oversight

SEC and CFTC Fines Follow-Up: Collection Programs Are Improving, but Further Steps Are Warranted

Published by the Government Accountability Office on 2003-07-15.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States General Accounting Office

GAO          Report to Congressional Requesters




July 2003
             SEC AND CFTC
             FINES FOLLOW-UP
             Collection Programs
             Are Improving, but
             Further Steps Are
             Warranted




GAO-03-795
             a
                                                July 2003


                                                SEC AND CFTC FINES FOLLOW-UP

                                                Collection Programs Are Improving, but
Highlights of GAO-03-795, a report to           Further Steps Are Warranted
House Ranking Minority Members of
congressional committees




Collecting fines ordered for                    SEC and CFTC have improved their collection programs since GAO issued
violations of securities and futures            its 2001 fines report. While it was too early to fully assess the effectiveness
laws helps ensure that violators are            of their actions, SEC could be doing more to maximize its use of Treasury’s
held accountable for their offenses             collection services. SEC has implemented regulations, procedures,
and may also deter future                       collections guidelines, and controls for using the Treasury Offset Program
violations. The requesters asked
GAO to evaluate the actions the
                                                (TOP), which applies payments the federal government owes to debtors to
Securities and Exchange                         their outstanding debts. However, SEC has been focusing on referring to
Commission (SEC) and Commodity                  TOP those delinquent cases with amounts levied after its new collections
Futures Trading Commission                      guidelines went into effect. The agency has not developed a formal strategy
(CFTC) have taken to address                    for referring older cases, reducing the likelihood of collecting monies on
earlier recommendations for                     what could be more than a billion dollars of delinquent debt. Further
improving their collection                      impeding collection efforts, SEC does not have a reliable system for tracking
programs. The committees also                   monies owed on these older cases and therefore could not determine which
asked GAO to update the fines                   cases were not being referred to TOP. SEC has drafted an action plan for a
collection rates from previous                  new system to track all cases with a monetary judgment. Once the system is
reports.                                        in place, the agency should have a tool for identifying all cases, including
                                                older delinquent cases that can be referred to TOP. However, SEC has not
                                                established a time frame for fully implementing the plan.
SEC should (1) develop a strategy
for referring older cases to                    GAO’s calculations for closed cases (collection actions completed) showed
Treasury for collection and (2)                 that regulators’ collection rates on fines imposed between 1997 and August
implement a reliable system to help             2002 equaled or exceeded those from 1992 to 1996. Recalculating the rates
manage all cases. SEC generally                 to include closed and open cases (collection actions ongoing) affected SEC’s
agreed with the facts presented and             and CFTC’s collection rates, primarily because of a few large uncollected
agreed to implement the
                                                fines.
recommendations made.
                                                Collection Rates for Fines Levied on Open and Closed Cases and Closed Cases for 1997–
                                                August 2002
                                                                                                Open and closed
                                                                                                          cases           Closed cases
                                                 Securities and futures regulators                              Percentage collected           Percentage collected
                                                 SEC                                                                                     40%                   94%
                                                 CFTC                                                                                     45                    99
                                                 American Stock Exchange                                                                  87                    95
                                                 Chicago Board Options Exchange                                                           98                    99
                                                 Chicago Board of Trade                                                                   94                    95
                                                 Chicago Mercantile Exchange                                                              96                    97
                                                 Chicago Stock Exchange                                                                   91                   100
                                                 NASD                                                                                     66                    95
                                                 National Futures Association                                                             67                    75
                                                 New York Mercantile Exchange                                                             83                   100
                                                 New York Stock Exchange                                                                 100                   100
www.gao.gov/cgi-bin/getrpt?GAO-03-795.          Source: GAO analysis of regulators’ data, except NASD, which calculated its own rates.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Davi
D’Agostino at (202) 512-8678 or
dagostinod@gao.gov.
Contents



Letter                                                                                                  1
                             Results in Brief                                                           3
                             Background                                                                 6
                             SEC and CFTC Have Taken Steps to Improve Their Collection
                               Programs, but SEC Has Not Ensured That All Eligible Cases Are
                               Referred to FMS and TOP                                                  8
                             SEC and CFTC Have Taken Steps to Improve Their Oversight of
                               SROs’ Sanctioning Practices, but Some Concerns Remain                   14
                             We Calculated Collection Rates in Two Different Ways to Provide a
                               More Complete Picture of Collection Efforts                             19
                             Conclusions                                                               27
                             Recommendations                                                           28
                             Agency Comments and Our Evaluation                                        28


Appendixes
              Appendix I:    Scope and Methodology                                                     30
             Appendix II:    Comments from the Securities and Exchange Commission                      36
             Appendix III:   Securities Regulators’ Collection Rates for Open and Closed
                             Cases by Calendar Year                                                    39
             Appendix IV:    Futures Regulators’ Collection Rates for Open and Closed
                             Cases by Calendar Year                                                    42
              Appendix V:    GAO Contacts and Staff Acknowledgments                                    45
                             GAO Contacts                                                              45
                             Acknowledgments                                                           45


Tables                       Table 1: Collection Rates for Fines Levied on Closed Cases for
                                       1997–August 2002 and 1992–96                                    20
                             Table 2: Collection Rates for Fines Levied on Open and Closed
                                       Cases and Closed Cases for 1997–August 2002                     21
                             Table 3: SEC’s Collection Rates                                           39
                             Table 4: The American Stock Exchange’s Collection Rates                   39
                             Table 5: The Chicago Board Options Exchange’s Collection
                                       Rates                                                           40
                             Table 6: The Chicago Stock Exchange’s Collection Rates                    40
                             Table 7: NASD’s Collection Rates                                          41
                             Table 8: NYSE’s Collection Rates                                          41
                             Table 9: CFTC’s Collection Rates                                          42
                             Table 10: The Chicago Board of Trade’s Collection Rates                   42



                             Page i                                GAO-03-795 SEC and CFTC Fines Follow-up
          Contents




          Table 11: The Chicago Mercantile Exchange’s Collection Rates                           43
          Table 12: NFA’s Collection Rates                                                       43
          Table 13: The New York Mercantile Exchange’s Collection Rates                          44


Figures   Figure 1: SEC’s Actual Collection Rates for Open and Closed Cases,
                    1997–August 2002, and Adjusted Collection Rates for
                    Selected Years                                                               22
          Figure 2: CFTC’s Actual Collection Rates for Open and Closed
                    Cases, 1997–August 2002, and Adjusted Collection Rates
                    for Selected Years                                                           24
          Figure 3: NASD’s Collection Rates for Open and Closed Cases,
                    1997–2002                                                                    26




          Abbreviations

          CFTC         Commodity Futures Trading Commission
          DPTS         Disgorgement and Penalties Tracking System
          FBI          Federal Bureau of Investigation
          FMS          Financial Management Service
          NFA          National Futures Association
          NYSE         New York Stock Exchange
          SEC          Securities and Exchange Commission
          SRO          self-regulatory organization
          TOP          Treasury Offset Program

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          Page ii                                        GAO-03-795 SEC and CFTC Fines Follow-up
A
United States General Accounting Office
Washington, D.C. 20548



                                    July 15, 2003                                                                                   Leter




                                    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

                                    Collecting fines ordered for violations of securities and futures laws helps
                                    ensure that violators are held accountable for their offenses and may also
                                    deter future violations. While previous GAO reports1 found that securities
                                    and futures regulators collected most of the fines imposed, the reports also
                                    identified weaknesses in the collection programs of the Securities and
                                    Exchange Commission (SEC) and the Commodity Futures Trading
                                    Commission (CFTC). These reports made several recommendations to help
                                    SEC and CFTC improve their collection programs and their oversight of the
                                    sanctioning practices of self-regulatory organizations (SRO).2




                                    1
                                     U.S. General Accounting Office, 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 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).
                                    2
                                     SROs have an extensive role in regulating the U.S. securities and futures markets, including
                                    ensuring that members comply with federal securities and futures laws and SRO rules. SROs
                                    include the national securities and futures exchanges, registered securities and futures
                                    associations, registered clearing agencies, and the Municipal Securities Rulemaking Board.




                                    Page 1                                           GAO-03-795 SEC and CFTC Fines Follow-up
This report responds to your July 30, 2001, request that we evaluate the
actions that SEC and CFTC have taken in response to the
recommendations made in our earlier fines collection reports. Also, as
agreed in a September 5, 2002, meeting with your staff, we are updating the
collection rates from our earlier reports. Our objectives were to (1)
evaluate SEC’s and CFTC’s actions to improve their collection programs,
(2) assess these agencies’ efforts to enhance their oversight of the SROs’
sanctioning practices, and (3) calculate the fines collection rates for SEC,
CFTC, and nine securities and futures SROs3 for 1997–2002.4

To evaluate SEC’s and CFTC’s actions to improve their collection programs,
we reviewed relevant debt collection regulations, guidelines, procedures,
controls, and laws; analyzed data related to their debt collection actions;
and interviewed officials of these agencies and of the Financial
Management Service (FMS) of the U.S. Department of Treasury. To assess
SEC’s and CFTC’s efforts to enhance their oversight of the SROs’
sanctioning practices, we interviewed agency officials and reviewed
related data. To calculate the fines collection rates for 1997–2002 for all the
SROs except NASD, we used data provided by SEC, CFTC, and the
regulators for fines levied from January 1997 through August 2002. Because
of the way its financial system was designed, NASD’s calculations are
based on fines invoiced through December 2002. Limitations on SEC’s data
reliability affect the accuracy of calculations related to its collections
activities as well as its overall fines collection rates. Appendix I contains a
full description of our scope and methodology.




3
 The nine SROs include the American Stock Exchange, Chicago Board Options Exchange,
Chicago Board of Trade, Chicago Mercantile Exchange, Chicago Stock Exchange, NASD,
National Futures Association, New York Mercantile Exchange, and New York Stock
Exchange.
4
All years in this report are calendar years.




Page 2                                         GAO-03-795 SEC and CFTC Fines Follow-up
Results in Brief   SEC and CFTC have continued to improve their collection programs since
                   we issued our 2001 fines report, but SEC needs to make additional
                   improvements to its program. First, SEC amended its debt collection
                   regulations to allow cases to be referred to FMS’s Treasury Offset Program
                   (TOP).5 SEC also implemented procedures, collections guidelines, and a
                   collections database—the latter to aid in tracking and referring to FMS,
                   including TOP, those cases with fines and disgorgements6 levied after the
                   guidelines went into effect. It was too soon to assess the effectiveness of
                   SEC’s strategy related to these post-guidelines cases, because most of them
                   were not yet eligible for referral. In contrast, SEC did not have a formal
                   strategy—one that prioritized cases based on their collection potential and
                   established time frames for their referral—for cases with fines and
                   disgorgements levied before the guidelines went into effect.7 Further
                   impeding collection efforts on these pre-guidelines cases, SEC’s original
                   system for tracking all cases with money judgments, the Disgorgement and
                   Penalties Tracking System (DPTS), was unreliable. Because DPTS was
                   unreliable, SEC could not determine which pre-guidelines cases were not
                   being referred to FMS and TOP or the amounts associated with them—
                   potentially well over a billion dollars. SEC has drafted a two-phase action
                   plan for replacing DPTS by the end of fiscal year 2003 but has not
                   established a time frame for implementing the computer system for the
                   second phase. In addition, SEC has developed procedures for making
                   timely responses to offers presented by FMS to settle a violator’s debt, and
                   CFTC has implemented procedures designed to ensure the timely referral
                   of delinquent cases to FMS. However, only four cases had been processed
                   under each agency’s procedures as of April 2003, an insufficient number to
                   assess their effectiveness.

