SEC and CFTC Penalties: Continued Progress Made in Collection
Efforts, but Greater SEC Management Attention Is Needed
(31-AUG-05, GAO-05-670).
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.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-05-670
ACCNO: A35018
TITLE: SEC and CFTC Penalties: Continued Progress Made in
Collection Efforts, but Greater SEC Management Attention Is
Needed
DATE: 08/31/2005
SUBJECT: Debt collection
Federal law
Fines (penalties)
Internal controls
Noncompliance
Strategic planning
Securities regulation
Collection procedures
Data collection
Data integrity
SEC Disgorgement Payment Tracking System
******************************************************************
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GAO-05-670
United States Government Accountability Office
GAO Report to Congressional Requesters
August 2005
SEC AND CFTC PENALTIES
Continued Progress Made in Collection Efforts, but Greater SEC Management
Attention Is Needed
a
GAO-05-670
[IMG]
August 2005
SEC AND CFTC PENALTIES
Continued Progress Made in Collection Efforts, but Greater SEC Management
Attention Is Needed
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.
United States Government Accountability Office
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
1 3 9
12
15
28
32 33 34 35
Appendixes
Appendix I: Objectives, Scope, and Methodology 37 Appendix II: CFTC's
Penalty and Restitution Collection Rates 42 Appendix III: Comments from
the Securities and Exchange Commission 44 Appendix IV: GAO Contact and
Staff Acknowledgments 47
Tables Table 1: Table 2:
Table 3: Table 4:
Table 5: Table 6:
Types of Remedies Available for SEC and CFTC
Violations 5
Status of Recommendations Related to SEC's Management
of its Collection Program from 1998 to 2003 GAO
reports 16
SEC's Collection Rates for CMPs Levied on All Cases and
Closed Cases Only, September 2002- December 2004 23
SEC's Collection Rate for Disgorgement Levied on All
Cases and Closed Cases Only, September 2002-December
2004 24
CFTC's Collection Rates for CMPs Levied on All Cases and
on Closed Cases Only, September 2002-December 2004 42
CFTC's Collection Rate for Restitution Levied on All Cases
and on Closed Cases Only, September 2002-December
2004 43
Contents
Figure Figure 1: Overview of SEC's Case Tracking Process 6
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
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A
United States Government Accountability Office Washington, D.C. 20548
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.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
1For 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.
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.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
2GAO, 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).
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.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.
3A 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.
Table 1: Types of Remedies Available for SEC and CFTC Violations
Available to Available to Remedy SEC CFTC
Civil monetary penalty: A remedial measure aimed at deterring future
misconduct. X X
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. X X
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. X X
Fair Fund: A disgorgement fund that also includes a
civil monetary penalty imposed on the disgorged
violator. X
Restitution: An equitable remedy to attempt to make
the victims whole. Requires proof of specific damages
to the victims. Xa X
Reparation: A compensatory award to harmed
investors in a private proceeding before CFTC hearing
officials. X
Sources: GAO analysis of SEC and CFTC data.
aAlthough restitution is available to SEC, the agency typically imposes
CMPs and disgorgement.
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).4
4CATS 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.
Figure 1: Overview of SEC's Case Tracking Process
Source: GAO analysis of SEC's case tracking process.
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)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.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.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.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.
5Pub. L. No. 104-134. Title III. Ch. 10. 110 Stat. 1321-358 (Apr. 26,
1996).
631 U.S.C. S: 3716(c)(6); 31 C.F.R. S: 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. S: 285.12(g).
7In 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.
8Receivers 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.
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 2004.9 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
9In 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.
(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.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
10In 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.
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.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.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 2003.13 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
11U.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).
12As 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. S: 3515. Fiscal year 2004 was the first
year SEC prepared its first complete set of financial statements pursuant
to this requirement.
13An 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.
consistent with our previous recommendation.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.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
14We selected and examined data for only one individual defendant or
respondent within a case. One case can have multiple defendants and
respondents.
