases or collect related data. A lack of reliable and meaningful
data could hinder SEC's ability to (1) ensure that the maximum amount
possible is returned to harmed investors and (2) develop effective
measures of the program's success. SEC recognizes the need to track
Fair Fund data and has recently added fields to CATS to identify these
cases and track their distribution. Finally, as required by SOX, SEC
has issued a report on actions it has taken to collect funds to be
returned to harmed investors and methods it has used to maximize
investor recovery.
As part of this review, we also found that CFTC implemented actions
that were consistent with the two remaining recommendations in our 2003
and 2001 reports. Specifically, we determined that CFTC, like SEC and
consistent with our 2003 recommendation, had participated with other
securities and futures regulators in initiatives designed to improve
controls over fingerprinting procedures for applicants seeking
admission to the futures industry. Further, CFTC has also developed a
process for referring eligible delinquent cases to FMS on a timely
basis, as we recommended in our 2001 report.
This report includes six new recommendations to the SEC Chairman to
ensure that SEC's collection staff have the appropriate tools to carry
out their duties and to improve SEC's ability to manage its collection
program. We requested comments on a draft of this report from the
Chairmen, SEC, and CFTC. SEC provided written comments that are
reprinted in appendix III. SEC agreed with all of our recommendations
and plans to take action to address them. SEC's comments are discussed
in more detail at the end of this report. CFTC provided technical
comments, as did SEC, which have been incorporated where appropriate.
SEC Has Made Progress in Improving the Accuracy and Usefulness of Data
It Collects, but Continued Attention Is Needed:
Our previous reports contained two recommendations that remained open
related to SEC's tracking of collection data. First, in 2002, we
recommended that SEC develop appropriate procedures to ensure the
accuracy and timeliness of information maintained in the Disgorgement
Payment Tracking System (DPTS), which was the tracking system SEC used
at the time to monitor disgorgement that had been ordered, waived, or
collected. Second, in 2003, we recommended that SEC take the steps
necessary to implement an action plan to replace DPTS with a new and
improved collection tracking system. SEC has made progress in
addressing these two recommendations by discontinuing its use of DPTS,
modifying CATS to capture financial information, and establishing an
improved procedure for entering data into CATS. Nevertheless, our
fiscal year 2004 audit of SEC's financial statements disclosed
inadequate internal controls over its reporting of penalty and
disgorgement transactions. SEC plans to address this finding by
strengthening its policies and its internal controls over existing
processes. In addition, we found, and SEC agreed that opportunities
exist to improve CATS's usefulness. The agency is in the process of
upgrading CATS to address the needs of a broader range of users, but
the project is in its early stages. Agency staff estimate that it will
not be fully complete until 2008.
SEC Discontinued DPTS, Modified CATS, and Established a Policy to
Improve Tracking of Collection Data:
In 2002, we reported that weaknesses in SEC's procedures for entering
and updating data in DPTS resulted in the system containing unreliable
data. Our 2002 review of a sample of 57 enforcement cases found that 18
cases, or approximately 32 percent, contained at least one error in the
amount of disgorgement ordered, waived, or collected, or in the status
of the case or of the individual violators. We found that the sources
used as a basis for entering data into DPTS did not always provide the
most accurate information. For example, we reported that staff in SEC's
Office of the Secretary, who were responsible for entering data into
DPTS, relied heavily on SEC litigation releases that, according to the
staff, did not contain all the details of a disgorgement order. The
staff also said that they did not independently verify the information
in the litigation releases. In January 2003, an independent accountant
confirmed that information in DPTS was not current and complete and
reported that the system could not be relied upon for financial
accounting and reporting purposes.[Footnote 11] As of October 2003, SEC
discontinued its use of DPTS.
SEC began using CATS to capture the financial information that DTPS had
tracked. This change was part of larger modifications to CATS made in
response to a legislative requirement that SEC prepare audited
financial statements for submission to Congress and the Office of
Management and Budget (OMB). SEC modified CATS by adding fields to
capture the necessary financial data--such as the amount of CMPs and
disgorgement ordered, collected, and distributed--and established a
policy of entering data on the amount of disgorgement and CMPs only if
valid supporting documentation was available.[Footnote 12] SEC staff
said they began collecting original source documents--copies of signed
and stamped final judgments, administrative orders, and court dockets-
-from SEC's headquarters, regional, and district offices. SEC staff
also told us that they entered financial data only for those cases with
an open enforcement action as of October 1, 2002, the beginning of
fiscal year 2003.[Footnote 13] As of February 2005, SEC staff said that
they had entered data on almost all of the approximately 4,500
enforcement cases, which involved over 12,000 defendants and
respondents that met SEC's criterion.
We reviewed a sample of 45 cases tracked in CATS and determined that
SEC had complied with its policy for improving data entry, which is:
consistent with our previous recommendation.[Footnote 14] Specifically,
we found supporting source documents for each of the 45 case files we
reviewed and were able to compare information from the source documents
with the data in CATS (as reflected in a March 2005 printout). However,
our comparison identified one $300,000 discrepancy on the amount of
disgorgement ordered and entered in CATS.
Although SEC has made progress in improving the reliability of CATS
collection data, in May 2005, we reported that SEC had inadequate
controls over its penalty and disgorgement activities, which increased
the risk that such activities would not be completely, accurately, and
properly recorded and reported for management's use in decision
making.[Footnote 15] In response to our findings, SEC stated that the
agency plans to strengthen internal controls and policies over its
existing recording and reporting process and has begun a multiyear
project to upgrade CATS.
Opportunities Exist to Improve CATS's Usefulness:
During this review, we found--and SEC agrees--that opportunities exist
to further improve CATS's usefulness for key system users, including
attorneys, case management specialists, and collection monitors in
Enforcement. Specifically, we found that CATS does not allow the
attorneys in Enforcement to perform customized searches or generate
tailored reports on the status of their cases. According to SEC staff,
certain search and reporting capabilities are available to a handful of
management level staff in the division but not to attorneys, who
constitute the bulk of the division's workforce. By not meeting the
attorneys' needs, CATS does not allow SEC to fully leverage its
existing resources, and attorneys are not able to efficiently address
their multiple and sometimes competing investigation, litigation, and
collection duties.
Similarly, we found that CATS currently does not meet all the needs of
case management specialists and collection monitors. Some staff, whose
positions were recently established to better track and report
collection activities, have expressed concerns about CATS's limited
reporting and search capabilities. To compensate for these limitations,
we found that collection staff in each of SEC's headquarters, district,
and regional offices are using their own ad hoc collection database--
outside of and separate from CATS--to track the status of delinquent
cases. According to the collection staff, these databases allow for
faster reporting and retrieval of information than CATS but, because
they also require the staff to enter some data twice, using additional
databases could lead to inefficiencies.
To address the various concerns of key users, including attorneys, case
management specialists, and collection monitors, and to strengthen the
inadequate internal controls identified in the 2004 financial statement
audit, SEC has begun a multiyear effort to upgrade CATS. SEC staff said
that they are trying to transform what is essentially a case tracking
system into a case management system that would be useful to a broader
range of users. For example, as part of the upgrade effort, SEC is
seeking to allow attorneys to generate customized reports on their
cases, search for information in memorandums, and establish a system
that would notify staff and remind them of deadlines in their cases.
According to SEC's Office of Information and Technology, the upgraded
system is also expected to address the needs of case management
specialists and collection monitors by capturing and reporting data
they require, eliminating the need for the separate databases. In
December 2004, SEC released a draft requirements analysis for the
upgraded system that contained steps to address the concerns of SEC's
user community. SEC approved funding for the first phase of the project
in June 2005 and, according to staff, the project will be fully
complete in 2008.
SEC Has Made Progress in Managing Its Collection Program but Needs to
Take Further Steps:
SEC has taken actions consistent with five of eight open
recommendations from our previous studies (table 2). The open
recommendations that SEC addressed were aimed at improving collection
activities--for example, SEC's practices for referring delinquent cases
to FMS--and addressing the need for additional collection resources.
However, further actions are needed to fully address three remaining
open recommendations, which are designed to improve SEC's performance
measures and program evaluations. Moreover, we identified three new
concerns related to SEC's management of collection staff, including (1)
the lack of a formal process for assessing the impact of collection
staff efforts, (2) the need for additional routine training and
guidance to ensure the effectiveness of collection staff's efforts, and
(3) the need for more formal communication and coordination protocols
between the two units that track and maintain CATS data in order to
improve the efficiency of collection activities.
SEC Has Taken Actions to Improve Some Collection Activities:
Our review indicated that, since 2003, SEC has made more timely
referral of delinquent cases to FMS and developed a strategy for
referring pre-guideline cases--that is, cases that existed at SEC
before Enforcement implemented its internal collection guidelines in
2002. The agency has also worked with the SROs to establish
fingerprinting guidelines and has begun analyzing data on SROs'
sanctions. In addition, SEC has worked to ensure that the agency makes
timely decisions on compromise offers presented by FMS and has
increased the resources for handling collections and related tasks.
Table 2: Status of Recommendations Related to SEC's Management of its
Collection Program from 1998 to 2003 GAO reports:
Previous open recommendations: The SEC Chairman should:
Previous open recommendations: Develop a formal strategy for referring
pre-guidelines cases to FMS and TOP that prioritizes cases based on
collectability and establishes implementation time frames;
Status: Addressed.
Previous open recommendations: Address weaknesses in controls over
fingerprinting procedures that could allow inappropriate persons to be
admitted to the securities industry;
Status: Addressed.
Previous open recommendations: Analyze data collected on the SROs'
disciplinary programs and establish a time frame for implementing the
new disciplinary database that is to replace the current one;
Status: Addressed.
Previous open recommendations: Continue working with FMS to ensure that
compromise offers are approved in a timely manner;
Status: Addressed.
