Securities Industry:

Strengthening Sales Practice Oversight

GGD-91-52: Published: Apr 25, 1991. Publicly Released: Apr 25, 1991.

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GAO reviewed the Securities and Exchange Commission's (SEC) oversight of four self-regulatory organizations' (SRO) monitoring and enforcement of sales practice compliance among securities industry firms.

GAO found that: (1) the only SEC timetable for completely inspecting SRO sales practices applied only to the district offices of one SRO; (2) SEC needed to improve its SRO inspection coverage, evaluation methods, and collection and use of customer complaint and management information; (3) except for one SRO, SEC only sporadically reviewed aspects of SRO sales practice programs since 1986; (4) because SEC reexamined broker-dealers using different methods than SRO used, it generally could not determine why it found violations that SRO missed, and could lose opportunities to recommend actions to improve SRO examination methods; and (5) SEC information systems did not provide adequate data to fully identify sales practice abuses or weaknesses.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: SEC has established a formal inspection cycle for all SRO as of the beginning of fiscal year 1992.

    Recommendation: The Chairman, SEC, should develop a timetable for fully inspecting the sales practice programs of all SRO.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Not Implemented

    Comments: SEC field offices tried replicating SRO exams without improving existing procedures. Therefore, they intend to continue their current oversight methods.

    Recommendation: The Chairman, SEC, should include direct testing of each SRO examination methods and results in the SEC program for reviewing the adequacy of SRO oversight. To the extent that either SEC or SRO examination methods prove superior, SEC should ensure that both use the better methods.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Implemented

    Comments: The SEC new customer complaint system became operational on June 1, 1991. SEC is working with SRO and others to determine the feasibility of exchanging customer complaint information.

    Recommendation: The Chairman, SEC, should continue to place a high priority on implementing a new customer complaint system but also improve the proposed system by including the ability to interface with SRO and state customer complaint systems.

    Agency Affected: United States Securities and Exchange Commission

  4. Status: Closed - Not Implemented

    Comments: SEC believes the costs involved in such a system outweighed the benefits.

    Recommendation: The Chairman, SEC, should explore ways to record and maintain information on the actual number of each type of violation found in SEC and SRO broker-dealer oversight examinations. Options could include assessing existing SRO databases or incorporating the data into the Examination Activity Tracking System.

    Agency Affected: United States Securities and Exchange Commission

 

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