SEC and CFTC: Most Fines Collected, but Improvements Needed in	 
the Use of Treasury's Collection Service (13-JUL-01, GAO-01-900).
								 
Fines are a tool that regulators can use to sanction those who	 
violate securities and futures industry rules. However, for fines
to be effective, regulators must collect them. This report	 
reviews the fine collection by the Securities and Exchange	 
Commission (SEC), the Commodity Futures Trading Commission	 
(CFTC), and nine exchanges and industry associations that act as 
self-regulatory organizations (SRO) in the securities and futures
industries. Specifically, GAO (1) compares how the securities and
futures regulators' current collection rates have changed since  
GAO's November 1998 report 1998 and assesses the changes they	 
made in their fine imposition practices; (2) discusses the steps 
taken by SEC and CFTC to oversee the SROs' fine imposition	 
activities, including the actions they have recently taken to	 
improve this oversight; and (3) assesses the effectiveness of	 
actions taken by SEC and CFTC to refer unpaid fines to the	 
Financial Management Services(FMS). GAO found that collection	 
rates at SEC, CFTC, and the SROs were generally comparable to, or
higher than, their rates at the time of GAO's earlier report.	 
Among the SROs, the National Association of Securities Dealers	 
(NASD) and the National Futures Association (NFA) had the lowest 
collection rates for the 1992 through 1996 period. However, both 
organizations' fine collection rates improved after they changed 
their fine imposition practices. SEC has begun to collect data	 
that would allow it to analyze securities sanctions throughout	 
the industry. Similarly, CFTC has begun documenting the results  
of its review of industrywide futures sanctions. Both SEC and	 
CFTC have reviewed the extent to which their respective SROs	 
maintain automated fine collection records. FMS' efforts to	 
collect SEC's fines have been hampered by SEC's delays in	 
approving compromise offers, delays by SEC's Commissioners in	 
responding to FMS' requests for more timely action, and by SEC's 
failure thus far to adopt the regulations it needs to again	 
submit its fines to the Treasury Offset Program to benefit from  
the associated collection opportunities. Although CFTC has only  
recently begun submitting fines to FMS for collection, already	 
concerns about the timeliness of these submissions exist. The	 
agency's Inspector General staff have recommended steps to ensure
that CFTC fines are submitted more timely to FMS, but these steps
have yet to be implemented. Weaknesses in procedures for ensuring
that CFTC submits all needed information to FMS to collect its	 
unpaid fines also appear to have caused further delays in FMS'	 
collection efforts.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-900 					        
    ACCNO:   A01222						        
  TITLE:     SEC and CFTC: Most Fines Collected, but Improvements     
             Needed in the Use of Treasury's Collection Service               
     DATE:   07/13/2001 
  SUBJECT:   Collection procedures				 
	     Debt collection					 
	     Fines (penalties)					 
	     Regulatory agencies				 
	     Securities fraud					 
	     Securities regulation				 
	     Self-regulatory organizations			 
	     Treasury Offset Program				 

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GAO-01-900
     
Report to the Ranking Minority Member, Committee on Energy and Commerce,
House of Representatives

United States General Accounting Office

GAO

July 2001 SEC AND CFTC Most Fines Collected, but Improvements Needed in the
Use of Treasury?s Collection Service

GAO- 01- 900

Page i GAO- 01- 900 Fines Collection Letter 1

Results in Brief 2 Background 4 Scope and Methodology 5 Regulators?
Collection Rates Have Generally Improved, but Impact

of Changes In Fine Imposition Practices at NASD and NFA Is Unknown 6 SEC and
CFTC Continue to Review Individual SRO Fines but Have

Also Taken Steps to Improve Their Industrywide Oversight 17 SEC and CFTC
Process Weaknesses Hamper FMS Efforts to

Collect Their Fines 20 Conclusions 26 Recommendations 27 Agency Comments and
Our Evaluation 27

Appendix I Department of the Treasury?s Financial Management Service Debt
Collection Process 30

Appendix II Comments From the Securities and Exchange Commission 32

Appendix III Comments From the Commodity Futures Trading Commission 33

Appendix IV Comments From the Department of the Treasury?s Financial
Management Service 35

Appendix V GAO Contacts and Staff Acknowledgments 37

Tables

Table 1: SEC and CFTC Fine Collection Rates for Fines Levied on Closed Cases
for 1997- 2000 and 1992- 1996 7 Contents

Page ii GAO- 01- 900 Fines Collection

Table 2: NASD Fine Collection Rates for Fines Levied on Closed Cases, by
Year 10 Table 3: NFA Fine Collection Rates for Fines Levied on Closed

Cases, by Year 13 Table 4: Reviewed Securities SROs? Fine Collection Rates
for Fines

Levied on Closed Cases for 1997- 2000 and 1992- 1996 16 Table 5: Reviewed
Futures SROs? Fine Collection Rates for Fines

Levied for 1997- 2000 and 1992- 1996 17

Figure

Figure 1: Percentage of Fines Collected by NASD and NFA for 1992- 1996 and
1997- 2000 9

Abbreviations

CFTC Commodity Futures Trading Commission DCIA Debt Collection Improvement
Act of 1996 FMS Financial Management Service NASD National Association of
Securities Dealers NFA National Futures Association SEC Securities and
Exchange Commission SRO self- regulatory organization TOP Treasury Offset
Program

Page 1 GAO- 01- 900 Fines Collection

July 16, 2001 The Honorable John D. Dingell Ranking Minority Member
Committee on Energy and Commerce House of Representatives

Dear Mr. Dingell: 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. This report provides the results of our
review of the fine collection activities of the Securities and Exchange
Commission (SEC), the Commodity Futures Trading Commission (CFTC), and nine
exchanges and industry associations that act as self- regulatory
organizations (SRO) in the securities and futures industries. 1

We reported on the fine collection activity of SEC, CFTC, and nine
securities and futures SROs in November 1998 and presented their collection
rates for 1992 through 1996. 2 As you requested, we have collected updated
information on these regulators? fine collections and practices and assessed
the changes they have made in response to the recommendations in our
previous report. As agreed with your staff, this report (1) compares how the
securities and futures regulators? current collection rates have changed
since our prior report and assesses the changes they made in their fine
imposition practices, (2) discusses the steps taken by SEC and CFTC to
oversee the SROs? fine imposition activities, including the actions they
have recently taken to improve this oversight, and (3) assesses the
effectiveness of actions taken by SEC and CFTC to refer unpaid fines to the
Department of the Treasury?s Financial Management Service (FMS).

1 SEC and CFTC enforce the federal securities and commodity futures laws,
respectively. Responsibility has been delegated to the SROs to enforce these
rules as well as their own rules and standards for SRO members. SROs include
the national securities and futures exchanges and registered securities and
futures associations. Other SROs include registered clearing agencies and
the Municipal Securities Rulemaking Board, but we did not review these
entities as part of this report.

2 Money Penalties: Securities and Futures Regulators Collect Many Fines But
Need to Better Use Industrywide Data (GAO/ GGD- 99- 8, Nov. 2, 1998).

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 900 Fines Collection

SEC, CFTC, and the nine securities and futures SROs collected most of the
fines they imposed in disciplinary cases closed from January 1997 through
December 2000. During this period, SEC and CFTC collected about 91 and 86
percent, respectively, of the total fines levied on cases closed. 3 These
collection percentages were comparable to those for the period 1992 through
1996. Of the SROs we reviewed, the National Association of Securities
Dealers (NASD) 4 and the National Futures Association (NFA) had the lowest
collection rates for the 1992 through 1996 period. However, both of these
organizations? fine collection rates improved after they made changes to
their fine imposition practices. Previously, when barring violators from
their industries, NASD and NFA had levied fines that, in many cases, were
due upon reentry into the industry. The imposition of such fines was viewed
as a potential barrier to those individuals? reentry. Because few violators
ever sought reentry, these fines were rarely collected. Since 1999, both
NASD and NFA have generally stopped levying fines when barring violators,
and their fine collection rates have greatly improved. It is uncertain
whether barred violators would be more likely to seek readmission into the
securities or futures industries if they no longer have fines to pay before
reentering. Officials at both organizations told us that they would continue
to apply stringent criteria when reviewing applications for reentry,
including those cases in which violators were barred but not fined, and SEC
and CFTC staff will also review applications for readmission into their
respective industries.

