SEC and CFTC Penalties: Continued Progress Made in Collection Efforts, but Greater SEC Management Attention Is Needed
Published: 2005-08-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) impose penalties, disgorgements, and restitution on proven and alleged violators of the securities and futures laws, respectively. GAO has issued a number of previous reports on agency collection efforts and made numerous recommendations for improvement. This report follows up on open issues from the previous reports and (1) discusses SEC's progress in improving its tracking of penalty and disgorgement collection data, (2) assesses the steps SEC has taken to improve collection program management, (3) evaluates SEC's implementation of the Fair Fund provision in the Sarbanes-Oxley Act of 2002, and (4) describes CFTC's actions to address previous GAO recommendations.
section_title: What GAO Found
paragraphs: In response to GAO's previous recommendations, SEC has taken positive steps to improve its tracking of collection data, such as discontinuing its use of an unreliable tracking system, modifying its existing Case Activity Tracking System (CATS) to capture financial data, and establishing a policy for improved data entry. GAO's review of 45 cases tracked in CATS revealed that SEC complied with its policy for improved data entry, a step that contributes to improving the overall reliability of SEC's collection data. However, GAO identified additional actions that SEC can take to enhance CATS's usefulness for key users, such as attorneys, collection monitors, and case management specialists in the Division of Enforcement. SEC is currently addressing this issue through a multiyear effort to comprehensively upgrade CATS. Agency officials estimate that the upgrade, which will be completed in phases, will be fully complete in 2008. SEC has also addressed some previous recommendations made to strengthen management of its collection program, such as increasing its collection staff and referring eligible delinquent cases to the Department of the Treasury's (Treasury) Financial Management Service (FMS) on a timely basis. However, SEC must take further steps to address other recommendations designed to enhance management's evaluation of program performance. During this review, GAO identified new issues that warrant SEC management attention. For example, although SEC has increased the number of staff devoted to collection efforts, the agency has neither developed a method to ensure that adequate and consistent supervision is provided to them, nor has it formally assessed whether its additional resources are being used effectively. SEC also has not developed a procedure by which to ensure that two key units, both responsible for tracking collection activity, are effectively communicating and coordinating with one another. Since implementing Section 308(a) of the Sarbanes-Oxley Act of 2002, (commonly known as the Fair Fund provision), SEC has instructed its staff to aggressively use the provision and estimates designating over $4.8 billion for return to harmed investors as a result of the provision's enactment. However, to date, only a small amount of the funds have been distributed. According to SEC, distribution is often a lengthy process that can be further complicated by external factors such as a pending criminal indictment on the violator. GAO also found that SEC lacked a reliable method by which to identify and collect data on Fair Fund cases. SEC took action to address this issue, but efforts were still in their early stages. SEC has yet to analyze the data it has collected in order to fully determine the provision's effectiveness in returning an increased fund amount to harmed investors. CFTC implemented both recommendations from previous GAO reports related to controls over fingerprinting procedures and timely referral of eligible delinquent cases to Treasury's FMS.

section_title: Letter
paragraphs: The Securities and Exchange Commission’s (SEC) primary mission is to  protect investors and maintain the integrity of the securities markets.  Similarly, the Commodity Futures Trading Commission (CFTC) protects  market users and the public from fraud, manipulation, and abusive  practices related to the sale of certain commodity interests, including  futures and options. As a part of their responsibility to protect investors,  the agencies seek to ensure that individuals who violate federal securities  or futures laws and regulations take responsibility for their misdeeds. For  their enforcement actions to be successful, however, both agencies must  have collection and distribution programs that function effectively.
In 2002, Congress passed the Sarbanes-Oxley Act (SOX) to address  corporate malfeasance and restore investor confidence in the U.S.  securities markets. This legislation established numerous reforms to  increase investor protection, including Section 308(a), the Federal Account  for Investor Restitution provision, commonly known as the Fair Fund  provision. This provision allows SEC to combine civil monetary penalties  (CMP) and disgorgement amounts collected in enforcement cases to  establish a fund for the benefit of victims of securities law violations.  Disgorgement is a remedy designed to deprive defendants of their ill-gotten  gains derived from their illegal activities. Before the law was implemented,  any CMPs collected were remitted directly to the Department of the  Treasury (Treasury), and only the amount of the actual disgorgement was  available to establish a fund for the benefit of victims. The new provision  reinforces the need for SEC to have an effective collection and distribution  program for both CMPs and disgorgement so that additional funds  collected as a result of the Fair Fund provision can benefit harmed  investors.
GAO has issued a number of reports, including follow-up reports, on SEC  and CFTC’s collection efforts and has made numerous recommendations  designed to help the agencies optimize their collection programs. Our  previous studies have shown that each agency continues to make  refinements and improvements in many areas but that some  recommendations designed to further strengthen their collection efforts  remained open. This study, responds to your requests that we reexamine  SEC and CFTC’s actions to address 12 recommendations that remained  open from prior studies, but focuses primarily on SEC’s activities because  SEC handles significantly more cases than CFTC and had the majority of  open recommendations. Specifically, this report (1) discusses SEC’s  progress in addressing recommendations aimed at improving the tracking  of penalty and disgorgement collection data, (2) assesses the steps SEC has  taken to address recommendations on its management of the collection  program and other related issues, (3) evaluates SEC’s implementation of  the Fair Fund provision, and (4) describes the actions CFTC has taken to  address previous recommendations.
To evaluate SEC and CFTC’s efforts to enhance their tracking of collection  data, we conducted a case file review at SEC to test the accuracy and  completeness of their data and reviewed CFTC’s process for tracking and  managing its data. To obtain additional insight into each agency’s collection  program, we reviewed pertinent documents, including flowcharts,  collection guidelines, position descriptions, court dockets,  computer-generated documents, memorandums of understanding, and  related laws. Further, we interviewed the appropriate management and  staff members at SEC and CFTC on their respective agency’s collection and  data tracking processes. We also obtained and reviewed documents on  delinquent case referrals from Treasury’s Financial Management Services  (FMS). To assess SEC’s efforts regarding performance measures and  oversight of self-regulatory organizations (SRO) and SEC and CFTC’s  fingerprinting initiatives, we interviewed key officials at both agencies  regarding actions they were taking to address the weaknesses identified  and reviewed relevant documents. In regard to the Fair Fund provision in  SOX, we obtained relevant documentation and discussed SEC’s  implementation approach with the appropriate officials. To calculate each  agency’s penalty and disgorgement collection rate, we obtained  information on monies ordered and collected from SEC and CFTC for the  period beginning September 1, 2002, and ending December 31, 2004. We  conducted our work from August 2004 to August 2005 in Washington, D.C.,  in accordance with generally accepted government auditing standards.  Appendix I describes the objectives, scope, and methodology of our review  in more detail.
subsections: section_title: Background
paragraphs: SEC was created in 1934 to protect investors and maintain the integrity of  the securities market. To accomplish its mission, the agency established  four strategic goals: (1) to enforce compliance with federal securities laws,  (2) to sustain an effective and flexible regulatory environment, (3) to  encourage and promote informed investment decision making, and (4) to  maximize the use of SEC’s resources.
CFTC, established in 1974, performs a comparable role in the futures  industry. Its primary mission is to protect market users and the public from  fraud, manipulation, and abusive practices related to the sale of commodity  futures and options and to foster open, competitive, and financially sound  commodity futures and options markets. CFTC has set three strategic goals  to support its mission: (1) to ensure the economic vitality of the commodity  futures and option markets; (2) to protect market users and the public; and  (3) to ensure market integrity in order to foster open, competitive, and  financially sound markets.
Both SEC and CFTC are independent agencies that have five-member  presidentially-appointed commissions that are led by chairmen who are  designated by the President. SEC and CFTC’s headquarters are located in  Washington, D.C.; SEC has a combination of 11 regional and district offices;  CFTC has 5 regional offices.
