July 30, 2001
The Honorable Laura Unger The Honorable Richard L. Gregg Dear Mr. Walker, Ms. Unger, and Mr. Gregg: I am writing with reference to the General Accounting Office (GAO) report, SEC and CFTC: Most Fines Collected, but Improvements Needed in the Use of Treasury’s Collection Service (GAO-01-900, July 16, 2001), which was prepared at my request. As the report notes: "Levying fines is an important mechanism that regulators use to sanction those who violate securities and futures industry rules. However, for fines to be an effective means of ensuring adherence with the rules, regulators must collect them." GAO reported on the fine collection activity of the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and nine securities and futures self-regulatory organizations (SROs) in November 1998 and presented their collection rates for the period 1992 through 1996. (See Money Penalties: Securities and Futures Regulators Collect Many Fines But Need to Better Use Industrywide Data (GAO/GGD-99-8, Nov. 2, 1998)). At that time, GAO reported that the SEC collected 83 percent of the total dollar amount of fines for cases it closed during 1992 through 1996; the New York Stock Exchange, the Chicago Board Options Exchange, and the Chicago Stock Exchange collected 95 percent or more of the amount of fines on their closed cases, and the American Stock Exchange collected 75 percent, while the NASD collected only 24 percent of the total dollar amount of fines on its closed cases. GAO recommended that the SEC encourage the SROs to maintain automated record keeping systems to track disciplinary cases and fine collection activities. GAO also recommended that the SEC analyze industrywide data on disciplinary program sanctions, particularly fines, to identify disparities among the SROs and identify ways to improve SRO disciplinary programs. By letter dated January 19, 2000, I asked GAO to provide updated collection rates for the entities covered by the 1998 report, to assess the effectiveness of the actions taken to respond to GAO’s findings and recommendations, and to assess the effectiveness of the collection efforts of the Department of Treasury’s Financial Management Service (FMS). The July 2001 GAO report found that collection rates for the period 1997 through 2000 have generally improved from the rates presented in the November 1998 report, and that various actions have been taken to improve the fine collection processes of the entities covered by the report. I commend everyone for their hard work but more needs to be done to improve the collection of delinquent fines. According to GAO, the SEC’s 1997 through 2000 collection rate was 91 percent, or eight percent higher than its 1992 through 1996 rate. In October 1999, SEC established a staff position to serve as a focal point for collecting fines and to be responsible for additional collection efforts after the Division of Enforcement exhausted its attempts (p. 7). GAO reports that NASD’s fine collection rate has risen to 49.4 percent, double the 24 percent rate presented in the 1998 report, mostly because NASD is imposing fewer fines (p. 10). After the 1998 report, NASD initiated a program to obtain SEC assistance in obtaining court orders that direct violators owing NASD fines to pay these amounts. Between April 1999 and December 31, 2000, NASD submitted over 60 cases to SEC. As of April 30, 2001, SEC had accepted 34 of these cases and had obtained court orders on 11 of the cases, representing fines of over $648,000 (p. 11). Also, in Spring 2001, NASD finalized a contract with a national collection agency to handle all aspects of its collections (p. 12). However, GAO says that fine collections improved at NASD primarily because of changes made to its fine imposition practices in October 1999 to eliminate routinely assessing fines in cases in which violators were being barred from the industry (p. 8, 10, 11, 14, 15). GAO raised a red flag about rogue brokers as a result of this retrenchment: "These fines, though seldom collected, served as a potential barrier to individuals applying for readmission [into the industry] .... [B]ecause certain barred violators no longer face the prospect of paying off a fine before reentering, they may be more willing to seek readmission" (p. 26). NASD officials countered that they would continue to fine barred violators in cases involving egregious violations and would continue to apply stringent criteria to any reentry applications. I appreciate these assurances but believe that this potential problem merits diligent oversight by the SEC and NASD. GAO found that three of the four other securities SROs -- the New York Stock Exchange (99.6 percent, up from 98), the Chicago Board Options Exchange (97.5 percent, up from 95), and the American Stock Exchange (90 percent, up from 75) -- reported higher collection rates than those detailed in the 1998 report (p. 16). GAO gave high marks to SEC’s oversight of SRO disciplinary programs (p. 17, 18). In response to GAO’s 1998 recommendation that SEC analyze industrywide information on disciplinary program sanctions, particularly fines, GAO notes that SEC has begun to employ a new database to capture information in disciplinary actions (p. 19). SEC’s Enforcement Director notes that: "we plan to use the information in the database to attempt to identify trends and disparities in SRO sanctions" (p. 32). Finally, GAO found a number of weaknesses that hamper the ability of Treasury’s FMS to collect fines (p. 20-24). Under the Debt Collection Improvement Act of 1996, the SEC refers delinquent fines to FMS, which conducts collections on behalf of federal agencies. GAO reports that FMS has had little success in collecting fines on SEC’s behalf -- FMS has collected only $5,000 or 0.14 percent of the over $3.5 million of fines referred by SEC since 1996, compared with 10.4 percent collection rate for the 18,577 fines totaling more than $100 million in fines referred to FMS by all other federal agencies. FMS officials attributed this dismal rate to several factors, including the large-dollar amount of SEC referrals, the age of the cases when referred, and the lack of violator assets. According to FMS data, the average SEC fine referred to FMS for collection was over $141,000, almost eight times as large as the $19,400 average referral from other agencies. SEC referrals are, on average, 15 months delinquent when FMS receives them, because SEC makes significant collection efforts before referring amounts to FMS. By the time a debt has been referred to FMS, the debtors are either in jail or their assets have already been stripped and there was no way to collect. According to FMS officials, weaknesses in SEC processes have also hampered FMS’ ability to collect fines, including SEC delays in approving offers made by violators to settle their fines for lesser amounts. According to data provided by SEC and FMS, in three cases in which violators offered to pay almost $250,000, SEC took between 42 and 327 days to approve the compromise offers negotiated by FMS or its agents. By that time, the violators were no longer able or willing to pay. Also SEC has yet to complete procedures necessary for its fines to be submitted to the Treasury Offset Program that allows for the collection of fine amounts from other government payments that might be due to the violators. GAO recommends that the SEC:
I agree with GAO’s recommendations and urge their prompt implementation. I request that GAO submit a followup report in March 2002 evaluating the steps taken to implement GAO’s recommendations. Please include Rep. John J. LaFalce, Ranking Member, Committee on Financial Services, and Rep. Paul E. Kanjorski, Ranking Member, Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, as co-requesters on that report. Thank you for your cooperation and attention to my request. Sincerely,
JOHN D. DINGELL Enclosure cc: The Honorable W. J. "Billy" Tauzin, Chairman The Honorable Michael G. Oxley, Chairman The Honorable John J. LaFalce, Ranking Member The Honorable Richard H. Baker, Chairman Government Sponsored Enterprises The Honorable Paul E. Kanjorski, Ranking Member Government Sponsored Enterprises
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