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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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