Previous open recommendations: Complete the evaluation of options for
addressing the competing priorities and increasing workload faced by
SEC's Enforcement staff, including (1) assessing the feasibility of
contracting certain collection functions and (2) increasing the number
of staff devoted to collections;
Status: Addressed.
Previous open recommendations: Ensure that management uses information
on the distribution of disgorgement, including the amounts due to and
received by investors and the fees paid to receivers, to monitor the
distribution of disgorgement;
Status: Not fully addressed.
Previous open recommendations: Ensure that disgorgement and the
collection of disgorgement are addressed in SEC's strategic and annual
performance plan, including developing appropriate performance
measures;
Status: Not fully addressed.
Previous open recommendations: Ensure the prompt implementation of
collection guidelines that specify the various collection actions
available, explain when such activities should be considered, and
stipulate how frequently they should be performed, and develop controls
to ensure that staff follow these guidelines;
Status: Not fully addressed.
Sources: GAO and SEC.
Note: For further information, see [Hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-03-795], [Hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-02-771], [Hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-01-900], and [Hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO/GGD-99-8].
[End of table]
SEC Refers Delinquent and Pre-Guideline Cases to FMS on a Timely Basis:
Our 2001 report found that SEC staff lacked clear procedures to follow
when referring delinquent cases to FMS for collection, as required by
the DCIA. As a result, eligible delinquent debts were not promptly
being referred to FMS, in turn hampering FMS's efforts to collect on
SEC's behalf. In 2003, Enforcement implemented procedures to ensure
more timely referrals of delinquent cases, but not enough time had
elapsed at the time of our 2003 study to evaluate the effectiveness of
the new procedures. However, during this review, we did find that SEC
was making referrals to FMS before the 180 day time frame expired.
Specifically, from a random sample of 45 cases, we identified and
reviewed 6 delinquent cases that were eligible for referral and were
able to verify that SEC had referred each of those cases before the 180
day limit.[Footnote 16]
Our 2003 study also found that SEC staff had not identified a strategy
for referring pre-guideline cases to FMS and did not know the extent to
which the pre-guideline procedures for referring cases were being
followed. We recommended that SEC staff establish a strategy that
prioritized cases according to their collectability. During this
review, SEC management said that all eligible delinquent cases had been
referred to FMS for collection when SEC switched from tracking cases in
DPTS to tracking them in CATS.[Footnote 17] Based on our review, we
determined that SEC had not prioritized the cases but had assessed all
outstanding cases for possible referral to FMS and sent forward the
appropriate paperwork when applicable, including for pre-guideline
cases. As part of our recent review of 45 randomly selected cases, we
examined the referral status of 10 pre-guideline cases and found that
only one case was eligible for referral and that SEC staff had referred
it to FMS before 180 days expired.[Footnote 18]
SEC Has Enhanced Controls for Fingerprinting Procedures:
During our 2003 study, we examined the application review process for
individuals seeking employment in the securities industry. During that
review, we found that SEC's statute did not mandate that SROs such as
NASD and NYSE require their member firms to ensure that fingerprints
sent to the Federal Bureau of Investigation (FBI) as part of criminal
history checks actually belonged to the applicants submitting them.
Because this lapse in oversight could have allowed inappropriate
persons to enter the securities industry, we recommended that SEC
establish controls to ensure that fingerprints sent by SROs to the FBI
actually belong to the applicants. In July 2004, SEC and CFTC formed a
task force with representatives from several of their SROs to enhance
controls over existing fingerprinting guidelines. Using the FBI's
guidance on the best practices for preventing fingerprinting fraud in
civil and criminal cases, the task force developed a set of improved
fingerprinting guidelines, including a suggestion that applicants
present two forms of identification instead of one immediately before
fingerprints are taken or submit an attestation form in addition to the
standard U4 attestation form.[Footnote 19] NASD made the fingerprinting
guidelines available to its member firms on May 29, 2005.
SEC Has Begun Analyzing SROs' Disciplinary Actions:
In 1998, we found that SEC was not analyzing industrywide data on
disciplinary sanctions imposed by SROs to identify possible disparities
that might require further review. We recommended that SEC conduct such
an analysis and find ways to improve the SROs' disciplinary programs.
Consistent with this recommendation, SEC developed a database to
collect information on the SROs' disciplinary actions, but our 2003
study found that problems with the database were hampering SEC's
ability to analyze the data. For example, the database did not capture
multiple violations or multiple parties in a single case and did not
support multiple users. We made a follow-on recommendation in our 2003
report that SEC analyze the data that had been collected on the SROs'
disciplinary programs, address any findings that resulted from the
analysis, and establish a time frame for implementing a new database.
As we recommended, SEC has begun analyzing data on disciplinary actions
that the SROs took in 2003 and 2004. According to SEC staff, the
analyses have shown that sanctioning practices among SROs differ
primarily because the facts and circumstances of the cases vary--for
instance, the number of defendants involved or presence of other
violations.[Footnote 20] SEC staff said that SEC will use the results
of the analyses to determine the scope and timing of future SRO
inspections. Also, as we recommended, SEC's Office of Compliance
Examinations and Inspections has sought assistance from the agency's
Office of Information Technology to develop a new, more reliable Web-
based database that is scheduled to be deployed in September 2005.
According to SEC staff, using the new database, SROs will be able to
submit data to SEC online, an innovation that is expected to reduce
data entry errors and increase the amount of time SEC staff have to
spend on mission-related work such as inspecting SROs and examining
broker-dealers. The new database is also expected to provide virtually
unlimited storage capacity, improved reporting capability, and greater
stability.
SEC Has Made More Timely Decisions on Compromise Offers:
In 2001, we found that SEC had not always made prompt decisions on
compromise offers submitted by FMS, reducing the likelihood of
collecting on the debts. At that time, we recommended that SEC continue
to work with FMS to ensure that compromise offers presented by FMS were
approved in a timely manner. During this study, we found that SEC had
been accepting or rejecting compromise offers within 30 days of
receiving them from FMS, as required by SEC's internal policy. To
ensure more timely responses, SEC management assigned one staff member
to monitor and track compromise offers, maintain a schedule log, and
serve as a liaison with FMS to handle missing documents or other
problems. According to SEC data, SEC received 12 compromise offers via
e-mail between July 16, 2003, and January 6, 2005, and was able to
decide on 7 of them within 30 days. The other five compromise offers
were held up because of problems with missing documentation. SEC's
procedures require staff to use a variety of documents in assessing
compromise offers, including credit bureau reports, recent financial
statements, and tax returns for the preceding 3 years. However, until
early 2005, FMS did not require its staff to submit tax returns to SEC
along with compromise offers. The cases that were held up at SEC
because of lack of documentation all involved tax returns--in one case,
the returns were illegible, and in four they were missing
altogether.[Footnote 21] On February 5, 2005, FMS issued a technical
bulletin that directed staff to submit copies of tax returns for the 3
relevant years to SEC with all compromise offers. According to FMS,
these new instructions should resolve any problems with missing
documents and enable SEC to meet the 30-day deadline for deciding on
compromise offers.
SEC Increased Its Collection Resources to Address Competing Priorities
and Growing Workload:
In past studies, we found that SEC's Enforcement staff attorneys, who
are responsible for collecting disgorgement, had other duties and
competing priorities that hindered their collection efforts. For
example, depending on the office to which they were assigned, attorneys
were responsible for a variety of functions, including investigating
potential violations of securities law, recommending actions SEC should
take when violations were found, prosecuting SEC's civil suits,
negotiating settlements, and conducting collection activities for CMPs
levied. We recommended in 2002 that SEC consider contracting out some
collection activities and increase its collection staff. Consistent
with our recommendation, in 2003 SEC assessed the feasibility of
contracting with private collection agents and proposed legislative
changes that would allow the agency to contact with private collection
agents.[Footnote 22] Furthermore, SEC created and filled over 20
positions, including collection attorneys, paralegals, monitors, and
case management specialists in its headquarters, district, and regional
offices to assist in implementing collection guidelines that the agency
created in response to our 2002 recommendation that it establish such
criteria, so that collections could be maximized. Below are brief
descriptions of the collection staff's roles and duties:
* SEC hired three attorneys to pursue collection efforts in
headquarters. These attorneys review the evidence from initial asset
searches to determine whether SEC should continue with collection
activities or refer the case to FMS, and they advise SEC's regional
staff attorneys on their collection cases. The lead attorney also
manages SEC's collection unit, develops policies (including the
agency's collection guidelines), and trains staff on the collection
process.
* In 2003, SEC created 13 case management specialist positions to
assist attorneys with administrative tasks associated with their
investigations. The specialists perform data entry tasks and track
enforcement matters. Depending on the location, the number of attorneys
that each specialist supports varies from smaller to larger caseloads.
For example, in one region, a specialist supports 21-24 staff attorneys
and in another approximately 50.
* To help resolve delinquent cases, SEC also designated existing staff
in each of the 11 regional offices to monitor collection activities as
a collateral duty and created and filled two collection paralegal
positions for headquarters.[Footnote 23] The monitors are responsible
for keeping staff and collection attorneys apprised of upcoming
deadlines, assisting in referring delinquent cases to FMS, and
maintaining a collection database that is separate from CATS for the
Enforcement Division.
SEC Management Has Not Completed Actions to Evaluate the Performance of
Its Collection Program:
We found that SEC had made some progress in addressing our remaining
three open recommendations related to (1) establishing performance
measures to better track the effectiveness of SEC's collection efforts;
(2) tracking, on an aggregate and individual basis, both receivers'
fees and the amounts distributed to harmed investors to ensure that
investor recovery is maximized; and (3) implementing collection
guidelines and developing controls to ensure that staff follow the
guidelines. However, as part of this review, we found that the agency
could take further action on these management practices to improve
these areas.