In keeping with its mission, each agency has a regulatory responsibility to  protect investors by ensuring the integrity of the securities and commodity  futures markets. Once SEC or CFTC staff conducts an investigation and  determines that a person or company has violated the law and should be  charged, the agency authorizes a civil suit against the alleged violator in  federal district court or a proceeding before an administrative law judge.  On finding that a defendant has violated securities or futures laws, the  court or the administrative law judge can issue a judgment ordering  sanctions such as CMPs, disgorgement, and/or restitution. However, the  agencies may decide not to seek disgorgement or restitution because it is  found to be unwarranted—for example, if a violator did not make a profit  from the illegal activity. Table 1 provides more information on some of the  remedies available to a federal district court or an administrative law judge.
SEC and CFTC both have collection programs and designated staff to track,  collect, and manage CMPs and disgorgement or restitution orders.  Specifically, as shown in figure 1, staff in SEC’s Division of Enforcement  (Enforcement) use the Case Activity Tracking System (CATS) to track  investigations, enforcement actions, and matters under inquiry (issues that  have the potential to turn into investigations).
When a case has been delinquent for at least 10 days, SEC and CFTC staff  can send a demand letter to a violator. The Debt Collection Improvement  Act of 1996 (DCIA) requires all federal agencies, including SEC and CFTC,  to refer non-tax debt more than 180 days delinquent to the Secretary of the  Treasury for purposes of centralized administrative offset. Once such a  referral is received, Treasury’s FMS activates the Treasury Offset Program  (TOP), under which outstanding debts, including amounts due to SEC or  CFTC as a result of judgments or settlement agreements, are collected by  the withholding of federal payments that the government owes the debtor,  such as tax refunds. During its collection efforts, FMS may negotiate  compromise offers with debtors unable to pay the entire amount of a  judgment and may accept less than the full amount if doing so is the only  way to ensure that the violator pays at least some of the debt owed. SEC  and CFTC must approve such offers for violators under their purview and  may reject an offer or ask for further information if the supporting  documentation is not satisfactory.
In general, when a disgorgement fund is established, SEC attorneys can  propose appointing a receiver to develop and administer a distribution plan  to facilitate the collection of disgorgement and, in the case of Fair Funds,  both CMPs and disgorgement, and the distribution of those funds to  harmed investors. Receivers act independently of SEC and defendants in  conducting their prescribed duties. They have primary responsibility for  establishing the distribution plan, including a description of the actions  that will be taken to identify harmed investors, and for ensuring that the  appropriate taxes are deducted from the monies collected.
Before Congress passed SOX, SEC could return only funds collected from  disgorgement to persons who had suffered financial harm from securities  violations. However, Section 308 (a) of the act allows SEC to add CMPs to  disgorgement funds. Section 308 (c) of the act also requires SEC to report  on the approaches the agency used, before the Fair Fund provision, to (1)  provide compensation to harmed investors and (2) to improve the  collection rates for CMPs and disgorgement, in order to establish a  benchmark for further action.
section_title: SEC Has Made Progress in Improving the Accuracy and Usefulness of Data It Collects, but Continued Attention Is Needed
paragraphs: Our previous reports contained two recommendations that remained open  related to SEC’s tracking of collection data. First, in 2002, we  recommended that SEC develop appropriate procedures to ensure the  accuracy and timeliness of information maintained in the Disgorgement  Payment Tracking System (DPTS), which was the tracking system SEC  used at the time to monitor disgorgement that had been ordered, waived, or  collected. Second, in 2003, we recommended that SEC take the steps  necessary to implement an action plan to replace DPTS with a new and  improved collection tracking system. SEC has made progress in addressing  these two recommendations by discontinuing its use of DPTS, modifying  CATS to capture financial information, and establishing an improved  procedure for entering data into CATS. Nevertheless, our fiscal year 2004  audit of SEC’s financial statements disclosed inadequate internal controls  over its reporting of penalty and disgorgement transactions. SEC plans to  address this finding by strengthening its policies and its internal controls  over existing processes. In addition, we found, and SEC agreed that  opportunities exist to improve CATS’s usefulness. The agency is in the  process of upgrading CATS to address the needs of a broader range of  users, but the project is in its early stages. Agency staff estimate that it will  not be fully complete until 2008.
subsections: section_title: SEC Discontinued DPTS, Modified CATS, and Established a Policy to Improve Tracking of Collection Data
paragraphs: In 2002, we reported that weaknesses in SEC’s procedures for entering and  updating data in DPTS resulted in the system containing unreliable data.  Our 2002 review of a sample of 57 enforcement cases found that 18 cases,  or approximately 32 percent, contained at least one error in the amount of  disgorgement ordered, waived, or collected, or in the status of the case or  of the individual violators. We found that the sources used as a basis for  entering data into DPTS did not always provide the most accurate  information. For example, we reported that staff in SEC’s Office of the  Secretary, who were responsible for entering data into DPTS, relied heavily  on SEC litigation releases that, according to the staff, did not contain all the  details of a disgorgement order. The staff also said that they did not  independently verify the information in the litigation releases. In January  2003, an independent accountant confirmed that information in DPTS was  not current and complete and reported that the system could not be relied  upon for financial accounting and reporting purposes. As of October 2003,  SEC discontinued its use of DPTS.
SEC began using CATS to capture the financial information that DTPS had  tracked. This change was part of larger modifications to CATS made in  response to a legislative requirement that SEC prepare audited financial  statements for submission to Congress and the Office of Management and  Budget (OMB). SEC modified CATS by adding fields to capture the  necessary financial data—such as the amount of CMPs and disgorgement  ordered, collected, and distributed—and established a policy of entering  data on the amount of disgorgement and CMPs only if valid supporting  documentation was available. SEC staff said they began collecting  original source documents—copies of signed and stamped final judgments,  administrative orders, and court dockets—from SEC’s headquarters,  regional, and district offices. SEC staff also told us that they entered  financial data only for those cases with an open enforcement action as of  October 1, 2002, the beginning of fiscal year 2003. As of February 2005,  SEC staff said that they had entered data on almost all of the approximately  4,500 enforcement cases, which involved over 12,000 defendants and  respondents that met SEC’s criterion.
We reviewed a sample of 45 cases tracked in CATS and determined that  SEC had complied with its policy for improving data entry, which is consistent with our previous recommendation. Specifically, we found  supporting source documents for each of the 45 case files we reviewed and  were able to compare information from the source documents with the  data in CATS (as reflected in a March 2005 printout). However, our  comparison identified one $300,000 discrepancy on the amount of  disgorgement ordered and entered in CATS.
Although SEC has made progress in improving the reliability of CATS  collection data, in May 2005, we reported that SEC had inadequate controls  over its penalty and disgorgement activities, which increased the risk that  such activities would not be completely, accurately, and properly recorded  and reported for management’s use in decision making. In response to our  findings, SEC stated that the agency plans to strengthen internal controls  and policies over its existing recording and reporting process and has  begun a multiyear project to upgrade CATS.
section_title: Opportunities Exist to Improve CATS’s Usefulness
paragraphs: During this review, we found—and SEC agrees—that opportunities exist to  further improve CATS’s usefulness for key system users, including  attorneys, case management specialists, and collection monitors in  Enforcement. Specifically, we found that CATS does not allow the  attorneys in Enforcement to perform customized searches or generate  tailored reports on the status of their cases. According to SEC staff, certain  search and reporting capabilities are available to a handful of management  level staff in the division but not to attorneys, who constitute the bulk of  the division’s workforce. By not meeting the attorneys’ needs, CATS does  not allow SEC to fully leverage its existing resources, and attorneys are not  able to efficiently address their multiple and sometimes competing  investigation, litigation, and collection duties.
Similarly, we found that CATS currently does not meet all the needs of case  management specialists and collection monitors. Some staff, whose  positions were recently established to better track and report collection  activities, have expressed concerns about CATS’s limited reporting and  search capabilities. To compensate for these limitations, we found that  collection staff in each of SEC’s headquarters, district, and regional offices  are using their own ad hoc collection database—outside of and separate  from CATS—to track the status of delinquent cases. According to the  collection staff, these databases allow for faster reporting and retrieval of  information than CATS but, because they also require the staff to enter  some data twice, using additional databases could lead to inefficiencies.
