SEC and CFTC Fines Follow-Up: Collection Programs Are Improving, 
but Further Steps Are Warranted (15-JUL-03, GAO-03-795).	 
                                                                 
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. The requesters	 
asked GAO to evaluate the actions the Securities and Exchange	 
Commission (SEC) and Commodity Futures Trading Commission (CFTC) 
have taken to address earlier recommendations for improving their
collection programs. The committees also asked GAO to update the 
fines collection rates from previous reports.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-795 					        
    ACCNO:   A07542						        
  TITLE:     SEC and CFTC Fines Follow-Up: Collection Programs Are    
Improving, but Further Steps Are Warranted			 
     DATE:   07/15/2003 
  SUBJECT:   Collection procedures				 
	     Electronic government				 
	     Federal legislation				 
	     Fines (penalties)					 
	     Internal controls					 
	     Law enforcement					 
	     Program evaluation 				 
	     Program management 				 
	     Sanctions						 
	     Strategic planning 				 
	     SEC Disgorgement Payment Tracking System		 
	     Treasury Offset Program				 

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GAO-03-795

                                       A

Report to Congressional Requesters

July 2003 SEC AND CFTC FINES FOLLOW- UP Collection Programs Are Improving,
but Further Steps Are Warranted

GAO- 03- 795

Contents Letter 1

Results in Brief 3 Background 6 SEC and CFTC Have Taken Steps to Improve
Their Collection

Programs, but SEC Has Not Ensured That All Eligible Cases Are Referred to
FMS and TOP 8 SEC and CFTC Have Taken Steps to Improve Their Oversight of
SROs* Sanctioning Practices, but Some Concerns Remain 14

We Calculated Collection Rates in Two Different Ways to Provide a More
Complete Picture of Collection Efforts 19 Conclusions 27 Recommendations
28 Agency Comments and Our Evaluation 28

Appendixes

Appendix I: Scope and Methodology 30

Appendix II: Comments from the Securities and Exchange Commission 36

Appendix III: Securities Regulators* Collection Rates for Open and Closed
Cases by Calendar Year 39

Appendix IV: Futures Regulators* Collection Rates for Open and Closed
Cases by Calendar Year 42

Appendix V: GAO Contacts and Staff Acknowledgments 45 GAO Contacts 45
Acknowledgments 45

Tables Table 1: Collection Rates for Fines Levied on Closed Cases for
1997* August 2002 and 1992* 96 20

Table 2: Collection Rates for Fines Levied on Open and Closed Cases and
Closed Cases for 1997* August 2002 21 Table 3: SEC*s Collection Rates 39
Table 4: The American Stock Exchange*s Collection Rates 39 Table 5: The
Chicago Board Options Exchange*s Collection Rates 40

Table 6: The Chicago Stock Exchange*s Collection Rates 40 Table 7: NASD*s
Collection Rates 41 Table 8: NYSE*s Collection Rates 41 Table 9: CFTC*s
Collection Rates 42 Table 10: The Chicago Board of Trade*s Collection
Rates 42

Table 11: The Chicago Mercantile Exchange*s Collection Rates 43 Table 12:
NFA*s Collection Rates 43 Table 13: The New York Mercantile Exchange*s
Collection Rates 44

Figures Figure 1: SEC*s Actual Collection Rates for Open and Closed Cases,
1997* August 2002, and Adjusted Collection Rates for

Selected Years 22 Figure 2: CFTC*s Actual Collection Rates for Open and
Closed

Cases, 1997* August 2002, and Adjusted Collection Rates for Selected Years
24 Figure 3: NASD*s Collection Rates for Open and Closed Cases,

1997* 2002 26

Abbreviations

CFTC Commodity Futures Trading Commission DPTS Disgorgement and Penalties
Tracking System FBI Federal Bureau of Investigation FMS Financial
Management Service NFA National Futures Association NYSE New York Stock
Exchange SEC Securities and Exchange Commission

SRO self- regulatory organization TOP Treasury Offset Program

This is a work of the U. S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
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separately.

Letter

July 15, 2003 The Honorable John D. Dingell Ranking Minority Member
Committee on Energy and Commerce House of Representatives The Honorable
Barney Frank Ranking Minority Member Committee on Financial Services House
of Representatives The Honorable Paul E. Kanjorski Ranking Minority Member
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises Committee on Financial Services House of Representatives

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. While previous GAO reports 1 found that
securities and futures regulators collected most of the fines imposed, the
reports also identified weaknesses in the collection programs of the
Securities and

Exchange Commission (SEC) and the Commodity Futures Trading Commission
(CFTC). These reports made several recommendations to help SEC and CFTC
improve their collection programs and their oversight of the sanctioning
practices of self- regulatory organizations (SRO). 2

1 U. S. General Accounting Office, Money Penalties: Securities and Futures
Regulators Collect Many Fines but Need to Better Use Industrywide Data,
GAO/ GGD- 99- 8 (Washington, D. C.: Nov. 2, 1998) and SEC and CFTC: Most
Fines Collected, but Improvements Needed in the Use of Treasury*s
Collection Service, GAO- 01- 900 (Washington, D. C.: July 16, 2001).

2 SROs have an extensive role in regulating the U. S. securities and
futures markets, including ensuring that members comply with federal
securities and futures laws and SRO rules. SROs include the national
securities and futures exchanges, registered securities and futures
associations, registered clearing agencies, and the Municipal Securities
Rulemaking Board.

This report responds to your July 30, 2001, request that we evaluate the
actions that SEC and CFTC have taken in response to the recommendations
made in our earlier fines collection reports. Also, as agreed in a
September 5, 2002, meeting with your staff, we are updating the collection
rates from our earlier reports. Our objectives were to (1) evaluate SEC*s
and CFTC*s actions to improve their collection programs, (2) assess these
agencies* efforts to enhance their oversight of the SROs* sanctioning
practices, and (3) calculate the fines collection rates for SEC,

CFTC, and nine securities and futures SROs 3 for 1997* 2002. 4 To evaluate
SEC*s and CFTC*s actions to improve their collection programs, we reviewed
relevant debt collection regulations, guidelines, procedures, controls,
and laws; analyzed data related to their debt collection actions; and
interviewed officials of these agencies and of the Financial Management
Service (FMS) of the U. S. Department of Treasury. To assess SEC*s and
CFTC*s efforts to enhance their oversight of the SROs* sanctioning
practices, we interviewed agency officials and reviewed related data. To
calculate the fines collection rates for 1997* 2002 for all the SROs
except NASD, we used data provided by SEC, CFTC, and the regulators for
fines levied from January 1997 through August 2002. Because of the way its
financial system was designed, NASD*s calculations are based on fines
invoiced through December 2002. Limitations on SEC*s data reliability
affect the accuracy of calculations related to its collections activities
as well as its overall fines collection rates. Appendix I contains a full
description of our scope and methodology.

3 The nine SROs include the American Stock Exchange, Chicago Board Options
Exchange, Chicago Board of Trade, Chicago Mercantile Exchange, Chicago
Stock Exchange, NASD, National Futures Association, New York Mercantile
Exchange, and New York Stock Exchange.

4 All years in this report are calendar years.

Results in Brief SEC and CFTC have continued to improve their collection
programs since we issued our 2001 fines report, but SEC needs to make
additional

improvements to its program. First, SEC amended its debt collection
regulations to allow cases to be referred to FMS*s Treasury Offset Program
(TOP). 5 SEC also implemented procedures, collections guidelines, and a
collections database* the latter to aid in tracking and referring to FMS,
including TOP, those cases with fines and disgorgements 6 levied after the
guidelines went into effect. It was too soon to assess the effectiveness
of SEC*s strategy related to these post- guidelines cases, because most of
them were not yet eligible for referral. In contrast, SEC did not have a
formal

strategy* one that prioritized cases based on their collection potential
and established time frames for their referral* for cases with fines and
disgorgements levied before the guidelines went into effect. 7 Further
impeding collection efforts on these pre- guidelines cases, SEC*s original
system for tracking all cases with money judgments, the Disgorgement and
Penalties Tracking System (DPTS), was unreliable. Because DPTS was

unreliable, SEC could not determine which pre- guidelines cases were not
being referred to FMS and TOP or the amounts associated with them*
potentially well over a billion dollars. SEC has drafted a two- phase
action plan for replacing DPTS by the end of fiscal year 2003 but has not
established a time frame for implementing the computer system for the
second phase. In addition, SEC has developed procedures for making timely
responses to offers presented by FMS to settle a violator*s debt, and CFTC
has implemented procedures designed to ensure the timely referral of
delinquent cases to FMS. However, only four cases had been processed under
each agency*s procedures as of April 2003, an insufficient number to
assess their effectiveness.