SEC Has Established, but Not Implemented, an Alternative Performance
Measure for Its Collections Activities:
Under the Government Performance and Results Act, federal agencies are
held accountable for achieving program results and are required to set
goals and measure their performance in achieving them.[Footnote 24] We
reported in 2002 that SEC's strategic and annual performance plans did
not clearly lay out the priority that disgorgement collection should
receive in relation to SEC's other goals and did not include collection-
related performance measures. Further, we identified several
limitations in using the agency's disgorgement collection rate as a
measure of the agency's effectiveness. For example, the rate is heavily
influenced by SEC's success in collecting or not collecting on a few
large cases and by factors that are beyond a regulator's control, such
as violators' ability to pay. We suggested other measures that SEC
could consider, including tracking the percentage of disgorgement funds
returned to harmed investors, measuring the timeliness of various
collection actions, and tracking the number of violators ordered to pay
disgorgement who go on to commit other violations. The last measure
would help determine whether the agency's disgorgement orders were
having a deterrent effect.
During this review, we found that SEC had developed a performance
measure for timeliness and included it in the agency's 2004 annual
performance plan but had not collected data on this measure or reported
on its results. The agency's timeliness measure, according to SEC's
2004 Performance Plan, is the "number and percent of
defendants/respondents subject to delinquent disgorgement orders during
the fiscal year for which the Enforcement staff did not formulate a
judgment recovery plan within 60 days after the debt became
delinquent." This measure could potentially be useful in tracking staff
efforts to recover delinquent debt and comply with SEC's recently
established collection guidelines. However, in its 2004-2009 Strategic
Plan and 2004 Performance and Accountability Report, SEC continued to
use only the collection rate as its sole measure of collection
performance. SEC staff acknowledged--and we have previously noted--that
using only the collection rate had inherent limitations but added that
the agency continued to use it because Congress and other agencies had
come to expect that SEC would report the measure. While reporting the
collection rate may serve other goals, it is not a meaningful
performance measure and, as a result, SEC cannot fully determine the
effectiveness of its collection program.
During this review, we calculated SEC's collection rate for all cases
(open and closed), as well as a separate rate for closed cases
only.[Footnote 25] As shown in table 3, SEC's penalty collection rate
for closed cases between September 2002 and December 2004 ranged from
72 percent to 100 percent and for all cases from 34 percent to 86
percent.
Table 3: SEC's Collection Rates for CMPs Levied on All Cases and Closed
Cases Only, September 2002-December 2004:
Fiscal year: 2002[A];
Total CMPs on all (open and closed) cases: Amount levied: $3,770,872;
Total CMPs on all (open and closed) cases: Amount collected:
$1,277,004;
Total CMPs on all (open and closed) cases: Percentage collected: 34%;
Total penalties on closed cases only: Amount levied: $319,986;
Total penalties on closed cases only: Amount collected: $244,986;
Total penalties on closed cases only: Percentage collected: 77%.
Fiscal year: 2003;
Total CMPs on all (open and closed) cases: Amount levied:
$1,030,602,290;
Total CMPs on all (open and closed) cases: Amount collected:
$726,830,024;
Total CMPs on all (open and closed) cases: Percentage collected: 71%;
Total penalties on closed cases only: Amount levied: $360,000;
Total penalties on closed cases only: Amount collected: $260,000;
Total penalties on closed cases only: Percentage collected: 72%.
Fiscal year: 2004;
Total CMPs on all (open and closed) cases: Amount levied:
$1,206,475,410;
Total CMPs on all (open and closed) cases: Amount collected:
$1,041,613,639;
Total CMPs on all (open and closed) cases: Percentage collected: 86%;
Total penalties on closed cases only: Amount levied: $1,190,000;
Total penalties on closed cases only: Amount collected: $1,190,000;
Total penalties on closed cases only: Percentage collected: 100%.
Total;
Total CMPs on all (open and closed) cases: Amount levied:
$2,240,848,572;
Total CMPs on all (open and closed) cases: Amount collected:
$1,769,720,667;
Total CMPs on all (open and closed) cases: Percentage collected: 79%;
Total penalties on closed cases only: Amount levied: $1,869,986;
Total penalties on closed cases only: Amount collected: $1,694,986;
Total penalties on closed cases only: Percentage collected: 91%.
Source: GAO analysis of unaudited SEC data.
[A] Amounts included for 2002 are for September only. Amounts for the
previous months in fiscal year 2002, totaling $81.6 million, were
reported in a prior report. SEC levied a total of $85 million in 2002.
The collected amounts include penalties that were due to SEC, courts,
and court-appointed receivers.
[End of table]
While the percentage collected is a limited measure, as noted above,
these rates represent a significant increase from the 40 percent
collection rate for CMPs SEC averaged from January 1997 through August
2002. During 2003, SEC imposed about $1 billion in penalties, up from
about $85 million in 2002. According to SEC staff, from September 2002
through August 2004, SEC brought enforcement actions against large,
well-financed entities such as mutual funds and major corporations that
had been accused of financial fraud. Because SEC collected most of the
penalties imposed in these large cases, its collection rate was
significantly higher than in previous years. SEC management told us
that the agency's collection rate is heavily influenced by the nature
of the entity that the agency sues and noted that, if SEC sued
companies or issuers that were not well-financed, its collection rate
would likely fall.
As shown in table 4, for disgorgement levied on closed cases between
September 2002 and August 2004, SEC's collection rate ranged from 56
percent to 100 percent and from 13 percent to 34 percent for all cases
during the same period.
Table 4: SEC's Collection Rate for Disgorgement Levied on All Cases and
Closed Cases Only, September 2002-December 2004:
Fiscal year: 2002[A];
Total disgorgement on all (open and closed) cases: Amount levied:
$25,065,891;
Total disgorgement on all (open and closed) cases: Amount collected:
$3,141,592;
Total disgorgement on all (open and closed) cases: Percentage
collected: 13%;
Total disgorgement on closed cases only: Amount levied: $514,617;
Total disgorgement on closed cases only: Amount collected: $288,700;
Total disgorgement on closed cases only: Percentage collected: 56%.
Fiscal year: 2003;
Total disgorgement on all (open and closed) cases: Amount levied:
$1,028,469,833;
Total disgorgement on all (open and closed) cases: Amount collected:
$249,750,377;
Total disgorgement on all (open and closed) cases: Percentage
collected: 24%;
Total disgorgement on closed cases only: Amount levied: $28,919;
Total disgorgement on closed cases only: Amount collected: $28,919;
Total disgorgement on closed cases only: Percentage collected: 100%.
Fiscal year: 2004;
Total disgorgement on all (open and closed) cases: Amount levied:
$2,298,441,773;
Total disgorgement on all (open and closed) cases: Amount collected:
$773,725,175;
Total disgorgement on all (open and closed) cases: Percentage
collected: 34%;
Total disgorgement on closed cases only: Amount levied: $72,413;
Total disgorgement on closed cases only: Amount collected: $72,413;
Total disgorgement on closed cases only: Percentage collected: 100%.
Total;
Total disgorgement on all (open and closed) cases: Amount levied:
$3,351,977,497;
Total disgorgement on all (open and closed) cases: Amount collected:
$1,026,617,144;
Total disgorgement on all (open and closed) cases: Percentage
collected: 31%;
Total disgorgement on closed cases only: Amount levied: $615,949;
Total disgorgement on closed cases only: Amount collected: $390,032;
Total disgorgement on closed cases only: Percentage collected: 63%.
Source: GAO analysis of unaudited SEC data.
[A] Amounts included for 2002 are from September only. Amounts for the
previous months in fiscal year 2002 were reported in a prior report.
The collected amounts include disgorgements that were due to SEC,
courts, and court-appointed receivers.
[End of table]
These rates also represent a substantial increase over the collection
rate of 14 percent for all cases involving a disgorgement order between
1995 and November 2001. We reported in 2002 that the collection rate
for CMPs tends to be higher than the collection rate for disgorgement
because SEC can take into account a violator's ability to pay when
imposing a penalty but cannot do so when imposing a disgorgement. We
also reported that many violators ordered to pay a penalty are members
of the securities industry and are motivated to pay their CMPs in order
to maintain their reputation within the industry. However, we reported
that many violators ordered to pay large disgorgement orders are either
not members of the securities industry or have no desire to remain so.
As we have discussed in previous reports, these factors make using the
disgorgement collection rate as the sole performance measure
problematic and highlight the need for SEC to continue its efforts to
develop alternative performance measures for collection activities.
SEC Is Working to Capture Data on Amounts Distributed and Receivers'
Fees:
In previous GAO reports, we determined that SEC did not have a
centralized system for monitoring information on distribution amounts
and receiver fees, making it difficult for the agency to assess the
overall effectiveness of distribution efforts and ensure that harmed
investors received the maximum amount of recovered funds. We
recommended that SEC better manage disgorgement cases by tracking this
information on both an aggregate and individual case basis. In the
past, SEC stated that it did not believe that aggregating this data
would help determine how well it was managing collection cases or that
being able to assess the reasonableness of receiver fees would
necessarily provide information on whether defrauded investors should
have or could have received more funds. SEC had also identified a
number of obstacles that hampered its ability to address our
recommendation--for example, the CATS database, which was designed to
track individual case information but not to aggregate it. Further, we
were told that the agency lacked the information necessary to identify
the amounts allocated to defrauded investors and receivers' fees, and
SEC staff told us that they did not always know how much receivers were
paid. As a result, the agency has had to rely on the courts to provide
this information, but the courts have not consistently provided it.
During our work for this report, we learned that, despite its concerns
about these obstacles, SEC had begun to make some progress in
addressing this open recommendation. Specifically, SEC has updated CATS
to identify distribution data and is in the process of drafting a
standard form that will be used to request information from the courts
on receivers' fees. If the courts respond to SEC's requests for this
information, the agency should be better able to assess how well
overall distribution efforts are working and whether harmed investors
are being reimbursed the maximum amounts possible for actions taken
against them by securities law violators.