As part of their oversight of the securities and futures industries, SEC and
CFTC review individual fines imposed by SROs. SEC and CFTC have also taken
various steps to improve their oversight of SRO fine imposition in general.
In response to recommendations in our November 1998 report, SEC has begun to
collect data that would allow it to analyze securities sanctions throughout
the industry. Similarly, CFTC has begun documenting results of its reviews
of industrywide futures sanctions. Also, as we recommended, these
organizations have reviewed the extent to which their respective SROs
maintain automated fine collection records.

3 This report presents information on fines levied on closed cases for which
all appeals are complete and the fines are, therefore, due. We did not
include disgorgement amounts, which represent repayment of illegally earned
profits.

4 In 1999, NASD Regulation, Inc., was established as a separate independent
subsidiary of the National Association of Securities Dealers, Inc. A major
reason for the restructuring was to separate the regulation of the broker/
dealer professionals from the operation of the Nasdaq Stock Market. (For
purposes of continuity, we will refer to NASD Regulation, Inc., in this
report as NASD). Results in Brief

Page 3 GAO- 01- 900 Fines Collection

In addition to their own collection efforts, SEC and CFTC are required by
law to refer their unpaid fines to Treasury?s FMS, which performs collection
activities on behalf of federal agencies. However, FMS has collected only
$5, 000 of the over $3.5 million of fines that SEC has referred since 1996.
Officials attributed this low collection rate primarily to the large average
fine amount and the lack of identifiable violator assets. However,
weaknesses in SEC processes have also hampered FMS? ability to collect
fines. In some cases, FMS or its agents have negotiated compromises that
would allow violators to pay reduced amounts to settle their fines, and
delays in SEC approvals of these compromise offers resulted in monies going
uncollected. In three cases in which violators offered to pay almost $250,
000, SEC took between 42 and 327 days to approve these compromise offers,
and when FMS subsequently attempted to obtain the funds, the violators were
no longer able or willing to pay. SEC staff stated that they have recently
instituted improvements in their review processes and are working with FMS
on reducing SEC review times for future compromise offers. In addition, SEC
lacks specific regulations to address another mechanism FMS uses to collect
amounts owed to SEC. As a result, until such regulations are adopted, SEC
fines have been withdrawn from a Treasury program that can identify any
federal government payments due to the violator, such as tax refunds, and
apply them against the delinquent fines owed to SEC.

Because CFTC submitted its first fines to FMS at the end of September 2000,
information on the results of FMS collection efforts on CFTC?s behalf were
not available. However, a recently completed internal audit 5 found that
CFTC had not been submitting fines to FMS within the required time frames
and did not ensure that all required information was obtained for cases to
be sent to FMS. We found that CFTC had not yet established formal procedures
to ensure timely fines submissions to FMS.

This report includes recommendations to SEC and CFTC that they assess the
impact of the fine imposition changes at NASD and NFA and that they also
improve their procedures for submitting fines to FMS for collection. We
requested comments on a draft of this report from the heads, or other
designees, of SEC, CFTC, FMS, NASD, and NFA. Overall, these organizations
generally agreed with our findings and recommendations. Their comments are
discussed near the end of this letter. SEC, CFTC, and

5 Report A- 01- 01, Audit of Civil Monetary Penalty Collections, CFTC
Inspector General, dated April 27, 2001.

Page 4 GAO- 01- 900 Fines Collection

FMS also provided written comments, which appear in appendixes II through
IV.

SEC and CFTC are responsible for administering and enforcing federal
securities and commodity futures laws and regulations, respectively. They
are also responsible for supervising daily market activity for the trading
of securities and futures, as well as ensuring fair and orderly markets. A
great deal of market regulation is carried out through SEC?s and CFTC?s
oversight of national exchanges and SROs. Securities and futures statutes
authorize the establishment of SROs subject to SEC and CFTC oversight, which
regulate and operate markets in which securities and futures are traded.

SEC and CFTC are responsible for overseeing and regulating the operations
and activities of their respective SROs. Two SROs-- NASD for the securities
industry and NFA for the futures industry-- are associations that regulate
registered securities and futures firms as well as oversee individuals
employed in the securities and futures industries. SEC has enforcement
programs and processes for taking actions against violators of federal
securities laws, and CFTC has similar programs and processes for taking
actions against violators of futures laws. SROs have disciplinary programs
through which they can discipline their members for violations of securities
and commodity futures laws, agency rules, and their own rules. Once a
violation is detected or suspected, agency or SRO staff can investigate the
facts of each case. Depending on the circumstances, a case may be
adjudicated in a federal court or decided by an administrative body within
the agencies or SROs. After a hearing, if the adjudicators determine that a
violation occurred, they may levy sanctions against the violators. Also, the
agencies or SROs may reach a settlement with the alleged violator before an
adjudicatory proceeding takes place, in which both parties agree on the
sanctions to be imposed. Violators of agency or SRO rules may be subject to
a variety of sanctions, including fines, and more than one sanction may
apply. 6

Under the Debt Collection Improvement Act of 1996 (DCIA), federal agencies
are required to submit unpaid debts, including fines, after a specified
period of time, to Treasury?s FMS for collection. The DCIA was

6 Other sanctions could include censure, industry bars, suspensions, and
revocation of registration. Background

Page 5 GAO- 01- 900 Fines Collection

passed to maximize collections of delinquent debts owed to the government
and minimize the cost of debt collection by consolidating related functions,
among other things. Specifically, the DCIA requires federal agencies to
refer their receivables that are over 180 days delinquent to FMS. FMS staff
attempt to collect referred debts during an initial 30- day period and then
transfer any unpaid debts to private collection agencies that make further
collection attempts for specified periods, during which time they send any
collections to FMS to return to the federal agencies that submitted the
debts.

Our work focused on fine collections achieved by the respective enforcement
and disciplinary programs of SEC, CFTC, and the securities and futures SROs.
As in our previous review, we did not include fines for minor violations,
such as floor conduct or decorum violations- generally referred to as
?traffic ticket? violations- that normally do not undergo disciplinary
proceedings but are handled through summary proceedings. We also did not
include monies owed for disgorgements, which are imposed to return illegally
made profits, or for restitution, which is imposed to restore funds
illegally taken from investors.

To determine the collection rates and changes made in agency or SRO rules or
processes regarding fines since our November 1998 report, we interviewed
officials from both SEC and CFTC, as well as the same SROs and industry
associations, regarding the fines they levied and collected. 7 We also
obtained collection data on fines levied for closed cases and for which all
appeals had been completed for 1997 through 2000. The securities SROs
included the American Stock Exchange, the Chicago Stock Exchange, the
Chicago Board Options Exchange, the New York Stock Exchange, and NASD. The
futures SROs included the Chicago Mercantile Exchange, the Chicago Board of
Trade, the New York Mercantile Exchange, and NFA. Because our 1998 report
found no problems with the accuracy or reliability of data provided, we did
not test the data sets or verify assertions that fines were paid. We also
obtained specific data and information regarding changes to agency and SRO
rules or processes.

7 As we had in our previous report, we excluded regional securities
exchanges that delegated their broker- dealer examination authority to the
American Stock Exchange, Chicago Board Options Exchange, NASD, or New York
Stock Exchange because they administered few disciplinary actions. We also
excluded certain futures exchanges for the same reason. Scope and

Methodology

Page 6 GAO- 01- 900 Fines Collection

To determine how SEC and CFTC oversee the fine imposition and collection
efforts of SROs, we interviewed SEC and CFTC officials and reviewed
inspections and examinations of SRO activities that these agencies had
conducted. To learn what actions they had taken to improve their oversight
of the SRO programs, we interviewed SEC and CFTC officials concerning the
actions taken to implement the recommendations in our 1998 report and
reviewed documentation related to these actions.