                   SEC and CFTC have also taken some actions to improve their oversight of
                   the SROs’ sanctioning practices, but SEC has not yet used the SROs’ data to
                   analyze these practices. In response to our 1998 recommendation, SEC has
                   been inputting the SROs’ data into its database for use in analyzing


                   5
                    Under TOP, FMS identifies federal payments, such as tax refunds, that are owed to
                   individuals and applies the payments to their outstanding debt. All cases referred to FMS for
                   collection are also eligible for referral to and servicing under TOP.
                   6
                    Disgorgement is a type of sanction that requires violators to give up profits obtained as a
                   result of violating the law.
                   7
                    According to SEC officials, although SEC currently has no formal strategy regarding pre-
                   guidelines cases, all eligible debts will ultimately be referred to FMS and TOP.




                   Page 3                                           GAO-03-795 SEC and CFTC Fines Follow-up
violations and disciplinary sanctions. These analyses should help SEC
identify any disparities among SROs and find ways to improve their
disciplinary programs. However, technological problems have hampered
SEC’s ability to complete the analyses. SEC officials told us that the agency
expects to initiate its first analysis during the summer of 2003. They also
said that the agency plans to develop a new disciplinary database to collect
and analyze data on sanctions in a timelier manner but has not established
a date for implementing it. Also, consistent with our 2001 recommendation,
SEC and CFTC have been monitoring readmission applications but have
not yet received any from barred individuals. We found, however, that SEC,
CFTC, the National Futures Association (NFA), and NASD have controls
designed to ensure that inappropriate readmissions of barred individuals
do not occur. Further, while examining the application review process, we
found weaknesses in controls over fingerprinting that could result in
inappropriate admissions to the securities and futures industries. But we
did not determine the extent to which these weaknesses resulted in
inappropriate admissions.




Page 4                                  GAO-03-795 SEC and CFTC Fines Follow-up
We calculated the fines collection rates in two ways in order to provide a
more complete picture of the regulators’ collection activities. The
collection rates for closed cases (those for which all possible collection
actions had been completed) for SEC,8 CFTC, and the SROs from January
1997 to August 2002 showed that the regulators had collected between 75
and 100 percent of the fines imposed and that they had either improved
their performance over the 1992-96 period or maintained a 100-percent
performance rate.9 Broadening the analysis to include open cases (those
for which collection actions were ongoing) had the greatest impact on
SEC’s and CFTC’s collection rates. Including open cases, they collected 40
and 45 percent, respectively, of the total dollar amount of fines levied.
However, the differences in the rates were largely explained by a few large
uncollected fines. According to regulators, large fines are more difficult to
collect than small ones, and a few large uncollected fines can significantly
affect an agency’s collection rate. The rates for the SROs changed much
less when adding open cases because the SROs generally had fewer and
smaller uncollected fines. According to SRO officials, SROs that were
exchanges had higher collection rates in part because they could sell a
member’s “seat,” or membership, to pay fines, giving members an incentive
to pay their fines quickly. As discussed in a previous report,10 these results
underscore the limitations of using the collection rate alone to measure the
effectiveness of collection efforts. That is, the rate can be significantly
influenced by factors that are beyond regulators’ control. Nonetheless,
examining the rates and the factors influencing them can be a starting point
for obtaining an understanding of regulators’ performance.

This report makes three recommendations to SEC for improving its
tracking and referral of delinquent cases to FMS and TOP and for
completing its analysis of SROs’ disciplinary sanctions. It also makes a
recommendation to SEC and CFTC for improving controls over the
fingerprinting of industry applicants. We received comments on a draft of
this report from SEC and CFTC. Both agencies generally agreed with the



8
 Although DPTS was unreliable, we used the system because it was the only available
source of data on SEC’s collection efforts.
9
 The closed case collection rate for 1992-96 appeared in our 1998 fines report
(GAO/GGD-99-8).
10
 U.S. General Accounting Office, SEC Enforcement: More Actions Needed to Improve
Oversight of Disgorgement Collections, GAO-02-771 (Washington, D.C.: July 12, 2002).




Page 5                                          GAO-03-795 SEC and CFTC Fines Follow-up
             facts we presented and agreed to implement the recommendations we
             made. SEC’s written comments are reprinted in appendix II.



Background   The regulatory structure of the U.S. securities markets was established by
             the Securities Exchange Act of 1934, which created SEC as an independent
             agency to oversee the U.S. securities markets and their participants.
             Similarly, in 1974 the Commodity Exchange Act established CFTC as an
             independent agency to oversee the U.S. commodity futures and options
             markets. Both agencies have five-member commissions headed by
             chairpersons who are appointed by the President of the United States for
             5-year terms. Among other things, the commissioners approve new SEC
             and SRO rules and amendments to existing rules. They also authorize
             enforcement actions. SEC and CFTC are headquartered in Washington,
             D.C. SEC has a combined total of 11 regional and district offices; CFTC has
             5 regional offices.

             Within SEC and CFTC, the divisions of enforcement are responsible for
             investigating possible violations of the securities and futures laws,
             respectively. With their commissions’ approval, they litigate or settle
             actions against alleged violators in federal civil courts and in administrative
             actions. Typically, enforcement staff investigate alleged violations of law,
             prepare a memorandum for the commissioners that describes alleged
             violations, and, if appropriate, make recommendations for further action.
             When the commissions decide that a case warrants further action, they can
             authorize filing a civil suit against the alleged violator in federal district
             court or instituting a proceeding before an administrative law judge. If
             either the court or the administrative law judge finds that a defendant has
             violated securities or futures laws, it can issue a judgment ordering
             sanctions such as fines and disgorgements and, in the case of futures
             violations, restitution; it can also bar or suspend violators from the
             securities and futures industries.

             The collection process for delinquent debt begins when all or part of a fine
             or disgorgement becomes delinquent because the violator has failed to pay
             some or all of the amount due by the date ordered by the court or
             administrative law judge. If the court or administrative law judge has not
             specified a payment date and no stay has been entered, SEC considers the
             debt delinquent 10 days after the court enters the judgment. CFTC officials
             told us that absent an appeal, they consider the debt delinquent 15 or
             60 days after the administrative law judge or court entered the judgment in
             administrative and civil cases, respectively. SEC and CFTC collect



             Page 6                                   GAO-03-795 SEC and CFTC Fines Follow-up
delinquent monetary judgments primarily through post-judgment litigation,
negotiating payments with defendants, and making referrals to the
Department of Treasury or the Department of Justice.

In accordance with the Debt Collection Improvement Act of 1996, SEC and
CFTC have each entered into an agreement with the Department of
Treasury to improve collections. Under this act, federal agencies are
required to submit all nontax debts that are 180 days delinquent to
Treasury’s FMS. 11 The act also requires that FMS either take appropriate
steps to collect the debt or terminate collection actions. In addition to
using traditional methods to collect these debts, such as sending demand
letters and hiring private collection agencies, FMS can use TOP. Under TOP,
FMS identifies federal payments, such as tax refunds, that are owed to
individuals and applies the payments to their outstanding debt. All cases
referred to FMS for collection are also eligible for referral to and servicing
under TOP. FMS also uses collection agencies to negotiate compromise
offers with individual debtors. A compromise offer is an agreement
between a federal agency and an individual debtor, in which the federal
agency agrees to discharge a debt by accepting less than the full amount.
Once the collection agency negotiates a compromise offer with a debtor, it
forwards the offer to FMS. In the absence of an agreement between FMS
and the federal agency to approve compromise offers on its behalf, FMS
refers the offer to the federal agency for final approval.

The U.S. securities and futures markets are regulated under their
respective statutes through a combination of self-regulation (subject to
federal oversight) and direct federal regulation. This regulatory scheme
was intended to give SROs responsibility for administering their own
operations, including most of the daily oversight of the securities and
futures markets and their participants. Two of the SROs—NASD and
NFA—are associations that regulate registered securities and futures firms
and oversee securities and futures professionals, respectively. The
remaining SROs include national exchanges that operate the markets
where securities and futures are traded. These SROs are primarily
responsible for establishing the standards under which their members
conduct business; monitoring the way that business is conducted; and
bringing disciplinary actions against their members for violating applicable
federal statutes, their own rules, and the rules promulgated by their federal
regulator. SROs can impose fines and other sanctions against members that


11
     31 U.S.C. § 3711 (g)(1).




Page 7                                   GAO-03-795 SEC and CFTC Fines Follow-up
                                    violate securities or futures laws or SRO rules, as applicable, through their
                                    enforcement and disciplinary processes. Some SROs’ disciplinary
                                    proceedings are decided by a hearing panel, which examines the evidence
                                    and decides on the appropriate sanction. SROs’ actions are usually initiated
                                    by a customer complaint, a compliance examination, market surveillance,
                                    regulatory filings, or a press report.



SEC and CFTC Have                   SEC and CFTC have taken actions to improve their collection programs,
                                    addressing the three recommendations in our 2001 fines report. However, it
Taken Steps to                      was too early to assess the effectiveness of their actions. After we made
Improve Their                       our first recommendation, SEC took various steps, among them,
                                    implementing collections guidelines that were intended to ensure that
Collection Programs,                eligible delinquent cases are referred to FMS, including TOP. But SEC’s
but SEC Has Not                     actions have not ensured that all eligible cases are referred. To address our
Ensured That All                    second recommendation, SEC developed procedures for responding to
                                    compromise offers submitted by FMS within 30 days. To address our third
Eligible Cases Are                  recommendation, CFTC implemented procedures for ensuring the timely
Referred to FMS and                 referral of delinquent cases to FMS for collection.
TOP

SEC Has Implemented                 SEC implemented regulations, related procedures and guidelines, and a
Regulations, Procedures,            collections database intended to ensure that eligible delinquent cases are
                                    referred to FMS, including TOP, as required by the Debt Collection
Guidelines, and a
                                    Improvement Act of 1996. However, SEC has focused on referring post-
Collections Database, but           guidelines cases, and it was too early to assess the effectiveness of SEC’s
Its Actions Have Not                strategy as it related to these cases. In contrast, SEC did not have a formal
Ensured the Referral of All         strategy for referring pre-guidelines cases and, further impeding its
Eligible Cases to FMS and           collection efforts, it did not have a reliable agencywide system for tracking
TOP                                 monies owed in these cases. Recognizing that its system was unreliable,
                                    SEC has drafted a two-phase action plan under which it will implement a
                                    centralized agencywide tracking system for all delinquent debt. However, it
                                    has not established a time frame for fully implementing the computer
                                    system for the second phase of the plan.