Uneven Supervision Reduces Assurance That Staff Are Following
Collection Guidelines:
In our 2002 study, we found that SEC's collection program lacked clear
policies and procedures specifying the actions that staff should take
to pursue collections. We commented that the lack of such guidance
affected both staff and management, since staff were not held
accountable to any clear standards and management could not determine
whether staff took all collection actions promptly, or ensure that
opportunities to maximize collection were not missed. We recommended
that SEC develop and implement collection guidelines and develop
controls to ensure that staff follow them. Consistent with the first
part of this recommendation, SEC has developed and implemented
collection guidelines that specify the various collection actions staff
can take, explain when such activities should be considered, and
stipulate how frequently they should be performed. SEC has also hired
additional resources to perform specific tasks outlined in its
collection guidelines. However, uneven supervision has reduced the
assurance that staff are following these guidelines.
According to SEC management, the primary control in place to ensure
that staff followed these guidelines is a periodic review, conducted by
the lead collection attorney, of the 12 individual collection databases
that collection staff use to track delinquent cases.[Footnote 26]
However, this periodic review may not be timely or effective since it
could result in noncompliance with the guidelines or errors being
undetected for an unspecified amount of time. Further, we found that
some of the individuals involved in the collection process in some of
SEC's regional offices--specifically monitors and case management
specialists--have supervisors who are not directly involved and may
lack detailed knowledge of the collection guidelines.[Footnote 27] In
addition, the level of supervision varies by location. For example, one
of the regional case management specialists told us that an associate
regional director oversees her work by reviewing a weekly CATS report
that she generates. At another location, a case management specialist
also told us that an assistant district administrator supervises her
but does not formally monitor her work.
Additional Concerns Could Impede SEC's Progress in Realizing the
Benefits of Improved Collection Efforts:
We identified three additional new areas of concern that could impede
SEC's progress in realizing the benefits of improved collection
efforts. Specifically, we found that SEC lacks (1) a formal mechanism
to monitor the effectiveness of the collection staff, (2) appropriate
guidance and training for some collection staff, and (3) effective
communication and coordination between two key units responsible for
tracking collection activity. First, SEC does not have a formal
mechanism to assess whether the increased collection resources are
being used effectively. SEC management believes that the new collection
resources have increased overall collection efforts and allowed
enforcement attorneys to devote more time to investigating potential
violations by reassigning some collection-related administrative
duties. However, without a formal process for determining the
effectiveness of the increased resources, SEC cannot validate these
benefits. SEC management explained that they have focused their
attention on making changes to the collection process in preparation
for the first external financial audit and thus have not yet been able
to focus on assessing the effectiveness of the collection staff's
activities. As SEC's collection process stabilizes, a formal approach
to gathering and analyzing input from Enforcement staff attorneys that
have interacted with collection staff would help determine whether the
new staff positions were being used effectively and whether any
improvements could be made.
Second, our interviews with some of the case management specialists and
collection monitors disclosed that some of the staff felt that they had
not received sufficient guidance or training on new protocols for the
collection procedures. SEC management told us that the agency had
periodically added new protocols to the established procedures for
tracking penalty and disgorgement data to help the agency prepare for
its first external financial audit. In particular, SEC staff said that
they had revised some internal controls and policies and procedures
related to data entry and added additional data entry screens to CATS.
Although new protocols addressing these changes have been communicated
to the collection staff through various methods such as e-mails,
monthly meetings, and monthly notifications, some of the collection
staff identified the need for additional guidance. Moreover, some of
them said that they would like to receive training on issues addressed
in policy updates, as well as receive more formal training in how to
interpret legal documentation such as judgments and how to work with
FMS on collection issues. SEC management said that the agency has
planned a workshop for the staff in late 2005 to provide information on
these and related issues and anticipates that it will help meet some of
the needs that staff have identified. Such attention should help the
collection staff perform their duties more effectively.
Third, since August 2004, Enforcement and the Office of Financial
Management (OFM) staff have shared responsibility for tracking and
maintaining penalty and disgorgement data in CATS, but the units lack
formal procedures to ensure that their staffs communicate and
coordinate activities. To prepare for the external financial statement
audit, SEC transferred responsibility for entering financial data in
CATS from Enforcement to OFM, since penalty and disgorgement activity
are recorded in SEC's financial statements. Under the terms of the
transfer, Enforcement would still enter most of the case-related data
into CATS, such as the names of defendants and dates of judgments and
orders, and OFM would enter data on the amounts of money ordered,
collected, and distributed. However, this division of responsibilities
has not always been effective. For instance, Enforcement staff need
timely and complete information on amounts that have been collected in
order to take appropriate collection actions, but communication with
OFM staff is not always consistent and timely, making coordination
difficult. As an example, when OFM staff enter financial data into
CATS, they do not always notify Enforcement, so that Enforcement staff
must periodically check CATS to find out whether money has been
collected and, in some instances, must contact OFM to determine the
status of a case. Further, OFM is not always timely in entering data,
resulting in delays that could hinder Enforcement staff's collection
efforts.
SEC Emphasizes Its Commitment to Implementing the Fair Fund Provision
but Has Been Slow in Distributing Funds and Assessing Results:
SEC demonstrated its commitment to effectively implementing the Fair
Fund provision of SOX by taking several steps. First, agency management
has issued clear guidance to staff on how to generate Fair Fund monies
from penalized offenders. As of April 2005, SEC has designated almost
$4.8 billion to be returned to harmed investors although, as of the
date of this report, very little of it had been distributed, primarily
because of time consuming tasks that have to be completed before
distribution can take place. Second, we found that SEC staff had begun
to collect and aggregate Fair Fund data to help in assessing the
agency's performance in distributing funds to harmed investors.
Finally, SEC has begun to address reporting requirements in its efforts
to collect funds for distribution and in the methods it is using to
maximize investor recovery.
SEC Has Issued Guidance on Implementing the Fair Fund Provision:
According to SEC staff, the agency is committed to using the Fair Fund
provision, which allows money from CMPs to be added to disgorgement
amounts, to help defrauded investors obtain more of the funds owed to
them. SEC has issued guidance to its staff on interpreting and applying
the provision--for example, explaining that ordering a disgorgement for
as little as $1 can qualify a case as a Fair Fund case and make CMPs
eligible for distribution. Among other cases, SEC applied this method
in SEC v. Lucent Technologies, in which the company agreed to pay a
settlement of $25 million in CMPs and $1 in disgorgement.[Footnote 28]
In this particular case, SEC charged the company and 10 individuals
with fraudulently and improperly recognizing approximately $1.148
billion of revenue and $470 million in pretax income during fiscal year
2000--a violation of generally accepted accounting principles (GAAP).
The guidance also highlights several other important aspects of the
Fair Fund provision. It discusses the legal and practical aspects of
seeking disgorgement, including estimating the amount the defendant
obtained illegally.[Footnote 29] It also instructs staff to include
language preserving SEC's ability to establish a Fair Fund at a later
date in cases that are settled early before it has been decided whether
the Fair Fund provision will be invoked. Finally, SEC requires that
language be added to judgments in all Fair Fund cases prohibiting
violators from using amounts collected under a judgment to offset
potential later judgments levied in third-party lawsuits. Because
allowing such offsets could reduce the amount of money investors
received in these lawsuits, the SEC language also stipulates that even
if a court allows offset language in later judgments, the violator is
obligated to pay the difference. This language is intended to aid
attorneys in fairly and fully applying the Fair Fund provision and to
help ensure that violators do not sidestep the intent of the Fair Fund
provision.
SEC Has Successfully Used Fair Funds, but Distribution Has Been Slow:
According to agency documents, SEC staff have successfully applied the
Fair Fund provision in at least 75 cases since 2002 and, as a result of
these efforts, more than $4.8 billion in disgorgement and CMPs were
designated for return to harmed investors as of April 2005. At the time
of our review, although SEC has collected money for 73 of the 75 cases
they identified, approximately $60 million from only three cases have
been distributed to harmed investors, and funds totaling about $25
million from only one other case were being readied for distribution.
SEC's rules regarding Fair Funds and disgorgement funds states that
"unless ordered otherwise, the Division of Enforcement shall submit a
proposed plan no later than 60 days after the respondent has turned
over the disgorgement…."[Footnote 30] However, SEC staff observed that
appointing a receiver to establish a plan for distributing funds can
sometimes be a lengthy process that can be further complicated by
factors beyond the agency's control. For example, in one case, an
analysis of an extensive trading history had to be conducted, in order
to determine issues such as the extent to which funds were diluted and
the shareholders were harmed, and to determine how to deal with tax
considerations for the distribution recipients. In another instance, a
company agreed to pay $80 million in disgorgement, CMPs, and interest,
but a pending criminal indictment prevented SEC from distributing any
funds until the criminal case is resolved. SEC acknowledged that the
agency has an obligation to distribute funds to harmed investors in a
timely manner and that SEC collection attorneys have begun to take on
some of the tasks associated with distribution in an effort to expedite
the distribution process. The collection attorneys also told us that
they are working to develop a more standardized process for
distributing funds to help ensure that staff attorneys perform this
function properly.
SEC Has Started to Collect and Aggregate Fair Fund Data:
During this review, we found that SEC implemented the Fair Fund
provision without having a method in place to systematically track the
number and amount of monies ordered, collected, and distributed, in
part because CATS was not initially designed to identify this
information. To gather information on Fair Fund cases, SEC management
has had to request that staff attorneys submit ad hoc summaries of
these cases, but the lack of a standard reporting format means that the
information may be inconsistent. SEC management also has used data from
CATS, Treasury's Bureau of Public Debt database, and discussions with
attorneys to compile information on Fair Fund cases, but this method
also has limitations because it does not employ a reliable data entry
process using source documents that account for all the cases. Without
reliable, accessible data, SEC is limited in its ability to evaluate
the overall effectiveness of its implementation of the Fair Fund
provision.