To determine how successful FMS had been in collecting fines owed to SEC and
CFTC, we interviewed FMS officials regarding the procedures used to collect
the delinquent debts of federal agencies, including SEC and CFTC. We also
reviewed documentation describing the process as well as factors bearing on
FMS? ability to collect on SEC?s behalf. We obtained statistics on the fines
submitted to FMS by SEC and CFTC as well as FMS? overall collection
statistics for all federal agencies. A collection agency association
official also provided insights and data on the degree to which the passage
of time impacts collectibility. We did not evaluate the effectiveness of
FMS? overall collection efforts on behalf of government agencies because
such efforts were the subject of an August 2000 GAO report. 8

We conducted this work in Washington, D. C., and Chicago, IL, from August
2000 to June 2001 in accordance with generally accepted government auditing
standards.

As we found in our November 1998 report, both SEC and CFTC continue to
collect most of the dollar amount of the fines they levy. Both NASD and NFA
made changes in their fine imposition practices that improved their overall
collection rates. However, these changes could result in barred violators
being more willing to seek readmission into these industries. The other
seven SROs we reviewed also continued to collect most of their fines.

8 Debt Collection: Treasury Faces Challenges in Implementing Its Cross-
Servicing Initiative (GAO/ AIMD- 00- 234, Aug. 4, 2000). Regulators?
Collection

Rates Have Generally Improved, but Impact of Changes In Fine Imposition
Practices at NASD and NFA Is Unknown

Page 7 GAO- 01- 900 Fines Collection

SEC and CFTC continue to collect the majority of the fines they levy, and
both agencies also made other improvements in their collection procedures.
As shown in table 1, these agencies? collection rates for the period 1997
through 2000 were higher than the 1992 through1996 rates presented in our
November 1998 report. Specifically, SEC?s average collection rate was 8
percentage points higher than its 1992 through 1996 rate, while CFTC?s was 5
percentage points higher than the previous period.

Table 1: SEC and CFTC Fine Collection Rates for Fines Levied on Closed Cases
for 1997- 2000 and 1992- 1996

(Dollars in thousands)

Total of fines on closed cases for 1997- 2000 Total of fines

on closed cases for 1992- 1996

Agency Amount levied Amount collected Percentage

collected Percentage collected

SEC $119,284 $108,650 91% 83% CFTC 177,830 152,757 86 81

Sources: SEC and CFTC.

Both agencies have also taken various actions to improve their fine
collection processes. In October 1999, SEC established a staff position to
serve as a focal point for collecting fines. This person was to be
responsible for additional collection efforts after staff in SEC?s Division
of Enforcement had exhausted their collection attempts. The official serving
as the focal point stated that to aid the Enforcement Division attorneys in
their collection efforts he had developed a collection protocol that
provides step- by- step tasks for collection efforts, as well as a list of
information sources that can help locate violators and their assets. This
official also obtained software programs to aid in the collection process.

CFTC officials also said that they had made changes to improve their
collection process. Previously, CFTC did not generally levy fines when
settling with violators who reported assets deemed insufficient to pay the
full amount of their fines. However, according to CFTC officials, agency
policy since June 2000 has been to fine violators with insufficient assets
and to require that they establish a payment plan that extends for up to 10
years. The payment amounts under these plans are based on the violators?
incomes. SEC and CFTC Collection

Rates Have Improved Since Our Previous Report

Page 8 GAO- 01- 900 Fines Collection

Fine collection rates improved at both NASD and NFA primarily because of
changes they made to their fine imposition practices. NASD?s practices
changed in October 1999, with collection rates markedly improving
thereafter. As shown in Figure 1, the percentages of fines collected by NASD
and NFA in the period 1997 through 2000 was more than double the percentages
for the period 1992 through 1996. In addition, NASD has taken other actions
to improve its fine collection activities, including affirming violators?
fine obligations under court orders obtained by SEC and contracting with a
private collection agency to assume collection responsibilities for NASD
fines. NASD and NFA changed their fine imposition practices to eliminate
routinely assessing fines in cases in which violators were being barred from
their industries. Officials at both associations stated that they intend to
continue to fine barred violators in cases involving particularly egregious
violations. Whether these changes will result in more violators seeking
readmission is unknown, but officials at both associations stated that they
would continue to apply stringent criteria to any reentry applications.
Changes in NASD and NFA

Fine Imposition Practices Resulted in Improved Collection Rates

Page 9 GAO- 01- 900 Fines Collection

Figure 1: Percentage of Fines Collected by NASD and NFA for 1992- 1996 and
1997- 2000

Percentage collected

Note: NASD?s new fine imposition and collection policy became effective
October 1999. Source: GAO analysis of NASD and NFA data.

Compared with its rates for the 1992 through 1996 period, NASD has recently
been more successful in collecting the fines it levied. As shown in table 2,
NASD?s collection rates for the period 1997 through 2000 are approximately
double that for the 1992 through 1996 period represented in our previous
report. NASD?s Fine Collection Rates

Improved After It Changed Its Fine Imposition Practices

Page 10 GAO- 01- 900 Fines Collection

Table 2: NASD Fine Collection Rates for Fines Levied on Closed Cases, by
Year

(Dollars in thousands)

Fines on closed cases Closed cases 1997 1998 1999 2000

Total of fines collected 1997- 2000

Total of fines collected 1992- 1996

Amount of fines levied $38,782 $27,933 $40,258 $14,293 $121,266 $113,858
Amount of fines collected 9,991 11,128 27,170 11,595 59, 884 27, 068
Percentage collected 25.5% 39.8% 67.4% 81.1% 49.4% 24%

Source: NASD.

NASD significantly improved fine collections after making a policy change
recommended by staff and its National Adjudicatory Council. NASD established
a task force in 1998 to review its policy on the imposition, suspension, and
collection of monetary sanctions. This task force considered the purpose of
monetary sanctions, particularly remedial fines when a violator is to be
barred from the industry, and determined that fines need not be imposed in
certain instances in which no widespread customer harm was done and serious
wrongdoers had been removed from the industry. In its November 1998 report,
the task force suggested that, in lieu of continuing to add fines routinely
to sanctions barring individuals from the industry, NASD should add fines in
only the most egregious cases. Officials told us that NASD had intended its
previous policy of suspending fines until the violators sought reentry into
the securities industry to serve as a barrier to keep barred or suspended
violators from seeking reentry into the industry.

In 1999, NASD adopted the task force recommendations and implemented a new
sanctioning policy that

 requires payment of restitution and disgorgement, as well as a fine, in
sales practice cases in which (1) widespread, significant, and identifiable
customer harm results or (2) the violator has retained substantial ill-
gotten gains;

 orders restitution and disgorgement in cases in which quantifiable
customer harm has been demonstrated or a violator has been unjustly
enriched;

 does not impose a fine in certain categories of cases (i. e., exam
cheating, conversion, and forgery) if an individual is barred; and

Page 11 GAO- 01- 900 Fines Collection

 requires satisfaction of any order of restitution or disgorgement when an
individual reenters the securities industry in cases in which there has been
no widespread customer harm and the violator has been barred or suspended.

NASD?s policy continues to consider a violator?s inability to pay when
imposing monetary sanctions. According to an NASD official, this policy is
consistent with applicable case law. NASD officials told us that when a fine
is ordered in addition to an order of restitution and/ or disgorgement,
NASD?s first priority is to return collected funds to customers under the
restitution or disgorgement orders. Only after the restitution or
disgorgement has been fully discharged do NASD officials apply collected
money toward fine payment.

In addition to changing its sanctioning policy, NASD has also taken two
other steps to improve its collection efforts. NASD recently initiated a
program to obtain SEC assistance in obtaining court orders that direct
violators owing NASD fines to pay these amounts. In late 1998, NASD
contacted SEC to inquire whether SEC could use particular authority under
the Securities Exchange Act of 1934 (the Exchange Act) to help NASD pursue
collection of its fines. SEC agreed to do so. Section 21( e)( 1) of the
Exchange Act authorizes SEC to seek court orders that require violators to
comply with certain orders issued under the act, which include those orders
involving monetary sanctions imposed by SROs, and affirmed by the SEC. Under
the agreement reached between SEC and NASD, SEC requires that the cases meet
certain criteria before it will seek these court orders. Specifically, SEC
will seek such orders for cases that

 have been affirmed by SEC on appeal,

 require the violator to pay any amount of restitution or a fine of $50,000
or more, and

 are less than 5 years old so that they are within the statute of
limitations, and the appeal process has been exhausted.