15GAO-05-244.
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
Status
Not fully Previous open recommendations Addressed addressed
The SEC Chairman should:
Develop a formal strategy for referring pre-guidelines cases to FMS and
TOP that prioritizes cases based on collectability and establishes
implementation time frames. X
Address weaknesses in controls over fingerprinting procedures that could
allow inappropriate persons to be admitted to the securities industry. X
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. X
Continue working with FMS to ensure that compromise offers are approved in
a timely manner. X
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. X
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. X
Ensure that disgorgement and the collection of disgorgement are addressed
in SEC's strategic and
annual performance plan, including developing appropriate performance
measures. X
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. X
Sources: GAO and SEC.
Note: For further information, see GAO-03-795, GAO-02-771, GAO-01-900, and
GAO/GGD-99-8.
SEC Refers Delinquent and Our 2001 report found that SEC staff lacked
clear procedures to follow Pre-Guideline Cases to FMS on a when referring
delinquent cases to FMS for collection, as required by the Timely Basis
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.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.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.18
SEC Has Enhanced Controls for During our 2003 study, we examined the
application review process for
Fingerprinting Procedures
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
16Under 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.
17Some 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.
18Of 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.
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.19 NASD
made the fingerprinting guidelines available to its member firms on May
29, 2005.
SEC Has Begun Analyzing SROs' In 1998, we found that SEC was not analyzing
industrywide data on
Disciplinary Actions 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.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
19For 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.
20The 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.
SEC Has Made More Timely Decisions on Compromise Offers
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.
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.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.
21SEC eventually accepted the offer with the illegible tax return after
receiving legible copies but rejected the remaining four offers because of
the missing returns.
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.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:
o 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.
o 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.
22The 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.
o 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.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
SEC Has Established, but Not Implemented, an Alternative Performance
Measure for Its Collections Activities
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.
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.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
23According to SEC management, SEC is in the process of combining the
duties of the collection monitors with those of the case management
specialists.
24GAO, Managing for Results: The Statutory Framework for Performance-Based
Management and Accountability, GAO/GGD/AIMD-98-52 (Washington, D.C.: Jan.
28, 1998).
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.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.
25For 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."
Table 3: SEC's Collection Rates for CMPs Levied on All Cases and Closed Cases
Only, September 2002- December 2004
Total CMPs on all (open and closed) cases Total penalties on closed cases
only
Fiscal year Amount levied Amount collected
Percentage collected Amount levied
Amount
collected
Percentage collected
2002a $3,770,872 $1,277,004 34% $319,986 $244,986 77%
2003 1,030,602,290 726,830,024 71 360,000 260,000 72
2004 1,206,475,410 1,041,613,639 86 1,190,000 1,190,000 100
Total $2,240,848,572 $1,769,720,667 79% $1,869,986 $1,694,986 91%
Source: GAO analysis of unaudited SEC data.
aAmounts 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.
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
Total disgorgement on all (open and closed) cases Total disgorgement on
closed cases only
Amount Percentage Amount Percentage
Fiscal Amount levied collected collected Amount collected collected
year levied
2002a $25,065,891 $3,141,592 13% $514,617 $288,700 56%
2003 1,028,469,833 249,750,377 24 28,919 28,919 100
2004 2,298,441,773 773,725,175 34 72,413 72,413 100
Total $3,351,977,497 $1,026,617,144 31% $615,949 $390,032 63%
Source: GAO analysis of unaudited SEC data.
aAmounts 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.
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 In previous GAO reports, we determined that
SEC did not have a
on Amounts Distributed and centralized system for monitoring information
on distribution amounts and
Receivers' Fees 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 In our 2002 study, we found that SEC's
collection program lacked clear
Assurance That Staff Are policies and procedures specifying the actions
that staff should take to
Following Collection Guidelines 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.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.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
26As 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.
