U.S. Government Securities: More Transaction Information and Investor Protection Measures Are Needed

Highlights

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

Recommendations

Matter for Congressional Consideration

Matter	Status	Comments
Congress should amend Section 15 of the Exchange Act, and any other statutes as may be necessary, to authorize a federal agency to adopt general rules of fair practice applicable to all government securities brokers and dealers. Self-regulatory organizations and bank regulators should also be authorized to develop and enforce specific requirements within the context of general rules. The rules, at a minimum, should cover dealer pricing practices and investor suitability requirements.	Closed – Implemented	P.L. 103-202 incorporates this provision.
Congress should amend the Exchange Act to require that all non-bank government securities specialist dealers provide Securities Investor Protection Corporation (SIPC) coverage if their business with customers is similar to that for which SIPC coverage normally applies in SEC-registered securities markets. Furthermore, the SIPC assessment structure should be modified so that specialist firms covered by SIPC pay their fair share of the assessment burden.	Closed – Implemented	The Senate bill requires more complete disclosure, rather than extending SIPC. P.L. 103-202 gave SEC the authority to require disclosure of the SIPC status of nonbank specialist dealers that sell government securities to retail customers.
Congress should amend the Exchange Act to require that government securities transaction information from screen brokers and any trading systems that serve a similar function be made available on a real-time basis to those willing to pay appropriate fees. Regulatory authority should be provided at the federal level to prescribe regulations as needed to ensure that transaction information is available.	Closed – Implemented	Congress may require further study rather than authorize standby regulatory authority. The House version of pending legislation would give SEC the power to require disclosure. P.L. 103-202 requires SEC to report annually, as a part of its annual report to Congress on progress made by market participants in reporting price and quote information on a timely basis.
Congress should continue Treasury's current regulatory authority over the activities of government securities brokers and dealers.	Closed – Implemented	P.L. 103-202 extended Treasury's rulemaking authority.
Congress should assign Treasury new authority to adopt sales practice rules governing government securities brokers and dealers and to adopt any rules needed to ensure public access to government securities screen brokers' information.	Closed – Implemented	P.L. 103-202 institutes extensive requirements for consultation among the Treasury, SEC, and the bank regulators. This makes it highly unlikely that any agency can proceed with rules that are strongly objected to by Treasury.
Congress should provide for a sunset on Treasury's authority so that the continued need for Treasury's rulemaking role can be reevaluated.	Closed – Not Implemented	Because Congress failed to act for two years after the sunset provision in the original 1986 expired in 1991, Congress decided it was safer to make extension permanent. This is understandable and should not be objected to by GAO, but the point of periodically reassessing the respective roles of Treasury, SEC, and the bank regulators in regulating government and other securities markets remains valid.

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Recommendations for Executive Action

Agency Affected	Recommendation	Status
United States Securities and Exchange Commission	SEC should develop a procedure for ensuring the accuracy of dealer registration data by, at a minimum, reviewing broker/dealer submissions for obvious omissions and inconsistencies and periodically (at least annually) having the self-regulatory agencies and bank regulators review SEC lists of registrants to identify discrepancies for follow-up by either SEC or the regulator.	Closed – Implemented SEC has revised its procedures. Every 6 months, the list of registered dealers is sent to the respective supervisory agencies for verification.
Department of the Treasury	The Secretary of the Treasury, SEC, and the Federal Reserve System, as part of their required study of the act's effectiveness, should develop recommendations to ensure that bank dealers' government securities activities, including advertising, are provided oversight comparable to the activities of NASD-regulated firms.	Closed – Implemented The Joint Report, issued in 1990, did not contain recommendations in this area. Treasury has encouraged all the bank regulators to improve their supervision and believes progress has been made. Without further audit work at this point, it is hard for GAO to continue to press for changes. GAO can revisit the status as part of larger jobs on supervision of investments. The issue is also similar to disclosure of mutual fund risks to customers. In practice, consultation on proposed rulemaking mandated by P.L. 103-202 may spill over into development of greater consistency in the supervision of government securities activities by banks and securities firms.
Federal Reserve System	The Secretary of the Treasury, SEC, and the Federal Reserve System, as part of their required study of the act's effectiveness, should develop recommendations to ensure that bank dealers' government securities activities, including advertising, are provided oversight comparable to the activities of NASD-regulated firms.	Closed – Implemented The Joint Report, issued in 1990, did not contain recommendations in this area. Treasury has encouraged all the bank regulators to improve their supervision and believes progress has been made. Without further audit work at this point, it is hard for GAO to continue to press for changes. GAO can revisit the status as part of larger jobs on supervision of investments. The issue is also similar to disclosure of mutual fund risks to customers. In practice, consultation on proposed rulemaking mandated by P.L. 103-202 may spill over into development of greater consistency in the supervision of government securities activities by banks and securities firms.
United States Securities and Exchange Commission	The Secretary of the Treasury, SEC, and the Federal Reserve System, as part of their required study of the act's effectiveness, should develop recommendations to ensure that bank dealers' government securities activities, including advertising, are provided oversight comparable to the activities of NASD-regulated firms.	Closed – Implemented The Joint Report, issued in 1990, did not contain recommendations in this area. Treasury has encouraged all the bank regulators to improve their supervision and believes progress has been made. Without further audit work at this point, it is hard for GAO to continue to press for changes. GAO can revisit the status as part of larger jobs on supervision of investments. The issue is also similar to disclosure of mutual fund risks to customers. In practice, consultation on proposed rulemaking mandated by P.L. 103-202 may spill over into development of greater consistency in the supervision of government securities activities by banks and securities firms.
Department of the Treasury	Unless the Department of the Treasury can demonstrate that a common approach results in capital requirements that are inappropriate for specialist firms, the Secretary of the Treasury and SEC should work together in developing a plan to phase out Treasury's unique capital requirements for specialist dealers.	Closed – Not Implemented The number of specialist dealers to which Treasury capital rules apply separately from SEC's continues to decline, from about 61 with 9 primary dealers in 1990, to about 14 with only 1 primary dealer in 1999, and more mergers are in process. In addition, SEC is revising its capital rules, with several new proposals being prepared for industry comment, and Treasury believes it should not try to modify its rules to match SEC rules that will be changed. Further, Treasury believes its rules function well for the specialist dealers.
United States Securities and Exchange Commission	Unless the Department of the Treasury can demonstrate that a common approach results in capital requirements that are inappropriate for specialist firms, the Secretary of the Treasury and SEC should work together in developing a plan to phase out Treasury's unique capital requirements for specialist dealers.	Closed – Not Implemented The number of specialist dealers to which Treasury capital rules apply separately from SEC's continues to decline, from about 61 with 9 primary dealers in 1990, to about 14 with only 1 primary dealer in 1999, and more mergers are in process. In addition, SEC is revising its capital rules, with several new proposals being prepared for industry comment, and Treasury believes it should not try to modify its rules to match SEC rules that will be changed. Further, Treasury believes its rules function well for the specialist dealers.

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