NASD officials said that one reason for seeking this agreement with SEC was
so to obtain federal court orders that would make it easier to pursue
collection of fines owed by violators. 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. By that date, NASD had collected over
$22,000 on 3 of the 11 cases, and had forwarded 8 to a private collection
agency. In addition, NASD reported receiving about $67,000 on four cases
before SEC obtained final court orders. The NASD Has Initiated Other

Changes to Improve Its Fine Collection Capabilities

Page 12 GAO- 01- 900 Fines Collection

remaining 26 cases of the over 60 submitted to SEC, which did not meet SEC?s
criteria, were returned to NASD. NASD officials said that they intend to
submit the cases to a private collection agency.

Another improvement NASD made was to contract with a national collection
agency to handle all aspects of its collections. In spring 2001, NASD staff
finalized a contract with a private organization to pursue outstanding money
obligations from NASD- related disciplinary proceedings. NASD officials
believe that using an outside agency that specializes in collecting debts
and is equipped to litigate collection matters is a more efficient and cost-
effective use of its resources.

Although it did not make a formal change to its fine imposition policy, NFA
has changed its fine imposition practices since December 1998. Like NASD,
NFA no longer generally levies fines on violators who are barred from the
futures industry. As a result, its fine collection rates, as shown in table
3, have also improved since the 1992 through 1996 period shown in our
previous report. Similar Change in Fine

Assessment Practices Improves NFA Fine Collection Rate

Page 13 GAO- 01- 900 Fines Collection

Table 3: NFA Fine Collection Rates for Fines Levied on Closed Cases, by Year

(Dollars in thousands)

Fines on Closed Cases Closed Cases 1997 1998 1999 2000

Total of fines collected 1997- 2000

Total of fines collected 1992- 1996

Amount of fines levied $427 $ 968 $761 $1,269 $3, 425 $3, 221 Amount of
fines collected or being paid on time under installment plans

402 450 716 1,081 a 2,649 881 Percentage collected 94.1% 46.5% 94.0% 85.2%
77.3% 27.0% a This amount includes actual cash collections as of December
31, 2000, of only $337,000. The remaining $743,000 shown as collected
reflects the fines being paid in installments on which no payments are
delinquent. NFA officials expected to collect these remaining amounts in
full by December 2001.

Source: NFA.

As shown in table 3, some violators are paying off their NFA fines in
installments. Of the 17 fines due in 2000, 9 were paid in full and 8 are
being paid on 1- year payment plans, with balances due by December 31, 2001.
NFA officials explained that they use an accrual accounting system, which,
under generally accepted accounting principles, allows entities to report
amounts as fully earned in the year recorded, regardless of whether they
were actually received or remain due as receivables. Therefore, NFA reports
fines as fully paid both when they have received full payment and when
installment payments are current as of the reporting date.

NFA?s improved collection rate stems from the change in its fine assessment
practices. Previously, NFA levied fines as an additional sanction against
violators that it also barred from the futures industry. NFA officials
stated that in adding fines to bars, their intent had been to ensure that
the violators would remain out of the industry. They said that such fines
were also intended to deter other industry participants from violating the
rules. They cited our November 1998 report, which pointed out that such
fines were seldom, if ever, collected, as influencing their decision to
discontinue the practice in all but the most egregious cases. They reasoned
that a bar alone would both protect the industry and punish the violators by
removing them from the industry and denying them their livelihood. The NFA
officials stated that they intend to continue adding fines to bars in
egregious cases as a message to industry participants that NFA will not
tolerate such violations.

Page 14 GAO- 01- 900 Fines Collection

Because both NASD and NFA have only recently changed their fine assessment
practices, the impact of these changes on whether barred individuals seek
readmission into the securities or futures industries is unknown. Officials
at both SROs stated that the fines levied in addition to bars could
effectively serve as barriers to keep these individuals from returning to
their respective industries, although they acknowledged that they were
unlikely to collect these fines.

With such fines no longer generally being levied, the impact on the
willingness of violators to seek reentry is not yet known. According to NASD
and NFA officials, few individuals that they have barred for violating their
rules have ever applied for readmission. NASD officials told us that, as of
June 12, 2001, applications for reentry by individuals who had been barred
by NASD since they changed their fine imposition policy had not increased.
These officials said that they did not believe that their policy change
would cause such applications to increase because it is very difficult to
obtain approval for reentry after being permanently barred. They also said
that other SROs that do not impose fines on barred individuals have not seen
many applications for reentry. The criteria that NASD considers for reentry
by barred individuals include

 the nature and gravity of the disqualifying event,

 the length of time that has elapsed since the disqualifying event,

 whether any intervening misconduct has occurred,

 whether the disqualified person has other disciplinary history,

 any other mitigating or aggravating circumstances that may exist,

 the precise nature of the securities- related activities proposed in the
application, and

 the disciplinary history and industry experience of both the member firm
and the person proposed by the firm to serve as the responsible supervisor
of the disqualified person. 9

An official in NFA?s General Counsel?s Office told us that the Commodity
Exchange Act, which governs the futures industry, does not specifically
contain provisions that would allow a barred individual to seek reentry, nor
does it specifically preclude such reapplication. An individual seeking
reentry would have to present evidence of mitigating facts or

9 Article III sect. 3 and sect. 4 of the NASD bylaws describe disqualifying events
for members, for which they can be barred, expelled, suspended, or subject
to certain other sanctions. (See http:// www. nasdr. com/ sd_ process. htm.)
Impact of NASD and NFA

Fine Imposition Changes Are Unclear

Page 15 GAO- 01- 900 Fines Collection

circumstances relating to the conduct that led to the individual?s being
barred as well as evidence of rehabilitation since the conduct occurred. 10
The NFA official also could not recall anyone being allowed to reenter and
stated that such applications would be held to strict standards. Both NASD
and NFA officials also pointed out that under their new practices,
individuals who had committed violations that resulted in considerable
customer losses would still have to pay disgorgement and restitution monies
before they could reenter either industry.

Both SEC and CFTC officials have a role in reviewing applications for
persons seeking readmission into the securities and futures industries. SEC
officials told us that Rule 19h- 1 under the Securities Exchange Act
requires SROs to submit applications of persons subject to statutory
disqualification for readmission into SEC. These applications are then
reviewed by staff in the Chief Counsel?s Office within SEC?s Division of
Market Regulation. SEC has the authority to deny the applications of such
persons. A CFTC official told us that CFTC?s staff have participated in a
Registration Working Group with staff from NFA and the other SROs since
1996. This group meets quarterly to discuss various issues of mutual
interest, including the review of applications of persons seeking entry or
readmission into the futures industry. The CFTC official stated that persons
whose registration or SRO membership has been revoked rarely return or seek
readmission into the futures industry. He said that any applications for
readmission into the futures industry would be scrutinized carefully.

The other securities and futures SROs that we reviewed also continued to
collect the majority of the fines they levied. As shown in table 4, three of
the four other securities SROs reported higher collection rates than those
detailed in our 1998 report. The fourth SRO, the Chicago Stock Exchange,
reported a lower collection rate, which according to a Chicago Stock
Exchange official, was due to the fact that certain fines levied late in
2000 had not yet been received.

10 Rule 501, of the NFA Rulebook describes NFA?s authority to deny,
condition, suspend, restrict, and revoke registration. Other Securities and

Futures SROs Continue to Report High Collection Rates

Page 16 GAO- 01- 900 Fines Collection

Table 4: Reviewed Securities SROs? Fine Collection Rates for Fines Levied on
Closed Cases for 1997- 2000 and 1992- 1996

(Dollars in thousands)

Total of fines on closed cases for 1997- 2000 Total of fines

on closed cases for 1992- 1996

SRO Amount levied Amount collected Percentage

collected Percentage collected

American Stock Exchange $1,385 $1,247 90.0% 75.0% Chicago Stock Exchange 566
495 87.4 100 Chicago Board Options Exchange 2,768 2,700 97.5 95 New York
Stock Exchange 14,301 14,244 99.6 98

Sources: American Stock Exchange, Chicago Stock Exchange, Chicago Board
Options Exchange, and New York Stock Exchange.