During this review, we found that SEC had started to take steps to
track data on Fair Fund cases by adding fields to CATS that allow case
management specialists to enter appropriate data, including receivers'
fees, amounts distributed for Fair Fund and disgorgement cases, and
amounts returned to Treasury. In addition, SEC staff said that
information on all Fair Fund cases created before these modifications
would be retroactively entered into the system. According to SEC
management, SEC plans to compile and aggregate Fair Fund data, such as
the number of cases and the associated monetary amounts, in order to
better assess the provision's impact.
We also learned that SEC was using the amounts designated for return to
harmed investors as an indicator of the program's success. For example,
when describing the Fair Fund program in SEC's 2006 budget request,
issued in February 2005, the agency stated that over $3.5 billion in
disgorgement and CMPs had been designated for this purpose. However,
these amounts alone may not be appropriate measures of the program's
success since harmed investors do not necessarily receive all the
money. A more comprehensive indicator could include the amount of CMPs
ordered as a direct result of the Fair Fund provision, the actual
amounts distributed, and the length of time required to distribute the
funds. SEC management told us that the agency plans to add an indicator
on Fair Fund distribution to its agencywide performance "dashboard"
that tracks the amount of funds returned to harmed investors.[Footnote
31] Such an indicator would be a useful output measure but would not
provide complete feedback on the effectiveness with which SEC executed
its responsibilities. Nevertheless, to calculate its planned measure,
SEC would have to collect data on how much money was actually returned
to investors once taxes, fees, and other administrative costs were
subtracted from the total amount collected.
SEC Has Complied with Other Aspects of Section 308:
As required by Section 308(c) of SOX, SEC issued a report in January
2003 detailing the agency's efforts in collecting funds to be returned
to harmed investors and the methods used to maximize this
recovery.[Footnote 32] The approaches involved "real time" enforcement
initiatives such as temporary restraining orders, asset freezes, and
the appointment of receivers to maximize recovery. SEC's report also
suggested some legislative changes that would assist the agency in
maximizing recovery for defrauded investors, including the following
three:
* technical amendment to the Fair Fund provision that would permit SEC
to include CMPs in Fair Funds for distribution to harmed investors in
cases that do not involve disgorgement;
* proposal that excludes securities cases from state law property
exemptions, so that violators could not use these "homestead"
exemptions to shield their assets from judgments and administrative
orders; and:
* grant of express authority to SEC to contract with private collection
agents.
These proposed changes, in addition to others pertaining to enhancing
enforcement capabilities and assisting defrauded investors, were
included in H.R. 2179, the Securities Fraud Deterrence and Investor
Restitution Act of 2003, which was introduced in the 108TH Congress.
The bill was reported favorably to the full House by the House
Financial Services Committee, but no vote took place.[Footnote 33]
CFTC Has Added Controls to Fingerprinting Procedures and Begun Making
Timely Referrals to FMS:
In our 2001 report, we recommended that CFTC take steps to ensure that
delinquent CMPs were promptly referred to FMS. In our 2003 report, we
also recommended that CFTC work with SEC and the SROs to address
weaknesses in fingerprinting procedures to ensure that only appropriate
persons are admitted to the futures industry. As part of this review,
we found that CFTC fully addressed these remaining open
recommendations. We also updated our calculation of CFTC's collection
rates since our 2003 report (see appendix II).
In 2001, we recommended that CFTC implement its Office of Inspector
General's (OIG) recommendation to create formal procedures to ensure
that delinquent CMPs were sent to FMS within the required time frames.
In an April 2001 report, CFTC's OIG found that CFTC staff were not
referring the delinquent debts to FMS in a timely manner, potentially
limiting FMS's ability to collect the monies owed. In 2004, CFTC's OIG
followed up on this issue and determined that for the period from 2001
through 2004, CFTC had consistently complied with DCIA by referring
delinquent debt to FMS within the allowable 180 days for collection
services. CFTC's OIG reviewed 21 uncollected penalty cases out of a
universe of 187 CMPs that were eligible for referral between October 1,
2001, and August 31, 2004. Of the 21 cases, 8 were excluded from
referral to FMS because they were either referred to the Department of
Justice for further review or were in litigation. CFTC's OIG found that
of the remaining 13 cases, CFTC had sent 12 to FMS within the required
time frame. One case was not received by FMS due to an undetected
facsimile transmission error. CFTC officials have stated that their
Enforcement division has changed the way it transmits information when
referring cases and now uses certified mail, which provides a receipt
to confirm that the information has been delivered.
During our 2003 study, we found that CFTC's statute, like SEC's, did
not mandate that SROs such as NFA require member firms to ensure the
validity of fingerprints submitted to the FBI by applicants of the
futures industry. In response to our recommendation that CFTC address
this weakness, CFTC, like SEC, worked with futures and securities
regulators to prepare recommended guidance for best practices for
fingerprinting procedures. According to CFTC officials, the agency
agrees with the other task force members that issuing "best practices"
guidance to the futures and securities industries could help prevent
applicants from using someone else's fingerprints as their own. CFTC
officials said that NFA made some adjustments to the fingerprinting
guidelines developed by the task force to tailor them to the futures
industry and that the updated guidance was made available to NFA
members on July 29, 2005.
Conclusions:
Over the past 2 years, SEC has undertaken a number of initiatives to
enhance its ability to collect and track CMPs and disgorgement data
and, to a lesser extent, monitor program effectiveness. SEC's
initiatives represent a significant investment by the agency to improve
its program. However, our recent audit of SEC's 2004 financial
statement and this follow-up review showed that SEC needs to continue
improving various aspects of its collection program. In response to our
financial audit report, SEC has planned a number of corrective actions
to address the identified control weaknesses related to the recording
and reporting of penalty and disgorgement transactions. While SEC
continues to address these internal control issues, it could also take
steps to further maximize the effectiveness of its additional
collection resources and strengthen the management of its collection
program. Overall, SEC staff lacks some of the tools and support it
needs to conduct collection and track collection data. In particular,
the inadequacies that exist within the CATS database, uneven
supervision of collection staff, and weak coordination between the two
units responsible for tracking collection data collectively reduce the
efficiency with which SEC staff carry out their responsibilities.
Just as important, SEC management also does not have the appropriate
tools to evaluate the effectiveness of the agency's collection
activities. Since expanding its collection staff, SEC has not formally
assessed how additional resources have assisted in the collection
process and alleviated staff attorneys' responsibilities. Without a
formal approach, SEC is not able to determine whether its resources are
being optimally utilized. SEC also still does not have meaningful
performance measures to assess the effectiveness of the agency's
collection activities, inhibiting management's ability to identify and
make adjustments as needed. Finally, SEC management has started to
collect data to centrally monitor distribution activities to assess how
well it is returning disgorgement funds to harmed investors, but these
actions have not yet been completed.
The Fair Fund provision has allowed for the potential for greater
return of monies to harmed investors from securities laws violators.
SEC has demonstrated its commitment in using this provision, and its
implementation efforts are noteworthy. Nevertheless, to date, the
majority of the monies collected under the provision have not been
distributed to harmed investors. We recognize that, as with other
distribution funds, the complexity and circumstances of a case could
contribute to the lapse in time between the collection of the monies
and subsequent distribution. However, because of SEC's traditional
focus on deterring fraud and the relatively few distributions that have
taken place, we are concerned that SEC may not be able to ensure the
timely distribution of the growing sum of money that has been collected
as a result of the establishment of Fair Funds. At a minimum, SEC
should have reliable and meaningful data available to monitor the
timely and complete distribution of Fair Fund monies.
Recommendations for Executive Action:
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,
we recommend that the Chairman, SEC, take the following three actions:
* 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.
* Establish procedures for staff in the OFM to notify Enforcement staff
on a timely basis about data entered into CATS.
* 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.
In addition, we recommend that the Chairman, SEC, take the following
three actions, including two that we have previously recommended, to
continue to ensure that the collection program meets its goal of
effectively deterring securities law violations and returning funds to
harmed investors:
* 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.
* Ensure that management determines, on an aggregate basis, (1) the
amount of disgorgement distributed each year to harmed investors, (2)
the amount of CMPs 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.
* 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 Comments and Our Evaluation:
We requested comments on a draft of this report from SEC and CFTC. Both
agencies provided technical comments, which we have incorporated into
the final report, as appropriate. SEC also provided written comments
that are reprinted in appendix III. In its comments, SEC acknowledged
that the Division of Enforcement's efforts in data tracking and
management practices are still in their early stages, but said that the
agency is working diligently to strengthen its collection program. SEC
also expressed agreement with our findings and all six of our
recommendations and said that it is working to implement each of the
recommendations.
Specifically, SEC is in the process of (1) developing reports and
training programs that will allow for consistent monitoring of the
collection program nationwide, (2) developing a system by which OFM can
notify Enforcement about data entered into SEC's case tracking system,
(3) determining the effectiveness of new collection processes and
staff, (4) revising current performance measures to more effectively
determine program performance, (5) collecting information on the amount
of penalties and disgorgement distributed to investors and paid to
receivers, and (6) developing systems to collect data on Fair Fund
cases.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time we will provide copies of this
report to the Chairmen and Ranking Minority Members of the Senate
Committee on Banking, Housing, and Urban Affairs and its Subcommittee
on Securities and Investment; the Chairmen, House Committee on
Financial Services and its Subcommittee on Capital Markets, Insurance,
and Government Sponsored Enterprises; and other interested
congressional committees. We will also send copies to the Chairman of
SEC, the Chairman of CFTC, and other interested parties. We also will
make copies available to others upon request. In addition, the report
will be available at no charge on the GAO Web site at [Hyperlink,
http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-8678 or [Hyperlink, hillmanr@gao.gov]. Contact
points for our Office of Congressional Relations and Public Affairs may
be found on the last page of this report. GAO staff who made major
contributions to this report are listed in appendix IV.