SEC and CFTC have also taken some actions to improve their oversight of
the SROs* sanctioning practices, but SEC has not yet used the SROs* data
to analyze these practices. In response to our 1998 recommendation, SEC
has been inputting the SROs* data into its database for use in analyzing

5 Under TOP, FMS identifies federal payments, such as tax refunds, that
are owed to individuals and applies the payments to their outstanding
debt. All cases referred to FMS for collection are also eligible for
referral to and servicing under TOP.

6 Disgorgement is a type of sanction that requires violators to give up
profits obtained as a result of violating the law. 7 According to SEC
officials, although SEC currently has no formal strategy regarding
preguidelines cases, all eligible debts will ultimately be referred to FMS
and TOP.

violations and disciplinary sanctions. These analyses should help SEC
identify any disparities among SROs and find ways to improve their
disciplinary programs. However, technological problems have hampered SEC*s
ability to complete the analyses. SEC officials told us that the agency
expects to initiate its first analysis during the summer of 2003. They
also said that the agency plans to develop a new disciplinary database to
collect and analyze data on sanctions in a timelier manner but has not
established

a date for implementing it. Also, consistent with our 2001 recommendation,
SEC and CFTC have been monitoring readmission applications but have not
yet received any from barred individuals. We found, however, that SEC,
CFTC, the National Futures Association (NFA), and NASD have controls
designed to ensure that inappropriate readmissions of barred individuals
do not occur. Further, while examining the application review process, we
found weaknesses in controls over fingerprinting that could result in
inappropriate admissions to the securities and futures industries. But we

did not determine the extent to which these weaknesses resulted in
inappropriate admissions.

We calculated the fines collection rates in two ways in order to provide a
more complete picture of the regulators* collection activities. The
collection rates for closed cases (those for which all possible collection

actions had been completed) for SEC, 8 CFTC, and the SROs from January
1997 to August 2002 showed that the regulators had collected between 75
and 100 percent of the fines imposed and that they had either improved

their performance over the 1992- 96 period or maintained a 100- percent
performance rate. 9 Broadening the analysis to include open cases (those
for which collection actions were ongoing) had the greatest impact on
SEC*s and CFTC*s collection rates. Including open cases, they collected 40

and 45 percent, respectively, of the total dollar amount of fines levied.
However, the differences in the rates were largely explained by a few
large uncollected fines. According to regulators, large fines are more
difficult to collect than small ones, and a few large uncollected fines
can significantly affect an agency*s collection rate. The rates for the
SROs changed much less when adding open cases because the SROs generally
had fewer and smaller uncollected fines. According to SRO officials, SROs
that were exchanges had higher collection rates in part because they could
sell a member*s *seat,* or membership, to pay fines, giving members an
incentive to pay their fines quickly. As discussed in a previous report,
10 these results

underscore the limitations of using the collection rate alone to measure
the effectiveness of collection efforts. That is, the rate can be
significantly influenced by factors that are beyond regulators* control.
Nonetheless, examining the rates and the factors influencing them can be a
starting point for obtaining an understanding of regulators* performance.

This report makes three recommendations to SEC for improving its tracking
and referral of delinquent cases to FMS and TOP and for completing its
analysis of SROs* disciplinary sanctions. It also makes a recommendation
to SEC and CFTC for improving controls over the fingerprinting of industry
applicants. We received comments on a draft of this report from SEC and
CFTC. Both agencies generally agreed with the

8 Although DPTS was unreliable, we used the system because it was the only
available source of data on SEC*s collection efforts. 9 The closed case
collection rate for 1992- 96 appeared in our 1998 fines report (GAO/ GGD-
99- 8).

10 U. S. General Accounting Office, SEC Enforcement: More Actions Needed
to Improve Oversight of Disgorgement Collections, GAO- 02- 771
(Washington, D. C.: July 12, 2002).

facts we presented and agreed to implement the recommendations we made.
SEC*s written comments are reprinted in appendix II. Background The
regulatory structure of the U. S. securities markets was established by

the Securities Exchange Act of 1934, which created SEC as an independent
agency to oversee the U. S. securities markets and their participants.
Similarly, in 1974 the Commodity Exchange Act established CFTC as an
independent agency to oversee the U. S. commodity futures and options
markets. Both agencies have five- member commissions headed by
chairpersons who are appointed by the President of the United States for
5- year terms. Among other things, the commissioners approve new SEC

and SRO rules and amendments to existing rules. They also authorize
enforcement actions. SEC and CFTC are headquartered in Washington, D. C.
SEC has a combined total of 11 regional and district offices; CFTC has 5
regional offices.

Within SEC and CFTC, the divisions of enforcement are responsible for
investigating possible violations of the securities and futures laws,
respectively. With their commissions* approval, they litigate or settle
actions against alleged violators in federal civil courts and in
administrative actions. Typically, enforcement staff investigate alleged
violations of law, prepare a memorandum for the commissioners that
describes alleged

violations, and, if appropriate, make recommendations for further action.
When the commissions decide that a case warrants further action, they can
authorize filing a civil suit against the alleged violator in federal
district court or instituting a proceeding before an administrative law
judge. If either the court or the administrative law judge finds that a
defendant has violated securities or futures laws, it can issue a judgment
ordering sanctions such as fines and disgorgements and, in the case of
futures violations, restitution; it can also bar or suspend violators from
the securities and futures industries.

The collection process for delinquent debt begins when all or part of a
fine or disgorgement becomes delinquent because the violator has failed to
pay some or all of the amount due by the date ordered by the court or
administrative law judge. If the court or administrative law judge has not
specified a payment date and no stay has been entered, SEC considers the
debt delinquent 10 days after the court enters the judgment. CFTC
officials told us that absent an appeal, they consider the debt delinquent
15 or 60 days after the administrative law judge or court entered the
judgment in administrative and civil cases, respectively. SEC and CFTC
collect

delinquent monetary judgments primarily through post- judgment litigation,
negotiating payments with defendants, and making referrals to the
Department of Treasury or the Department of Justice. In accordance with
the Debt Collection Improvement Act of 1996, SEC and CFTC have each
entered into an agreement with the Department of Treasury to improve
collections. Under this act, federal agencies are required to submit all
nontax debts that are 180 days delinquent to

Treasury*s FMS. 11 The act also requires that FMS either take appropriate
steps to collect the debt or terminate collection actions. In addition to
using traditional methods to collect these debts, such as sending demand
letters and hiring private collection agencies, FMS can use TOP. Under
TOP, FMS identifies federal payments, such as tax refunds, that are owed
to individuals and applies the payments to their outstanding debt. All
cases referred to FMS for collection are also eligible for referral to and
servicing under TOP. FMS also uses collection agencies to negotiate
compromise offers with individual debtors. A compromise offer is an
agreement between a federal agency and an individual debtor, in which the
federal agency agrees to discharge a debt by accepting less than the full
amount. Once the collection agency negotiates a compromise offer with a
debtor, it

forwards the offer to FMS. In the absence of an agreement between FMS and
the federal agency to approve compromise offers on its behalf, FMS refers
the offer to the federal agency for final approval.

The U. S. securities and futures markets are regulated under their
respective statutes through a combination of self- regulation (subject to
federal oversight) and direct federal regulation. This regulatory scheme
was intended to give SROs responsibility for administering their own
operations, including most of the daily oversight of the securities and
futures markets and their participants. Two of the SROs* NASD and NFA* are
associations that regulate registered securities and futures firms and
oversee securities and futures professionals, respectively. The remaining
SROs include national exchanges that operate the markets where securities
and futures are traded. These SROs are primarily responsible for
establishing the standards under which their members

conduct business; monitoring the way that business is conducted; and
bringing disciplinary actions against their members for violating
applicable federal statutes, their own rules, and the rules promulgated by
their federal

regulator. SROs can impose fines and other sanctions against members that
11 31 U. S. C. S: 3711 (g)( 1).

violate securities or futures laws or SRO rules, as applicable, through
their enforcement and disciplinary processes. Some SROs* disciplinary
proceedings are decided by a hearing panel, which examines the evidence
and decides on the appropriate sanction. SROs* actions are usually
initiated by a customer complaint, a compliance examination, market
surveillance, regulatory filings, or a press report.