To address the various concerns of key users, including attorneys, case  management specialists, and collection monitors, and to strengthen the  inadequate internal controls identified in the 2004 financial statement  audit, SEC has begun a multiyear effort to upgrade CATS. SEC staff said  that they are trying to transform what is essentially a case tracking system  into a case management system that would be useful to a broader range of  users. For example, as part of the upgrade effort, SEC is seeking to allow  attorneys to generate customized reports on their cases, search for  information in memorandums, and establish a system that would notify  staff and remind them of deadlines in their cases. According to SEC’s Office  of Information and Technology, the upgraded system is also expected to  address the needs of case management specialists and collection monitors  by capturing and reporting data they require, eliminating the need for the  separate databases. In December 2004, SEC released a draft requirements  analysis for the upgraded system that contained steps to address the  concerns of SEC’s user community. SEC approved funding for the first  phase of the project in June 2005 and, according to staff, the project will be  fully complete in 2008.
section_title: SEC Has Made Progress in Managing Its Collection Program but Needs to Take Further Steps
paragraphs: SEC has taken actions consistent with five of eight open recommendations  from our previous studies (table 2). The open recommendations that SEC  addressed were aimed at improving collection activities—for example,  SEC’s practices for referring delinquent cases to FMS—and addressing the  need for additional collection resources. However, further actions are  needed to fully address three remaining open recommendations, which are  designed to improve SEC’s performance measures and program  evaluations. Moreover, we identified three new concerns related to SEC’s  management of collection staff, including (1) the lack of a formal process  for assessing the impact of collection staff efforts, (2) the need for  additional routine training and guidance to ensure the effectiveness of  collection staff’s efforts, and (3) the need for more formal communication  and coordination protocols between the two units that track and maintain  CATS data in order to improve the efficiency of collection activities.
subsections: section_title: SEC Has Taken Actions to Improve Some Collection Activities
paragraphs: Our review indicated that, since 2003, SEC has made more timely referral  of delinquent cases to FMS and developed a strategy for referring  pre-guideline cases—that is, cases that existed at SEC before Enforcement  implemented its internal collection guidelines in 2002. The agency has also  worked with the SROs to establish fingerprinting guidelines and has begun  analyzing data on SROs’ sanctions. In addition, SEC has worked to ensure  that the agency makes timely decisions on compromise offers presented by  FMS and has increased the resources for handling collections and related  tasks.
Our 2001 report found that SEC staff lacked clear procedures to follow  when referring delinquent cases to FMS for collection, as required by the  DCIA. As a result, eligible delinquent debts were not promptly being  referred to FMS, in turn hampering FMS’s efforts to collect on SEC’s behalf.
In 2003, Enforcement implemented procedures to ensure more timely  referrals of delinquent cases, but not enough time had elapsed at the time  of our 2003 study to evaluate the effectiveness of the new procedures.  However, during this review, we did find that SEC was making referrals to  FMS before the 180 day time frame expired. Specifically, from a random  sample of 45 cases, we identified and reviewed 6 delinquent cases that  were eligible for referral and were able to verify that SEC had referred each  of those cases before the 180 day limit.
Our 2003 study also found that SEC staff had not identified a strategy for  referring pre-guideline cases to FMS and did not know the extent to which  the pre-guideline procedures for referring cases were being followed. We  recommended that SEC staff establish a strategy that prioritized cases  according to their collectability. During this review, SEC management said  that all eligible delinquent cases had been referred to FMS for collection  when SEC switched from tracking cases in DPTS to tracking them in  CATS. Based on our review, we determined that SEC had not prioritized  the cases but had assessed all outstanding cases for possible referral to  FMS and sent forward the appropriate paperwork when applicable,  including for pre-guideline cases. As part of our recent review of 45  randomly selected cases, we examined the referral status of 10  pre-guideline cases and found that only one case was eligible for referral  and that SEC staff had referred it to FMS before 180 days expired.
subsections: section_title: SEC Has Enhanced Controls for Fingerprinting Procedures
paragraphs: During our 2003 study, we examined the application review process for  individuals seeking employment in the securities industry. During that  review, we found that SEC’s statute did not mandate that SROs such as  NASD and NYSE require their member firms to ensure that fingerprints  sent to the Federal Bureau of Investigation (FBI) as part of criminal history  checks actually belonged to the applicants submitting them. Because this  lapse in oversight could have allowed inappropriate persons to enter the  securities industry, we recommended that SEC establish controls to ensure  that fingerprints sent by SROs to the FBI actually belong to the applicants.  In July 2004, SEC and CFTC formed a task force with representatives from  several of their SROs to enhance controls over existing fingerprinting  guidelines. Using the FBI’s guidance on the best practices for preventing  fingerprinting fraud in civil and criminal cases, the task force developed a  set of improved fingerprinting guidelines, including a suggestion that  applicants present two forms of identification instead of one immediately  before fingerprints are taken or submit an attestation form in addition to  the standard U4 attestation form. NASD made the fingerprinting  guidelines available to its member firms on May 29, 2005.
section_title: SEC Has Begun Analyzing SROs’ Disciplinary Actions
paragraphs: In 1998, we found that SEC was not analyzing industrywide data on  disciplinary sanctions imposed by SROs to identify possible disparities that  might require further review. We recommended that SEC conduct such an  analysis and find ways to improve the SROs’ disciplinary programs.  Consistent with this recommendation, SEC developed a database to collect  information on the SROs’ disciplinary actions, but our 2003 study found  that problems with the database were hampering SEC’s ability to analyze  the data. For example, the database did not capture multiple violations or  multiple parties in a single case and did not support multiple users. We  made a follow-on recommendation in our 2003 report that SEC analyze the  data that had been collected on the SROs’ disciplinary programs, address  any findings that resulted from the analysis, and establish a time frame for  implementing a new database.
As we recommended, SEC has begun analyzing data on disciplinary actions  that the SROs took in 2003 and 2004. According to SEC staff, the analyses  have shown that sanctioning practices among SROs differ primarily  because the facts and circumstances of the cases vary—for instance, the  number of defendants involved or presence of other violations. SEC staff  said that SEC will use the results of the analyses to determine the scope  and timing of future SRO inspections. Also, as we recommended, SEC’s  Office of Compliance Examinations and Inspections has sought assistance  from the agency’s Office of Information Technology to develop a new, more  reliable Web-based database that is scheduled to be deployed in September  2005. According to SEC staff, using the new database, SROs will be able to  submit data to SEC online, an innovation that is expected to reduce data  entry errors and increase the amount of time SEC staff have to spend on  mission-related work such as inspecting SROs and examining  broker-dealers. The new database is also expected to provide virtually  unlimited storage capacity, improved reporting capability, and greater  stability.
section_title: SEC Has Made More Timely Decisions on Compromise Offers
paragraphs: In 2001, we found that SEC had not always made prompt decisions on  compromise offers submitted by FMS, reducing the likelihood of collecting  on the debts. At that time, we recommended that SEC continue to work  with FMS to ensure that compromise offers presented by FMS were  approved in a timely manner. During this study, we found that SEC had  been accepting or rejecting compromise offers within 30 days of receiving  them from FMS, as required by SEC’s internal policy. To ensure more timely  responses, SEC management assigned one staff member to monitor and  track compromise offers, maintain a schedule log, and serve as a liaison  with FMS to handle missing documents or other problems. According to  SEC data, SEC received 12 compromise offers via e-mail between July 16,  2003, and January 6, 2005, and was able to decide on 7 of them within 30  days. The other five compromise offers were held up because of problems  with missing documentation. SEC’s procedures require staff to use a  variety of documents in assessing compromise offers, including credit  bureau reports, recent financial statements, and tax returns for the  preceding 3 years. However, until early 2005, FMS did not require its staff to  submit tax returns to SEC along with compromise offers. The cases that  were held up at SEC because of lack of documentation all involved tax  returns—in one case, the returns were illegible, and in four they were  missing altogether. On February 5, 2005, FMS issued a technical bulletin  that directed staff to submit copies of tax returns for the 3 relevant years to  SEC with all compromise offers. According to FMS, these new instructions  should resolve any problems with missing documents and enable SEC to  meet the 30-day deadline for deciding on compromise offers.
section_title: SEC Increased Its Collection Resources to Address Competing Priorities and Growing Workload
paragraphs: In past studies, we found that SEC’s Enforcement staff attorneys, who are  responsible for collecting disgorgement, had other duties and competing  priorities that hindered their collection efforts. For example, depending on  the office to which they were assigned, attorneys were responsible for a  variety of functions, including investigating potential violations of  securities law, recommending actions SEC should take when violations  were found, prosecuting SEC’s civil suits, negotiating settlements, and  conducting collection activities for CMPs levied. We recommended in 2002  that SEC consider contracting out some collection activities and increase  its collection staff. Consistent with our recommendation, in 2003 SEC  assessed the feasibility of contracting with private collection agents and  proposed legislative changes that would allow the agency to contact with  private collection agents. Furthermore, SEC created and filled over 20  positions, including collection attorneys, paralegals, monitors, and case  management specialists in its headquarters, district, and regional offices to  assist in implementing collection guidelines that the agency created in  response to our 2002 recommendation that it establish such criteria, so that  collections could be maximized. Below are brief descriptions of the  collection staff’s roles and duties:  SEC hired three attorneys to pursue collection efforts in headquarters.