SEC’s Strategy Has Focused on       We recommended in our 2001 report that SEC take steps to ensure that
Referring Post-Guidelines Cases,    regulations allowing SEC’s delinquent fines to be submitted to TOP be
but It Is Too Early to Assess the   adopted so that SEC would benefit from the associated collection
Effectiveness of This Strategy      opportunities. At the time of our review, SEC officials had told us that they




                                    Page 8                                  GAO-03-795 SEC and CFTC Fines Follow-up
had rewritten their rules for using TOP but that they could not estimate
when the rules would be approved by the commission or implemented.

After we made our recommendation, SEC amended its debt collection
regulations.12 In April 2002, SEC implemented related procedures to allow
cases to be forwarded to TOP. Consistent with the Debt Collection
Improvement Act of 1996, the procedures required that cases be referred to
FMS after they had been delinquent for more than 180 days. SEC
subsequently issued additional guidelines and implemented a collections
database that were intended to ensure that eligible delinquent post-
guidelines cases are referred to FMS, including TOP, within 180 days of
becoming delinquent. SEC imposed the more stringent requirement on
itself in recognition of the enhanced probability of collecting monies
ordered on newer cases.

The guidelines provided more detailed instructions for staff on how to
pursue collections, specifying steps for referring eligible delinquent cases
to FMS, including TOP, within 180 days. According to an agency official, the
guidelines went into effect agencywide on September 2, 2002. SEC also
created a collections database for all post-guidelines fines and
disgorgement cases that is maintained by headquarters and each regional
or district office, as applicable. The database tracks actions that staff have
taken to recover debt on delinquent cases, including preparing cases for
referral to FMS, and is used to help ensure that staff are following the new
collections guidelines. SEC officials told us that the agency was tracking
only post-guidelines cases because the database had limited storage
capacity and could become unstable if too many cases were added. In
addition, the agency has assigned attorneys and administrative staff to
every office to maintain the database and its related collection activities for
delinquent cases, including ensuring that eligible cases are referred to FMS
and TOP in a timely manner. According to an agency official, these staff
received training on using the guidelines in the fall of 2002.

It was too early to fully assess the effectiveness of SEC’s strategy for
tracking, collecting, and referring post-guidelines cases, because most of
these cases were not yet 180 days delinquent. Based on a judgmental
sample of 66 cases, we identified 4 delinquent fines and disgorgement cases


12
 “Debt Collection—Amendments to Collection Rules and Adoption of Wage Garnishments
Rules,” Securities and Exchange Commission, Release No. 34-44965, 66 Fed. Reg. 54125
(Oct. 26, 2001).




Page 9                                      GAO-03-795 SEC and CFTC Fines Follow-up
                              valued at $4 million that were eligible for referral as of March 31, 2003. We
                              found that SEC had referred two of the four cases within the 180-day time
                              frame and was preparing the other two for referral.

SEC Did Not Have a Formal     Although SEC had developed controls to better ensure that eligible post-
Strategy for Referring Pre-   guidelines cases were promptly referred to FMS and TOP, it had not
Guidelines Cases              developed a formal strategy for referring eligible pre-guidelines cases. Such
                              a strategy would include prioritizing cases based on their collection
                              potential and establishing time frames for making the referrals. Further
                              impeding its collection efforts, SEC’s original system for tracking monies
                              owed in pre-guidelines cases—DPTS—was not reliable. As a result, SEC
                              could not identify all the cases that had not been referred to FMS and TOP.
                              SEC officials told us that the agency’s April 2002 procedures applied to the
                              pre-guidelines cases and that agency attorneys had followed these
                              procedures in referring some pre-guidelines cases to Treasury. But SEC did
                              not know the extent to which the procedures were being followed or
                              whether eligible cases were not being referred. They explained that the
                              attorneys would know the status of the cases assigned to them but that no
                              agencywide information was available. They also told us that they expected
                              all eligible cases to be referred to FMS and TOP eventually but noted that
                              they had not prioritized the cases for referral or established time frames for
                              referring them.

                              Neither we nor SEC could determine with any certainty the extent to which
                              eligible pre-guidelines cases were not being referred to FMS and TOP due
                              to the unreliability of DPTS. Using DPTS, the only information available,
                              we identified about 900 pre-guidelines cases valued at about $2.8 billion
                              that were 180 days past due and that might be eligible for referral. As of
                              January 31, 2003, almost 54 percent of these cases were over 3 years old
                              based on their judgment date, which, in the absence of better data, we used
                              as a rough proxy for the delinquency date. SEC officials emphasized that
                              these numbers do not accurately reflect the number of pre-guidelines cases
                              eligible for referral to FMS and TOP. They said that some of the cases were
                              ineligible for referral because they were on appeal, in post-judgment
                              litigation, or had a receiver appointed to marshal and distribute assets. In
                              addition, many cases might already have been referred for collection. SEC
                              officials also pointed out that our calculations of the age of cases were
                              inaccurate because we relied on the judgment date rather than the
                              delinquency date, which is not tracked in DPTS. We recognize that many
                              factors affect the accuracy of DPTS, including some that might not be
                              mentioned here. However, we are reporting these numbers as the best
                              information available.



                              Page 10                                  GAO-03-795 SEC and CFTC Fines Follow-up
SEC Had an Action Plan for        Both GAO and SEC have recognized DPTS’s lack of reliability. Our 2002
Replacing DPTS but Had Not        disgorgement report and a January 2003 report commissioned by the SEC
Established a Time Frame for      Inspector General found that DPTS was not complete and accurate and
Full Implementation of the Plan   could not be relied upon for financial accounting and reporting purposes.
                                  Recognizing that the agency did not have a system that provided an
                                  accurate assessment of levied amounts and payments (among other
                                  things), SEC developed a draft action plan for implementing a new system
                                  to replace DPTS. The April 2003 draft plan calls for implementing a
                                  comprehensive centralized system for tracking, documenting, and
                                  reporting on fines and disgorgements ordered, paid, and disbursed in SEC
                                  enforcement actions. The agency had been taking steps to address the
                                  milestones in the plan. If the plan is effectively implemented, the agency
                                  should have a tool for accurately identifying uncollected pre-guidelines
                                  cases for referral to FMS and TOP for collection.

                                  SEC’s action plan has been divided into two phases. In the first phase, SEC
                                  is tentatively scheduled to replace DPTS by the end of fiscal year 2003. SEC
                                  officials described the replacement system as a comprehensive case
                                  tracking, record-keeping, and reporting system for fines and disgorgements
                                  ordered, paid, and distributed. They said that the system will be integrated
                                  with a database maintained by the Division of Enforcement. The
                                  replacement system is intended to, among other things, maintain the data
                                  on debt needed for general reporting and management purposes.
                                  According to SEC officials, one benefit of the replacement system will be to
                                  assist the agency in managing its delinquent cases. However, SEC will
                                  continue to rely on its new collections database, which tracks collection
                                  efforts on post-guidelines cases, to ensure the timely referral of these cases
                                  to FMS and TOP until phase two of the action plan is implemented. In
                                  phase two, SEC plans a comprehensive upgrade to its case tracking system,
                                  which will be integrated with several other databases, including the new
                                  collections database. SEC expects to begin the requirements analysis for
                                  the phase two computer system in fiscal year 2004 but has not established a
                                  milestone for completing this analysis. After the requirements analysis is
                                  complete, SEC plans to establish an implementation date for the system.



SEC Has Implemented               We recommended in our July 2001 report that SEC continue to work with
Procedures for Responding         FMS to ensure that compromise offers presented by FMS are approved in a
                                  timely manner. Our recommendation resulted from a finding that SEC did
to Compromise Offers in a
                                  not always respond to compromise offers promptly and that as a result
Timely Manner                     some debts had never been collected. For example, we reported that FMS
                                  waited from between 42 and 327 days for SEC’s decisions on three



                                  Page 11                                  GAO-03-795 SEC and CFTC Fines Follow-up
compromise offers. But by the time SEC made its decisions, the debtors no
longer had the money to pay the amounts specified in the compromise
offers. To address this concern, in April 2001 FMS proposed securing
delegation authority from SEC—that is, permission to approve
compromise offers that SEC did not respond to within 30 days.

In response to our recommendation, SEC took several steps to ensure that
compromise offers are approved in a timely manner. First, in July 2001 SEC
implemented procedures specifying the actions required to address a
compromise offer, including a schedule to ensure that a decision is made
within 30 days. For example, within 5 days of receiving an offer, SEC staff
are to have made a final decision on whether to recommend the offer to the
commission for approval. SEC also implemented controls to monitor the
status of offers. When it receives a compromise offer from FMS, SEC enters
the offer into a system that tracks information such as the date the offer
was made, the name of the attorney reviewing the offer, the date the offer
was referred to the commission for a final decision, and the date of the final
decision. The Division of Enforcement’s chief counsel monitors the status
of offers based on weekly reports generated from this system to ensure that
follow-up action is taken to address any problems. Finally, SEC has
designated two staff to respond to FMS inquiries about the status of
compromise offers.

It is still too early to determine the effectiveness of SEC’s actions. As of
April 22, 2003, SEC had received four compromise offers from FMS under
its new procedures. SEC and FMS data showed that SEC had responded to
three of the offers within the 30-day guideline and to one offer within 40
days. The late offer represented a debt of $1.6 million, and the settlement
offer was for $50,000. SEC staff told us that the agency ultimately rejected
the offer, at least in part because of the disparity between the amount
offered and the amount owed. SEC officials attributed the delay in
responding to this offer to scheduling conflicts caused by the holiday
season. The officials told us that the agency was in touch with FMS before
the end of 30 days to indicate, on an informal basis, that the reply to the
compromise offer would be delayed and that the offer would be rejected.
FMS officials told us that they did not view SEC’s late response to this offer
as a problem—that is, the delay did not represent weaknesses in agency
policies, procedures, or controls. They said that SEC had shown marked
improvement in responding to compromise offers and that as a result FMS
was no longer seeking delegation authority from SEC.




Page 12                                  GAO-03-795 SEC and CFTC Fines Follow-up
CFTC Implemented              We recommended in our 2001 report that CFTC take steps to ensure that
Procedures for Ensuring the   delinquent fines were promptly referred to FMS, including creating formal
                              procedures that addressed both sending debts to FMS within the required
Timely Referral of            time frames and requiring all of the necessary information from the
Delinquent Debt to FMS        Division of Enforcement on these debts. Our recommendation flowed from
                              a finding in an April 2001 report by CFTC’s Inspector General showing that
                              CFTC staff were not referring delinquent debts to FMS in a timely manner,
                              potentially limiting FMS’s ability to collect the monies owed. The report
                              also noted that CFTC’s collection procedures had not been updated to
                              address referrals to FMS and, among other examples, identified a fine in
                              the amount of $7 million that had not been referred to FMS for more than 2
                              years because of inadequate communication between CFTC’s Division of
                              Enforcement and its Division of Trading and Markets.