SEC and CFTC Have SEC and CFTC have taken actions to improve their
collection programs, Taken Steps to

addressing the three recommendations in our 2001 fines report. However, it
was too early to assess the effectiveness of their actions. After we made
Improve Their

our first recommendation, SEC took various steps, among them, Collection
Programs,

implementing collections guidelines that were intended to ensure that but
SEC Has Not

eligible delinquent cases are referred to FMS, including TOP. But SEC*s
actions have not ensured that all eligible cases are referred. To address
our

Ensured That All second recommendation, SEC developed procedures for
responding to

Eligible Cases Are compromise offers submitted by FMS within 30 days. To
address our third

recommendation, CFTC implemented procedures for ensuring the timely
Referred to FMS and

referral of delinquent cases to FMS for collection. TOP

SEC Has Implemented SEC implemented regulations, related procedures and
guidelines, and a

Regulations, Procedures, collections database intended to ensure that
eligible delinquent cases are

Guidelines, and a referred to FMS, including TOP, as required by the Debt
Collection

Collections Database, but Improvement Act of 1996. However, SEC has
focused on referring postguidelines

cases, and it was too early to assess the effectiveness of SEC*s Its
Actions Have Not

strategy as it related to these cases. In contrast, SEC did not have a
formal Ensured the Referral of All

strategy for referring pre- guidelines cases and, further impeding its
Eligible Cases to FMS and

collection efforts, it did not have a reliable agencywide system for
tracking TOP

monies owed in these cases. Recognizing that its system was unreliable,
SEC has drafted a two- phase action plan under which it will implement a
centralized agencywide tracking system for all delinquent debt. However,
it has not established a time frame for fully implementing the computer
system for the second phase of the plan.

SEC*s Strategy Has Focused on We recommended in our 2001 report that SEC
take steps to ensure that

Referring Post- Guidelines Cases, regulations allowing SEC*s delinquent
fines to be submitted to TOP be

but It Is Too Early to Assess the adopted so that SEC would benefit from
the associated collection

Effectiveness of This Strategy opportunities. At the time of our review,
SEC officials had told us that they

had rewritten their rules for using TOP but that they could not estimate
when the rules would be approved by the commission or implemented.

After we made our recommendation, SEC amended its debt collection
regulations. 12 In April 2002, SEC implemented related procedures to allow
cases to be forwarded to TOP. Consistent with the Debt Collection
Improvement Act of 1996, the procedures required that cases be referred to

FMS after they had been delinquent for more than 180 days. SEC
subsequently issued additional guidelines and implemented a collections
database that were intended to ensure that eligible delinquent
postguidelines cases are referred to FMS, including TOP, within 180 days
of becoming delinquent. SEC imposed the more stringent requirement on
itself in recognition of the enhanced probability of collecting monies
ordered on newer cases.

The guidelines provided more detailed instructions for staff on how to
pursue collections, specifying steps for referring eligible delinquent
cases to FMS, including TOP, within 180 days. According to an agency
official, the guidelines went into effect agencywide on September 2, 2002.
SEC also created a collections database for all post- guidelines fines and

disgorgement cases that is maintained by headquarters and each regional or
district office, as applicable. The database tracks actions that staff
have taken to recover debt on delinquent cases, including preparing cases
for referral to FMS, and is used to help ensure that staff are following
the new collections guidelines. SEC officials told us that the agency was
tracking only post- guidelines cases because the database had limited
storage

capacity and could become unstable if too many cases were added. In
addition, the agency has assigned attorneys and administrative staff to
every office to maintain the database and its related collection
activities for delinquent cases, including ensuring that eligible cases
are referred to FMS and TOP in a timely manner. According to an agency
official, these staff received training on using the guidelines in the
fall of 2002.

It was too early to fully assess the effectiveness of SEC*s strategy for
tracking, collecting, and referring post- guidelines cases, because most
of these cases were not yet 180 days delinquent. Based on a judgmental
sample of 66 cases, we identified 4 delinquent fines and disgorgement
cases 12 *Debt Collection* Amendments to Collection Rules and Adoption of
Wage Garnishments

Rules,* Securities and Exchange Commission, Release No. 34- 44965, 66 Fed.
Reg. 54125 (Oct. 26, 2001).

valued at $4 million that were eligible for referral as of March 31, 2003.
We found that SEC had referred two of the four cases within the 180- day
time frame and was preparing the other two for referral. SEC Did Not Have
a Formal

Although SEC had developed controls to better ensure that eligible
postguidelines Strategy for Referring PreGuidelines cases were promptly
referred to FMS and TOP, it had not

Cases developed a formal strategy for referring eligible pre- guidelines
cases. Such

a strategy would include prioritizing cases based on their collection
potential and establishing time frames for making the referrals. Further
impeding its collection efforts, SEC*s original system for tracking monies
owed in pre- guidelines cases* DPTS* was not reliable. As a result, SEC
could not identify all the cases that had not been referred to FMS and
TOP. SEC officials told us that the agency*s April 2002 procedures applied
to the

pre- guidelines cases and that agency attorneys had followed these
procedures in referring some pre- guidelines cases to Treasury. But SEC
did not know the extent to which the procedures were being followed or
whether eligible cases were not being referred. They explained that the
attorneys would know the status of the cases assigned to them but that no
agencywide information was available. They also told us that they expected

all eligible cases to be referred to FMS and TOP eventually but noted that
they had not prioritized the cases for referral or established time frames
for referring them.

Neither we nor SEC could determine with any certainty the extent to which
eligible pre- guidelines cases were not being referred to FMS and TOP due
to the unreliability of DPTS. Using DPTS, the only information available,
we identified about 900 pre- guidelines cases valued at about $2.8 billion
that were 180 days past due and that might be eligible for referral. As of
January 31, 2003, almost 54 percent of these cases were over 3 years old
based on their judgment date, which, in the absence of better data, we
used as a rough proxy for the delinquency date. SEC officials emphasized
that these numbers do not accurately reflect the number of pre- guidelines
cases eligible for referral to FMS and TOP. They said that some of the
cases were ineligible for referral because they were on appeal, in post-
judgment litigation, or had a receiver appointed to marshal and distribute
assets. In addition, many cases might already have been referred for
collection. SEC officials also pointed out that our calculations of the
age of cases were inaccurate because we relied on the judgment date rather
than the delinquency date, which is not tracked in DPTS. We recognize that
many factors affect the accuracy of DPTS, including some that might not be
mentioned here. However, we are reporting these numbers as the best

information available.

SEC Had an Action Plan for Both GAO and SEC have recognized DPTS*s lack of
reliability. Our 2002

Replacing DPTS but Had Not disgorgement report and a January 2003 report
commissioned by the SEC

Established a Time Frame for Inspector General found that DPTS was not
complete and accurate and

Full Implementation of the Plan could not be relied upon for financial
accounting and reporting purposes.

Recognizing that the agency did not have a system that provided an
accurate assessment of levied amounts and payments (among other things),
SEC developed a draft action plan for implementing a new system to replace
DPTS. The April 2003 draft plan calls for implementing a comprehensive
centralized system for tracking, documenting, and reporting on fines and
disgorgements ordered, paid, and disbursed in SEC enforcement actions. The
agency had been taking steps to address the milestones in the plan. If the
plan is effectively implemented, the agency should have a tool for
accurately identifying uncollected pre- guidelines

cases for referral to FMS and TOP for collection. SEC*s action plan has
been divided into two phases. In the first phase, SEC is tentatively
scheduled to replace DPTS by the end of fiscal year 2003. SEC officials
described the replacement system as a comprehensive case tracking, record-
keeping, and reporting system for fines and disgorgements

ordered, paid, and distributed. They said that the system will be
integrated with a database maintained by the Division of Enforcement. The
replacement system is intended to, among other things, maintain the data
on debt needed for general reporting and management purposes. According to
SEC officials, one benefit of the replacement system will be to assist the
agency in managing its delinquent cases. However, SEC will continue to
rely on its new collections database, which tracks collection efforts on
post- guidelines cases, to ensure the timely referral of these cases

to FMS and TOP until phase two of the action plan is implemented. In phase
two, SEC plans a comprehensive upgrade to its case tracking system, which
will be integrated with several other databases, including the new
collections database. SEC expects to begin the requirements analysis for
the phase two computer system in fiscal year 2004 but has not established
a milestone for completing this analysis. After the requirements analysis
is complete, SEC plans to establish an implementation date for the system.