The recent collection rates for the three other futures SROs we reviewed
were generally about the same as their rates for the 1992 through 1996
period, although the Chicago Board of Trade?s 95- percent rate for 1997
through 2000 was significantly higher than its rate for the previous period,
which was 54 percent. However, Chicago Board of Trade officials formerly had
explained that the lower rate for the previous period had been because
several large- dollar fines had been written off.

Page 17 GAO- 01- 900 Fines Collection

Table 5: Reviewed Futures SROs? Fine Collection Rates for Fines Levied for
1997- 2000 and 1992- 1996

(Dollars in thousands)

Total of fines on closed cases for 1997- 2000 Total of fines

on closed cases for 1992- 1996

SRO Amount levied Amount collected Percentage

collected Percentage collected

Chicago Mercantile Exchange

$4,286 $3,160 73.7% 85% Chicago Board of Trade 2,618 2,493 95.2 54 New York
Mercantile Exchange

1,984 1,722 87.0 N/ A a a Dollar amounts collected in 1992- 1996 were not
available when we prepared our 1998 report. Sources: Chicago Mercantile
Exchange, Chicago Board of Trade, and New York Mercantile Exchange.

In conducting their oversight of securities and futures SROs disciplinary
programs, SEC and CFTC review individual fines imposed by SROs to assess the
reasonableness of the sanctions applied. Their reviews have generally found
that the fines the SROs levied were appropriate. In response to
recommendations in our November 1998 report, they also have taken steps to
improve their ability to review SRO fines on an industrywide basis.

In overseeing the disciplinary programs of SROs, SEC and CFTC conduct on-
site inspections during which their examiners review the supporting
documentation for selected fines and other sanctions SROs have levied. In
general, their findings indicated that SROs levy fines appropriate to the
nature of the violations identified.

According to SEC officials, in general, the securities SROs adequately
administer their formal disciplinary programs and levy appropriate
sanctions. In a small fraction of the cases, SEC examiners found that some
SEC and CFTC

Continue to Review Individual SRO Fines but Have Also Taken Steps to Improve
Their Industrywide Oversight SEC and CFTC Reviews of Individual SRO Fines
Found Most Fines Appropriate

Page 18 GAO- 01- 900 Fines Collection

SROs had levied inadequate sanctions. We reviewed 10 SEC reports that were
completed between January 1, 1997, and December 31, 2000, 11 for the 5
securities SROs that were included in our report. Although examiners
generally found that most sanctions were appropriate given the violation and
case circumstances, in five reports, SEC examiners noted instances in which
they believed different sanctions should have been applied. For instance,
one SRO inspection report cited as inadequate a fine that was about the same
amount as the ill- gotten profit resulting from the violation. The report
stated that a fine should be set significantly higher than the amount of
ill- gotten gains resulting from violative activity in order to serve as a
deterrent to such future activity. In another SRO inspection report, SEC
examiners cited the imposition of disparate fines of $1,000 and $10,000 in
two separate, but similar, cases involving failure to disclose criminal
information. Noting that fines should be consistent in cases in which
violations and circumstances are similar, SEC recommended that the SROs?
attorneys consider past sanctions imposed for similar violations when
determining sanctions for current cases.

CFTC officials also said that their reviews show that, overall, futures SROs
levy sanctions that are appropriate for the violations. Between January 1997
and December 2000, CFTC examiners completed five reviews of the four futures
SRO disciplinary programs. 12 Like SEC, CFTC examiners also occasionally
found instances in which inadequate sanctions had been levied by futures
SROs. In a report documenting the review of 1 SRO, CFTC examiners noted 1
instance, of 42 cases reviewed, in which they believed the fine should have
been imposed for a higher dollar amount. In

11 During this period, SEC inspected NASD?s Hearing Officer and Disciplinary
Program and the enforcement departments at the Chicago Stock Exchange, the
Chicago Board Options Exchange, the Pacific Exchange, and the Philadelphia
Stock Exchange once each. NASD?s District Offices in New Jersey, New York,
and Washington, D. C. were also inspected once during this period. They also
inspected the Enforcement Department at the New York Stock Exchange twice,
as well as NASD District Offices in San Francisco, Denver, Seattle, Atlanta,
New York, Chicago, Philadelphia, Los Angeles, New Orleans, Cleveland, Kansas
City, Dallas, and Boston. They inspected the American Stock Exchange three
times during this period.

12 CFTC prepared 13 exam reports during this period. These included two
reviews each for the Chicago Board of Trade, the Kansas City Board of Trade,
and the New York Cotton Exchange, as well as single reviews of the Chicago
Mercantile Exchange; the Coffee, Sugar & Cocoa Exchange, Inc.; the
Commodities Exchange; the Minneapolis Grain Exchange; the New York Futures
Exchange; and the New York Mercantile Exchange. In addition, one CFTC report
represented a joint review of the Chicago Board of Trade, the Chicago
Mercantile Exchange, the Coffee, Sugar & Cocoa Exchange, Inc.; the New York
Mercantile Exchange/ COMEX, and the New York Commodity Exchange.

Page 19 GAO- 01- 900 Fines Collection

another case, they cited that a fine should have been imposed but was not.
The report recommended that the SRO set more appropriate sanctions for
similar future violations.

In response to recommendations in our November 1998 report, SEC and CFTC
have taken various steps to improve their oversight of the SRO disciplinary
programs. These improvements relate to data collected and reviewed for the
purpose of assessing SRO fines on an industrywide basis. In addition, SEC
and CFTC have taken steps to ensure that SROs maintain automated sanctions
information where appropriate.

In response to our recommendation that SEC analyze industrywide information
on disciplinary program sanctions, particularly fines, SEC has begun to
employ a new database to capture information on disciplinary actions. In
1998, we reported that SEC?s oversight approach involved reviewing sample
cases at each SRO and comparing the sanctions imposed with those imposed at
other securities SROs. We recommended that SEC maintain and analyze
industrywide information to provide it an additional means with which to
ensure that comparable fines are assessed for similar violations throughout
the SROs. According to SEC officials, SEC?s Office of Compliance Inspections
and Examinations had previously maintained limited sanctions information,
such as the dates SROs filed the sanctions, and violators? names. However,
these data did not include sufficient information about the violations for
industrywide analyses.

In October 2000, the examination staff implemented a new database to serve
as a repository for information reported to SEC on disciplinary actions
taken by securities SROs. In addition to violators? names and SRO filing
dates, the new database captures information such as rules violated,
violation type (such as sales practices and recordkeeping), and sanctions
applied (such as suspension, fine, and censure). SEC officials stated that
because the new system allows them to generate reports that focus on any of
the data fields, they may be able to identify trends or disparities in
sanctions across SROs. As of May 31, 2001, the new database contained
information from 1,111 filings.

In our previous report, we noted that CFTC performed industrywide analyses
of sanctions imposed by the futures SROs but did not document the results of
these analyses. We recommended that CFTC appropriately document the results
of these analyses. CFTC officials told us that since SEC and CFTC Have

Taken Steps to Improve Their Oversight of SRO Sanctions Industrywide

SEC Now Captures Data for Reviewing Disciplinary Actions Across SROs

CFTC Now Documents Its Reviews of Disciplinary Actions Imposed by Futures
SROs

Page 20 GAO- 01- 900 Fines Collection

January 2000, they have prepared reports that document their quarterly
reviews of sanctions across SROs. Our review of all four quarterly reports
for 2000 found that they discussed the number of disciplinary cases at each
SRO, the rules violated, the sanctions imposed, and the consistency of
sanctions across SROs. In addition to the quarterly reports, CFTC?s Division
of Trading and Markets also reports annually to the Commission on civil
monetary penalty collection activities for the fiscal year. This report
compares the year?s collections with those of previous fiscal years,
discusses collection activities, and analyzes outstanding debts.

Our 1998 report also noted that some SROs did not maintain automated records
of their fine collection activities and recommended that SEC and CFTC
encourage their SROs to maintain automated records of their fine collection
activities that are appropriate for the number of fines they impose. SEC and
CFTC officials told us that SROs included in this review use accounting-
based software to monitor their collection activities.