27The 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.
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.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).
28Securities 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).
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.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...."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
29SEC 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.
3017 C.F.R. S: 201.1101.
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.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 As required by Section 308(c) of SOX, SEC
issued a report in January 2003
Aspects of Section 308 detailing the agency's efforts in collecting funds
to be returned to harmed investors and the methods used to maximize this
recovery.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:
o 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;
o 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
31The 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.
32SEC's Report to Congress: Report Pursuant to Section 308 (c) of the
Sarbanes Oxley Act of 2002, January 2003.
o 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.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
33However, 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.
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:
o 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.
o Establish procedures for staff in the OFM to notify Enforcement staff
on a timely basis about data entered into CATS.
o 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:
o 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.
o 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.
o 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 http://www.gao.gov.
If you or your staff have any questions about this report, please contact
me at (202) 512-8678 or [email protected]. 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.
Richard J. Hillman Managing Director, Financial Markets
and Community Investment
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.1 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 2004.2 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.3 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
1GAO-03-795 and GAO-02-771.
2Securities and Exchange Commission, Office of the Inspector General: CATS
2000 Data, Audit No. 331 (Washington, D.C.: Jan. 30, 2002) and GAO-05-244.
3GAO-03-795, GAO-02-771, and GAO-01-900.
Appendix I
Objectives, Scope, and Methodology
and after the collection guidelines were established, we interviewed SEC
staff to discuss the activities they took recently to refer delinquent
cases to FMS.4 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
4We included both pre-and post-collection guideline cases for penalties
and disgorgement, because the collection guidelines apply equally to both.
Appendix I
Objectives, Scope, and Methodology
assessment.5 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.6
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 onethird 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
5The 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).
6H.R. 2179.
Appendix I
Objectives, Scope, and Methodology
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
Appendix I
Objectives, Scope, and Methodology
CFTC's collection rates for all cases (open and closed cases) and closed
cases only.7 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.
7In our 2003 report, we also calculated the penalty collection rate for
nine self-regulatory organizations, in addition to SEC and CFTC.
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.1 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
Total CMPs on all (open and closed) cases Total CMPs on closed cases only
Amount Percentage Amount Percentage
Fiscal Amount collected collected Amount collected collected
year levied levied
2002a $225,000 $225,000 100% $225,000 $225,000 100%
2003 137,313,266 87,410,107 64 78,697,174 77,307,229 98
2004 320,889,522 121,899,500 38 121,889,500 121,769,500 99.9
Total $458,427,788 $209,534,607 46% $200,811,674 $199,301,729 99%
Source: GAO analysis of CFTC's data.
aAmounts 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.
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
1For 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."
Appendix II CFTC's Penalty and Restitution Collection Rates
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
Total restitution on all (open and closed) cases Total restitution on
closed cases only
Fiscal year Amount levied
Amount collected
Percentage collected Amount levied
Amount
collected
Percentage collected
2002a 0 0 0 0 0
$77,133,613 $6,461,706 8% $83,260 $83,260 100%
2004 102,169,341 3,772,249 4 0 0 0
Total $179,302,954 $10,233,955 6% $83,260 $83,260 100%
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.
aAmounts included for 2002 are for September only. Amounts for the
previous months in fiscal year 2002 were reported in a prior report.
Appendix III
Comments from the Securities and Exchange Commission
Appendix III Comments from the Securities and Exchange Commission Appendix
III Comments from the Securities and Exchange Commission
Appendix IV
GAO Contact and Staff Acknowledgments
GAO Contact Richard J. Hillman (202) 512-8678
Staff In addition to the individual named above, Karen Tremba, Assistant
Director, Emily Chalmers, Ronald Ito, Grant Mallie, Bettye Massenburg,
Acknowledgments Marc Molino, David Pittman, Carl Ramirez, Omyra Ramsingh,
and Cheri Truett made key contributions to this report.
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