These attorneys review the evidence from initial asset searches to  determine whether SEC should continue with collection activities or  refer the case to FMS, and they advise SEC’s regional staff attorneys on  their collection cases. The lead attorney also manages SEC’s collection  unit, develops policies (including the agency’s collection guidelines),  and trains staff on the collection process.
In 2003, SEC created 13 case management specialist positions to assist  attorneys with administrative tasks associated with their investigations.  The specialists perform data entry tasks and track enforcement matters.  Depending on the location, the number of attorneys that each specialist  supports varies from smaller to larger caseloads. For example, in one  region, a specialist supports 21–24 staff attorneys and in another  approximately 50.
To help resolve delinquent cases, SEC also designated existing staff in  each of the 11 regional offices to monitor collection activities as a  collateral duty and created and filled two collection paralegal positions  for headquarters. The monitors are responsible for keeping staff and  collection attorneys apprised of upcoming deadlines, assisting in  referring delinquent cases to FMS, and maintaining a collection  database that is separate from CATS for the Enforcement Division.
section_title: SEC Management Has Not Completed Actions to Evaluate the Performance of Its Collection Program
paragraphs: We found that SEC had made some progress in addressing our remaining  three open recommendations related to (1) establishing performance  measures to better track the effectiveness of SEC’s collection efforts; (2)  tracking, on an aggregate and individual basis, both receivers’ fees and the  amounts distributed to harmed investors to ensure that investor recovery is  maximized; and (3) implementing collection guidelines and developing  controls to ensure that staff follow the guidelines. However, as part of this  review, we found that the agency could take further action on these  management practices to improve these areas.
subsections: section_title: SEC Has Established, but Not Implemented, an Alternative Performance Measure for Its Collections Activities
paragraphs: Under the Government Performance and Results Act, federal agencies are  held accountable for achieving program results and are required to set  goals and measure their performance in achieving them. We reported in  2002 that SEC’s strategic and annual performance plans did not clearly lay  out the priority that disgorgement collection should receive in relation to  SEC’s other goals and did not include collection-related performance  measures. Further, we identified several limitations in using the agency’s  disgorgement collection rate as a measure of the agency’s effectiveness.  For example, the rate is heavily influenced by SEC’s success in collecting  or not collecting on a few large cases and by factors that are beyond a  regulator’s control, such as violators’ ability to pay. We suggested other  measures that SEC could consider, including tracking the percentage of  disgorgement funds returned to harmed investors, measuring the  timeliness of various collection actions, and tracking the number of  violators ordered to pay disgorgement who go on to commit other  violations. The last measure would help determine whether the agency’s  disgorgement orders were having a deterrent effect.
During this review, we found that SEC had developed a performance  measure for timeliness and included it in the agency’s 2004 annual  performance plan but had not collected data on this measure or reported  on its results. The agency’s timeliness measure, according to SEC’s 2004  Performance Plan, is the “number and percent of defendants/respondents  subject to delinquent disgorgement orders during the fiscal year for which  the Enforcement staff did not formulate a judgment recovery plan within 60  days after the debt became delinquent.” This measure could potentially be  useful in tracking staff efforts to recover delinquent debt and comply with  SEC’s recently established collection guidelines. However, in its 2004–2009  Strategic Plan and 2004 Performance and Accountability Report, SEC  continued to use only the collection rate as its sole measure of collection  performance. SEC staff acknowledged—and we have previously  noted—that using only the collection rate had inherent limitations but  added that the agency continued to use it because Congress and other  agencies had come to expect that SEC would report the measure. While  reporting the collection rate may serve other goals, it is not a meaningful  performance measure and, as a result, SEC cannot fully determine the  effectiveness of its collection program.
During this review, we calculated SEC’s collection rate for all cases (open  and closed), as well as a separate rate for closed cases only. As shown in  table 3, SEC’s penalty collection rate for closed cases between September  2002 and December 2004 ranged from 72 percent to 100 percent and for all  cases from 34 percent to 86 percent.
While the percentage collected is a limited measure, as noted above, these  rates represent a significant increase from the 40 percent collection rate for  CMPs SEC averaged from January 1997 through August 2002. During 2003,  SEC imposed about $1 billion in penalties, up from about $85 million in  2002. According to SEC staff, from September 2002 through August 2004,  SEC brought enforcement actions against large, well-financed entities such  as mutual funds and major corporations that had been accused of financial  fraud. Because SEC collected most of the penalties imposed in these large  cases, its collection rate was significantly higher than in previous years.  SEC management told us that the agency’s collection rate is heavily  influenced by the nature of the entity that the agency sues and noted that, if  SEC sued companies or issuers that were not well-financed, its collection  rate would likely fall.
As shown in table 4, for disgorgement levied on closed cases between  September 2002 and August 2004, SEC’s collection rate ranged from 56  percent to 100 percent and from 13 percent to 34 percent for all cases  during the same period.
These rates also represent a substantial increase over the collection rate of  14 percent for all cases involving a disgorgement order between 1995 and  November 2001. We reported in 2002 that the collection rate for CMPs  tends to be higher than the collection rate for disgorgement because SEC  can take into account a violator’s ability to pay when imposing a penalty  but cannot do so when imposing a disgorgement. We also reported that  many violators ordered to pay a penalty are members of the securities  industry and are motivated to pay their CMPs in order to maintain their  reputation within the industry. However, we reported that many violators  ordered to pay large disgorgement orders are either not members of the  securities industry or have no desire to remain so. As we have discussed in  previous reports, these factors make using the disgorgement collection rate  as the sole performance measure problematic and highlight the need for  SEC to continue its efforts to develop alternative performance measures  for collection activities.
section_title: SEC Is Working to Capture Data on Amounts Distributed and Receivers’ Fees
paragraphs: In previous GAO reports, we determined that SEC did not have a  centralized system for monitoring information on distribution amounts and  receiver fees, making it difficult for the agency to assess the overall  effectiveness of distribution efforts and ensure that harmed investors  received the maximum amount of recovered funds. We recommended that  SEC better manage disgorgement cases by tracking this information on  both an aggregate and individual case basis. In the past, SEC stated that it  did not believe that aggregating this data would help determine how well it  was managing collection cases or that being able to assess the  reasonableness of receiver fees would necessarily provide information on  whether defrauded investors should have or could have received more  funds. SEC had also identified a number of obstacles that hampered its  ability to address our recommendation—for example, the CATS database,  which was designed to track individual case information but not to  aggregate it. Further, we were told that the agency lacked the information  necessary to identify the amounts allocated to defrauded investors and  receivers’ fees, and SEC staff told us that they did not always know how  much receivers were paid. As a result, the agency has had to rely on the  courts to provide this information, but the courts have not consistently  provided it.