SEC Has Implemented We recommended in our July 2001 report that SEC
continue to work with

Procedures for Responding FMS to ensure that compromise offers presented
by FMS are approved in a

to Compromise Offers in a timely manner. Our recommendation resulted from
a finding that SEC did

Timely Manner not always respond to compromise offers promptly and that as
a result

some debts had never been collected. For example, we reported that FMS
waited from between 42 and 327 days for SEC*s decisions on three

compromise offers. But by the time SEC made its decisions, the debtors no
longer had the money to pay the amounts specified in the compromise
offers. To address this concern, in April 2001 FMS proposed securing
delegation authority from SEC* that is, permission to approve compromise
offers that SEC did not respond to within 30 days.

In response to our recommendation, SEC took several steps to ensure that
compromise offers are approved in a timely manner. First, in July 2001 SEC
implemented procedures specifying the actions required to address a
compromise offer, including a schedule to ensure that a decision is made
within 30 days. For example, within 5 days of receiving an offer, SEC
staff

are to have made a final decision on whether to recommend the offer to the
commission for approval. SEC also implemented controls to monitor the
status of offers. When it receives a compromise offer from FMS, SEC enters
the offer into a system that tracks information such as the date the offer
was made, the name of the attorney reviewing the offer, the date the offer
was referred to the commission for a final decision, and the date of the
final decision. The Division of Enforcement*s chief counsel monitors the
status of offers based on weekly reports generated from this system to
ensure that follow- up action is taken to address any problems. Finally,
SEC has designated two staff to respond to FMS inquiries about the status
of compromise offers.

It is still too early to determine the effectiveness of SEC*s actions. As
of April 22, 2003, SEC had received four compromise offers from FMS under
its new procedures. SEC and FMS data showed that SEC had responded to
three of the offers within the 30- day guideline and to one offer within
40

days. The late offer represented a debt of $1.6 million, and the
settlement offer was for $50,000. SEC staff told us that the agency
ultimately rejected the offer, at least in part because of the disparity
between the amount offered and the amount owed. SEC officials attributed
the delay in responding to this offer to scheduling conflicts caused by
the holiday season. The officials told us that the agency was in touch
with FMS before the end of 30 days to indicate, on an informal basis, that
the reply to the compromise offer would be delayed and that the offer
would be rejected. FMS officials told us that they did not view SEC*s late
response to this offer

as a problem* that is, the delay did not represent weaknesses in agency
policies, procedures, or controls. They said that SEC had shown marked
improvement in responding to compromise offers and that as a result FMS
was no longer seeking delegation authority from SEC.

CFTC Implemented We recommended in our 2001 report that CFTC take steps to
ensure that

Procedures for Ensuring the delinquent fines were promptly referred to
FMS, including creating formal

Timely Referral of procedures that addressed both sending debts to FMS
within the required Delinquent Debt to FMS

time frames and requiring all of the necessary information from the
Division of Enforcement on these debts. Our recommendation flowed from a
finding in an April 2001 report by CFTC*s Inspector General showing that
CFTC staff were not referring delinquent debts to FMS in a timely manner,
potentially limiting FMS*s ability to collect the monies owed. The report

also noted that CFTC*s collection procedures had not been updated to
address referrals to FMS and, among other examples, identified a fine in
the amount of $7 million that had not been referred to FMS for more than 2
years because of inadequate communication between CFTC*s Division of
Enforcement and its Division of Trading and Markets. As we recommended,
CFTC has improved its procedures for referring its

debt to FMS in a timely manner and has taken steps to ensure that it has
all the necessary enforcement information before making the referral. CFTC
updated its collection procedures and implemented them in July 2002. They
now include specific requirements for referring debt to FMS within 180

days of the date that the debt became delinquent. CFTC also implemented
controls to ensure that it has identified all delinquent debt eligible for
referral. For example, CFTC management reviews quarterly reports on the
status of cases to ensure that all debts are referred to FMS within 180
days. According to CFTC officials, the agency*s shift of all debt
collection responsibility from its Division of Trading and Markets to its
Division of

Enforcement streamlined its debt referral process. Although it is too
early to fully assess the effectiveness of CFTC*s actions, our review of
CFTC*s data on uncollected cases indicated that the agency had been
referring all eligible debt to FMS within 180 days. As of April 24, 2003,
CFTC had had four delinquent cases dating from the time its procedures
went into effect. Using FMS*s data, we confirmed that the cases had been
referred to FMS within 123 days. Also, a review of CFTC*s data of all
delinquent cases levied before the procedures went into effect showed that
CFTC had referred all eligible cases to FMS for collection. FMS officials
told us that CFTC had been making debt referrals with complete information
on all its cases.

SEC and CFTC Have SEC and CFTC have taken steps to address our two
recommendations for

Taken Steps to improving their oversight of SROs* sanctioning practices.
But SEC has not

fully implemented our 1998 recommendation that it analyze industrywide
Improve Their

data on SRO- imposed sanctions to examine disparities and help improve
Oversight of SROs*

disciplinary programs. The agency has experienced technological problems
Sanctioning Practices,

that have hampered its ability to complete these analyses. In addition*
and consistent with our 2001 recommendation* SEC and CFTC have been but
Some Concerns monitoring readmission applications to the securities and
futures

Remain industries. However, at the time of our review neither had received
any

applications since changing their fine imposition practices. Also, SEC,
CFTC, NASD, and NFA have controls designed to ensure that inappropriate
readmissions do not occur. Further, while examining the application review
process, we found weaknesses in controls over fingerprinting that could
result in inappropriate admissions to the securities and futures
industries.

Technological Problems In our 1998 report, we recommended that SEC analyze
industrywide

Have Hampered SEC*s information on disciplinary program sanctions,
particularly fines, to

Ability to Analyze identify possible disparities among the SROs and find
ways to improve

Disciplinary Actions Across SROs* disciplinary programs. We concluded that
analyzing industrywide

data could provide SEC with an additional tool to identify disparities
SROs

among SROs that might require further review. We reported in 2001 that SEC
had developed a database to collect information on SROs* disciplinary
actions.

As of June 30, 2003, according to agency officials, SEC was still
inputting information into its database but had not yet completed any
analyses because technological difficulties had hampered its ability to
collect sufficient data to perform the analyses. First, the database had a
limited

number of fields and therefore could not capture multiple disciplinary
violations or multiple parties in a single case. In October 2002, SEC
officials told us that they had addressed this limitation by enhancing the
database to incorporate the required fields and were continuing to add
disciplinary

information to the database. However, in November 2002, the enhanced
database failed because it could not support multiple users. SEC repaired
the database, and agency officials told us that they expected to complete
their first data analyses in the summer of 2003. The analyses are expected
to show whether SROs impose similar fines and sanctions for similar
violations. An SEC official said that the agency expects these analyses to
supplement the information obtained during agency inspections of the SROs*
disciplinary programs.

SEC officials told us that the agency is planning to use funds from its
fiscal year 2003 budget increase to develop a new disciplinary database
that will replace the current one. According to SEC officials, this new
disciplinary database is expected to allow SROs to submit data on- line
rather than having to send it to SEC to be entered by staff. This
streamlined process is expected to reduce data entry errors. An SEC
official told us that while planning had begun for the new disciplinary
database, no completion date had been established.

SEC and CFTC Have In our 2001 report, we recommended that SEC and CFTC
periodically

Monitored Readmission assess the pattern of readmission applications to
ensure that the changes in Applications and Have

NASD*s and NFA*s fine imposition practices do not result in any unintended
Controls Designed to

consequences, such as inappropriate readmissions. NASD and NFA had stopped
routinely assessing fines when barring individuals in October 1999
Preclude Inappropriate

and December 1998, respectively, eliminating the related requirement that
Readmissions

the fines be paid as a condition of reentry to the securities and futures
industries. These fines had rarely been collected, because few violators
ever sought reentry. We were concerned that because barred individuals
were no longer required to pay a fine before reentry, they might be more
willing to seek readmission.