                              As we recommended, CFTC has improved its procedures for referring its
                              debt to FMS in a timely manner and has taken steps to ensure that it has all
                              the necessary enforcement information before making the referral. CFTC
                              updated its collection procedures and implemented them in July 2002. They
                              now include specific requirements for referring debt to FMS within 180
                              days of the date that the debt became delinquent. CFTC also implemented
                              controls to ensure that it has identified all delinquent debt eligible for
                              referral. For example, CFTC management reviews quarterly reports on the
                              status of cases to ensure that all debts are referred to FMS within 180 days.
                              According to CFTC officials, the agency’s shift of all debt collection
                              responsibility from its Division of Trading and Markets to its Division of
                              Enforcement streamlined its debt referral process.

                              Although it is too early to fully assess the effectiveness of CFTC’s actions,
                              our review of CFTC’s data on uncollected cases indicated that the agency
                              had been referring all eligible debt to FMS within 180 days. As of April 24,
                              2003, CFTC had had four delinquent cases dating from the time its
                              procedures went into effect. Using FMS’s data, we confirmed that the cases
                              had been referred to FMS within 123 days. Also, a review of CFTC’s data of
                              all delinquent cases levied before the procedures went into effect showed
                              that CFTC had referred all eligible cases to FMS for collection. FMS
                              officials told us that CFTC had been making debt referrals with complete
                              information on all its cases.




                              Page 13                                 GAO-03-795 SEC and CFTC Fines Follow-up
SEC and CFTC Have             SEC and CFTC have taken steps to address our two recommendations for
                              improving their oversight of SROs’ sanctioning practices. But SEC has not
Taken Steps to                fully implemented our 1998 recommendation that it analyze industrywide
Improve Their                 data on SRO-imposed sanctions to examine disparities and help improve
                              disciplinary programs. The agency has experienced technological problems
Oversight of SROs’            that have hampered its ability to complete these analyses. In addition—and
Sanctioning Practices,        consistent with our 2001 recommendation—SEC and CFTC have been
but Some Concerns             monitoring readmission applications to the securities and futures
                              industries. However, at the time of our review neither had received any
Remain                        applications since changing their fine imposition practices. Also, SEC,
                              CFTC, NASD, and NFA have controls designed to ensure that inappropriate
                              readmissions do not occur. Further, while examining the application review
                              process, we found weaknesses in controls over fingerprinting that could
                              result in inappropriate admissions to the securities and futures industries.



Technological Problems        In our 1998 report, we recommended that SEC analyze industrywide
Have Hampered SEC’s           information on disciplinary program sanctions, particularly fines, to
                              identify possible disparities among the SROs and find ways to improve
Ability to Analyze
                              SROs’ disciplinary programs. We concluded that analyzing industrywide
Disciplinary Actions Across   data could provide SEC with an additional tool to identify disparities
SROs                          among SROs that might require further review. We reported in 2001 that
                              SEC had developed a database to collect information on SROs’ disciplinary
                              actions.

                              As of June 30, 2003, according to agency officials, SEC was still inputting
                              information into its database but had not yet completed any analyses
                              because technological difficulties had hampered its ability to collect
                              sufficient data to perform the analyses. First, the database had a limited
                              number of fields and therefore could not capture multiple disciplinary
                              violations or multiple parties in a single case. In October 2002, SEC officials
                              told us that they had addressed this limitation by enhancing the database to
                              incorporate the required fields and were continuing to add disciplinary
                              information to the database. However, in November 2002, the enhanced
                              database failed because it could not support multiple users. SEC repaired
                              the database, and agency officials told us that they expected to complete
                              their first data analyses in the summer of 2003. The analyses are expected
                              to show whether SROs impose similar fines and sanctions for similar
                              violations. An SEC official said that the agency expects these analyses to
                              supplement the information obtained during agency inspections of the
                              SROs’ disciplinary programs.



                              Page 14                                  GAO-03-795 SEC and CFTC Fines Follow-up
                         SEC officials told us that the agency is planning to use funds from its fiscal
                         year 2003 budget increase to develop a new disciplinary database that will
                         replace the current one. According to SEC officials, this new disciplinary
                         database is expected to allow SROs to submit data on-line rather than
                         having to send it to SEC to be entered by staff. This streamlined process is
                         expected to reduce data entry errors. An SEC official told us that while
                         planning had begun for the new disciplinary database, no completion date
                         had been established.



SEC and CFTC Have        In our 2001 report, we recommended that SEC and CFTC periodically
Monitored Readmission    assess the pattern of readmission applications to ensure that the changes in
                         NASD’s and NFA’s fine imposition practices do not result in any unintended
Applications and Have
                         consequences, such as inappropriate readmissions. NASD and NFA had
Controls Designed to     stopped routinely assessing fines when barring individuals in October 1999
Preclude Inappropriate   and December 1998, respectively, eliminating the related requirement that
Readmissions             the fines be paid as a condition of reentry to the securities and futures
                         industries. These fines had rarely been collected, because few violators
                         ever sought reentry. We were concerned that because barred individuals
                         were no longer required to pay a fine before reentry, they might be more
                         willing to seek readmission.

                         Consistent with our recommendation, SEC and CFTC have monitored
                         readmission applications. They found, and we confirmed, that no
                         individuals who were barred after the changes in NASD’s and NFA’s fine
                         imposition practices had applied for reentry. Also, NASD’s and NFA’s
                         application review processes included controls designed to ensure that
                         inappropriate applications for reentry are not approved. Officials of both
                         SROs told us that as part of their background checks they did a database
                         search against the names of past and current registrants in both industries
                         to determine whether the applicants had a disciplinary history. In addition,
                         both SROs submitted applicants’ fingerprints to the Federal Bureau of
                         Investigation (FBI) for a criminal background check. NASD and NFA
                         required all individuals who had been suspended, expelled, or barred to
                         be—at a minimum—sponsored by a registered firm before being
                         considered for readmission. According to a CFTC official, finding a sponsor
                         is difficult, as most firms would not hire an individual with a history of
                         serious disciplinary problems, in part due to increased supervisory
                         requirements and the risk of harming their reputations.

                         SEC and CFTC were reviewing the applications of all individuals who had
                         been statutorily disqualified from registration, including any barred



                         Page 15                                  GAO-03-795 SEC and CFTC Fines Follow-up
                              individuals, and had the authority to reverse an admission decision made
                              by NASD or NFA, respectively.13 SEC and CFTC officials told us that they
                              would consider various factors when reviewing a readmission application,
                              including the facts and circumstances of the case, the appropriateness of
                              the proposed supervision, and the prospective employer’s ability to provide
                              the proposed supervision. Officials from both agencies told us that if they
                              were to begin receiving a large number of applications from barred
                              applicants, they would reexamine the SROs’ fine imposition practices.



Weaknesses in                 While examining the application review process, we found that neither the
Fingerprinting Controls       related statutes, SEC, nor CFTC required the SROs to ensure that the
                              fingerprints sent to the FBI for use in criminal history checks belonged to
Could Result in
                              the applicants who submitted them. Further, in the absence of such a
Inappropriate Admissions to   requirement, NASD,14 the New York Stock Exchange (NYSE),15 and NFA16
the Securities and Futures    lacked related controls over fingerprinting, potentially allowing
Industries                    inappropriate persons to enter the securities and futures industries. The
                              securities17 and futures laws18 require that applicants to these industries
                              have their fingerprints taken and then sent for review to the FBI as part of a
                              criminal background check. The goal of the criminal background check is
                              to ensure that inappropriate individuals are not granted admission to the
                              securities or futures industries. The statutes also require SRO member

                              13
                               Individuals who have been statutorily disqualified have been expelled or suspended from
                              membership or participation in an SRO or barred and suspended from associating with a
                              member of any SRO.
                              14
                                Although several securities SROs have formal agreements with the FBI under which they
                              may submit fingerprints for a criminal history check, according to an SEC official, the firms
                              typically submit fingerprints to NASD because all industry registrants that do business with
                              the public—the majority of registrants—must also be NASD members.
                              15
                               According to an SEC official, all the securities SROs have similar fingerprinting procedures
                              for accepting and processing fingerprints. Because NYSE is the largest securities SRO that
                              operates a market, and because we wanted to determine how another SRO’s procedures
                              might differ from those of NASD and NFA, we included NYSE in our review. According to an
                              SEC official, NASD sends about 300,000 fingerprints to the FBI each year. A NYSE official
                              told us that NYSE sends approximately 40,000.
                              16
                               NFA is responsible for submitting the fingerprints of all futures industry applicants to the
                              FBI. According to an NFA official, for the 12-month period ending June 30, 2003, NFA sent
                              approximately 11,000 fingerprints to the FBI.
                              17
                                   15 U.S.C. § 78g (f)(2).
                              18
                                   7 U.S.C. § 6n and 17 C.F.R. § 3.10 (1997).




                              Page 16                                           GAO-03-795 SEC and CFTC Fines Follow-up
firms to be responsible for assuring that their personnel are fingerprinted.
SEC and CFTC rules provide that applicants can satisfy this requirement by
submitting fingerprints to the SROs who then send them to the FBI for
processing.

However, neither the statutes, SEC, nor CFTC require SROs to ensure that
the fingerprints sent to the FBI for use in criminal history checks belong to
the applicants who submitted them. In the absence of such a requirement,
NASD, NYSE, and NFA have not imposed requirements on member firms to
help ensure that the identity of the person being fingerprinted matches the
fingerprints being submitted for FBI review. The SROs told us that,
consistent with the law, they required their members to be fingerprinted
and that these fingerprints were submitted to the FBI for assessment.
NYSE officials emphasized that their members were in full compliance with
the law and related regulations, which do not require specific controls.

In the absence of specific requirements, firms have taken a variety of
approaches to fingerprinting applicants. For example, while SEC and some
SROs told us that most firms used their own personnel or police officers to
obtain fingerprints, they said that a small number of firms may allow
applicants to fingerprint themselves, a practice that provides an
opportunity for individuals to perpetrate fraud by submitting someone
else’s fingerprints instead of their own. According to SEC and CFTC
officials, their agencies have trained staff in their headquarters and some
regional offices that take fingerprints of their employees using approved
fingerprinting kits. An NFA official also stated that NFA headquarters has
trained staff that take fingerprints of industry applicants, verifying their
identities as part of the process. The FBI also informed us that it suggests
using law enforcement or other trained personnel to take fingerprints. SEC
and NYSE also said that many reputable businesses provide fingerprinting
services and that SRO member firms could contract with these businesses.




Page 17                                 GAO-03-795 SEC and CFTC Fines Follow-up
In a 1996 CFTC review of NFA’s registration fitness program, CFTC
recommended that NFA conduct a review to determine the feasibility of
adopting controls to ensure that the fingerprints submitted for criminal
history checks belonged to the applicant. NFA found that a number of
obstacles stood in the way of establishing an effective program to verify
fingerprints. According to an NFA official, the agency examined the
procedures of the Bureau of Citizenship and Immigration Services of the
Department of Homeland Security (formerly the Immigration and
Naturalization Service) in responding to CFTC’s recommendation. On the
basis of this examination, NFA concluded that it would not be cost-
effective to replicate the bureau’s procedures. For example, unlike NFA,
the bureau has fingerprinting sites throughout the country with trained
employees to take fingerprints.19 As part of its review, NFA considered
requiring an attestation form, which would include the fingerprinter’s name
and address and the document used to verify the applicant’s identity.
Ultimately, however, NFA concluded that such a form could be subject to
forgery and would not provide assurance that the fingerprints belonged to
the applicant. CFTC accepted NFA’s conclusions.