During our work for this report, we learned that, despite its concerns about  these obstacles, SEC had begun to make some progress in addressing this  open recommendation. Specifically, SEC has updated CATS to identify  distribution data and is in the process of drafting a standard form that will  be used to request information from the courts on receivers’ fees. If the  courts respond to SEC’s requests for this information, the agency should be  better able to assess how well overall distribution efforts are working and  whether harmed investors are being reimbursed the maximum amounts  possible for actions taken against them by securities law violators.
section_title: Uneven Supervision Reduces Assurance That Staff Are Following Collection Guidelines
paragraphs: In our 2002 study, we found that SEC’s collection program lacked clear  policies and procedures specifying the actions that staff should take to  pursue collections. We commented that the lack of such guidance affected  both staff and management, since staff were not held accountable to any  clear standards and management could not determine whether staff took  all collection actions promptly, or ensure that opportunities to maximize  collection were not missed. We recommended that SEC develop and  implement collection guidelines and develop controls to ensure that staff  follow them. Consistent with the first part of this recommendation, SEC  has developed and implemented collection guidelines that specify the  various collection actions staff can take, explain when such activities  should be considered, and stipulate how frequently they should be  performed. SEC has also hired additional resources to perform specific  tasks outlined in its collection guidelines. However, uneven supervision has  reduced the assurance that staff are following these guidelines.
According to SEC management, the primary control in place to ensure that  staff followed these guidelines is a periodic review, conducted by the lead  collection attorney, of the 12 individual collection databases that collection staff use to track delinquent cases. However, this periodic review may not  be timely or effective since it could result in noncompliance with the  guidelines or errors being undetected for an unspecified amount of time.  Further, we found that some of the individuals involved in the collection  process in some of SEC’s regional offices—specifically monitors and case  management specialists—have supervisors who are not directly involved  and may lack detailed knowledge of the collection guidelines. In addition,  the level of supervision varies by location. For example, one of the regional  case management specialists told us that an associate regional director  oversees her work by reviewing a weekly CATS report that she generates.  At another location, a case management specialist also told us that an  assistant district administrator supervises her but does not formally  monitor her work.
section_title: Additional Concerns Could Impede SEC’s Progress in Realizing the Benefits of Improved Collection Efforts
paragraphs: We identified three additional new areas of concern that could impede  SEC’s progress in realizing the benefits of improved collection efforts.  Specifically, we found that SEC lacks (1) a formal mechanism to monitor  the effectiveness of the collection staff, (2) appropriate guidance and  training for some collection staff, and (3) effective communication and  coordination between two key units responsible for tracking collection  activity. First, SEC does not have a formal mechanism to assess whether  the increased collection resources are being used effectively. SEC  management believes that the new collection resources have increased  overall collection efforts and allowed enforcement attorneys to devote  more time to investigating potential violations by reassigning some  collection-related administrative duties. However, without a formal process  for determining the effectiveness of the increased resources, SEC cannot  validate these benefits. SEC management explained that they have focused  their attention on making changes to the collection process in preparation  for the first external financial audit and thus have not yet been able to focus  on assessing the effectiveness of the collection staff’s activities. As SEC’s  collection process stabilizes, a formal approach to gathering and analyzing  input from Enforcement staff attorneys that have interacted with collection  staff would help determine whether the new staff positions were being  used effectively and whether any improvements could be made.
Second, our interviews with some of the case management specialists and  collection monitors disclosed that some of the staff felt that they had not  received sufficient guidance or training on new protocols for the collection  procedures. SEC management told us that the agency had periodically  added new protocols to the established procedures for tracking penalty  and disgorgement data to help the agency prepare for its first external  financial audit. In particular, SEC staff said that they had revised some  internal controls and policies and procedures related to data entry and  added additional data entry screens to CATS. Although new protocols  addressing these changes have been communicated to the collection staff  through various methods such as e-mails, monthly meetings, and monthly  notifications, some of the collection staff identified the need for additional  guidance. Moreover, some of them said that they would like to receive  training on issues addressed in policy updates, as well as receive more  formal training in how to interpret legal documentation such as judgments  and how to work with FMS on collection issues. SEC management said that  the agency has planned a workshop for the staff in late 2005 to provide  information on these and related issues and anticipates that it will help  meet some of the needs that staff have identified. Such attention should  help the collection staff perform their duties more effectively.
Third, since August 2004, Enforcement and the Office of Financial  Management (OFM) staff have shared responsibility for tracking and  maintaining penalty and disgorgement data in CATS, but the units lack  formal procedures to ensure that their staffs communicate and coordinate  activities. To prepare for the external financial statement audit, SEC  transferred responsibility for entering financial data in CATS from  Enforcement to OFM, since penalty and disgorgement activity are recorded  in SEC’s financial statements. Under the terms of the transfer, Enforcement  would still enter most of the case-related data into CATS, such as the  names of defendants and dates of judgments and orders, and OFM would  enter data on the amounts of money ordered, collected, and distributed.  However, this division of responsibilities has not always been effective. For  instance, Enforcement staff need timely and complete information on  amounts that have been collected in order to take appropriate collection  actions, but communication with OFM staff is not always consistent and  timely, making coordination difficult. As an example, when OFM staff enter  financial data into CATS, they do not always notify Enforcement, so that  Enforcement staff must periodically check CATS to find out whether  money has been collected and, in some instances, must contact OFM to  determine the status of a case. Further, OFM is not always timely in  entering data, resulting in delays that could hinder Enforcement staff’s  collection efforts.
section_title: SEC Emphasizes Its Commitment to Implementing the Fair Fund Provision but Has Been Slow in Distributing Funds and Assessing Results
paragraphs: SEC demonstrated its commitment to effectively implementing the Fair  Fund provision of SOX by taking several steps. First, agency management  has issued clear guidance to staff on how to generate Fair Fund monies  from penalized offenders. As of April 2005, SEC has designated almost $4.8  billion to be returned to harmed investors although, as of the date of this  report, very little of it had been distributed, primarily because of time  consuming tasks that have to be completed before distribution can take  place. Second, we found that SEC staff had begun to collect and aggregate  Fair Fund data to help in assessing the agency’s performance in distributing  funds to harmed investors. Finally, SEC has begun to address reporting  requirements in its efforts to collect funds for distribution and in the  methods it is using to maximize investor recovery.
subsections: section_title: SEC Has Issued Guidance on Implementing the Fair Fund Provision
paragraphs: According to SEC staff, the agency is committed to using the Fair Fund  provision, which allows money from CMPs to be added to disgorgement  amounts, to help defrauded investors obtain more of the funds owed to  them. SEC has issued guidance to its staff on interpreting and applying the  provision—for example, explaining that ordering a disgorgement for as  little as $1 can qualify a case as a Fair Fund case and make CMPs eligible  for distribution. Among other cases, SEC applied this method in SEC v.  Lucent Technologies, in which the company agreed to pay a settlement of  $25 million in CMPs and $1 in disgorgement. In this particular case, SEC  charged the company and 10 individuals with fraudulently and improperly  recognizing approximately $1.148 billion of revenue and $470 million in  pretax income during fiscal year 2000—a violation of generally accepted  accounting principles (GAAP).
The guidance also highlights several other important aspects of the Fair  Fund provision. It discusses the legal and practical aspects of seeking  disgorgement, including estimating the amount the defendant obtained  illegally. It also instructs staff to include language preserving SEC’s ability  to establish a Fair Fund at a later date in cases that are settled early before  it has been decided whether the Fair Fund provision will be invoked.  Finally, SEC requires that language be added to judgments in all Fair Fund  cases prohibiting violators from using amounts collected under a judgment  to offset potential later judgments levied in third-party lawsuits. Because  allowing such offsets could reduce the amount of money investors received  in these lawsuits, the SEC language also stipulates that even if a court  allows offset language in later judgments, the violator is obligated to pay  the difference. This language is intended to aid attorneys in fairly and fully  applying the Fair Fund provision and to help ensure that violators do not  sidestep the intent of the Fair Fund provision.
section_title: SEC Has Successfully Used Fair Funds, but Distribution Has Been Slow
paragraphs: According to agency documents, SEC staff have successfully applied the  Fair Fund provision in at least 75 cases since 2002 and, as a result of these  efforts, more than $4.8 billion in disgorgement and CMPs were designated  for return to harmed investors as of April 2005. At the time of our review,  although SEC has collected money for 73 of the 75 cases they identified,  approximately $60 million from only three cases have been distributed to  harmed investors, and funds totaling about $25 million from only one other  case were being readied for distribution.