Consistent with our recommendation, SEC and CFTC have monitored
readmission applications. They found, and we confirmed, that no
individuals who were barred after the changes in NASD*s and NFA*s fine

imposition practices had applied for reentry. Also, NASD*s and NFA*s
application review processes included controls designed to ensure that
inappropriate applications for reentry are not approved. Officials of both
SROs told us that as part of their background checks they did a database
search against the names of past and current registrants in both
industries to determine whether the applicants had a disciplinary history.
In addition, both SROs submitted applicants* fingerprints to the Federal
Bureau of Investigation (FBI) for a criminal background check. NASD and
NFA required all individuals who had been suspended, expelled, or barred
to be* at a minimum* sponsored by a registered firm before being
considered for readmission. According to a CFTC official, finding a
sponsor is difficult, as most firms would not hire an individual with a
history of serious disciplinary problems, in part due to increased
supervisory requirements and the risk of harming their reputations. SEC
and CFTC were reviewing the applications of all individuals who had been
statutorily disqualified from registration, including any barred

individuals, and had the authority to reverse an admission decision made
by NASD or NFA, respectively. 13 SEC and CFTC officials told us that they
would consider various factors when reviewing a readmission application,
including the facts and circumstances of the case, the appropriateness of

the proposed supervision, and the prospective employer*s ability to
provide the proposed supervision. Officials from both agencies told us
that if they were to begin receiving a large number of applications from
barred applicants, they would reexamine the SROs* fine imposition
practices.

Weaknesses in While examining the application review process, we found
that neither the

Fingerprinting Controls related statutes, SEC, nor CFTC required the SROs
to ensure that the Could Result in fingerprints sent to the FBI for use in
criminal history checks belonged to

the applicants who submitted them. Further, in the absence of such a
Inappropriate Admissions to

requirement, NASD, 14 the New York Stock Exchange (NYSE), 15 and NFA 16
the Securities and Futures lacked related controls over fingerprinting,
potentially allowing Industries

inappropriate persons to enter the securities and futures industries. The
securities 17 and futures laws 18 require that applicants to these
industries have their fingerprints taken and then sent for review to the
FBI as part of a criminal background check. The goal of the criminal
background check is to ensure that inappropriate individuals are not
granted admission to the

securities or futures industries. The statutes also require SRO member 13
Individuals who have been statutorily disqualified have been expelled or
suspended from membership or participation in an SRO or barred and
suspended from associating with a member of any SRO.

14 Although several securities SROs have formal agreements with the FBI
under which they may submit fingerprints for a criminal history check,
according to an SEC official, the firms typically submit fingerprints to
NASD because all industry registrants that do business with the public*
the majority of registrants* must also be NASD members.

15 According to an SEC official, all the securities SROs have similar
fingerprinting procedures for accepting and processing fingerprints.
Because NYSE is the largest securities SRO that operates a market, and
because we wanted to determine how another SRO*s procedures might differ
from those of NASD and NFA, we included NYSE in our review. According to
an SEC official, NASD sends about 300,000 fingerprints to the FBI each
year. A NYSE official told us that NYSE sends approximately 40,000.

16 NFA is responsible for submitting the fingerprints of all futures
industry applicants to the FBI. According to an NFA official, for the 12-
month period ending June 30, 2003, NFA sent approximately 11,000
fingerprints to the FBI.

17 15 U. S. C. S: 78g (f)( 2). 18 7 U. S. C. S: 6n and 17 C. F. R. S: 3.10
(1997).

firms to be responsible for assuring that their personnel are
fingerprinted. SEC and CFTC rules provide that applicants can satisfy this
requirement by submitting fingerprints to the SROs who then send them to
the FBI for processing.

However, neither the statutes, SEC, nor CFTC require SROs to ensure that
the fingerprints sent to the FBI for use in criminal history checks belong
to the applicants who submitted them. In the absence of such a
requirement, NASD, NYSE, and NFA have not imposed requirements on member
firms to help ensure that the identity of the person being fingerprinted
matches the fingerprints being submitted for FBI review. The SROs told us
that, consistent with the law, they required their members to be
fingerprinted and that these fingerprints were submitted to the FBI for
assessment. NYSE officials emphasized that their members were in full
compliance with the law and related regulations, which do not require
specific controls. In the absence of specific requirements, firms have
taken a variety of

approaches to fingerprinting applicants. For example, while SEC and some
SROs told us that most firms used their own personnel or police officers
to obtain fingerprints, they said that a small number of firms may allow
applicants to fingerprint themselves, a practice that provides an
opportunity for individuals to perpetrate fraud by submitting someone
else*s fingerprints instead of their own. According to SEC and CFTC
officials, their agencies have trained staff in their headquarters and
some regional offices that take fingerprints of their employees using
approved

fingerprinting kits. An NFA official also stated that NFA headquarters has
trained staff that take fingerprints of industry applicants, verifying
their identities as part of the process. The FBI also informed us that it
suggests using law enforcement or other trained personnel to take
fingerprints. SEC and NYSE also said that many reputable businesses
provide fingerprinting services and that SRO member firms could contract
with these businesses.

In a 1996 CFTC review of NFA*s registration fitness program, CFTC
recommended that NFA conduct a review to determine the feasibility of
adopting controls to ensure that the fingerprints submitted for criminal
history checks belonged to the applicant. NFA found that a number of

obstacles stood in the way of establishing an effective program to verify
fingerprints. According to an NFA official, the agency examined the
procedures of the Bureau of Citizenship and Immigration Services of the
Department of Homeland Security (formerly the Immigration and
Naturalization Service) in responding to CFTC*s recommendation. On the
basis of this examination, NFA concluded that it would not be
costeffective to replicate the bureau*s procedures. For example, unlike
NFA, the bureau has fingerprinting sites throughout the country with
trained employees to take fingerprints. 19 As part of its review, NFA
considered

requiring an attestation form, which would include the fingerprinter*s
name and address and the document used to verify the applicant*s identity.
Ultimately, however, NFA concluded that such a form could be subject to
forgery and would not provide assurance that the fingerprints belonged to
the applicant. CFTC accepted NFA*s conclusions.

NYSE and NFA officials described other obstacles to establishing controls
over fingerprinting. They explained that space limitations on the FBI
fingerprint card made it difficult to identify the person taking the
fingerprints. Further, they said that the card provided space for the
fingerprinter*s signature, which is often illegible, but not for the
fingerprinter*s printed name or the name of another contact who could
verify information related to the fingerprints. NYSE officials also said
that the FBI could adjust its fingerprint card so that it required more
complete contact information for the person taking the fingerprints. An
NFA official also told us that because some SROs process registration
applications both nationally and internationally, these SROs would not be
able to establish enforceable rules regarding who should take
fingerprints.

We did not determine the extent to which individuals with a criminal
history could submit someone else*s fingerprints and thus enter the
securities or futures industries undetected. However, SEC and CFTC
officials said that the SROs* fingerprinting processes are vulnerable to
such

19 As of February 19, 2003, the bureau had 76 freestanding fingerprinting
sites, 54 sites located in its offices, and 46 locations served by mobile
routes. It had also designated 45 law enforcement agencies to take
fingerprints. NFA officials told us that futures industry applicants were
too widely dispersed to travel to the bureau*s sites to be fingerprinted,
precluding a contractual arrangement with the bureau.

a practice because of the lack of controls for preventing applicants from
using someone else*s fingerprints as their own. SRO officials said that
existing systems were reasonably designed to prevent fraud but were not
foolproof, adding that the potential cost of imposing any unduly
restrictive requirements was a concern. Some SRO officials said that to
the extent they are needed, SEC and CFTC should establish industrywide
standards. NFA officials said that since weaknesses in fingerprinting
procedures apply equally to the securities and futures industries, SEC and
CFTC should establish comparable requirements to ensure that one industry
is not at a disadvantage to the other. NYSE officials said that SEC
rulemaking would be the most appropriate method for changes to
fingerprinting procedures in the securities industry. We Calculated

To provide a more complete picture of efforts by securities and futures
Collection Rates in

regulators to collect fines, we calculated the collection rates in two
different ways. The collection rates for closed cases (cases with a final
Two Different Ways to

judgment order for which all collection actions were completed) for SEC,
20 Provide a More CFTC, and the SROs from January 1997 to August 2002
showed that the

Complete Picture of regulators collected most of the fines imposed.
Broadening the analysis to

include open cases (cases with a final judgment order that remained open
Collection Efforts while collection efforts continued) had the greatest
impact on SEC*s and CFTC*s collection rates because of a few large
uncollected fines. Our analysis of the collection rates highlights a theme
introduced in an earlier report that the collection rate alone may not be
a valid measure of the effectiveness of collection efforts, because
collections can be influenced by factors that are outside regulators*
control. 21 SEC, CFTC, and the SROs

SEC, CFTC, and the SROs collected between 75 and 100 percent of all the
Collected Almost All Fines

fines imposed in closed cases. For these cases, collection efforts had in
Closed Cases

ceased either because the fines had been collected in full or in part or
were unlikely to be collected and thus had been written off as bad debts.
As shown in table 1, SEC and CFTC collected about 94 and 99 percent,
respectively, of the total dollars levied in cases closed from January
1997 through August 2002* the period immediately following the one covered
in

20 Due to the unreliability of DPTS data, we could not accurately
calculate SEC*s collection rates. 21 GAO- 02- 771.

our 1998 fines report. These amounts represent an 11 and 18 percentage
point increase, respectively, over the rates presented in the 1998 report,
which covered the 1992* 96 period. CFTC wrote off fewer fines as
uncollectible in the more recent period, and almost all of its collected
fines were paid in full.