NYSE and NFA officials described other obstacles to establishing controls
over fingerprinting. They explained that space limitations on the FBI
fingerprint card made it difficult to identify the person taking the
fingerprints. Further, they said that the card provided space for the
fingerprinter’s signature, which is often illegible, but not for the
fingerprinter’s printed name or the name of another contact who could
verify information related to the fingerprints. NYSE officials also said that
the FBI could adjust its fingerprint card so that it required more complete
contact information for the person taking the fingerprints. An NFA official
also told us that because some SROs process registration applications both
nationally and internationally, these SROs would not be able to establish
enforceable rules regarding who should take fingerprints.

We did not determine the extent to which individuals with a criminal
history could submit someone else’s fingerprints and thus enter the
securities or futures industries undetected. However, SEC and CFTC
officials said that the SROs’ fingerprinting processes are vulnerable to such

19
  As of February 19, 2003, the bureau had 76 freestanding fingerprinting sites, 54 sites
located in its offices, and 46 locations served by mobile routes. It had also designated 45 law
enforcement agencies to take fingerprints. NFA officials told us that futures industry
applicants were too widely dispersed to travel to the bureau’s sites to be fingerprinted,
precluding a contractual arrangement with the bureau.




Page 18                                           GAO-03-795 SEC and CFTC Fines Follow-up
                             a practice because of the lack of controls for preventing applicants from
                             using someone else’s fingerprints as their own. SRO officials said that
                             existing systems were reasonably designed to prevent fraud but were not
                             foolproof, adding that the potential cost of imposing any unduly restrictive
                             requirements was a concern. Some SRO officials said that to the extent
                             they are needed, SEC and CFTC should establish industrywide standards.
                             NFA officials said that since weaknesses in fingerprinting procedures apply
                             equally to the securities and futures industries, SEC and CFTC should
                             establish comparable requirements to ensure that one industry is not at a
                             disadvantage to the other. NYSE officials said that SEC rulemaking would
                             be the most appropriate method for changes to fingerprinting procedures
                             in the securities industry.



We Calculated                To provide a more complete picture of efforts by securities and futures
                             regulators to collect fines, we calculated the collection rates in two
Collection Rates in          different ways. The collection rates for closed cases (cases with a final
Two Different Ways to        judgment order for which all collection actions were completed) for SEC,20
                             CFTC, and the SROs from January 1997 to August 2002 showed that the
Provide a More               regulators collected most of the fines imposed. Broadening the analysis to
Complete Picture of          include open cases (cases with a final judgment order that remained open
Collection Efforts           while collection efforts continued) had the greatest impact on SEC’s and
                             CFTC’s collection rates because of a few large uncollected fines. Our
                             analysis of the collection rates highlights a theme introduced in an earlier
                             report that the collection rate alone may not be a valid measure of the
                             effectiveness of collection efforts, because collections can be influenced by
                             factors that are outside regulators’ control.21



SEC, CFTC, and the SROs      SEC, CFTC, and the SROs collected between 75 and 100 percent of all the
Collected Almost All Fines   fines imposed in closed cases. For these cases, collection efforts had
                             ceased either because the fines had been collected in full or in part or were
in Closed Cases
                             unlikely to be collected and thus had been written off as bad debts. As
                             shown in table 1, SEC and CFTC collected about 94 and 99 percent,
                             respectively, of the total dollars levied in cases closed from January 1997
                             through August 2002—the period immediately following the one covered in

                             20
                              Due to the unreliability of DPTS data, we could not accurately calculate SEC’s collection
                             rates.
                             21
                                  GAO-02-771.




                             Page 19                                         GAO-03-795 SEC and CFTC Fines Follow-up
                                                                 our 1998 fines report. These amounts represent an 11 and 18 percentage
                                                                 point increase, respectively, over the rates presented in the 1998 report,
                                                                 which covered the 1992–96 period. CFTC wrote off fewer fines as
                                                                 uncollectible in the more recent period, and almost all of its collected fines
                                                                 were paid in full.



Table 1: Collection Rates for Fines Levied on Closed Cases for 1997–August 2002 and 1992–96

                                                                                                                                               Total fines on
                                                                                                                                             closed cases for
                                                                       Total fines on closed cases for 1997–August 2002                          1992–96
Agencies and securities and futures                                                                                       Percentage                  Percentage
SROs                                                                    Amount levied           Amount collected            collected                   collected
SEC                                                                        $186,880,769             $175,446,541                  94%                         83%
CFTC                                                                         163,230,782             161,228,782                    99                          81
American Stock Exchange                                                         2,406,307              2,286,307                    95                          75
Chicago Board Options Exchange                                                  3,153,744              3,109,994                    99                          95
Chicago Board of Trade                                                          3,471,600              3,313,100                    95                          54
Chicago Mercantile Exchange                                                     3,001,000              2,915,000                    97                          85
Chicago Stock Exchange                                                             257,500               257,500                   100                         100
NASD                                                                        135,401,570a             129,027,116                    95                          24b
NFA                                                                             3,449,500              2,569,975                    75                          27
New York Mercantile Exchange                                                    1,163,294              1,163,294                   100               Not Available
NYSE                                                                          19,150,667              19,145,667                   100                          98
Source: GAO analysis of SEC, CFTC, and SRO data, except NASD, which calculated its own rates.

                                                                 Note: Percentages are rounded to the nearest whole number.
                                                                 a
                                                                  NASD data include cases invoiced from 1997 through 2002.
                                                                 b
                                                                  Calculations may include cases with payment plans, which we were unable to exclude because of the
                                                                 design of NASD’s system.


                                                                 The eight securities and futures SROs for which data were available had the
                                                                 same or higher collection rates on closed cases in the most recent period
                                                                 compared with the earlier period. The Chicago Board of Trade’s collection
                                                                 rate showed significant improvement, increasing from 54 to 95 percent of
                                                                 the total dollars levied. Its collection rate for the 1992–96 period was
                                                                 heavily influenced by two large uncollected fines totaling $2.25 million.
                                                                 Excluding those two cases, the rate for this period would have been about
                                                                 99 percent rather than 54 percent—much closer to the 95 percent rate for
                                                                 the more recent period. NASD’s and NFA’s rates also showed significant
                                                                 improvement, increasing 71 and 48 percentage points, respectively, over



                                                                 Page 20                                            GAO-03-795 SEC and CFTC Fines Follow-up
                                                                 the rates presented in the 1998 report, which covered the 1992–96 period.
                                                                 However, NASD’s and NFA’s collection rates improved because, as we have
                                                                 noted, the regulators stopped routinely assessing fines when barring
                                                                 individuals from the securities and futures industry. These fines had been
                                                                 the most difficult to collect, because barred individuals had little incentive
                                                                 to pay them.



Including Open Cases in the                                      SEC’s and CFTC’s collection rates were affected more than the SROs’ rates
Calculations Had the                                             when we added open cases to our calculations. As shown in table 2, SEC
                                                                 collected about 40 percent of the total dollars levied in all cases, open and
Greatest Impact on SEC’s
                                                                 closed, from January 1997 through August 2002—54 percentage points less
and CFTC’s Collection Rates                                      than its rate for closed cases.
Because of a Few Large
Fines


Table 2: Collection Rates for Fines Levied on Open and Closed Cases and Closed Cases for 1997–August 2002

                                                                                                                                         Total fines on
                                                                                                                                       closed cases for
                                                                Total fines on open and closed cases for 1997–August 2002             1997–August 2002
Agencies and securities and futures                                                                                     Percentage             Percentage
SROs                                                                    Amount levied           Amount collected          collected              collected
SEC                                                                        $480,375,353             $190,103,396              40%                    94%
CFTC                                                                         357,832,773             161,269,894                45                     99
American Stock Exchange                                                         2,631,819              2,286,307                87                     95
Chicago Board Options Exchange                                                  3,168,744              3,113,809                98                     99
Chicago Board of Trade                                                          3,549,350              3,321,600                94                     95
Chicago Mercantile Exchange                                                     3,073,585              2,962,585                96                     97
Chicago Stock Exchange                                                             284,500               257,500                91                    100
NASD                                                                        210,568,908a             139,607,518                66                     95
NFA                                                                             4,021,250              2,676,725                67                     75
New York Mercantile Exchange                                                    1,422,294              1,177,294                83                    100
NYSE                                                                          19,151,667              19,146,667               100                    100
Source: GAO analysis of SEC, CFTC, and SRO data, except NASD, which claculated its own rates.

                                                                 Note: Percentages are rounded to the nearest whole number.
                                                                 a
                                                                  NASD data include cases invoiced from 1997 through 2002.




                                                                 Page 21                                           GAO-03-795 SEC and CFTC Fines Follow-up
We examined SEC’s collection rates by year and found that the rates varied
greatly over time because of a few large fines. (See appendix III for the
collection rates of the securities regulators for open and closed cases by
calendar year.) For example, in 1999 SEC collected 26 percent of the total
fines levied in that year, but one uncollected fine of $123 million
significantly lowered the rate. Had SEC been able to collect this one fine,
its collection rate for 1999 would have been 89 percent (fig. 1). Also, in
2002, SEC collected 61 percent of all fines, but approximately half came
from two payments made by two violators. Excluding these payments, the
reported collection rate for 2002 would have been about 30 percent (fig. 1).



Figure 1: SEC’s Actual Collection Rates for Open and Closed Cases, 1997–August
2002, and Adjusted Collection Rates for Selected Years
Percentage of dollars collected

100



 80



 60



 40



 20




  0
      1997                 1998            1999     2000          2001          2002

                Actual collection rate

                Adjusted collection rate
Source: GAO analysis of SEC's data.



To help control for the influence of large dollar amounts on SEC’s
collection rates, we analyzed the number of cases paid in full and found
that SEC had collected the full amount of the fine in the majority of cases it
levied. For the entire period from 1997 through 2001, 72 percent of the fines
levied had been paid in full. In 2002, 55 percent of the fines levied were paid




Page 22                                           GAO-03-795 SEC and CFTC Fines Follow-up
in full. The rate may be lower for 2002 because SEC has had less time—
approximately 4 months—to collect on cases levied through August 2002.

CFTC collected about 45 percent of the total dollar amount of the fines it
levied over the same period. Like SEC’s rate, CFTC’s was heavily influenced
by a few large fines. A closer review of CFTC’s annual rates from January
1997 through August 2002 showed that the regulator collected between 2
and 90 percent of the total fines levied. (See appendix IV for the collection
rates of the futures regulators for open and closed cases by calendar year.)
But in 2000, when CFTC’s collection rate was just 2 percent, our
calculations included a single uncollected fine of $90 million. Had CFTC
been able to collect this one fine, its collection rate would have been 95
percent (fig. 2). Also, in 1998, when CFTC collected 90 percent of the total
dollar amount levied through August 2002, one payment for $125 million
heavily skewed the rate (fig. 2). Without this one payment and fine, CFTC’s
reported collection rate would have been approximately 7 percent (fig. 2).