Signed by:
Richard J. Hillman:
Managing Director, Financial Markets and Community Investment:
[End of section]
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
To discuss the Securities and Exchange Commission's (SEC) progress in
addressing recommendations made in our 2002 and 2003 reports that were
aimed at improving the agency's tracking of data on civil monetary
penalties (CMP) and disgorgement, we interviewed staff in SEC's
Division of Enforcement (Enforcement), Office of Financial Management
(OFM), and Office of Information Technology (OIT) to obtain information
on efforts they have made to implement the recommendations.[Footnote
34] To gain further information on SEC's activities in upgrading its
tracking system, we reviewed relevant documents, such as an internal
Case Activity Tracking System (CATS) data entry guide (with associated
procedures), sample data entry forms completed by Enforcement
attorneys, a draft systems definition document for an upgraded case
tracking system prepared by an SEC-hired contractor, an assessment of
the accuracy and completeness of CATS data conducted by SEC's Office of
Inspector General, and GAO's audit of SEC's financial statements for
fiscal year 2004.[Footnote 35] To assess the reliability of penalty and
disgorgement data that SEC provided for the calculation of its
collection rate, we interviewed staff in Enforcement and OFM about the
new policies and procedures for entering data into CATS. We selected a
random sample of 45 cases tracked in CATS to test the improved
procedures by (1) reviewing case files for valid supporting source
documents maintained by Enforcement staff, including final judgments,
administrative orders, and court dockets, and (2) verifying data
accuracy for penalty and disgorgement amounts ordered by comparing data
recorded in source documents with data entered in CATS as of March
2005. We concluded that for purposes of this report, the data provided
by SEC were sufficiently reliable.
To assess the steps SEC has taken to address our earlier
recommendations on its management of the collection program and related
issues, we conducted relevant testing of procedures, including those
related to referrals and approvals of compromise offers, interviewed
staff from SEC and other agencies involved in SEC's collection
activities, and reviewed pertinent documents.[Footnote 36]
Specifically, to evaluate the effectiveness of SEC's procedures for
referring delinquent cases to the Department of the Treasury's
(Treasury) Financial Management Service (FMS) both before and after the
collection guidelines were established, we interviewed SEC staff to
discuss the activities they took recently to refer delinquent cases to
FMS.[Footnote 37] Using our sample of 45 cases, we identified those
that met the criteria for referral and used FMS's records to verify
that the cases had been referred and determine how quickly SEC
submitted the referrals. Next, to assess SEC's efforts to address our
2003 recommendation that the agency work with the securities and
futures self-regulatory organizations (SRO) to address weaknesses in
controls over fingerprinting procedures, we interviewed SEC staff to
discuss actions taken since we made our recommendation and the status
of the fingerprinting guidelines. We also obtained a draft copy of the
guidelines and reviewed the additional controls that had been proposed
to prevent inappropriate persons from being admitted to the securities
industry.
To assess SEC's progress in tracking SROs' disciplinary actions and in
implementing a new database to track them--a recommendation from our
2003 report--we reviewed the results of the analyses that SEC's Office
of Compliance Inspections and Examinations (OCIE) conducted of these
actions, as of May 2005, and an internal planning document that OIT had
prepared. We also interviewed OCIE and OIT staff about the efforts each
office had made to address the recommendation. Further, to address a
recommendation related to approval of compromise offers from FMS, we
assessed SEC's efforts to improve its timeliness by obtaining and
analyzing data from SEC and FMS on all of the 12 compromise offers
presented by FMS between July 15, 2003, and January 6, 2005, to
determine whether SEC had met its internal time frame. We also
interviewed SEC and FMS staff to discuss the effectiveness of SEC's
policies and procedures and to obtain information on SEC's efforts to
work with FMS to ensure the timely approval of offers.
In addition, to determine whether SEC had implemented our 2002
recommendation that it complete an evaluation of options for addressing
its competing priorities and increasing workload by assessing the
feasibility of contracting out certain collection functions or
increasing staff devoted to collections, we reviewed SEC's study
pursuant to a mandate in Sarbanes-Oxley Act of 2002 (SOX) to obtain the
results of the feasibility assessment.[Footnote 38] We also reviewed
and followed up on the status of the Securities Fraud Deterrence and
Investor Restitution Act, introduced in the 108TH Congress, which
included a number of legislative proposals that SEC had recommended in
its study, such as contracting with private collection agencies to
collect delinquent debt owed to the agency.[Footnote 39] Further, we
interviewed SEC staff to discuss recent measures taken by the agency to
increase its collection staff. Moreover, to determine if SEC had
established alternative measures to its collection rates, as
recommended in our 2002 report, we reviewed the agency's 2004-2009
Strategic Plan, 2004 Performance Plan, and 2004 Performance and
Accountability Report for collection indicators and interviewed staff
in Enforcement to obtain their views on using alternative measures. In
addition, to determine whether SEC had promptly implemented its
collection guidelines and taken action to ensure that staff followed
them, we reviewed the collection guidelines and job descriptions for
case management specialists. We conducted structured interviews with
nine collection staff members, including two attorneys, one regional
collection monitor, one paralegal, and five case management
specialists, three of whom also perform collection monitors' duties, to
discuss their duties in relations to the collection guidelines and
their views on the level of training they have received. SEC management
selected these individuals based on our criteria that we speak with one-
third of the new collection staff. These staff members worked in
headquarters and regional offices in Atlanta, Boston, Denver, and
Miami. Finally, we reviewed collection checklists and screen printouts
from the databases used by collection staff and interviewed SEC
officials who manage the collection program and staff to discuss their
role in SEC's case tracking and collection process.
To evaluate SEC's implementation of the Fair Fund provision, we
reviewed Section 308 (a-c) of the act and performed a legislative
search and legal analyses. To determine how and when SEC applies the
provision, we reviewed information from SEC's Web site, the agency's
CATS database, a sample of distribution plans and rulings on cases to
which the Fair Fund provision had been attached, and SEC's Rules on
Fair Fund and Disgorgement Plans and interviewed relevant SEC staff.
Further, to determine the number of cases and the amount of CMPs and
disgorgement ordered and collected since the SOX was implemented in
2002, we reviewed two internal documents that summarized Fair Fund
cases and amounts dated June 30, 2004, and April 22, 2005, and
interviewed SEC staff on their use of the data. In addition, to gain a
better understanding of the distribution process, we interviewed SEC
staff on the data and controls they used to ensure that appropriate
amounts were being returned to harmed investors. Moreover, Section
308(c) of SOX required that SEC report on (1) enforcement actions that
SEC took to obtain CMPs or disgorgement for the 5-year period prior to
the act's implementation and (2) methods SEC used to ensure that
injured investors were being fairly compensated. SEC issued this report
in January 2003, and we reviewed it to determine if SEC had met the
legislation's requirement. We also performed a legal analysis to assess
whether receiving Fair Funds affected a harmed investor's ability to
sue a violator through private litigation.
To describe the actions CFTC has taken to address previous
recommendations, we interviewed relevant CFTC staff, reviewed
collection documents they provided and relied on CFTC's Office of
Inspector General's (OIG) work. Specifically, to determine whether CFTC
had complied with the Debt Collection Improvement Act of 1996 by
referring delinquent debt to FMS, we relied primarily on CFTC OIG's
findings associated with this recommendation. In particular, we
reviewed the OIG's 2004 and 2001 audit reports and supporting work
papers for our assessment of the timeliness of referrals. We also
reviewed CFTC's documents describing its collection workflow and
processes and interviewed CFTC's OIG staff and CFTC staff to discuss
CFTC's procedures on referring debt to FMS. Furthermore, to assess the
actions CFTC has taken to address our recommendation on strengthening
fingerprinting controls, we conducted our work on CFTC and SEC
simultaneously. We obtained a copy of the draft for the new
fingerprinting guidelines and reviewed them for additional controls to
preclude inappropriate individuals from being admitted to the futures
industry.
Finally, to calculate SEC's collection rates for CMPs and disgorgement
and CFTC's collection rates for CMPs and restitution, we requested data
from each agency on the amount of these sanctions ordered from
September 2002 through August 2004 and collected through December 2004.
We chose September 2002 as the beginning of our time period in order to
pick up where our 2003 report ended. As with our 2003 report, we
limited our review to CMPs, disgorgement, and restitution ordered
through August 2004 to allow SEC and CFTC through December 2004 (4
months) to attempt collections. Also consistent with our 2003 report,
we calculated SEC's and CFTC's collection rates for all cases (open and
closed cases) and closed cases only.[Footnote 40] For purposes of our
calculation, we defined open cases as "cases with a final judgment
order that remained open while collection efforts continued" and closed
cases as "cases with a final judgment order for which collection
actions were completed." We relied on SEC and CFTC to categorize cases
as being open or closed, consistent with the above definition. We did
not independently verify either SEC or CFTC's classification of a case
as being open or closed. For data provided by both agencies, we
performed basic tests of the data's integrity, such as checks for
missing records and obvious errors. We concluded that the data provided
by SEC and CFTC, for purposes of this report, were sufficiently
reliable.
We conducted our work from August 2004 to August 2005 in Washington,
D.C., in accordance with generally accepted government auditing
standards.