SEC’s rules regarding Fair Funds and disgorgement funds states that  “unless ordered otherwise, the Division of Enforcement shall submit a  proposed plan no later than 60 days after the respondent has turned over  the disgorgement….” However, SEC staff observed that appointing a  receiver to establish a plan for distributing funds can sometimes be a  lengthy process that can be further complicated by factors beyond the  agency’s control. For example, in one case, an analysis of an extensive  trading history had to be conducted, in order to determine issues such as  the extent to which funds were diluted and the shareholders were harmed,  and to determine how to deal with tax considerations for the distribution  recipients. In another instance, a company agreed to pay $80 million in  disgorgement, CMPs, and interest, but a pending criminal indictment  prevented SEC from distributing any funds until the criminal case is  resolved. SEC acknowledged that the agency has an obligation to distribute  funds to harmed investors in a timely manner and that SEC collection  attorneys have begun to take on some of the tasks associated with  distribution in an effort to expedite the distribution process. The collection  attorneys also told us that they are working to develop a more standardized  process for distributing funds to help ensure that staff attorneys perform  this function properly.
section_title: SEC Has Started to Collect and Aggregate Fair Fund Data
paragraphs: During this review, we found that SEC implemented the Fair Fund  provision without having a method in place to systematically track the  number and amount of monies ordered, collected, and distributed, in part  because CATS was not initially designed to identify this information. To  gather information on Fair Fund cases, SEC management has had to  request that staff attorneys submit ad hoc summaries of these cases, but  the lack of a standard reporting format means that the information may be  inconsistent. SEC management also has used data from CATS, Treasury’s  Bureau of Public Debt database, and discussions with attorneys to compile  information on Fair Fund cases, but this method also has limitations  because it does not employ a reliable data entry process using source  documents that account for all the cases. Without reliable, accessible data,  SEC is limited in its ability to evaluate the overall effectiveness of its  implementation of the Fair Fund provision.
During this review, we found that SEC had started to take steps to track  data on Fair Fund cases by adding fields to CATS that allow case  management specialists to enter appropriate data, including receivers’ fees,  amounts distributed for Fair Fund and disgorgement cases, and amounts  returned to Treasury. In addition, SEC staff said that information on all Fair  Fund cases created before these modifications would be retroactively  entered into the system. According to SEC management, SEC plans to  compile and aggregate Fair Fund data, such as the number of cases and the  associated monetary amounts, in order to better assess the provision’s  impact.
We also learned that SEC was using the amounts designated for return to  harmed investors as an indicator of the program’s success. For example,  when describing the Fair Fund program in SEC’s 2006 budget request,  issued in February 2005, the agency stated that over $3.5 billion in  disgorgement and CMPs had been designated for this purpose. However,  these amounts alone may not be appropriate measures of the program’s  success since harmed investors do not necessarily receive all the money. A  more comprehensive indicator could include the amount of CMPs ordered  as a direct result of the Fair Fund provision, the actual amounts distributed,  and the length of time required to distribute the funds. SEC management  told us that the agency plans to add an indicator on Fair Fund distribution  to its agencywide performance “dashboard” that tracks the amount of  funds returned to harmed investors. Such an indicator would be a useful  output measure but would not provide complete feedback on the  effectiveness with which SEC executed its responsibilities. Nevertheless,  to calculate its planned measure, SEC would have to collect data on how  much money was actually returned to investors once taxes, fees, and other  administrative costs were subtracted from the total amount collected.
subsections: section_title: SEC Has Complied with Other Aspects of Section 308
paragraphs: As required by Section 308(c) of SOX, SEC issued a report in January 2003  detailing the agency’s efforts in collecting funds to be returned to harmed  investors and the methods used to maximize this recovery. The  approaches involved “real time” enforcement initiatives such as temporary  restraining orders, asset freezes, and the appointment of receivers to  maximize recovery. SEC’s report also suggested some legislative changes  that would assist the agency in maximizing recovery for defrauded  investors, including the following three:  technical amendment to the Fair Fund provision that would permit SEC  to include CMPs in Fair Funds for distribution to harmed investors in  cases that do not involve disgorgement;   proposal that excludes securities cases from state law property  exemptions, so that violators could not use these “homestead”  exemptions to shield their assets from judgments and administrative  orders; and  grant of express authority to SEC to contract with private collection  agents.
These proposed changes, in addition to others pertaining to enhancing  enforcement capabilities and assisting defrauded investors, were included  in H.R. 2179, the Securities Fraud Deterrence and Investor Restitution Act  of 2003, which was introduced in the 108th Congress. The bill was reported  favorably to the full House by the House Financial Services Committee, but  no vote took place.
section_title: CFTC Has Added Controls to Fingerprinting Procedures and Begun Making Timely Referrals to FMS
paragraphs: In our 2001 report, we recommended that CFTC take steps to ensure that  delinquent CMPs were promptly referred to FMS. In our 2003 report, we  also recommended that CFTC work with SEC and the SROs to address  weaknesses in fingerprinting procedures to ensure that only appropriate  persons are admitted to the futures industry. As part of this review, we  found that CFTC fully addressed these remaining open recommendations.  We also updated our calculation of CFTC’s collection rates since our 2003  report (see appendix II).
In 2001, we recommended that CFTC implement its Office of Inspector  General’s (OIG) recommendation to create formal procedures to ensure  that delinquent CMPs were sent to FMS within the required time frames. In  an April 2001 report, CFTC’s OIG found that CFTC staff were not referring  the delinquent debts to FMS in a timely manner, potentially limiting FMS’s  ability to collect the monies owed. In 2004, CFTC’s OIG followed up on this  issue and determined that for the period from 2001 through 2004, CFTC had  consistently complied with DCIA by referring delinquent debt to FMS  within the allowable 180 days for collection services. CFTC’s OIG reviewed  21 uncollected penalty cases out of a universe of 187 CMPs that were  eligible for referral between October 1, 2001, and August 31, 2004. Of the 21  cases, 8 were excluded from referral to FMS because they were either  referred to the Department of Justice for further review or were in  litigation. CFTC’s OIG found that of the remaining 13 cases, CFTC had sent  12 to FMS within the required time frame. One case was not received by  FMS due to an undetected facsimile transmission error. CFTC officials have  stated that their Enforcement division has changed the way it transmits  information when referring cases and now uses certified mail, which  provides a receipt to confirm that the information has been delivered.
During our 2003 study, we found that CFTC’s statute, like SEC’s, did not  mandate that SROs such as NFA require member firms to ensure the  validity of fingerprints submitted to the FBI by applicants of the futures  industry. In response to our recommendation that CFTC address this  weakness, CFTC, like SEC, worked with futures and securities regulators  to prepare recommended guidance for best practices for fingerprinting  procedures. According to CFTC officials, the agency agrees with the other  task force members that issuing “best practices” guidance to the futures  and securities industries could help prevent applicants from using someone  else’s fingerprints as their own. CFTC officials said that NFA made some  adjustments to the fingerprinting guidelines developed by the task force to  tailor them to the futures industry and that the updated guidance was made  available to NFA members on July 29, 2005.
section_title: Conclusions
paragraphs: Over the past 2 years, SEC has undertaken a number of initiatives to  enhance its ability to collect and track CMPs and disgorgement data and, to  a lesser extent, monitor program effectiveness. SEC’s initiatives represent a  significant investment by the agency to improve its program. However, our  recent audit of SEC’s 2004 financial statement and this follow-up review  showed that SEC needs to continue improving various aspects of its  collection program. In response to our financial audit report, SEC has  planned a number of corrective actions to address the identified control  weaknesses related to the recording and reporting of penalty and  disgorgement transactions. While SEC continues to address these internal  control issues, it could also take steps to further maximize the  effectiveness of its additional collection resources and strengthen the  management of its collection program. Overall, SEC staff lacks some of the  tools and support it needs to conduct collection and track collection data.  In particular, the inadequacies that exist within the CATS database, uneven  supervision of collection staff, and weak coordination between the two  units responsible for tracking collection data collectively reduce the  efficiency with which SEC staff carry out their responsibilities.