To help control for the influence that large dollar amounts can have on the
rate, we again analyzed the number of cases paid in full. Over the entire
period of our study, from 1997 through August 2002, CFTC had collected
the full amount in slightly more than 50 percent of the cases it levied.
Although CFTC’s collection rates over the entire period of our study were
relatively low, the agency was actively pursuing collections on all its
uncollected cases, primarily through the Departments of Treasury and
Justice. CFTC’s Chief of Cooperative Enforcement told us that the agency
would continue to levy large fines when appropriate, even though large
uncollectible amounts could reduce the agency’s collection rate. He said
that levying fines that are commensurate with the related wrongdoing
sends a message to the public that CFTC is serious about enforcing its
statutes.




Page 23                                 GAO-03-795 SEC and CFTC Fines Follow-up
Figure 2: CFTC’s Actual Collection Rates for Open and Closed Cases, 1997–August
2002, and Adjusted Collection Rates for Selected Years
Percentage of dollars collected

100




 80




 60




 40




 20




  0
      1997                   1998          1999        2000          2001           2002

                Actual collection rate

                Adjusted collection rate
Source: GAO analysis of CFTC's data.



The collection rates for the nine securities and futures SROs were
comparable in both sets of calculations (see table 2). When we included
open cases in our calculations, these SROs’ collection rates decreased
slightly, with all but two (NASD’s and the New York Mercantile Exchange’s)
declining between 1 and 9 percentage points. One reason for the relatively
small decline was that these SROs generally had fewer and smaller
uncollected fines, suggesting that they had been more successful in
collecting on all cases than SEC and CFTC. According to an NFA official,
one reason that the SROs that operate markets had higher collection rates
was that in their role as exchanges they could sell a member’s “seat,” or
membership, to pay off the fine, giving members an incentive to pay their
fines. Because other regulators do not have this type of leverage, their rates
are typically lower.




Page 24                                           GAO-03-795 SEC and CFTC Fines Follow-up
NASD’s collection rate for closed cases was 95 percent and its rate for open
and closed cases was 66 percent—a change of 29 percentage points.
NASD’s rate for open and closed cases22 was affected by low collections in
1997 and 1998. As a result, the rates did not necessarily reflect the effects of
the changes NASD made to its fine imposition practices in October 1999. As
indicated in figure 3, NASD’s annual collection rates generally increased
from January 1997 through December 2002. In 1997, NASD collected 26
percent of the total dollars invoiced. In 2002, it collected 96 percent—a 70
percentage point increase over 6 years. As we reported earlier, one of the
primary reasons for the increases was a change in the way NASD imposes
fines. Specifically, NASD stopped routinely assessing fines when barring an
individual from the industry, reducing the number of fines it invoiced each
year and improving its overall collection rate. Also, in calculating its rate,
NASD excluded about $137 million in fines that would be due and payable
only if the fined individuals were to reenter the securities industry. The
New York Mercantile Exchange’s collection rate for open and closed cases
was 83 percent—a decline of 17 percentage points from its closed case
rate. When we excluded one uncollected $200,000 fine, the collection rate
for open and closed cases declined by only 4 percentage points.




22
 Because of the way NASD’s financial system was designed, we could not calculate the
collection rate with an acceptable degree of accuracy using the approach we applied to
other SROs. As a result, we relied on summary information that NASD provided. NASD’s
calculations use cases invoiced from January 1997 through December 2002; for the other
SROs, we used cases levied through August 31, 2002. See appendix I for the potential impact
of NASD’s invoicing procedures on the amounts collected.




Page 25                                         GAO-03-795 SEC and CFTC Fines Follow-up
                             Figure 3: NASD’s Collection Rates for Open and Closed Cases, 1997–2002
                             Percentage of dollars collected

                             100



                              80



                              60



                              40



                              20



                               0
                                   1997                 1998        1999      2000          2001          2002
                             Source: GAO analysis of NASD's data.




Collection Rates Can Be      Collection rates are the most widely available—and in some cases the
Influenced by Factors That   only—measure of regulators’ success in collecting fines for violations of
                             securities and futures laws. But external factors over which regulators
Are Beyond Regulators’
                             have no control can skew these rates. Nonetheless, examining the rates and
Control                      the factors influencing them can be a starting point for obtaining an
                             understanding of regulators’ performance and changes to it. Also, in
                             exploring these rates regulators can identify cases that account for a
                             significant share of uncollected debts and decide whether continuing with
                             collection efforts for these cases is worthwhile.

                             Primary among the external factors affecting collection rates are the large
                             fines and payments that we have been discussing. Just one or two
                             extremely large uncollected fines can lower a collection rate significantly.
                             Similarly, one or two large payments on such fines can raise a collection
                             rate. Other external factors that can influence collection rates include
                             violators’ ability to pay and the size of the fines themselves. For example,
                             an SEC official said that some violators who have been barred from the
                             industry cannot pay their fines because their earning capacity has been
                             limited. In discussing CFTC’s relatively low collection rate, an agency
                             official told us that the courts, in an attempt to match the gravity of the
                             sanction to the offense, have sometimes imposed fines that are more than
                             what an agency might realistically be able to collect. This official said that



                             Page 26                                       GAO-03-795 SEC and CFTC Fines Follow-up
              in one case, a court fined a company $90 million—triple the monetary gain
              from its illegal activities. He also said that in another case, a court assessed
              fines totaling $4 million against four violators, although CFTC had sought
              $660,000.



Conclusions   Since our last report, SEC and CFTC have made material improvements to
              their policies and procedures for collecting delinquent fines that, if
              followed, should improve collections on debts owed to the federal
              government. Nonetheless, SEC lacks a formal strategy for collecting on its
              pre-guidelines delinquent debt. Although the probability of collecting
              monies ordered on older cases diminishes over time, some portion of these
              pre-guidelines cases may have collection potential that is being overlooked.
              Developing a formal strategy that prioritizes pre-guidelines cases based on
              their collection potential and establishes time frames for their referral to
              FMS and TOP would improve the likelihood of collecting some portion of
              the debt associated with these cases, which could be more than $1 billion.

              The success of SEC’s efforts to collect this debt will be closely related to
              the timely replacement of DPTS. Phase one of SEC’s action plan includes a
              tentative deadline for replacing DPTS by the end of fiscal year 2003. At that
              time, SEC will be able to identify all cases eligible for referral to FMS and
              TOP and develop a strategy for making these referrals. SEC has not yet set
              a milestone for completing the requirements analysis for phase two of its
              action plan or established a date to fully implement the computer system
              that will integrate SEC’s now separate databases. We are concerned that,
              without target dates, progress in implementing phase two could be slowed,
              affecting SEC’s ability to more efficiently address all cases that should be
              referred to FMS and TOP.

              Further, SEC’s progress has been slow in the 5 years since we
              recommended that the agency analyze industrywide information on SRO
              disciplinary program sanctions, in part because technological problems
              have hindered its ability to collect sufficient data to perform the analyses.
              SEC has not yet completed its first analysis and has no schedule for
              implementing the new disciplinary database intended to replace its current
              database. Finally, while controls were in place that should keep barred
              individuals from being readmitted to the securities and futures industries,
              neither the related statutes, SEC, or CFTC require the SROs to ensure that
              the fingerprints sent to the FBI for use in criminal history checks belong to
              the applicants who submit them. In the absence of such a requirement, the
              SROs lacked related controls that could help prevent inappropriate



              Page 27                                   GAO-03-795 SEC and CFTC Fines Follow-up
                      admissions to the securities and futures industries. SRO involvement in
                      weighing alternatives for addressing fingerprinting requirements for the
                      securities and futures industries would ensure that concerns about cost-
                      effective solutions are appropriately considered and addressed.



Recommendations       We recommend that the SEC Chairman

                      • develop a formal strategy for referring pre-guidelines cases to FMS and
                        TOP that prioritizes cases based on collectibility and establishes
                        implementation time frames;

                      • take the necessary steps to implement the action plan to replace DPTS
                        by (1) meeting the fiscal year 2003 milestone for implementing phase
                        one of the plan, (2) setting a milestone for completing the requirements
                        analysis for phase two of the plan, and (3) establishing and meeting the
                        implementation date for phase two; and

                      • analyze the data that have been collected on the SROs’ disciplinary
                        programs, address any findings that result, and establish a time frame
                        for implementing the new disciplinary database that is to replace the
                        current database.

                      We also recommend that SEC and CFTC work together and with the
                      securities and futures SROs to address weaknesses in controls over
                      fingerprinting procedures that could allow inappropriate persons to be
                      admitted to the securities and futures industries.



Agency Comments and   We requested comments on a draft of this report from the Chairmen, or
                      their designees, of SEC and CFTC. SEC officials provided written
Our Evaluation        comments, which are reprinted in appendix II. CFTC provided oral
                      comments. In general, both agencies agreed with the facts we presented
                      and also agreed to implement the recommendations we made. SEC
                      emphasized that it expected to meet its milestone for implementing a
                      replacement database for DPTS by the end of fiscal year 2003 and said that
                      once the new system was in place, the agency would be able to identify
                      delinquent debts that had not been referred to FMS and TOP and set
                      deadlines for making referrals. While SEC said that further milestones for
                      phase two of its action plan will be set at some time in the future, it made
                      no reference to establishing a time frame for implementing its new



                      Page 28                                 GAO-03-795 SEC and CFTC Fines Follow-up
disciplinary database. We believe that SEC needs to move quickly to set
time frames for both of these projects, because in the absence of dates on
which to focus, progress may be delayed. SEC also said that agency staff
will contact CFTC to review the possibility of adopting new industrywide
fingerprinting standards, including procedures to verify the identities of all
individuals who are being fingerprinted. CFTC officials told us that they
would work with SEC and the SROs to address our recommendation.
Finally, we also received technical comments from SEC and CFTC that we
incorporated into the report, as appropriate.


As agreed with your offices, 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 send 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 Chairman, House Committee on Energy and Commerce;
the Chairman, House Committee on Financial Services and its
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises; and other interested congressional committees. We will 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
http://www.gao.gov.

If you have any further questions, please call me at (202) 512-8678,
dagostinod@gao.gov, or Cecile Trop at (312) 220-7705, tropc@gao.gov.
Additional GAO contacts and staff acknowledgments are listed in appendix
V.




Davi M. D’Agostino
Director, Financial Markets and
  Community Investment




Page 29                                  GAO-03-795 SEC and CFTC Fines Follow-up
Appendix I

Scope and Methodology                                                                                  AA
                                                                                                        ppp
                                                                                                          ep
                                                                                                           ned
                                                                                                             n
                                                                                                             x
                                                                                                             id
                                                                                                              e
                                                                                                              x
                                                                                                              Iis




             To evaluate SEC’s and CFTC’s actions to improve their collection programs,
             we assessed their responses to our 2001 recommendations that (1) SEC
             take steps to ensure that regulations allowing SEC fines to be submitted to
             TOP are adopted; (2) SEC continue to work with FMS to ensure that
             compromise offers presented by FMS are approved in a timely manner; and
             (3) CFTC take steps to ensure that delinquent fines are referred promptly to
             FMS, including creating formal procedures that address both sending debts
             to FMS within the required time frames and requiring all of the necessary
             information from the Division of Enforcement on these debts.