As required by the DCIA, SEC and CFTC refer delinquent fines to Treasury?s
FMS, which conducts collections on behalf of federal agencies (see app. I
for information on FMS? general activities and procedures). However, FMS has
had little success in collecting fines on SEC?s behalf, which FMS officials
attributed to several factors, including the large- dollar amount of SEC
referrals, the age of the cases when referred, and the lack of violator
assets. However, 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.
Also, SEC has yet to complete procedures necessary for its fines to be
submitted to a Treasury program that allows for the collection of fine
amounts from other government payments that might be due to the violators.
Because CFTC began referring its cases to FMS only 3 months before the end
of 2000, FMS officials stated that they had not had sufficient time to have
collected anything for CFTC. However, an internal audit of CFTC referrals to
FMS (1) found that not all CFTC fines were being submitted in a timely
manner, and (2) also noted a weakness in CFTC?s procedures for submitting
fines to FMS. SROs Reviewed Have

Automated Systems SEC and CFTC Process Weaknesses Hamper FMS Efforts to
Collect Their Fines

Page 21 GAO- 01- 900 Fines Collection

Although SEC was one of the first agencies to sign an agreement with FMS
stating that it would refer its delinquent cases for collection, FMS
collections on SEC?s behalf have been much lower than its collections for
other federal agencies. SEC began referring cases to FMS shortly after
executing the September 17, 1996 letter of agreement with FMS. By the end of
2000, SEC had referred 25 cases representing fines and penalties totaling
over $3.5 million. FMS had collected about $5,000, or 0.14 percent of the
total fines SEC referred for collection. In contrast, of the 18,557 fines
totaling more than $110 million in fines referred to FMS by all federal
agencies by year- end 2000, FMS had collected 10.4 percent of these debts.

FMS officials cited several factors to explain why their collection rate for
SEC fines is so much lower than for other federal agency debts. The
officials stated that SEC fines generally represent larger dollar amounts
than debts referred by other agencies. According to FMS data, the average
SEC fine referred to FMS for collection was over $141,000, which is almost
eight times as large as the $18,400 average referral from other agencies.
The officials stated that, historically, larger debts are less collectible
than smaller debts. An FMS official also stated that because SEC makes
significant collection efforts before referring amounts to FMS, SEC
referrals are, on average, 15 months delinquent when FMS receives them.
According to the FMS official, the age of the SEC?s debts further reduces
their collectibility compared with the smaller, more recent debts referred
by other agencies.

FMS officials stated that the low collection rate is the fault of neither
the agency nor FMS but is due to the nature of the cases themselves. Both
SEC and FMS officials told us that, in some cases, 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 is no way to collect. According to FMS
records on the status of debts, in 6 of the 25 SEC cases, totaling almost
$600,000, debtors had no assets or were no longer in business. However, in
11 of the 25 cases, totaling almost $2.7 million, collection agents have
been unable to locate and initiate contact with the debtors to attempt to
collect the fines. The remaining eight cases represented a variety of
dispositions, including those returned to SEC as uncollectible. SEC
officials also pointed out that SEC fines represent rulings against
violators who have already proved unwilling to pay, despite being ordered to
do so by a judge. In contrast, other debts referred to FMS involve such
government debts as delinquent loans. According to an SEC official who
oversees collection efforts, FMS? lack of success in collecting SEC fines
underscores the thoroughness of SEC?s own collection efforts. FMS
Collections for SEC

Fine Referrals Are Low Compared With Collections for Other Federal Agency
Fine Referrals

Page 22 GAO- 01- 900 Fines Collection

In addition to the characteristics that make SEC fines difficult to collect,
SEC?s slow responses to compromise offers have also exacerbated FMS? low
collection rate on these fines. In some cases, an agency and a debtor may
reach an agreement, called a compromise offer, in which the agency agrees to
discharge a debt by accepting less than the full fine amount. Private
collection agencies under contract to FMS usually negotiate compromise
offers 13 with individual debtors. A compromise offer can also result if the
collection agency negotiates an agreement under which the debtor would pay
his or her total debt or some lesser amount in installments, 14 rather than
in one lump sum. Once an offer to pay a lesser amount or installment
payments over an extended time period has been negotiated, a collection
agency then sends the compromise offer to FMS. Although some FMS collection
agreements with federal agencies stipulate that FMS can unilaterally accept
compromise offers above certain dollar amounts or percentages of the
originally owed amount, SEC?s agreement requires FMS to send all compromise
offers to the agency for approval. Because SEC was one of the original
agencies with which FMS agreed to perform collection services, the agreement
between the two agencies did not provide broad authority for FMS to accept
compromise offers on SEC?s behalf.

However, SEC has not always made timely responses to compromise offers
presented by FMS, which may have worsened FMS? chances of collecting the
amounts offered in those compromises. FMS officials told us that during the
time the offers were awaiting SEC approval, some violators? assets
diminished to the point that the debtors were no longer able to pay the
agreed amount. As a result, money that could have been collected was not.
According to FMS officials, SEC has kept compromise offers for long periods
before responding. For instance, according to data provided by SEC and FMS,
three cases that SEC approved in March 2001 had spent from 42 to 327 days
awaiting SEC decisions. An FMS official said that, by the time the cases had
been approved, the debtors no longer had the money to pay the amounts in the
agreements. As of mid- June 2001, FMS had not received any payments on these
compromise offers, which

13 According to FMS officials, private collection agencies have 50- percent
compromise authority, meaning that they can negotiate compromise offers for
no less than 50 percent of the original debt amount owed. Because the
collection agencies are paid on a commission basis, it is to their advantage
to collect as much as possible to increase their commission.

14 Generally, installment payments must be for at least $100 and can extend
to no more than 24 months. Lack of Timely Action on

Compromise Offers May Have Hampered Collections

Page 23 GAO- 01- 900 Fines Collection

totaled almost $250,000. The FMS official responsible for overseeing these
offers stated that the likelihood of nonpayment increases with the passage
of time, because assets can be depleted during the time that SEC is
considering its decision.

SEC officials acknowledged that there had been delays in responding to FMS.
In the case that took 327 days to review, SEC officials explained that they
attempted to contact the regional office staff who originally investigated
the case to discuss the compromise offer, but these staff had left the
agency. The officials said that because the compromise offer involved
repayments over a 16- year period, obtaining the investigating staff?s
opinion was considered important to ensure that the fine remained
meaningful. However, in some cases, the SEC staff said that not all of the
information that SEC needed to review the compromise offers, such as the
violators? financial statements, were included with FMS requests for action.
In such cases, a few days were added to the time that SEC spent reviewing
the offers because SEC staff had to request this information from FMS before
they could conduct their reviews. An FMS official explained that because FMS
had not required its private collection agencies to obtain violators?
financial statements, FMS staff had to request these documents on SEC?s
behalf. However, beginning October 2001, all collection agencies with which
FMS contracts will be required to obtain such statements in addition to the
currently required credit bureau reports.

FMS and SEC officials told us they have been working together to reduce the
delays in approving compromise offers. At a meeting in April 2001, FMS
officials informed SEC staff that the DCIA gives FMS the authority to act on
behalf of other agencies to approve compromise offers. They stated that a
clause to that effect is now routinely part of its standard agreement with
other federal agencies, although such a clause was not included in the SEC/
FMS agreement. On April 20, 2001, FMS sent SEC?s Division of Enforcement a
letter proposing that, unless such action is otherwise prohibited by SEC?s
governing statute, the FMS/ SEC agreement be amended to state that FMS is
authorized to act on SEC?s behalf to approve compromise offers if SEC has
not responded after 30 days. SEC staff are considering the Commission?s
legal authority to delegate to an external agency the authority to
compromise a judgment debt.

SEC staff said that they are currently making improvements to their
procedures for processing compromise offers submitted by FMS. They stated
that they have changed their process to include using a standardized format
and new tracking system to ensure that compromise

Page 24 GAO- 01- 900 Fines Collection

agreements are on track for response within 30 days of receipt. According to
the information they provided, the compromise offer that FMS most recently
sent to SEC took the shortest amount of time-- 42 days- for SEC to review.
However, even this faster response from SEC did not elicit payment from the
violator.

