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 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. 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 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 taken actions to improve their collection programs, addressing the three recommendations in our 2001 fines report. However, it was too early to assess the effectiveness of their actions. After we made our first recommendation, SEC took various steps, among them, implementing collections guidelines that were intended to ensure that eligible delinquent cases are referred to FMS, including TOP. But SEC’s actions have not ensured that all eligible cases are referred. To address our second recommendation, SEC developed procedures for responding to compromise offers submitted by FMS within 30 days. To address our third recommendation, CFTC implemented procedures for ensuring the timely referral of delinquent cases to FMS for collection. SEC implemented regulations, related procedures and guidelines, and a collections database intended to ensure that eligible delinquent cases are referred to FMS, including TOP, as required by the Debt Collection Improvement Act of 1996. However, SEC has focused on referring post- guidelines cases, and it was too early to assess the effectiveness of SEC’s strategy as it related to these cases. In contrast, SEC did not have a formal strategy for referring pre-guidelines cases and, further impeding its collection efforts, it did not have a reliable agencywide system for tracking 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. We recommended in our 2001 report that SEC take steps to ensure that regulations allowing SEC’s delinquent fines to be submitted to TOP be adopted so that SEC would benefit from the associated collection opportunities. At the time of our review, SEC officials had told us that they 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. 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 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. Although SEC had developed controls to better ensure that eligible post- guidelines cases were promptly referred to FMS and TOP, it had not 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.