Table 1: Collection Rates for Fines Levied on Closed Cases for 1997*
August 2002 and 1992* 96 Total fines on closed cases for Total fines on
closed cases for 1997* August 2002

1992* 96 Agencies and securities and futures Percentage Percentage SROs

Amount levied Amount collected collected collected

SEC $186,880,769 $175,446,541 94% 83% CFTC 163,230,782 161,228,782 99 81
American Stock Exchange 2,406,307 2,286,307 95 75 Chicago Board Options
Exchange 3,153,744 3,109,994 99 95 Chicago Board of Trade 3,471,600
3,313,100 95 54 Chicago Mercantile Exchange 3,001,000 2,915,000 97 85
Chicago Stock Exchange 257,500 257,500 100 100 NASD 135,401,570 a
129,027,116 95 24 b NFA 3,449,500 2,569,975 75 27 New York Mercantile
Exchange 1,163,294 1,163,294 100 Not Available NYSE 19,150,667 19,145,667
100 98 Source: GAO analysis of SEC, CFTC, and SRO data, except NASD, which
calculated its own rates. Note: Percentages are rounded to the nearest
whole number.

a NASD data include cases invoiced from 1997 through 2002. b Calculations
may include cases with payment plans, which we were unable to exclude
because of the design of NASD*s system.

The eight securities and futures SROs for which data were available had
the same or higher collection rates on closed cases in the most recent
period compared with the earlier period. The Chicago Board of Trade*s
collection rate showed significant improvement, increasing from 54 to 95
percent of

the total dollars levied. Its collection rate for the 1992* 96 period was
heavily influenced by two large uncollected fines totaling $2.25 million.
Excluding those two cases, the rate for this period would have been about
99 percent rather than 54 percent* much closer to the 95 percent rate for
the more recent period. NASD*s and NFA*s rates also showed significant
improvement, increasing 71 and 48 percentage points, respectively, over

the rates presented in the 1998 report, which covered the 1992* 96 period.
However, NASD*s and NFA*s collection rates improved because, as we have
noted, the regulators stopped routinely assessing fines when barring
individuals from the securities and futures industry. These fines had been
the most difficult to collect, because barred individuals had little
incentive to pay them. Including Open Cases in the

SEC*s and CFTC*s collection rates were affected more than the SROs* rates
Calculations Had the

when we added open cases to our calculations. As shown in table 2, SEC
Greatest Impact on SEC*s

collected about 40 percent of the total dollars levied in all cases, open
and and CFTC*s Collection Rates

closed, from January 1997 through August 2002* 54 percentage points less
than its rate for closed cases. Because of a Few Large

Fines

Table 2: Collection Rates for Fines Levied on Open and Closed Cases and
Closed Cases for 1997* August 2002 Total fines on closed cases for Total
fines on open and closed cases for 1997* August 2002 1997* August 2002

Agencies and securities and futures Percentage Percentage SROs Amount
levied Amount collected collected collected

SEC $480,375,353 $190,103,396 40% 94% CFTC 357,832,773 161,269,894 45 99
American Stock Exchange 2,631,819 2,286,307 87 95 Chicago Board Options
Exchange 3,168,744 3,113,809 98 99 Chicago Board of Trade 3,549,350
3,321,600 94 95 Chicago Mercantile Exchange 3,073,585 2,962,585 96 97
Chicago Stock Exchange 284,500 257,500 91 100 NASD 210,568,908 a
139,607,518 66 95 NFA 4,021,250 2,676,725 67 75 New York Mercantile
Exchange 1,422,294 1,177,294 83 100 NYSE 19,151,667 19,146,667 100 100
Source: GAO analysis of SEC, CFTC, and SRO data, except NASD, which
claculated its own rates.

Note: Percentages are rounded to the nearest whole number. a NASD data
include cases invoiced from 1997 through 2002.

We examined SEC*s collection rates by year and found that the rates varied
greatly over time because of a few large fines. (See appendix III for the
collection rates of the securities regulators for open and closed cases by
calendar year.) For example, in 1999 SEC collected 26 percent of the total
fines levied in that year, but one uncollected fine of $123 million
significantly lowered the rate. Had SEC been able to collect this one
fine, its collection rate for 1999 would have been 89 percent (fig. 1).
Also, in 2002, SEC collected 61 percent of all fines, but approximately
half came from two payments made by two violators. Excluding these
payments, the reported collection rate for 2002 would have been about 30
percent (fig. 1).

Figure 1: SEC*s Actual Collection Rates for Open and Closed Cases, 1997*
August 2002, and Adjusted Collection Rates for Selected Years Percentage
of dollars collected

100 80 60 40 20

0 1997

1998 1999 2000 2001 2002 Actual collection rate Adjusted collection rate
Source: GAO analysis of SEC's data.

To help control for the influence of large dollar amounts on SEC*s
collection rates, we analyzed the number of cases paid in full and found
that SEC had collected the full amount of the fine in the majority of
cases it

levied. For the entire period from 1997 through 2001, 72 percent of the
fines levied had been paid in full. In 2002, 55 percent of the fines
levied were paid

in full. The rate may be lower for 2002 because SEC has had less time*
approximately 4 months* to collect on cases levied through August 2002.

CFTC collected about 45 percent of the total dollar amount of the fines it
levied over the same period. Like SEC*s rate, CFTC*s was heavily
influenced by a few large fines. A closer review of CFTC*s annual rates
from January

1997 through August 2002 showed that the regulator collected between 2 and
90 percent of the total fines levied. (See appendix IV for the collection
rates of the futures regulators for open and closed cases by calendar
year.) But in 2000, when CFTC*s collection rate was just 2 percent, our

calculations included a single uncollected fine of $90 million. Had CFTC
been able to collect this one fine, its collection rate would have been 95
percent (fig. 2). Also, in 1998, when CFTC collected 90 percent of the
total dollar amount levied through August 2002, one payment for $125
million heavily skewed the rate (fig. 2). Without this one payment and
fine, CFTC*s reported collection rate would have been approximately 7
percent (fig. 2).

To help control for the influence that large dollar amounts can have on
the rate, we again analyzed the number of cases paid in full. Over the
entire period of our study, from 1997 through August 2002, CFTC had
collected the full amount in slightly more than 50 percent of the cases it
levied. Although CFTC*s collection rates over the entire period of our
study were

relatively low, the agency was actively pursuing collections on all its
uncollected cases, primarily through the Departments of Treasury and
Justice. CFTC*s Chief of Cooperative Enforcement told us that the agency
would continue to levy large fines when appropriate, even though large
uncollectible amounts could reduce the agency*s collection rate. He said
that levying fines that are commensurate with the related wrongdoing sends
a message to the public that CFTC is serious about enforcing its statutes.

Figure 2: CFTC*s Actual Collection Rates for Open and Closed Cases, 1997*
August 2002, and Adjusted Collection Rates for Selected Years Percentage
of dollars collected

100 80 60 40 20

0 1997

1998 1999 2000 2001 2002 Actual collection rate Adjusted collection rate
Source: GAO analysis of CFTC's data.

The collection rates for the nine securities and futures SROs were
comparable in both sets of calculations (see table 2). When we included
open cases in our calculations, these SROs* collection rates decreased
slightly, with all but two (NASD*s and the New York Mercantile Exchange*s)
declining between 1 and 9 percentage points. One reason for the relatively
small decline was that these SROs generally had fewer and smaller
uncollected fines, suggesting that they had been more successful in
collecting on all cases than SEC and CFTC. According to an NFA official,
one reason that the SROs that operate markets had higher collection rates
was that in their role as exchanges they could sell a member*s *seat,* or
membership, to pay off the fine, giving members an incentive to pay their

fines. Because other regulators do not have this type of leverage, their
rates are typically lower.