[End of section]
Appendix II: CFTC's Penalty and Restitution Collection Rates:
We calculated the Commodity Futures Trading Commission's (CFTC) civil
monetary penalties (CMP) and restitution collection rates to provide
updated information on CFTC's activities through December 2004. As in
our 2003 report, we calculated CFTC's collection rate for all cases
(open and closed) and closed cases only.[Footnote 41] As shown in table
5, from September 2002 through December 2004, CFTC's CMPs collection
rate for all cases ranged from 38 percent to 100 percent and for closed
cases only from 98 percent to 100 percent.
Table 5: CFTC's Collection Rates for CMPs Levied on All Cases and on
Closed Cases Only, September 2002-December 2004:
Fiscal year: 2002[A];
Total CMPs on all (open and closed) cases: Amount levied: $225,000;
Total CMPs on all (open and closed) cases: Amount collected: $225,000;
Total CMPs on all (open and closed) cases: Percentage collected: 100%;
Total CMPs on closed cases only: Amount levied: $225,000;
Total CMPs on closed cases only: Amount collected: $225,000;
Total CMPs on closed cases only: Percentage collected: 100%.
Fiscal year: 2003;
Total CMPs on all (open and closed) cases: Amount levied: $137,313,266;
Total CMPs on all (open and closed) cases: Amount collected:
$87,410,107;
Total CMPs on all (open and closed) cases: Percentage collected: 64%;
Total CMPs on closed cases only: Amount levied: $78,697,174;
Total CMPs on closed cases only: Amount collected: $77,307,229;
Total CMPs on closed cases only: Percentage collected: 98%.
Fiscal year: 2004;
Total CMPs on all (open and closed) cases: Amount levied: $320,889,522;
Total CMPs on all (open and closed) cases: Amount collected:
$121,899,500;
Total CMPs on all (open and closed) cases: Percentage collected: 38%;
Total CMPs on closed cases only: Amount levied: $121,889,500;
Total CMPs on closed cases only: Amount collected: $121,769,500;
Total CMPs on closed cases only: Percentage collected: 99.9%.
Total;
Total CMPs on all (open and closed) cases: Amount levied: $458,427,788;
Total CMPs on all (open and closed) cases: Amount collected:
$209,534,607;
Total CMPs on all (open and closed) cases: Percentage collected: 46%;
Total CMPs on closed cases only: Amount levied: $200,811,674;
Total CMPs on closed cases only: Amount collected: $199,301,729;
Total CMPs on closed cases only: Percentage collected: 99%.
Source: GAO analysis of CFTC's data.
[A] Amounts included for 2002 are from September only. Amounts for the
previous months in fiscal year 2002 were reported in a prior report.
According to data CFTC provided, during 2003 there were 12 cases
totaling $5,557,680 that were neither open nor closed but were on
appeal for which CFTC collected $0. Similarly, during 2004, there were
two cases totaling $626,000 that were neither open nor closed but were
on appeal for which CFTC collected $0.
[End of table]
Like the Securities and Exchange Commission (SEC), CFTC also imposed
significantly larger amounts of CMPs from September 2002 through
December 2004 compared with previous years. For example, during 2003
CFTC imposed about $137 million in CMPs, up from $15.6 million in 2002.
According to CFTC officials, there were three reasons for the increase.
First, in 2002, CFTC was reorganized to leverage the Enforcement's
investigation and litigation resources. This reorganization allowed the
division to file more cases and ultimately it entered into an increased
number of judgments imposing a penalty. Second, by 2003, the
Enforcement division was engaged in an industrywide investigation of
the energy sector concerning attempted manipulation and false reporting
conduct, and settlements in these cases resulted in the imposition of
approximately $250 million in CMPs. Third, following reauthorization in
2001, CFTC's jurisdiction over investigations of foreign exchange fraud
was clarified; since that time, CFTC has begun to file more actions in
this area. In one case, according to CFTC officials, a court entered
separate judgments against the named defendants, imposing approximately
$75 million in CMPs.
However, unlike SEC's collection activity, CFTC's collection rate for
CMPs did not significantly increase over previous years. For example,
from September 2002 through December 2004 CFTC's CMPs collection rate
for all cases was 46 percent. From January 1997 through August 2002,
the agency's collection rate was 45 percent.
As shown in table 6, CFTC's collection rate for restitution ranged from
4 percent to 8 percent for all cases and was 100 percent for closed
cases only.
Table 6: CFTC's Collection Rate for Restitution Levied on All Cases and
on Closed Cases Only, September 2002-December 2004:
Fiscal year: 2002[A];
Total restitution on all (open and closed) cases: Amount levied: $0;
Total restitution on all (open and closed) cases: Amount collected: $0;
Total restitution on all (open and closed) cases: Percentage collected:
0;
Total restitution on closed cases only: Amount levied: $0;
Total restitution on closed cases only: Amount collected: $0;
Total restitution on closed cases only: Percentage collected: 0.
Fiscal year: 2003;
Total restitution on all (open and closed) cases: Amount levied:
$77,133,613;
Total restitution on all (open and closed) cases: Amount collected:
$6,461,706;
Total restitution on all (open and closed) cases: Percentage collected:
8%;
Total restitution on closed cases only: Amount levied: $83,260;
Total restitution on closed cases only: Amount collected: $83,260;
Total restitution on closed cases only: Percentage collected: 100%.
Fiscal year: 2004;
Total restitution on all (open and closed) cases: Amount levied:
$102,169,341;
Total restitution on all (open and closed) cases: Amount collected:
$3,772,249;
Total restitution on all (open and closed) cases: Percentage collected:
4%;
Total restitution on closed cases only: Amount levied: $0;
Total restitution on closed cases only: Amount collected: $0;
Total restitution on closed cases only: Percentage collected: 0%.
Total;
Total restitution on all (open and closed) cases: Amount levied:
$179,302,954;
Total restitution on all (open and closed) cases: Amount collected:
$10,233,955;
Total restitution on all (open and closed) cases: Percentage collected:
6%;
Total restitution on closed cases only: Amount levied: $83,260;
Total restitution on closed cases only: Amount collected: $83,260;
Total restitution on closed cases only: Percentage collected: 100%.
Source: GAO analysis of CFTC's data.
Note: According to data CFTC provided, during 2003, one case totaling
$219,250 was on appeal and, therefore, CFTC has not yet collected
anything. Similarly, during 2004, one case totaling $276,557 was on
appeal and so far has netted CFTC nothing. CFTC did not collect any
restitution for closed cases during 2004.
[A] Amounts included for 2002 are for September only. Amounts for the
previous months in fiscal year 2002 were reported in a prior report.
[End of table]
[End of section]
Appendix III: Comments from the Securities and Exchange Commission:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION:
DIVISION OF ENFORCEMENT:
100 F Street, N.E.:
Washington, D.C. 20549:
August 19, 2005:
Mr. Richard J. Hillman:
Managing Director:
Financial Markets and Community Investment:
U.S. Government Accountability Office:
441 G Street, N.W.:
Washington, DC 20548:
Re: SEC and CFTC Enforcement:
Dear Mr. Hillman:
Thank you for the opportunity to review and comment on the draft report
primarily concerning the Securities and Exchange Commission's
("Commission") collection efforts regarding penalties and disgorgement
and implementation of the Sarbanes-Oxley Act's Fair Funds provision.
The report discusses how the Commission's Division of Enforcement has
complied with recommendations in prior reports and has taken positive
steps in this regard. In addition, the report makes recommendations
regarding how the Commission can most effectively continue to meet its
goal of deterring securities law violations and returning funds to
harmed investors.
I appreciate the collegiality your staff exhibited in preparing the
report and in discussing its findings and recommendations with my
staff. As the report points out, the Division of Enforcement's efforts
in data tracking and management practices for penalties and
disgorgement are still in their early stages, but we are working
diligently to strengthen our program.
Furthermore, we agree with your findings and recommendations and are
working to implement them. Our specific comments are as follows:
I. Supervision, Monitoring, and Guidance Related to Collections
Guidelines and Duties:
The draft report recommends that we develop methods to ensure that
those doing collection work receive consistent supervision, monitoring,
and guidance to carry out their duties and implement systems so that
management can monitor compliance with the collections guidelines. We
agree with this finding and recommendation and are developing reports
that will allow us to monitor the collections program nationwide. These
reports will permit management to exercise consistent supervision of
the program and monitoring of compliance with the guidelines. We also
are preparing training programs for our staff to enhance guidance in
this area.
II. OFM Notification to Enforcement:
Your draft report recommends that the staff develop systems whereby OFM
can notify Enforcement regarding data that OFM has entered into the
system. We agree that enhanced communication with OFM staff can improve
the efficiency of our case management and collections staffs. As the
SEC develops the new system to replace the financial functionality of
CATS, this need will be accommodated. Interim measures will be
considered as well.
III. Determine Effectiveness of New Processes:
Your draft report notes that we have recently implemented a number of
new processes and hired new staff to fulfill these duties. You suggest
that as the collection process stabilizes, we adopt a formal approach
to gain input to determine the effectiveness of these processes and
what improvements we can make. We agree that after the program
stabilizes, we will determine how we can best evaluate the
effectiveness of this program and where we need to make improvements.
IV. Performance Measures for Collections:
The draft report recommends that we continue to identify, establish,
and utilize performance measures to gauge the effectiveness of our
collections activities. We agree and are working to revise our
performance measures in this area so that we can most effectively
determine our performance.
V. Aggregate Analysis of Distributions:
You recommend that we aggregate the amount of money distributed to
investors, penalties sent to Treasury, and fees paid receivers, and
that we use this information to monitor distributions to investors. As
we have discussed with you, we are working to collect information on
the amount of money distributed to investors. We currently have
aggregate numbers regarding the amount of disgorgement and penalties
sent to Treasury. We are in the process of developing systems to track
the fees paid to receivers. When we are able to start accumulating this
information, we will analyze how it can best be utilized so we can most
effectively distribute money to investors.