SEC?s lack of specific regulations has affected another mechanism FMS uses
to collect amounts owed to SEC. In addition to its other collection efforts,
FMS also uses the Treasury Offset Program (TOP) 15 to attempt to obtain
monies owed to federal agencies. This program is designed to (1) identify
any federal government payments, such as tax refunds, due to an individual
or entity with an outstanding government debt and (2) apply them toward
repayment of the outstanding government debt. The collection agreement
between FMS and SEC stated that FMS could use TOP to collect SEC debts after
consulting with and obtaining the concurrence of SEC officials. FMS has
collected some money on SECordered disgorgements through TOP and had also
routinely put SEC fines into the program. However, SEC officials said that
they did not believe that their existing offset regulations provided
sufficient authority to allow FMS to obtain collections on fines owed to SEC
through TOP. In addition, they did not believe that they had ever formally
concurred with FMS? submission of SEC fines into TOP. In April 2001, SEC
officials asked FMS to withdraw all outstanding fines from the program until
the SEC staff had completed steps to comply with the DCIA, including
addressing additional requirements arising from November 2000 amendments.
This legislation requires agencies to first adopt regulations that address
collecting fines by administrative offset before using TOP for collection.
16 SEC officials told us at the end of June 2001 that they had rewritten
their rules and expected them to be sent to the Commission soon for
approval, but the officials could not estimate when the rules would be
approved and in force.

FMS has also recently agreed to perform collection activities on CFTC?s
behalf, but concerns already exist regarding the timeliness of CFTC?s
submissions to FMS. CFTC signed a letter of agreement with FMS on August 27,
1999, authorizing FMS to provide debt collection services on its

15 Under TOP, the database of delinquent federal debtors is matched against
a database containing the names of those to whom payments are to be
disbursed by Treasury. When matches are identified, the owed amounts are
offset or withheld from the federal payment due to those owing the
delinquent debts.

16 31 U. S. C. 3716( b)( 2000 supp.). SEC?s Lack of Applicable

Regulations Affects FMS? Ability to Use Government Payments to Pay SEC Fines

CFTC Debts Have Been Recently Referred to FMS for Collection

Page 25 GAO- 01- 900 Fines Collection

behalf for its delinquent debts. On September 29, 2000, CFTC referred its
first 13 fine cases to FMS totaling $3.2 million, followed in November by 2
more cases totaling over $200,000. According to FMS officials, as of
December 31, 2000, FMS had not yet made any collections on the 15 cases. The
FMS officials also stated that they have not had the referrals for a
sufficient period of time to make collections, and they do not have enough
experience with CFTC referrals yet to comment on the cases.

However, FMS collections on CFTC fine cases may be reduced if the referrals
are not timely. According to a report prepared by the CFTC Inspector
General, CFTC staff does not refer cases to FMS as soon as they are
eligible. This internal audit report, which examined the agency?s civil
monetary penalty collections, reviewed data collected through February 1,
2001. According to the report, the auditors found 12 eligible cases totaling
over $17 million that had not yet been sent to FMS. Of these, 11 cases were
eligible to have been sent with the first batch of cases in September 2000,
and 1 case was eligible to have been sent with the second batch in November
2000. The report recommended that CFTC refer cases to FMS at least monthly.
As previously stated in this report, the longer cases wait for collection,
the lower the likelihood that they will be collected. Therefore, CFTC?s
delays in referring cases are likely to reduce FMS collections. CFTC
officials stated that since February 2001, they have sent 15 more penalties
to FMS including 11 of the 12 cases previously discussed. They expect to
refer the 12th case to FMS soon. Also, rather than waiting for fines to be
delinquent 180 days, CFTC officials said they have begun to refer cases to
FMS as soon as the required debtor notification periods are complete.

Weaknesses in CFTC?s procedures for submitting fines to FMS may reduce FMS
collections. According to CFTC officials, although the agency?s staff
recently submitted additional fines to FMS, their written procedures have
not been updated to address referrals to FMS. In addition, one fine
submission to FMS was delayed because of inadequate communication between
the CFTC?s Division of Trading and Markets and its Division of Enforcement.
According to the CFTC Inspector General report, this communication problem
resulted in one fine of over $7 million not being referred for more than 2
years. CFTC staff stated that the agency is also taking steps to use other
information sources for violator addresses. CFTC is currently awaiting
Treasury instructions for obtaining addresses from Internal Revenue Service
records. In commenting on this report, CFTC noted that the Commission is
revising its internal instructions to ensure that cases are referred to FMS
within 180 days of becoming delinquent,

Page 26 GAO- 01- 900 Fines Collection

and that the Division of Enforcement provides all of the necessary
information to make such referrals.

On the basis of the data we obtained, collection rates at SEC, CFTC, and the
nine securities and futures SROs were generally comparable to, or higher
than, their rates from our previous review. In addition, NASD and NFA, which
previously had the lowest collection rates, changed their fine imposition
practices and, therefore, their collection rates greatly improved.

However, whether the actions NASD and NFA have taken will affect the number
of formerly barred individuals seeking and gaining reentry into the
securities or futures industries is unknown. Previously, these SROs would
levy fines in addition to barring individuals from their respective
industries for rule or law violations. These fines, though seldom collected,
served as a potential barrier to individuals applying for readmission into
their industries. The subsequent decisions by NASD and NFA to generally
discontinue levying fines when barring individuals appear to have improved
these SROs? fine collection rates. However, because certain barred violators
no longer face the prospect of paying off a fine before reentering these
industries, they may be more willing to seek readmission. NASD and NFA
officials indicated that to prevent readmission of unsuitable individuals to
either industry, they would continue to apply stringent criteria to any
readmission applications. SEC and CFTC staff also review readmission
applications when they are received from the SROs and could, as part of
their periodic reviews of SRO operations, ensure that changes in NASD?s and
NFA?s fine imposition practices do not result in any unintended
consequences, such as inappropriate readmissions.

Although the fines that SEC refers to FMS may be difficult to collect,
various weaknesses also appear to have hampered FMS? efforts to collect
fines on SEC?s behalf. Delays in the approval of compromise offers appear to
have resulted in lost opportunities to collect monies. Also, SEC has not yet
adopted the regulations it needs to again submit its fines to TOP to benefit
from the associated collection opportunities. Resolution of these issues
would likely lead to an improvement in FMS? ability to collect fines on
SEC?s behalf.

Finally, although CFTC has only recently begun submitting fines to FMS for
collection, already concerns about the timeliness of these submissions
exist. The agency?s Inspector General staff have recommended steps to ensure
that CFTC fines are submitted more timely to FMS, but these steps
Conclusions

Page 27 GAO- 01- 900 Fines Collection

have yet to be implemented. Weaknesses in procedures for ensuring that CFTC
submits all needed information to FMS to collect its unpaid fines also
appear to have further delayed FMS? collection efforts. Because older fines
are harder to collect, FMS prospects for collecting CFTC fines would improve
if CFTC would more promptly refer its cases to FMS.

We recommend that the Acting Chairman, SEC,

 periodically assess the pattern of readmission applications to ensure that
the changes in NASD?s fine imposition practices do not result in any
unintended consequences, such as inappropriate readmissions;

 continue working with FMS to ensure that compromise offers presented by
FMS are approved in a timely manner; and

 take steps to ensure that regulations allowing SEC fines to be submitted
to TOP are adopted.

We also recommend that the Acting Chairman, CFTC,

 periodically assess the pattern of readmission applications to ensure that
the changes in NFA?s fine imposition practices do not result in any
unintended consequences, such as inappropriate readmissions; and

 take steps to ensure that delinquent fines are promptly referred to FMS,
including creating formal procedures that address both sending debts to FMS
within the required time frames and requiring all of the necessary
information from the Division of Enforcement on these debts.

We requested comments on a draft of this report from the heads, or other
designees, of SEC, CFTC, FMS, NASD, and NFA, and we incorporated their
technical comments into this report where appropriate. Overall, each of the
organizations generally agreed with the findings and recommendations in our
report. SEC, CFTC, and FMS provided us with written comments, which appear
in appendixes II through IV. Their letters made the following points.