Just as important, SEC management also does not have the appropriate  tools to evaluate the effectiveness of the agency’s collection activities.
Since expanding its collection staff, SEC has not formally assessed how  additional resources have assisted in the collection process and alleviated  staff attorneys’ responsibilities. Without a formal approach, SEC is not able  to determine whether its resources are being optimally utilized. SEC also  still does not have meaningful performance measures to assess the  effectiveness of the agency’s collection activities, inhibiting management’s  ability to identify and make adjustments as needed. Finally, SEC  management has started to collect data to centrally monitor distribution  activities to assess how well it is returning disgorgement funds to harmed  investors, but these actions have not yet been completed.
The Fair Fund provision has allowed for the potential for greater return of  monies to harmed investors from securities laws violators. SEC has  demonstrated its commitment in using this provision, and its  implementation efforts are noteworthy. Nevertheless, to date, the majority  of the monies collected under the provision have not been distributed to  harmed investors. We recognize that, as with other distribution funds, the  complexity and circumstances of a case could contribute to the lapse in  time between the collection of the monies and subsequent distribution.  However, because of SEC’s traditional focus on deterring fraud and the  relatively few distributions that have taken place, we are concerned that  SEC may not be able to ensure the timely distribution of the growing sum  of money that has been collected as a result of the establishment of Fair  Funds. At a minimum, SEC should have reliable and meaningful data  available to monitor the timely and complete distribution of Fair Fund  monies.
section_title: Recommendations for Executive Action
paragraphs: SEC has taken actions to strengthen its data tracking and management  practices for its penalty and disgorgement collection program. However,  the agency could take additional steps to ensure that collection staff  members have the necessary tools and support to carry out their  responsibilities efficiently and are being used effectively. Therefore, we  recommend that the Chairman, SEC, take the following three actions:   Develop a method to ensure that case management specialists and  collection monitors in Enforcement receive consistent supervision and  the necessary monitoring and guidance to carry out their duties and that  SEC management can ensure that staff are following the collection  guidelines.
Establish procedures for staff in the OFM to notify Enforcement staff on  a timely basis about data entered into CATS.
Determine the effectiveness of new case management specialists,  collection monitors, and collection attorneys by using formal  approaches such as periodically surveying staff attorneys that interact  with collection staff to evaluate the assistance the staff provides.
In addition, we recommend that the Chairman, SEC, take the following  three actions, including two that we have previously recommended, to  continue to ensure that the collection program meets its goal of effectively  deterring securities law violations and returning funds to harmed investors:  Continue to identify and establish appropriate performance measures to  gauge the effectiveness of collection activities and begin collecting and  tracking data to implement the timeliness measure presented in SEC’s  2004 annual performance plan, if SEC still considers that measure  appropriate.
Ensure that management determines, on an aggregate basis, (1) the  amount of disgorgement distributed each year to harmed investors, (2)  the amount of CMPs sent to Treasury, and (3) the amount of receivers’  fees and other specialists’ fees and that the agency uses this information  to more objectively monitor the distribution of monies to harmed  investors.
Ensure that management establishes a procedure for consistently  collecting and aggregating its Fair Funds data to assist in the monitoring  and managing of the distribution of monies to harmed investors and  establishes measures to evaluate the timeliness and completeness of  distribution efforts.
section_title: Agency Comments and Our Evaluation
paragraphs: We requested comments on a draft of this report from SEC and CFTC. Both  agencies provided technical comments, which we have incorporated into  the final report, as appropriate. SEC also provided written comments that  are reprinted in appendix III. In its comments, SEC acknowledged that the  Division of Enforcement’s efforts in data tracking and management  practices are still in their early stages, but said that the agency is working  diligently to strengthen its collection program. SEC also expressed  agreement with our findings and all six of our recommendations and said  that it is working to implement each of the recommendations.
Specifically, SEC is in the process of (1) developing reports and training  programs that will allow for consistent monitoring of the collection  program nationwide, (2) developing a system by which OFM can notify  Enforcement about data entered into SEC’s case tracking system, (3)  determining the effectiveness of new collection processes and staff, (4)  revising current performance measures to more effectively determine  program performance, (5) collecting information on the amount of  penalties and disgorgement distributed to investors and paid to receivers,  and (6) developing systems to collect data on Fair Fund cases.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time we will provide copies of this report to the  Chairmen and Ranking Minority Members of the Senate Committee on  Banking, Housing, and Urban Affairs and its Subcommittee on Securities  and Investment; the Chairmen, House Committee on Financial Services and  its Subcommittee on Capital Markets, Insurance, and Government  Sponsored Enterprises; and other interested congressional committees. We  will also send copies to the Chairman of SEC, the Chairman of CFTC, and  other interested parties. We also will make copies available to others upon  request. In addition, the report will be available at no charge on the GAO  Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-8678 or hillmanr@gao.gov. Contact points for our Office of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix IV.
section_title: Objectives, Scope, and Methodology
paragraphs: To discuss the Securities and Exchange Commission’s (SEC) progress in  addressing recommendations made in our 2002 and 2003 reports that were  aimed at improving the agency’s tracking of data on civil monetary  penalties (CMP) and disgorgement, we interviewed staff in SEC’s Division  of Enforcement (Enforcement), Office of Financial Management (OFM),  and Office of Information Technology (OIT) to obtain information on  efforts they have made to implement the recommendations. To gain  further information on SEC’s activities in upgrading its tracking system, we  reviewed relevant documents, such as an internal Case Activity Tracking  System (CATS) data entry guide (with associated procedures), sample data  entry forms completed by Enforcement attorneys, a draft systems  definition document for an upgraded case tracking system prepared by an  SEC-hired contractor, an assessment of the accuracy and completeness of  CATS data conducted by SEC’s Office of Inspector General, and GAO’s  audit of SEC’s financial statements for fiscal year 2004. To assess the  reliability of penalty and disgorgement data that SEC provided for the  calculation of its collection rate, we interviewed staff in Enforcement and  OFM about the new policies and procedures for entering data into CATS.  We selected a random sample of 45 cases tracked in CATS to test the  improved procedures by (1) reviewing case files for valid supporting  source documents maintained by Enforcement staff, including final  judgments, administrative orders, and court dockets, and (2) verifying data  accuracy for penalty and disgorgement amounts ordered by comparing  data recorded in source documents with data entered in CATS as of March  2005. We concluded that for purposes of this report, the data provided by  SEC were sufficiently reliable.
To assess the steps SEC has taken to address our earlier recommendations  on its management of the collection program and related issues, we  conducted relevant testing of procedures, including those related to  referrals and approvals of compromise offers, interviewed staff from SEC  and other agencies involved in SEC’s collection activities, and reviewed  pertinent documents. Specifically, to evaluate the effectiveness of SEC’s  procedures for referring delinquent cases to the Department of the  Treasury’s (Treasury) Financial Management Service (FMS) both before  and after the collection guidelines were established, we interviewed SEC  staff to discuss the activities they took recently to refer delinquent cases to  FMS. Using our sample of 45 cases, we identified those that met the  criteria for referral and used FMS’s records to verify that the cases had  been referred and determine how quickly SEC submitted the referrals.  Next, to assess SEC’s efforts to address our 2003 recommendation that the  agency work with the securities and futures self-regulatory organizations  (SRO) to address weaknesses in controls over fingerprinting procedures,  we interviewed SEC staff to discuss actions taken since we made our  recommendation and the status of the fingerprinting guidelines. We also  obtained a draft copy of the guidelines and reviewed the additional controls  that had been proposed to prevent inappropriate persons from being  admitted to the securities industry.
To assess SEC’s progress in tracking SROs’ disciplinary actions and in  implementing a new database to track them—a recommendation from our  2003 report—we reviewed the results of the analyses that SEC’s Office of  Compliance Inspections and Examinations (OCIE) conducted of these  actions, as of May 2005, and an internal planning document that OIT had  prepared. We also interviewed OCIE and OIT staff about the efforts each  office had made to address the recommendation. Further, to address a  recommendation related to approval of compromise offers from FMS, we  assessed SEC’s efforts to improve its timeliness by obtaining and analyzing  data from SEC and FMS on all of the 12 compromise offers presented by  FMS between July 15, 2003, and January 6, 2005, to determine whether SEC  had met its internal time frame. We also interviewed SEC and FMS staff to  discuss the effectiveness of SEC’s policies and procedures and to obtain  information on SEC’s efforts to work with FMS to ensure the timely  approval of offers.