NASD*s collection rate for closed cases was 95 percent and its rate for
open and closed cases was 66 percent* a change of 29 percentage points.
NASD*s rate for open and closed cases 22 was affected by low collections
in 1997 and 1998. As a result, the rates did not necessarily reflect the
effects of the changes NASD made to its fine imposition practices in
October 1999. As indicated in figure 3, NASD*s annual collection rates
generally increased from January 1997 through December 2002. In 1997, NASD
collected 26 percent of the total dollars invoiced. In 2002, it collected
96 percent* a 70 percentage point increase over 6 years. As we reported
earlier, one of the

primary reasons for the increases was a change in the way NASD imposes
fines. Specifically, NASD stopped routinely assessing fines when barring
an individual from the industry, reducing the number of fines it invoiced
each year and improving its overall collection rate. Also, in calculating
its rate, NASD excluded about $137 million in fines that would be due and
payable only if the fined individuals were to reenter the securities
industry. The New York Mercantile Exchange*s collection rate for open and
closed cases was 83 percent* a decline of 17 percentage points from its
closed case rate. When we excluded one uncollected $200, 000 fine, the
collection rate for open and closed cases declined by only 4 percentage
points.

22 Because of the way NASD*s financial system was designed, we could not
calculate the collection rate with an acceptable degree of accuracy using
the approach we applied to other SROs. As a result, we relied on summary
information that NASD provided. NASD*s calculations use cases invoiced
from January 1997 through December 2002; for the other SROs, we used cases
levied through August 31, 2002. See appendix I for the potential impact of
NASD*s invoicing procedures on the amounts collected.

Figure 3: NASD*s Collection Rates for Open and Closed Cases, 1997* 2002
Percentage of dollars collected

100 80 60 40 20

0 1997

1998 1999 2000 2001 2002 Source: GAO analysis of NASD's data.

Collection Rates Can Be Collection rates are the most widely available*
and in some cases the

Influenced by Factors That only* measure of regulators* success in
collecting fines for violations of

Are Beyond Regulators* securities and futures laws. But external factors
over which regulators Control

have no control can skew these rates. Nonetheless, examining the rates and
the factors influencing them can be a starting point for obtaining an
understanding of regulators* performance and changes to it. Also, in
exploring these rates regulators can identify cases that account for a

significant share of uncollected debts and decide whether continuing with
collection efforts for these cases is worthwhile. Primary among the
external factors affecting collection rates are the large

fines and payments that we have been discussing. Just one or two extremely
large uncollected fines can lower a collection rate significantly.
Similarly, one or two large payments on such fines can raise a collection

rate. Other external factors that can influence collection rates include
violators* ability to pay and the size of the fines themselves. For
example, an SEC official said that some violators who have been barred
from the industry cannot pay their fines because their earning capacity
has been limited. In discussing CFTC*s relatively low collection rate, an
agency official told us that the courts, in an attempt to match the
gravity of the

sanction to the offense, have sometimes imposed fines that are more than
what an agency might realistically be able to collect. This official said
that

in one case, a court fined a company $90 million* triple the monetary gain
from its illegal activities. He also said that in another case, a court
assessed fines totaling $4 million against four violators, although CFTC
had sought $660, 000. Conclusions Since our last report, SEC and CFTC have
made material improvements to

their policies and procedures for collecting delinquent fines that, if
followed, should improve collections on debts owed to the federal
government. Nonetheless, SEC lacks a formal strategy for collecting on its
pre- guidelines delinquent debt. Although the probability of collecting
monies ordered on older cases diminishes over time, some portion of these
pre- guidelines cases may have collection potential that is being
overlooked. Developing a formal strategy that prioritizes pre- guidelines
cases based on

their collection potential and establishes time frames for their referral
to FMS and TOP would improve the likelihood of collecting some portion of
the debt associated with these cases, which could be more than $1 billion.

The success of SEC*s efforts to collect this debt will be closely related
to the timely replacement of DPTS. Phase one of SEC*s action plan includes
a tentative deadline for replacing DPTS by the end of fiscal year 2003. At
that

time, SEC will be able to identify all cases eligible for referral to FMS
and TOP and develop a strategy for making these referrals. SEC has not yet
set a milestone for completing the requirements analysis for phase two of
its action plan or established a date to fully implement the computer
system that will integrate SEC*s now separate databases. 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. Further, SEC*s progress has been slow
in the 5 years since we

recommended that the agency analyze industrywide information on SRO
disciplinary program sanctions, in part because technological problems
have hindered its ability to collect sufficient data to perform the
analyses. SEC has not yet completed its first analysis and has no schedule
for implementing the new disciplinary database intended to replace its
current database. Finally, while controls were in place that should keep
barred individuals from being readmitted to the securities and futures
industries, neither the related statutes, SEC, or CFTC require the SROs to
ensure that the fingerprints sent to the FBI for use in criminal history
checks belong to the applicants who submit them. In the absence of such a
requirement, the SROs lacked related controls that could help prevent
inappropriate

admissions to the securities and futures industries. SRO involvement in
weighing alternatives for addressing fingerprinting requirements for the
securities and futures industries would ensure that concerns about
costeffective solutions are appropriately considered and addressed.

Recommendations We recommend that the SEC Chairman  develop a formal
strategy for referring pre- guidelines cases to FMS and

TOP that prioritizes cases based on collectibility and establishes
implementation time frames;

 take the necessary steps to implement the action plan to replace DPTS by
(1) meeting the fiscal year 2003 milestone for implementing phase one of
the plan, (2) setting a milestone for completing the requirements analysis
for phase two of the plan, and (3) establishing and meeting the
implementation date for phase two; and

 analyze the data that have been collected on the SROs* disciplinary
programs, address any findings that result, and establish a time frame for
implementing the new disciplinary database that is to replace the current
database.

We also recommend that SEC and CFTC work together and with the securities
and futures SROs to address weaknesses in controls over fingerprinting
procedures that could allow inappropriate persons to be admitted to the
securities and futures industries.

Agency Comments and We requested comments on a draft of this report from
the Chairmen, or

Our Evaluation their designees, of SEC and CFTC. SEC officials provided
written

comments, which are reprinted in appendix II. CFTC provided oral comments.
In general, both agencies agreed with the facts we presented and also
agreed to implement the recommendations we made. SEC emphasized that it
expected to meet its milestone for implementing a replacement database for
DPTS by the end of fiscal year 2003 and said that once the new system was
in place, the agency would be able to identify delinquent debts that had
not been referred to FMS and TOP and set deadlines for making referrals.
While SEC said that further milestones for phase two of its action plan
will be set at some time in the future, it made no reference to
establishing a time frame for implementing its new

disciplinary database. We believe that SEC needs to move quickly to set
time frames for both of these projects, because in the absence of dates on
which to focus, progress may be delayed. SEC also said that agency staff

will contact CFTC to review the possibility of adopting new industrywide
fingerprinting standards, including procedures to verify the identities of
all individuals who are being fingerprinted. CFTC officials told us that
they would work with SEC and the SROs to address our recommendation.
Finally, we also received technical comments from SEC and CFTC that we

incorporated into the report, as appropriate. As agreed with your offices,
unless you publicly announce the contents of this report earlier, we plan
no further distribution until 30 days from the report date. At that time,
we will send copies of this report to the Chairmen and Ranking Minority
Members of the Senate Committee on Banking, Housing, and Urban Affairs and
its Subcommittee on Securities and

Investment; the Chairman, House Committee on Energy and Commerce; the
Chairman, House Committee on Financial Services and its Subcommittee on
Capital Markets, Insurance, and Government Sponsored Enterprises; and
other interested congressional committees. We will send copies to the
Chairman of SEC, the Chairman of CFTC, and other interested

parties. We also will make copies available to others upon request. In
addition, the report will be available at no charge on the GAO Web site
http:// www. gao. gov.

If you have any further questions, please call me at (202) 512- 8678,
dagostinod@ gao. gov, or Cecile Trop at (312) 220- 7705, tropc@ gao. gov.
Additional GAO contacts and staff acknowledgments are listed in appendix
V.

Davi M. D*Agostino Director, Financial Markets and Community Investment

Appendi Appendi xes x I

Scope and Methodology To evaluate SEC*s and CFTC*s actions to improve
their collection programs, we assessed their responses to our 2001
recommendations that (1) SEC take steps to ensure that regulations
allowing SEC fines to be submitted to TOP are adopted; (2) SEC continue to
work with FMS to ensure that compromise offers presented by FMS are
approved in a timely manner; and (3) CFTC take steps to ensure that
delinquent fines are referred promptly 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.

