Customer Protection Rule Oversight Procedures Appear Adequate
GGD-92-17: Published: Nov 21, 1991. Publicly Released: Nov 21, 1991.
- Full Report:
Pursuant to a congressional request, GAO reviewed the Securities Exchange Commission's (SEC) oversight and enforcement of the SEC customer protection rule, focusing on: (1) how SEC determines whether broker-dealers are complying with the rule's possession or control requirement; (2) whether SEC has written procedures or methodologies for testing for rule compliance; and (3) the procedures SEC uses to monitor the New York Stock Exchange's (NYSE) and the National Association of Securities Dealers' (NASD) examinations to determine their members' compliance with the rule.
GAO found that: (1) SEC, NYSE, and NASD established written procedures that address all the requirements needed to determine broker-dealers' compliance with the rule's possession or control requirements; (2) NYSE and NASD stated that they annually examine all of their member broker-dealers to determine their compliance with the rule; (3) NASD stated that its examination methods differ from NYSE methods because NYSE member broker-dealers are generally larger and more involved in complex activities that are affected by the rule; (4) SEC officials examine about 6 percent of the broker-dealers that NYSE and NASD examine to ensure broker-dealer compliance with securities laws and to evaluate and provide feedback to NYSE and NASD on the quality of their examination programs; (5) between 1988 and 1990, SEC found possession or control violations in 57 broker-dealer examinations that NYSE and NASD failed to discover; (6) SEC established an examination activity tracking system to capture the number and type of violations that SEC examiners find during oversight examinations; (7) in 1990, SEC discovered 17 instances in which either NASD or NYSE had failed to detect possession or control violations; and (8) SEC encouraged NYSE and NASD to correct the identified violations and consequently NYSE and NASD took steps to remedy their examination deficiencies.