In addition, to determine whether SEC had implemented our 2002  recommendation that it complete an evaluation of options for addressing  its competing priorities and increasing workload by assessing the  feasibility of contracting out certain collection functions or increasing staff  devoted to collections, we reviewed SEC’s study pursuant to a mandate in  Sarbanes-Oxley Act of 2002 (SOX) to obtain the results of the feasibility assessment. We also reviewed and followed up on the status of the  Securities Fraud Deterrence and Investor Restitution Act, introduced in the  108th Congress, which included a number of legislative proposals that SEC  had recommended in its study, such as contracting with private collection  agencies to collect delinquent debt owed to the agency.  Further, we  interviewed SEC staff to discuss recent measures taken by the agency to  increase its collection staff. Moreover, to determine if SEC had established  alternative measures to its collection rates, as recommended in our 2002  report, we reviewed the agency’s 2004-2009 Strategic Plan, 2004  Performance Plan, and 2004 Performance and Accountability Report for  collection indicators and interviewed staff in Enforcement to obtain their  views on using alternative measures. In addition, to determine whether  SEC had promptly implemented its collection guidelines and taken action  to ensure that staff followed them, we reviewed the collection guidelines  and job descriptions for case management specialists. We conducted  structured interviews with nine collection staff members, including two  attorneys, one regional collection monitor, one paralegal, and five case  management specialists, three of whom also perform collection monitors’  duties, to discuss their duties in relations to the collection guidelines and  their views on the level of training they have received. SEC management  selected these individuals based on our criteria that we speak with one- third of the new collection staff. These staff members worked in  headquarters and regional offices in Atlanta, Boston, Denver, and Miami.  Finally, we reviewed collection checklists and screen printouts from the  databases used by collection staff and interviewed SEC officials who  manage the collection program and staff to discuss their role in SEC’s case  tracking and collection process.
To evaluate SEC’s implementation of the Fair Fund provision, we reviewed  Section 308 (a–c) of the act and performed a legislative search and legal  analyses. To determine how and when SEC applies the provision, we  reviewed information from SEC’s Web site, the agency’s CATS database, a  sample of distribution plans and rulings on cases to which the Fair Fund  provision had been attached, and SEC’s Rules on Fair Fund and  Disgorgement Plans and interviewed relevant SEC staff. Further, to  determine the number of cases and the amount of CMPs and disgorgement  ordered and collected since the SOX was implemented in 2002, we  reviewed two internal documents that summarized Fair Fund cases and  amounts dated June 30, 2004, and April 22, 2005, and interviewed SEC staff  on their use of the data. In addition, to gain a better understanding of the  distribution process, we interviewed SEC staff on the data and controls  they used to ensure that appropriate amounts were being returned to  harmed investors.  Moreover, Section 308(c) of SOX required that SEC  report on (1) enforcement actions that SEC took to obtain CMPs or  disgorgement for the 5-year period prior to the act’s implementation and (2)  methods SEC used to ensure that injured investors were being fairly  compensated. SEC issued this report in January 2003, and we reviewed it to  determine if SEC had met the legislation’s requirement. We also performed  a legal analysis to assess whether receiving Fair Funds affected a harmed  investor’s ability to sue a violator through private litigation.
To describe the actions CFTC has taken to address previous  recommendations, we interviewed relevant CFTC staff, reviewed collection  documents they provided and relied on CFTC’s Office of Inspector  General’s (OIG) work. Specifically, to determine whether CFTC had  complied with the Debt Collection Improvement Act of 1996 by referring  delinquent debt to FMS, we relied primarily on CFTC OIG’s findings  associated with this recommendation. In particular, we reviewed the OIG’s  2004 and 2001 audit reports and supporting work papers for our  assessment of the timeliness of referrals. We also reviewed CFTC’s  documents describing its collection workflow and processes and  interviewed CFTC’s OIG staff and CFTC staff to discuss CFTC’s procedures  on referring debt to FMS. Furthermore, to assess the actions CFTC has  taken to address our recommendation on strengthening fingerprinting  controls, we conducted our work on CFTC and SEC simultaneously. We  obtained a copy of the draft for the new fingerprinting guidelines and  reviewed them for additional controls to preclude inappropriate individuals  from being admitted to the futures industry.
Finally, to calculate SEC’s collection rates for CMPs and disgorgement and  CFTC’s collection rates for CMPs and restitution, we requested data from  each agency on the amount of these sanctions ordered from September  2002 through August 2004 and collected through December 2004. We chose  September 2002 as the beginning of our time period in order to pick up  where our 2003 report ended. As with our 2003 report, we limited our  review to CMPs, disgorgement, and restitution ordered through August  2004 to allow SEC and CFTC through December 2004 (4 months) to attempt  collections. Also consistent with our 2003 report, we calculated SEC’s and  CFTC’s collection rates for all cases (open and closed cases) and closed  cases only. For purposes of our calculation, we defined open cases as  “cases with a final judgment order that remained open while collection  efforts continued” and closed cases as “cases with a final judgment order  for which collection actions were completed.” We relied on SEC and CFTC  to categorize cases as being open or closed, consistent with the above  definition. We did not independently verify either SEC or CFTC’s  classification of a case as being open or closed. For data provided by both  agencies, we performed basic tests of the data’s integrity, such as checks  for missing records and obvious errors. We concluded that the data  provided by SEC and CFTC, for purposes of this report, were sufficiently  reliable.
We conducted our work from August 2004 to August 2005 in Washington,  D.C., in accordance with generally accepted government auditing  standards.
section_title: CFTC’s Penalty and Restitution Collection Rates
paragraphs: We calculated the Commodity Futures Trading Commission’s (CFTC) civil  monetary penalties (CMP) and restitution collection rates to provide  updated information on CFTC’s activities through December 2004. As in  our 2003 report, we calculated CFTC’s collection rate for all cases (open  and closed) and closed cases only. As shown in table 5, from September  2002 through December 2004, CFTC’s CMPs collection rate for all cases  ranged from 38 percent to 100 percent and for closed cases only from 98  percent to 100 percent.
Like the Securities and Exchange Commission (SEC), CFTC also imposed  significantly larger amounts of CMPs from September 2002 through  December 2004 compared with previous years. For example, during 2003  CFTC imposed about $137 million in CMPs, up from $15.6 million in 2002.  According to CFTC officials, there were three reasons for the increase.  First, in 2002, CFTC was reorganized to leverage the Enforcement’s  investigation and litigation resources. This reorganization allowed the  division to file more cases and ultimately it entered into an increased  number of judgments imposing a penalty. Second, by 2003, the  Enforcement division was engaged in an industrywide investigation of the  energy sector concerning attempted manipulation and false reporting  conduct, and settlements in these cases resulted in the imposition of  approximately $250 million in CMPs. Third, following reauthorization in  2001, CFTC’s jurisdiction over investigations of foreign exchange fraud was  clarified; since that time, CFTC has begun to file more actions in this area.  In one case, according to CFTC officials, a court entered separate  judgments against the named defendants, imposing approximately $75  million in CMPs.
However, unlike SEC’s collection activity, CFTC’s collection rate for CMPs  did not significantly increase over previous years. For example, from  September 2002 through December 2004 CFTC’s CMPs collection rate for  all cases was 46 percent. From January 1997 through August 2002, the  agency’s collection rate was 45 percent.
As shown in table 6, CFTC’s collection rate for restitution ranged from 4  percent to 8 percent for all cases and was 100 percent for closed cases only.
section_title: Comments from the Securities and Exchange Commission
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Karen Tremba, Assistant  Director, Emily Chalmers, Ronald Ito, Grant Mallie, Bettye Massenburg,  Marc Molino, David Pittman, Carl Ramirez, Omyra Ramsingh, and Cheri  Truett made key contributions to this report.