August 14, 2003
The Honorable William H. Donaldson The Honorable David M. Walker Dear Chairman Donaldson and Mr. Walker: We are writing with respect to the July 15, 2003, report, SEC And CFTC Fines Follow-up: Collection Programs Are Improving, but Further Steps Are Warranted, GAO-03-795, which was prepared by the U.S. General Accounting Office (GAO) at our request. It evaluates the actions taken by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to improve their collection programs and to enhance their oversight of the sanctioning practices of the self-regulatory organizations (SROs) in response to recommendations contained in the previous GAO reports, Money Penalties: Securities and Futures Regulators Collect Many Fines but Need to Better Use Industrywide Data, GAO/GGD-99-8 (November 2, 1998) and SEC and CFTC: Most Fines Collected, but Improvements Needed in the Use of Treasury's Collection Service, GAO-01-900 (July 16, 2001). It also calculates the fines collection rates for SEC, CFTC, and the nine securities and futures SROs for 1997-2002. See Appendices III and IV, pp. 39-44. In the 44-page report that we are releasing today, GAO notes on page 1 that: "Collecting fines ordered for violations of securities and futures laws helps ensure that violators are held accountable for their offenses and may also deter future violations." We wholeheartedly agree. GAO has determined that, since GAO's last report, SEC, and CFTC have made "material improvements" to their policies and procedures for collecting delinquent fines (p. 27), but found that the SEC is lagging on some reforms and that it is too early to fully assess the effectiveness of a number of recent SEC actions. Our specific comments on the 2003 report are as follows: 1. GAO reports at page 8 that SEC and CFTC have taken steps to improve their collection programs, addressing the three recommendations in GAO's 2001 fines report. "However, it was too early to assess the effectiveness of their actions,"said GAO. As a result, we will be compelled to ask GAO to reevaluate these matters. 2. According to GAO, the SEC implemented regulations, related procedures and guidelines, and a collections database intended to ensure that eligible delinquent cases are referred to the Financial Management Service (FMS) of the U.S. Treasury Department, including the Treasury Offset Program (TOP), as required by the Debt Collection Improvement Act of 1996. SEC created a collections database for all post-guidelines fines and disgorgement cases -- the guidelines went into effect agencywide on September 2, 2002 -- but the SEC tracks only post-guideline cases "because the database had limited storage capacity and could become unstable if too many cases were added" (p. 9). This is unfortunate and unacceptable and we believe that the SEC should commit to a firm time line for fixing this shortcoming. 3. GAO found that SEC did not have a formal strategy for referring pre-guideline cases, and, further impeding its collection efforts, SEC's original system for tracking monies owed in pre-guideline cases, the Disgorgement and Penalties Tracking System (DPTS), "was not reliable." GAO notes that "SEC did not know the extent to which the procedures were being followed or whether eligible cases were not being referred." Using the only information available, i.e., the unreliable DPTS, GAO identified about 900 pre-guideline cases valued at $2.8 billion that were 180 days past due and that might be eligible for referral, figures that SEC disputes (p. 10). According to GAO, SEC has drafted a two-phase action plan for implementing a new agencywide tracking system. In the first phase, SEC will replace DPTS by the end of fiscal year 2003. The SEC, however, has not established a time frame for fully implementing the computer system for the second phase of the plan (p. 11). GAO notes at page 27: "We are concerned that, without target dates, progress in implementing phase two could be slowed, affecting SEC's ability to more efficiently address all cases that should be referred to FMS and TOP." We agree. We have significantly increased the SEC's resources in the last year, and believe some of these augmented resources should be used to fix their serious information technology problems. 4. GAO's 2001 report found that SEC did not always respond to compromise offers promptly and that, by the time SEC made its decisions, the monies were no longer available and debts were never collected. GAO notes at page 12 of the 2003 report that SEC has taken several steps to improve its response time but "[i]t is still too early to determine the effectiveness of SEC's actions." GAO, however, reports the views of FMS officials that SEC has shown "marked improvement" in its response time. We commend SEC for these actions. 5. In its 1998 report, GAO recommended that SEC analyze industrywide information on disciplinary program sanctions, particularly fines, to identify possible disparities among the SROs' disciplinary programs. GAO reported in 2001 that SEC had developed a database to collect information on the SROs' disciplinary actions. This year GAO reports that, as of June 30, 2003, SEC was still inputting information into its database but had not yet completed any analyses because of technological difficulties. The report says at page 14 that "the database had a limited number of fields and therefore could not capture multiple parties in a single case," and, one month after the SEC implemented enhancements to the system, "the enhanced database failed because it could not support multiple users." SEC told GAO that the agency is planning to use funds from its fiscal 2003 budget increase to develop a new database (p. 15). We observe that SEC has been working on this recommendation for five years and has made several shortsighted decisions. We expect the SEC to think more comprehensively as it develops new technological tools, and we would appreciate receiving a firm commitment with time frames for completion of this work. 6. GAO outlines on pages 16 -19 weaknesses in controls over fingerprinting that could result in inappropriate admissions to the securities and futures industries. For example, SEC and some SROs told GAO that a small number of firms may allow applicants to fingerprint themselves, a practice that provides an opportunity for individuals to perpetrate fraud and frustrate criminal history checks by submitting someone else's fingerprints instead of their own. SRO officials said that existing systems were reasonably designed to prevent fraud but were not foolproof, and that, to the extent needed, SEC and CFTC should establish industrywide standards. We agree with these concerns. 7. GAO found that SEC, CFTC, and the SROs collected between 75 and 100 percent of all the fines imposed in closed cases. All of the regulatory organizations analyzed in the 2003 report have maintained or improved their collection rates using the closed-case calculation method. That is good news. Including open cases in the calculations, however, had a great impact -- SEC's collection rate, for example, fell to 40 percent from 94 percent -- because of a few large uncollected fines. We recognize the caveats contained in GAO's report about the calculation methods and the external factors that can skew these rates. The summary of the report notes that "SEC could do more to maximize its use of Treasury's collection services." This is especially important after the adoption of Section 308 (a) of the Sarbanes-Oxley Act which allows the SEC, in appropriate cases, to distribute civil money penalties to harmed investors. Increased collection rates could help compensate more investors for some of their losses, a result we all strongly support. We encourage SEC and CFTC, to the extent possible, to work to improve their performances under the open and closed cases measure. 8. To improve the SEC's collection program for the protection of investors, GAO recommends that SEC develop a formal strategy for referring pre-guideline cases to FMS and TOP that prioritize cases based on collectibility and establishes implementation time frames (p. 28). GAO also recommends that SEC establish and meet time frames for completing both phases of the action plan to replace DPTS and for implementing the new SRO disciplinary database. Finally, GAO recommends that SEC and CFTC work together to address weaknesses in controls over fingerprinting procedures. We agree with these recommendations and urge their prompt implementation.We request that GAO submit a followup report in 18 months on SEC, CFTC, and SRO progress in implementing these recommendations, the effectiveness of these reforms as well as the actions whose effectiveness GAO said it was too early to assess in the 2003 report, and the need for any further actions. This report should include an assessment of the effectiveness of Section 308 (a) of the Sarbanes-Oxley Act and any other legislative or regulatory actions taken to assist the SEC in its efforts to collect penalties, fines, and disgorgements. We thank you for your cooperation and attention to our requests. Sincerely, Barney Frank Paul E. Kanjorski John D. Dingell Enclosure cc: The Honorable Michael G. Oxley, Chairman The Honorable Richard H.
Baker, Chairman Government Sponsored Enterprises Committee on Financial Services The Honorable W.J.
"Billy" Tauzin, Chairman
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