             To assess steps SEC took to ensure that regulations allowing SEC fines to
             be submitted to TOP were adopted, we reviewed SEC’s final regulations
             and related procedures and collection guidelines. To determine compliance
             with the new collection guidelines for referring delinquent cases to TOP,
             we selected a judgmental sample of 66 post-guidelines fines and
             disgorgement cases using DPTS and obtained information from SEC on the
             referral status of those cases.1 Of the 66 cases, four were eligible for
             referral at the time of our review. We selected cases where judgments or
             orders were entered after SEC’s guidelines took effect, because staff told
             us they were tracking the referral of those cases. To determine the number,
             dollar amount owing, and age of the delinquent cases at the agency, we
             identified all cases with ongoing collections, using DPTS data as of January
             31, 2003, and calculated the age from the judgment date (which in the
             absence of better data, we used as a rough proxy for the delinquency date)
             to January 31, 2003. Since DPTS was unreliable, the aging analysis provides
             only a rough estimate of the total number and age of cases. We interviewed
             SEC and FMS officials to obtain their views on SEC’s progress in referring
             cases to FMS and TOP and information on any impediments to this
             progress.

             To assess SEC’s efforts to continue to work with FMS to ensure that
             compromise offers presented by FMS are approved in a timely manner, we
             examined SEC’s procedures for processing compromise offers. We
             obtained data from SEC on the four compromise offers FMS submitted to
             SEC between July 1, 2001, and April 22, 2003, and analyzed the length of
             time it took for SEC to respond to the compromise offers. We obtained and
             used FMS’s data to validate SEC’s response time. We also interviewed SEC
             and FMS officials to discuss SEC’s policies, procedures, and controls and to


             1
              We included both fines and disgorgement cases, because the collection guidelines apply
             equally to both.




             Page 30                                        GAO-03-795 SEC and CFTC Fines Follow-up
Appendix I
Scope and Methodology




obtain information on the agencies’ efforts to work together to ensure the
timely approval of offers. We also obtained FMS’s views on SEC’s progress
in responding to offers.

To assess steps CFTC took to ensure that delinquent fines are promptly
referred to FMS, we reviewed CFTC’s collection procedures, which it calls
instructions, to ensure that they included time frames for referring cases to
FMS and provisions for obtaining all necessary enforcement information.
We also reviewed related agency controls. To assess staff’s compliance
with the revised procedures, we obtained data from CFTC on its only four
delinquent cases and analyzed the length of time it took to refer them to
FMS. We obtained and used FMS’s data to validate that all of CFTC’s cases
have been transferred within 180 days. We also interviewed CFTC officials
to discuss the agency’s procedures and controls and obtained FMS’s views
on CFTC’s progress in referring fines.

To assess SEC’s and CFTC’s efforts to enhance their oversight of the SROs’
sanctioning practices, we assessed their responses to our 1998 and 2001
recommendations that (1) SEC analyze industrywide information on
disciplinary program sanctions, particularly fines, to identify possible
disparities among the SROs and find ways to improve the SROs’ programs;
and (2) SEC and CFTC periodically assess the pattern of readmission
applications to ensure that the changes in NASD’s and NFA’s fine
imposition practices do not result in any unintended consequences, such as
inappropriate readmissions.

To assess the status of SEC’s efforts to analyze industrywide information
on SROs’ disciplinary program sanctions, we interviewed SEC officials to
discuss the types of analyses planned, any obstacles encountered, and
efforts to overcome those obstacles. To assess both SEC’s and CFTC’s
efforts to periodically assess the pattern of readmission applications, we
interviewed officials of these agencies to determine the number of
readmission applications from barred individuals and reviewed
documentation that described the controls used to keep barred applicants
from reapplying. We focused our review on permanent bars and application
records since NASD and NFA changed their fine imposition practices in
October 1999 and December 1998, respectively. To validate both agencies’
statements that they had not reviewed any readmission applications from
barred individuals since our 2001 report, we obtained the names of barred
individuals from NASD and NFA and verified that each individual had not
applied for readmission. Specifically, for NASD, we compared the names of
over 900 barred applicants who had not been fined against a list of



Page 31                                 GAO-03-795 SEC and CFTC Fines Follow-up
Appendix I
Scope and Methodology




readmission applications. We focused on these individuals because of
concerns that individuals who had been barred and not fined might be
more willing to seek readmission than those who had been barred and
fined. For NFA, we researched the histories of 32 barred individuals, using
NFA’s database to validate that none of the individuals had applied for
readmission. We examined all barred applicants, including both those who
had been fined and those who had not been, because the data did not allow
us to distinguish between these groups. To ensure that NFA’s and NASD’s
data were sound, we interviewed agency officials to assess the controls
these agencies had over their data systems, such as their processes for
entering and updating data, safeguards for protecting the data against
unauthorized changes, and any tests conducted to verify the accuracy and
completeness of the data. We found that the data were useable for our
purposes.

To address concerns that surfaced during our review about controls over
the fingerprinting procedures used in criminal history checks, we
interviewed officials at NASD, NFA, NYSE, and the FBI and reviewed laws
and regulations related to fingerprinting. In addition to NYSE, other SROs
that operate markets have agreements with the FBI under which they may
submit fingerprints to the FBI for criminal history checks. We limited our
review to NYSE because it is the largest SRO that operates a market, and
we wanted to determine how another SRO’s procedures might differ from
those of NASD and NFA.

To calculate the fines collection rates for SEC, CFTC, and nine securities
and futures SROs for 1997 through 2002 (all years were calendar years), we
focused on these regulators’ imposition and collection of fines through
their enforcement and disciplinary programs. The nine SROs2 included the
American Stock Exchange, the Chicago Board Options Exchange, the
Chicago Board of Trade, the Chicago Mercantile Exchange, the Chicago
Stock Exchange, NASD, NFA, the New York Mercantile Exchange, and
NYSE. We excluded fines for minor rule infringements such as floor
conduct, decorum, and record-keeping violations that normally do not
undergo disciplinary proceedings. The exchanges generally referred to
these violations as “traffic ticket” violations, and they are handled through


2
 As in our previous reports, we excluded regional securities exchanges that delegated their
broker-dealer examination authority to the American Stock Exchange, Chicago Board
Options Exchange, NASD, or NYSE because they administered few disciplinary actions. We
also excluded some futures exchanges based on the same rationale.




Page 32                                         GAO-03-795 SEC and CFTC Fines Follow-up
Appendix I
Scope and Methodology




summary proceedings and involve smaller fine amounts. We excluded
amounts owed for disgorgement and restitution, except for NASD, because
these sanctions are different from fines in that they are imposed to return
illegally made profits or to restore funds illegally taken from investors. Due
to the way NASD tracked its fines and payments, NASD was unable to
exclude disgorgement amounts from its payment data. We also excluded
fines that were not invoiced, because they would not be due unless the
fined individual sought to reenter the securities industry. All other fines
were factored into the rate, including fines dismissed in bankruptcy,3 to
obtain the most complete view possible of the regulators’ efforts to
discipline violators.4

To calculate annual fines collection rates and composite collection rates,
we obtained and analyzed data from SEC, CFTC, and all SROs, except
NASD, on fines levied from January 1997 through August 2002, and
collected through December 2002. NASD’s data include fines invoiced from
1997 through 2002. We limited our review to fines levied through August
2002 to allow regulators through December 2002 (4 months) to attempt
collections. We calculated the collection rate in two ways. First, we
calculated the rate by including only closed cases—that is, cases with a
final judgment order for which all collection actions were completed. This
approach is consistent with the one used in our 1998 report.5 Second, to
provide a more complete view of regulators’ collection activities, we
calculated the rate using all closed and open cases—that is, cases with a
final judgment order for which collections actions were completed and
cases with a final judgment order that remained open while collection
efforts continued. For cases with a payment plan, we adjusted the levy
amount to the amount owed as of December 31, 2002, because a portion of
the original levied amount was not yet due. We could not do this for SEC or
NASD because agency data did not specify the amount owed as of
December 31, 2002. As a result, SEC’s and NASD’s rate may be understated.




3
 Provisions of the Sarbanes-Oxley Act of 2002 have amended the federal Bankruptcy Code
to prevent individual debtors from discharging in bankruptcy court certain debts, including
judgments and settlements that result from violations of federal and state securities laws or
regulations. Sarbanes-Oxley Act § 803, amending 11 U.S.C. 523(a).
4
 To the extent that cases were dismissed through bankruptcy proceedings, these cases
would be included in the closed case analysis.
5
GAO/GGD-99-8.




Page 33                                          GAO-03-795 SEC and CFTC Fines Follow-up
Appendix I
Scope and Methodology




We also used NASD’s calculations of its collection rates, because the design
of NASD’s financial system did not allow us to calculate these rates with an
acceptable degree of accuracy using the approach we applied to other
SROs. First, according to NASD officials, NASD’s calculations used the date
a fine was invoiced instead of the date it was levied. Fines were typically
invoiced between 15 and 45 days after they were levied. This difference
may have had a minor effect, particularly on the annual collection rates.
Second, NASD’s collection rates represent the total amount collected up to
December 31, 2002, on fines invoiced from January 1997 through December
2002 (as opposed to the August 31, 2002, date for the other SROs). Third,
because NASD’s system could not identify cases on a payment plan,
NASD’s calculations do not adjust the fine amount to the amount owing as
of December 31, 2002, exerting a slight bias toward understating the
collection rate. Fourth, NASD’s collection rates (1) include disgorgement
because NASD was not able to separate such amounts from its payment
data and (2) exclude fines that were levied but not invoiced because such
fines were not due unless the fined individual sought to reenter the
securities industry.

We also assessed the reliability of the data provided by the 11 regulators by
asking officials about agency controls for collecting fines and payment
data, supervising data entry, safeguarding the data from unauthorized
changes, and processing that data. We also asked whether they performed
data verification and testing. Although the controls varied across the
agencies, each one demonstrated a basic level of system and application
controls. We also performed basic tests of the integrity of the data we
received from some of the regulators that provided us with individual fines
data. We concluded that the data from all of the organizations, except SEC,
was sufficiently reliable for the purposes of this report.

The number of errors we and SEC found in DPTS during the course of our
work and the findings of the January 3, 2003, report to the SEC Inspector
General that the data in DPTS were incomplete and inaccurate led us to
conclude that DPTS fines data remain insufficiently reliable to calculate an
accurate collection rate. While we cannot be sure of the magnitude or
direction of the errors in the DPTS fines data, we are nevertheless
reporting the number and dollar value of cases eligible for referral to FMS
and TOP, the age of this debt, and SEC collection rates as the best estimates
possible at this time.

We did our work in accordance with generally accepted government
auditing standards between August 15, 2002, and July 1, 2003. We



Page 34                                 GAO-03-795 SEC and CFTC Fines Follow-up
Appendix I
Scope and Methodology




performed our work in Boston, Mass.; Chicago, Ill.; New York, N.Y.; and
Washington, D.C.