Regarding our recommendation that SEC provide more timely responses to FMS
on compromise offers, the Director of SEC?s Division of Enforcement stated
that SEC staff are working with FMS to increase the timeliness of SEC
responses to compromise offers presented by FMS. Regarding our
recommendation that SEC improve its processes relating to TOP, the Director
stated that SEC staff are diligently working toward promulgating regulations
clarifying SEC?s authority to take various steps Recommendations

Agency Comments and Our Evaluation

Page 28 GAO- 01- 900 Fines Collection

toward debt collection, including the use of this program. The Director also
stated that the agency plans to use its new disciplinary action database to
(1) identify trends and disparities in SRO sanctions, and (2) continue to
assess the adequacy of SRO sanctions as well as any disparities in such
sanctions during its oversight inspections of SRO disciplinary programs.

In commenting on our recommendation that CFTC review NFA readmissions to
ensure that NFA?s revised fine imposition practices do not result in the
readmission of inappropriate individuals, CFTC?s Acting Chairman stated that
the agency does not anticipate a substantial increase in applications from
barred individuals. The Acting Chairman further pointed out that any
registration applications from individuals subject to an NFA bar would be
carefully reviewed at the CFTC Registration Working Group?s quarterly
meetings. We responded by adding text to this report on the role that both
SEC and CFTC have in reviewing applications for readmission into their
respective industries. In addition, we revised our recommendation to clarify
our intention that, in addition to reviewing individual applications for
readmission, these agencies should also assess the pattern of applications
to ensure that the changes in NASD?s and NFA?s fine imposition practices do
not have unintended consequences. Regarding our recommendation that CFTC
take steps to ensure that delinquent fines are promptly referred to FMS, the
Acting Chairman stated that all but one case mentioned in our draft report
had been sent to FMS, and that case should be referred to FMS by the end of
August. The Acting Chairman also stated that CFTC is in the process of
revising its internal instruction concerning penalty collections to ensure
timely referral of delinquent cases with all of the necessary information,
and that this process should be completed before the end of Fiscal Year
2001.

The Commissioner of the Department of the Treasury?s FMS, pointing out that
the collectibility of cases declines as debts age, suggested that we include
information on the age of SEC cases referred for collection. We have
included this information in this report. The FMS Commissioner also noted
that because SEC has significant tools at its disposal to collect from
solvent debtors before referring cases to FMS, the low collection rates on
SEC fines are not unexpected. The Commissioner also stated that FMS is
working in partnership with SEC to improve the agency?s responsiveness to
compromise and repayment agreement offers.

Page 29 GAO- 01- 900 Fines Collection

As agreed with you, unless you publicly release its contents earlier, we
plan no further distribution of this letter until 30 days from its issuance
date. At that time, we will send copies to the Secretary of the Treasury;
the Acting Chairman, SEC; the Acting Chairman, CFTC, and other interested
parties. We will also make copies available to others upon request.

If you have any further questions, please call me at (202) 512- 8678 or Cody
J. Goebel, Assistant Director, at (202) 512- 7329. Additional GAO contacts
and acknowledgments are listed in appendix V.

Sincerely yours, Richard J. Hillman Director, Financial Markets and

Community Investment

Page 30 GAO- 01- 900 Fines Collection

The Department of the Treasury?s Financial Management Service (FMS),
originally established as the Bureau of Government Financial Operations in
1974, was renamed in 1984. The Debt Collection Improvement Act of 1996
requires federal agencies to refer their delinquent debts to FMS for
collection, so that FMS can serve as the government?s central debt
collection agency, managing the government?s non- tax delinquent debt
portfolio.

Within FMS, Debt Management Services administers these efforts, called
cross- servicing. The cross- servicing program collects debts more than 180
days delinquent that have been referred by federal agencies. According to
FMS officials, 20 to 30 collectors perform the cross- servicing collection
efforts at FMS? collection center in Birmingham, Alabama, and about 40
people at headquarters perform agency liaison or manage private collection
agencies, for a total of about 70 to 100 people who work in some capacity on
cross- servicing.

One tool that FMS uses to collect these debts is the Treasury Offset Program
(TOP), in which FMS matches a database of delinquent debtors against
payments to be disbursed by Treasury and then offsets or withholds federal
payments to recipients who also owe delinquent debts. FMS (1) presently
offsets Office of Personnel Management retirement payments, federal income
tax refunds, vendor payments, and some federal salary payments and (2) is
planning to add Social Security benefit payments and the remaining federal
salary and non- Treasury- disbursed payments to the TOP system. FMS? cross-
servicing collections for fiscal year 2000 were in excess of $41 million,
almost doubling the $23 million collected in fiscal year 1999, which had
more than doubled the $10 million collected in fiscal year 1998. Since the
passage of the Debt Collection Improvement Act of 1996, cross- servicing
collections have totaled $74.9 milion.

Federal agencies are required to send delinquent debts owed to them to FMS
for collection once these debts are 180 days past due. FMS policy is to keep
a case for 30 days, during which time it will send the debtor a demand
letter asking for payment. If no payment is received 20 days after sending
the demand letter, FMS will refer those cases that have a debtor?s taxpayer
ID number or electronic ID number to TOP for collection where it can remain
active for up to 10 years. At the end of the 30- day period, FMS refers each
unpaid case to 1 of the 11 private collection agencies it has on contract to
collect debts on a commission basis. When referring cases to these
collection agencies, FMS uses a distribution formula intended to distribute
the debts among the agencies on the basis of their Appendix I: Department of
the Treasury?s

Financial Management Service Debt Collection Process

Page 31 GAO- 01- 900 Fines Collection

performance history. A collection agency has 180 days to attempt to collect
the debt, during which time it performs such actions as skip traces, asset
searches, and information searches from credit bureaus. If a collection
agency is unsuccessful in collecting the debt during the period it has the
case, the case is referred to a second agency to pursue collection over a
second 180- day period. These collection agencies work on a commission basis
and get nothing if their efforts are unsuccessful at collecting a debt. FMS
evaluates these agencies on their performance and may reward good
performance with bonus payments or with additional referrals. For cases in
which debtors can prove they are unable to pay their debts in full, a
collection agency can also work with debtors to

?compromise? debts, which means that they will accept less than full payment
to discharge a debt. This compromise must be agreed to by the referring
agency when amounts exceed certain agreed- upon thresholds.

After two collection agencies have been unsuccessful in collecting a debt,
the case is returned to FMS. FMS then can refer a case to the Department of
Justice to pursue litigation against the debtor, or it can return the case
to the referring agency as uncollectible. The referring agency can either
write off the case, particularly if the debtor has no assets, or hold the
case for later attempts at collection if it appears that the debtor may
eventually gain some assets from which collection might be made. When a debt
is written off or compromised, FMS will, upon agency request and if the
forgiven amount exceeds $600, issue a Form 1099- C to the debtor, indicating
that the forgiven amount may be taxable income to the debtor.

FMS charges 18 percent of any collections it makes while working the debt
from its Birmingham Debt Management Operations Center in the first 30 days
and on any judgment cases it sends to Justice for post- judgment
enforcement. FMS? fee drops to 3 percent when a debt is referred to a
private collection agency or to Justice on nonjudgment cases, but this is in
addition to the collection agency?s or Justice?s fees of 25 and 3 percent,
respectively. When TOP offset occurs, FMS charges 3 percent in addition to
an across- the- board Offset Program fee of $11.75. The referring agency
elects whether to (1) add this fee to the debt so that the debtor winds up
paying the collection fee, or (2) deduct the fee from the original debt due
the agency so that the agency pays the fee. In most cases, including both
the Security and Exchange Commission and Commodity Futures Trading
Commission, fees are added to the original debt amount so that the debtor
pays.

Page 32 GAO- 01- 900 Fines Collection

Appendix II: Comments From the Securities and Exchange Commission

Page 33 GAO- 01- 900 Fines Collection

Appendix III: Comments From the Commodity Futures Trading Commission

Page 34 GAO- 01- 900 Fines Collection

Page 35 GAO- 01- 900 Fines Collection

Appendix IV: Comments From the Department of the Treasury?s Financial
Management Service

Page 36 GAO- 01- 900 Fines Collection

Page 37 GAO- 01- 900 Fines Collection

Richard J. Hillman (202) 512- 8678 Cody J. Goebel (202) 512- 7329

In addition to those named above, Darleen Wall, Joan Conway, Sindy Udell,
Emily Chalmers, and Steven Haughton made key contributions to this report.
Appendix V: GAO Contacts and Staff

Acknowledgments GAO Contacts Acknowledgments

(250000)

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