VI. Fair Funds Data Collection:
The draft report recommends that we establish a procedure for
collecting Fair Funds data to assist us in monitoring and managing
money distributed to investors. We agree and are working diligently to
develop these systems.
We appreciate the care that is evident in the draft report and its
recommendations. If we can be of any further assistance, please contact
me at (202) 551-4894 or Joan McKown at (202) 551-4933.
Yours truly,
Signed by:
Linda Chatman Thomsen:
Director:
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Richard J. Hillman (202) 512-8678:
Staff Acknowledgments:
In addition to the individual named above, Karen Tremba, Assistant
Director, Emily Chalmers, Ronald Ito, Grant Mallie, Bettye Massenburg,
Marc Molino, David Pittman, Carl Ramirez, Omyra Ramsingh, and Cheri
Truett made key contributions to this report.
(250214):
FOOTNOTES
[1] For purposes of this report, the term "securities law" has the
meaning as ascribed to such term in Section 3(a)(47) of the Securities
Exchange Act of 1934, as amended, and the term "futures laws" refers to
the Commodity Exchange Act, as amended.
[2] GAO, SEC and CFTC Fines Follow-up: Collection Programs Are
Improving, but Further Steps are Warranted, GAO-03-795 (Washington,
D.C.: July 15, 2003); SEC Enforcement: More Actions Needed to Improve
Oversight of Disgorgement Collections, GAO-02-771 (Washington, D.C.:
July 12, 2002); SEC and CFTC: Most Fines Collected, but Improvements
Needed in the Use of Treasury's Collection Service, GAO-01-900
(Washington, D.C.: July 16, 2001); Money Penalties: Securities and
Futures Regulators Collect Many Fines but Need to Better Use
Industrywide Data, GAO/GGD-99-8 (Washington, D.C.: Nov. 2, 1998); and
Securities Enforcement: Improvements Needed in SEC Controls Over
Disgorgement Cases, GAO/GGD-94-188 (Washington, D.C.: Aug. 23, 1994).
[3] A judgment is a ruling on how much the violator should pay as a
result of their misdeeds. CMPs are based on the "level of
egregiousness" of the underlying conduct and the violator's ability to
pay. Disgorgement and restitution are based, respectively, on the
extent to which the wrongdoer profited, and the victim lost as a result
of the violations, and do not take into account ability to pay.
[4] CATS is not integrated with other databases at SEC but serves as a
source of data for an agencywide search engine that staff use to
perform searches on individuals or companies under investigation.
[5] Pub. L. No. 104-134. Title III. Ch. 10. 110 Stat. 1321-358 (Apr.
26, 1996).
[6] 31 U.S.C. § 3716(c)(6); 31 C.F.R. § 901.3(b). With some exceptions,
agencies are also required to transfer all non-tax debts over 180 days
delinquent to FMS for purposes of debt collection. Administrative
offset is one type of tool used for collection, therefore, the
transferring of the debt simultaneously satisfies the referral
requirement for purposes of an administrative offset. 31 C.F.R. §
285.12(g).
[7] In many instances, the financial circumstances of violators make it
unlikely that they will be able to pay the full amount of a judgment--
for instance, some violators are jailed and are thus are unable to
generate income, while others may have filed for bankruptcy.
[8] Receivers can be appointed at any stage of the litigation process
by the court to perform duties such as identifying and seizing assets
but may also be appointed for the sole purpose of developing and
administering the distribution plan.
[9] In GAO, Financial Audit: SEC's Financial Statement for Fiscal Year
2004, GAO-05-244 (Washington, D.C.: June 25, 2005), we identified
inadequate controls in the recording and reporting of penalty and
disgorgement information related to manual procedures that SEC employed
in transferring penalty and disgorgement data from CATS to subsidiary
accounting ledgers. For this report, our assessment of the steps SEC
has taken to improve the tracking of penalties and disgorgement focused
on those designed to ensure the reliability of the initial data entered
into CATS.
[10] In addition to SEC and CFTC oversight, the U.S. securities and
futures markets are regulated under their respective statutes by SROs,
which include the New York Stock Exchange (NYSE), American Stock
Exchange, National Association of Securities Dealers (NASD), Chicago
Board of Trade, Chicago Mercantile Exchange, and National Futures
Association (NFA), among others.
[11] U.S. Securities and Exchange Commission's Office of Inspector
General, Financial Management Systems Controls: Independent
Accountant's Report. Audit No. 362, (Washington, D.C.: Jan. 31, 2003).
[12] As a result of the enactment of the Accountability of Tax Dollars
Act of 2002, SEC is required to prepare and submit to Congress and OMB
audited financial statements. 31 U.S.C. § 3515. Fiscal year 2004 was
the first year SEC prepared its first complete set of financial
statements pursuant to this requirement.
[13] An enforcement action occurs when SEC files a complaint against an
alleged violator of federal securities laws in federal district court
or before an administrative law judge.
[14] We selected and examined data for only one individual defendant or
respondent within a case. One case can have multiple defendants and
respondents.
[15] GAO-05-244.
[16] Under SEC's internal collection guidelines, which are intended to
assist the Enforcement staff in ensuring compliance with the DCIA of
1996, eligible debts that have been delinquent for more than 180 days
should be prepared for referral to FMS unless (1) a case is still in
litigation, (2) an entity has become defunct, (3) a
defendant/respondent is deceased, incarcerated or a foreign national
residing abroad, or (4) a bankruptcy is pending.
[17] Some SEC delinquent cases were ineligible for referral because
they were on appeal, in postjudgment litigation, or had a receiver
appointed to marshal and distribute assets.
[18] Of the remaining nine cases, three had already been collected in
full; three were closed, meaning no further action was warranted; two
had been terminated; and one had been waived by the court.
[19] For any person seeking NASD registration, the attestation would be
in addition to the attestation on the Form U4 and would require that
the applicant attest to the completeness and accuracy of the
information submitted on the form.
[20] The analyses involve the following types of violations:
misrepresentation or material omissions of fact, failure to respond
truthfully and completely, outside business activities, net capital
violations, conversion, and continuing education requirements.
[21] SEC eventually accepted the offer with the illegible tax return
after receiving legible copies but rejected the remaining four offers
because of the missing returns.
[22] The feasibility assessment was part of a study done in response to
SOX, SEC: Report Pursuant to Section 308(c) of the Sarbanes Oxley Act
of 2002 (Washington, D.C., January 2003). The Securities Fraud
Deterrence and Investor Restitution Act was introduced in the 108TH
Congress as H.R. 2179 and contained provisions that, if adopted, would
strengthen SEC's enforcement capabilities and assist defrauded
investors. Congress has not taken action on this bill.
[23] According to SEC management, SEC is in the process of combining
the duties of the collection monitors with those of the case management
specialists.
[24] GAO, Managing for Results: The Statutory Framework for Performance-
Based Management and Accountability, GAO/GGD/AIMD-98-52 (Washington,
D.C.: Jan. 28, 1998).
[25] For our calculations, we defined open cases as "cases with a final
judgment order that remained open while collection efforts continued"
and closed cases as "cases with a final judgment order for which all
collection actions were completed."
[26] As mentioned earlier, collection staff in SEC's headquarters,
district, and regional offices are using ad hoc collection databases
that are separate from CATS, in order to track the status of delinquent
cases.
[27] The collection paralegals in headquarters are supervised by the
lead attorney in the collection unit, who has detailed knowledge of the
guidelines and ensure that they are followed.
[28] Securities and Exchange Commission v. Lucent Technologies, Inc.,
et al., No. 04-CV-2315 (May 17, 2004). One of the other defendants also
agreed to pay disgorgement of $109,505, representing profits gained as
a result of the illegal conduct alleged in the complaint. SEC stated
that it expected the penalties and disgorgement received from the four
defendants of the settlement agreement to be distributed pursuant to
the Fair Fund provision. See SEC Litigation Release No. 18715 (May 17,
2004).
[29] SEC has the burden of showing that the amount that is sought in a
disgorgement is a reasonable approximation of profits causally
connected to the violation.
[30] 17 C.F.R. § 201.1101.
[31] The purpose of SEC's "dashboards" initiative is to regularly track
divisions' and offices' progress in achieving programmatic,
operational, staffing, and budgetary objectives. These management
reports form the basis for SEC management to gauge performance,
exchange ideas on common problems, and adjust operations and resources
as necessary.
[32] SEC's Report to Congress: Report Pursuant to Section 308 (c) of
the Sarbanes Oxley Act of 2002, January 2003.
[33] However, in regards to state law property exemptions, Section 322
of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,
Pub. L. No. 109-8, 119 Stat. 23, 96-97 (April 20, 2005), imposes a
limitation on the value of exempt property that can be claimed by
Chapter 11 debtors pursuant to state law, if the debtor owes a debt
arising under a violation of federal securities laws. Section 322 will
become effective in October 2005, but applies to Chapter 11 filings
made on or after the date of enactment of the act.
[34] GAO-03-795 and GAO-02-771.
[35] Securities and Exchange Commission, Office of the Inspector
General: CATS 2000 Data, Audit No. 331 (Washington, D.C.: Jan. 30,
2002) and GAO-05-244.
[36] GAO-03-795, GAO-02-771, and GAO-01-900.
[37] We included both pre-and post-collection guideline cases for
penalties and disgorgement, because the collection guidelines apply
equally to both.
[38] The feasibility assessment was part of a study done in response to
SOX, SEC: Report Pursuant to Section 308(c) of the Sarbanes Oxley Act
of 2002 (Washington, D.C.: January 2002).
[39] H.R. 2179.
[40] In our 2003 report, we also calculated the penalty collection rate
for nine self-regulatory organizations, in addition to SEC and CFTC.
[41] For purposes of our calculations, we defined open cases as "cases
with a final judgment order that remained open while collection efforts
continued" and closed cases as "cases with a final judgment order for
which all collection actions were completed."
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