Page 35                                GAO-03-795 SEC and CFTC Fines Follow-up
Appendix II

Comments from the Securities and Exchange
Commission                                                        Appendx
                                                                        Ii




              Page 36       GAO-03-795 SEC and CFTC Fines Follow-up
Appendix II
Comments from the Securities and Exchange
Commission




Page 37                                     GAO-03-795 SEC and CFTC Fines Follow-up
Appendix II
Comments from the Securities and Exchange
Commission




Page 38                                     GAO-03-795 SEC and CFTC Fines Follow-up
Appendix III

Securities Regulators’ Collection Rates for
Open and Closed Cases by Calendar Year                                                                                                      Appendx
                                                                                                                                                  iI




                                                               We calculated the collection rates using data from SEC and the SROs,
                                                               except for NASD, which calculated its own rates (see appendix I for further
                                                               details). The rates are based on fines levied from January 1997 through
                                                               August 2002 and include all amounts collected on those fines through
                                                               December 2002, except for NASD. The fines data listed for each year
                                                               represent collection activity on the fines levied in each of those years.
                                                               Percentages were rounded to the nearest whole number.



Table 3: SEC’s Collection Rates

                                      Number of fines         Percentage of fines                                             Percentage of
Year                                          levied                  paid in full   Amount levied    Amount collected      dollars collected
1997                                                  233                    80%        $56,302,014         $18,360,390                 33%
1998                                                  291                      72        47,688,706          26,530,896                   56
1999                                                  444                      76       195,173,240          50,111,404                   26
2000                                                  347                      74        38,390,286          21,188,325                   55
2001                                                  300                      72        61,205,291          24,108,247                   39
2002                                                  215                      55        81,615,816          49,804,134                   61
Total                                              1,830                     72%       $480,375,353        $190,103,396                 40%
Source: GAO analysis of SEC’s data.




Table 4: The American Stock Exchange’s Collection Rates

                                      Number of fines         Percentage of fines                                             Percentage of
Year                                          levied                  paid in full   Amount levied    Amount collected      dollars collected
1997                                                   17                    88%          $310,000            $237,500                  77%
1998                                                   13                      85           341,500            309,640                    91
1999                                                     8                     63           355,000            260,000                    73
2000                                                     5                     80           217,243            204,167                    94
2001                                                     8                     88         1,300,000           1,200,000                   92
2002                                                     7                     71           108,076              75,000                   69
Total                                                  58                    81%         $2,631,819          $2,286,307                 87%
Source: GAO analysis of the American Stock Exchange’s data.




                                                               Page 39                                GAO-03-795 SEC and CFTC Fines Follow-up
                                                                  Appendix III
                                                                  Securities Regulators’ Collection Rates for
                                                                  Open and Closed Cases by Calendar Year




Table 5: The Chicago Board Options Exchange’s Collection Rates

                                   Number of fines               Percentage of fines                                                    Percentage of
Year                                       levied                        paid in full         Amount levied     Amount collected      dollars collected
1997                                                    70                       99%              $1,048,401           $1,044,901                100%
1998                                                    38                         97                463,278             453,278                    98
1999                                                    50                         96                569,165             561,565                    99
2000                                                    38                         92                659,400             633,065                    96
2001                                                    16                         94                340,000             332,500                    98
2002                                                         7                   100                   88,500              88,500                  100
Total                                                 219                        96%              $3,168,744           $3,113,809                 98%
Source: GAO analysis of the Chicago Board Options Exchange’s data.




Table 6: The Chicago Stock Exchange’s Collection Rates

                                   Number of fines               Percentage of fines                                                    Percentage of
Year                                       levied                        paid in full         Amount levied     Amount collected      dollars collected
1997                                                     3                     100%                  $11,000             $11,000                 100%
1998                                                     6                       100                   39,500              39,500                  100
1999                                                     8                         88                125,000             100,000                    80
2000                                                     6                         67                  87,000              85,000                   98
2001                                                     1                       100                   20,000              20,000                  100
2002                                                     1                       100                    2,000               2,000                  100
Total                                                   25                       88%                $284,500            $257,500                  91%
Source: GAO analysis of the Chicago Stock Exchange’s data.




                                                                  Page 40                                       GAO-03-795 SEC and CFTC Fines Follow-up
                                                     Appendix III
                                                     Securities Regulators’ Collection Rates for
                                                     Open and Closed Cases by Calendar Year




Table 7: NASD’s Collection Rates

                                  Number of fines   Percentage of fines                                                                Percentage of
Year                                      levied            paid in full          Amount levieda         Amount collected            dollars collected
1997                                         881                     64%              $38,782,000               $10,189,309                        26%
1998                                         916                       65              27,933,000                 11,032,446                         39
1999                                         901                       66              42,714,100                 26,817,300                         63
2000                                         701                       70              14,292,808                 11,979,986                         84
2001                                         657                       76              16,677,000                 12,376,818                         74
2002                                         659                       72              70,170,000                 67,211,659                         96
Total                                       4,715                    68%             $210,568,908              $139,607,518                        66%
Source: NASD.
                                                     a
                                                     NASD data include fines invoiced from 1997 through 2002. See appendix I for the potential impact of
                                                     NASD’s invoicing procedures on the amounts collected.




Table 8: NYSE’s Collection Rates

                                  Number of fines   Percentage of fines                                                                Percentage of
Year                                      levied            paid in full           Amount levied         Amount collected            dollars collected
1997                                          37                   100%                $1,637,500                 $1,637,500                      100%
1998                                          38                     100                 3,345,000                 3,345,000                        100
1999                                          50                     100                 4,365,000                 4,365,000                        100
2000                                          54                     100                 4,953,667                 4,953,667                        100
2001                                          55                       98                3,981,500                 3,976,500                        100
2002                                          22                     100                   869,000                   869,000                        100
Total                                        256                   100%               $19,151,667               $19,146,667                       100%
Source: GAO analysis of NYSE’s data.




                                                     Page 41                                             GAO-03-795 SEC and CFTC Fines Follow-up
Appendix IV

Futures Regulators’ Collection Rates for Open
and Closed Cases by Calendar Year                                                                                                           Appendx
                                                                                                                                                  iIV




                                                               We calculated the collection rates using data from CFTC and the SROs. The
                                                               rates are based on fines levied from January 1997 through August 2002 and
                                                               include all amounts collected on those fines through December 2002. The
                                                               fines data listed for each year represent collection activity on the fines
                                                               levied in each of those years. Percentages were rounded to the nearest
                                                               whole number.



Table 9: CFTC’s Collection Rates

                                    Number of fines           Percentage of fines                                             Percentage of
Year                                        levied                    paid in full   Amount levied    Amount collected      dollars collected
1997                                                     18                  67%         $2,767,000          $1,590,000                 57%
1998                                                     25                    44       140,507,176        126,078,305                    90
1999                                                     40                    38        86,192,731          22,955,045                   27
2000                                                     40                    80        97,321,467           2,255,255                    2
2001                                                     39                    44        15,689,399           7,886,289                   50
2002                                                     25                    44        15,355,000            505,000                     3
Total                                                  187                   52%      $357,832,773        $161,269,894                  45%
Source: GAO analysis of CFTC’s data.




Table 10: The Chicago Board of Trade’s Collection Rates

                                    Number of fines           Percentage of fines                                             Percentage of
Year                                        levied                    paid in full   Amount levied    Amount collected      dollars collected
1997                                                     53                  98%          $334,500            $334,000                 100%
1998                                                     31                    90          162,000             141,500                    87
1999                                                     38                    95         1,570,500           1,545,500                   98
2000                                                     53                    92          545,125             497,125                    91
2001                                                     39                    90          306,175             273,925                    89
2002                                                     42                    88          631,050             529,550                    84
Total                                                  256                   93%         $3,549,350          $3,321,600                 94%
Source: GAO analysis of the Chicago Board of Trade’s data.




                                                               Page 42                                GAO-03-795 SEC and CFTC Fines Follow-up
                                                                   Appendix IV
                                                                   Futures Regulators’ Collection Rates for
                                                                   Open and Closed Cases by Calendar Year




Table 11: The Chicago Mercantile Exchange’s Collection Rates

                                      Number of fines             Percentage of fines                                                   Percentage of
Year                                          levied                      paid in full        Amount levied     Amount collected      dollars collected
1997                                                    16                       94%                $811,500            $801,500                  99%
1998                                                    21                         86               1,053,000           1,032,000                   98
1999                                                    25                        100                 349,500            349,500                   100
2000                                                    16                         81                 183,000            138,000                    75
2001                                                    31                         97                 443,250            433,250                    98
2002                                                   11                          91                233,335              208,335                   89
Total                                                 120                        93%              $3,073,585           $2,962,585                 96%
Source: GAO analysis of the Chicago Mercantile Exchange’s data.




Table 12: NFA’s Collection Rates

                                      Number of fines             Percentage of fines                                                   Percentage of
Year                                          levied                      paid in full        Amount levied     Amount collected      dollars collected
1997                                                    16                       94%                $426,500            $401,500                  94%
1998                                                    32                         47                 962,500            450,000                    47
1999                                                    21                         90                 760,500            733,000                    96
2000                                                    28                         57               1,269,000            638,375                    50
2001                                                    24                         54                 304,250            239,250                    79
2002                                                    14                         29                 298,500            214,600                    72
Total                                                 135                        61%              $4,021,250           $2,676,725                 67%
Source: GAO analysis of NFA’s data.




                                                                   Page 43                                      GAO-03-795 SEC and CFTC Fines Follow-up
                                                                    Appendix IV
                                                                    Futures Regulators’ Collection Rates for
                                                                    Open and Closed Cases by Calendar Year




Table 13: The New York Mercantile Exchange’s Collection Rates

                                   Number of fines                 Percentage of fines                                                   Percentage of
Year                                       levied                          paid in full        Amount levied     Amount collected      dollars collected
1997                                                    18                       100%                $186,100            $186,100                 100%
1998                                                      8                         75                  79,000              39,000                   49
1999                                                    15                         100                 141,000            141,000                   100
2000                                                    22                          91                 396,000            191,000                    48
2001                                                    20                          95                 224,194            224,194                   100
2002                                                    14                         100                 396,000            396,000                   100
Total                                                   97                        95%              $1,422,294           $1,177,294                 83%
Source: GAO analysis of the New York Mercantile Exchange’s data.




                                                                    Page 44                                      GAO-03-795 SEC and CFTC Fines Follow-up
Appendix V

GAO Contacts and Staff Acknowledgments                                                        Append
                                                                                                   x
                                                                                                   i
                                                                                                   V




GAO Contacts      Davi D’Agostino, (202) 512-8678
                  Cecile Trop, (312) 220-7705



Acknowledgments   In addition to those named above, Emily Chalmers, Marc Molino, Carl
                  Ramirez, Jerome Sandau, Michele Tong, Sindy Udell, and Anita Zagraniczny
                  made key contributions to this report.




(250092)          Page 45                               GAO-03-795 SEC and CFTC Fines Follow-up
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