To assess steps SEC took to ensure that regulations allowing SEC fines to
be submitted to TOP were adopted, we reviewed SEC*s final regulations and
related procedures and collection guidelines. To determine compliance with
the new collection guidelines for referring delinquent cases to TOP, we
selected a judgmental sample of 66 post- guidelines fines and disgorgement
cases using DPTS and obtained information from SEC on the

referral status of those cases. 1 Of the 66 cases, four were eligible for
referral at the time of our review. We selected cases where judgments or
orders were entered after SEC*s guidelines took effect, because staff told
us they were tracking the referral of those cases. To determine the
number, dollar amount owing, and age of the delinquent cases at the
agency, we

identified all cases with ongoing collections, using DPTS data as of
January 31, 2003, and calculated the age from the judgment date (which in
the absence of better data, we used as a rough proxy for the delinquency
date) to January 31, 2003. Since DPTS was unreliable, the aging analysis
provides only a rough estimate of the total number and age of cases. We
interviewed SEC and FMS officials to obtain their views on SEC*s progress
in referring cases to FMS and TOP and information on any impediments to
this progress.

To assess SEC*s efforts to continue to work with FMS to ensure that
compromise offers presented by FMS are approved in a timely manner, we
examined SEC*s procedures for processing compromise offers. We obtained
data from SEC on the four compromise offers FMS submitted to

SEC between July 1, 2001, and April 22, 2003, and analyzed the length of
time it took for SEC to respond to the compromise offers. We obtained and
used FMS*s data to validate SEC*s response time. We also interviewed SEC
and FMS officials to discuss SEC*s policies, procedures, and controls and
to

1 We included both fines and disgorgement cases, because the collection
guidelines apply equally to both.

obtain information on the agencies* efforts to work together to ensure the
timely approval of offers. We also obtained FMS*s views on SEC*s progress
in responding to offers.

To assess steps CFTC took to ensure that delinquent fines are promptly
referred to FMS, we reviewed CFTC*s collection procedures, which it calls
instructions, to ensure that they included time frames for referring cases
to FMS and provisions for obtaining all necessary enforcement information.
We also reviewed related agency controls. To assess staff*s compliance

with the revised procedures, we obtained data from CFTC on its only four
delinquent cases and analyzed the length of time it took to refer them to
FMS. We obtained and used FMS*s data to validate that all of CFTC*s cases
have been transferred within 180 days. We also interviewed CFTC officials
to discuss the agency*s procedures and controls and obtained FMS*s views
on CFTC*s progress in referring fines.

To assess SEC*s and CFTC*s efforts to enhance their oversight of the SROs*
sanctioning practices, we assessed their responses to our 1998 and 2001
recommendations that (1) SEC analyze industrywide information on
disciplinary program sanctions, particularly fines, to identify possible
disparities among the SROs and find ways to improve the SROs* programs;
and (2) SEC and CFTC periodically assess the pattern of readmission
applications to ensure that the changes in NASD*s and NFA*s fine
imposition practices do not result in any unintended consequences, such as
inappropriate readmissions. To assess the status of SEC*s efforts to
analyze industrywide information on SROs* disciplinary program sanctions,
we interviewed SEC officials to

discuss the types of analyses planned, any obstacles encountered, and
efforts to overcome those obstacles. To assess both SEC*s and CFTC*s
efforts to periodically assess the pattern of readmission applications, we

interviewed officials of these agencies to determine the number of
readmission applications from barred individuals and reviewed
documentation that described the controls used to keep barred applicants
from reapplying. We focused our review on permanent bars and application
records since NASD and NFA changed their fine imposition practices in
October 1999 and December 1998, respectively. To validate both agencies*

statements that they had not reviewed any readmission applications from
barred individuals since our 2001 report, we obtained the names of barred
individuals from NASD and NFA and verified that each individual had not
applied for readmission. Specifically, for NASD, we compared the names of
over 900 barred applicants who had not been fined against a list of

readmission applications. We focused on these individuals because of
concerns that individuals who had been barred and not fined might be more
willing to seek readmission than those who had been barred and

fined. For NFA, we researched the histories of 32 barred individuals,
using NFA*s database to validate that none of the individuals had applied
for readmission. We examined all barred applicants, including both those
who had been fined and those who had not been, because the data did not
allow us to distinguish between these groups. To ensure that NFA*s and
NASD*s data were sound, we interviewed agency officials to assess the
controls

these agencies had over their data systems, such as their processes for
entering and updating data, safeguards for protecting the data against
unauthorized changes, and any tests conducted to verify the accuracy and
completeness of the data. We found that the data were useable for our

purposes. To address concerns that surfaced during our review about
controls over the fingerprinting procedures used in criminal history
checks, we interviewed officials at NASD, NFA, NYSE, and the FBI and
reviewed laws and regulations related to fingerprinting. In addition to
NYSE, other SROs that operate markets have agreements with the FBI under
which they may submit fingerprints to the FBI for criminal history checks.
We limited our review to NYSE because it is the largest SRO that operates
a market, and we wanted to determine how another SRO*s procedures might
differ from those of NASD and NFA.

To calculate the fines collection rates for SEC, CFTC, and nine securities
and futures SROs for 1997 through 2002 (all years were calendar years), we
focused on these regulators* imposition and collection of fines through

their enforcement and disciplinary programs. The nine SROs 2 included the
American Stock Exchange, the Chicago Board Options Exchange, the Chicago
Board of Trade, the Chicago Mercantile Exchange, the Chicago

Stock Exchange, NASD, NFA, the New York Mercantile Exchange, and NYSE. We
excluded fines for minor rule infringements such as floor conduct,
decorum, and record- keeping violations that normally do not undergo
disciplinary proceedings. The exchanges generally referred to these
violations as *traffic ticket* violations, and they are handled through

2 As in our previous reports, we excluded regional securities exchanges
that delegated their broker- dealer examination authority to the American
Stock Exchange, Chicago Board Options Exchange, NASD, or NYSE because they
administered few disciplinary actions. We also excluded some futures
exchanges based on the same rationale.

summary proceedings and involve smaller fine amounts. We excluded amounts
owed for disgorgement and restitution, except for NASD, because these
sanctions are different from fines in that they are imposed to return
illegally made profits or to restore funds illegally taken from investors.
Due to the way NASD tracked its fines and payments, NASD was unable to
exclude disgorgement amounts from its payment data. We also excluded

fines that were not invoiced, because they would not be due unless the
fined individual sought to reenter the securities industry. All other
fines were factored into the rate, including fines dismissed in
bankruptcy, 3 to obtain the most complete view possible of the regulators*
efforts to discipline violators. 4 To calculate annual fines collection
rates and composite collection rates,

we obtained and analyzed data from SEC, CFTC, and all SROs, except NASD,
on fines levied from January 1997 through August 2002, and collected
through December 2002. NASD*s data include fines invoiced from 1997
through 2002. We limited our review to fines levied through August 2002 to
allow regulators through December 2002 (4 months) to attempt collections.
We calculated the collection rate in two ways. First, we calculated the
rate by including only closed cases* that is, cases with a final judgment
order for which all collection actions were completed. This approach is
consistent with the one used in our 1998 report. 5 Second, to provide a
more complete view of regulators* collection activities, we calculated the
rate using all closed and open cases* that is, cases with a final judgment
order for which collections actions were completed and cases with a final
judgment order that remained open while collection efforts continued. For
cases with a payment plan, we adjusted the levy amount to the amount owed
as of December 31, 2002, because a portion of the original levied amount
was not yet due. We could not do this for SEC or NASD because agency data
did not specify the amount owed as of December 31, 2002. As a result,
SEC*s and NASD*s rate may be understated.

3 Provisions of the Sarbanes- Oxley Act of 2002 have amended the federal
Bankruptcy Code to prevent individual debtors from discharging in
bankruptcy court certain debts, including judgments and settlements that
result from violations of federal and state securities laws or
regulations. Sarbanes- Oxley Act S: 803, amending 11 U. S. C. 523( a).

4 To the extent that cases were dismissed through bankruptcy proceedings,
these cases would be included in the closed case analysis. 5 GAO/ GGD- 99-
8.

We also used NASD*s calculations of its collection rates, because the
design of NASD*s financial system did not allow us to calculate these
rates with an acceptable degree of accuracy using the approach we applied
to other SROs. First, according to NASD officials, NASD*s calculations
used the date a fine was invoiced instead of the date it was levied. Fines
were typically invoiced between 15 and 45 days after they were levied.
This difference may have had a minor effect, particularly on the annual
collection rates. Second, NASD*s collection rates represent the total
amount collected up to December 31, 2002, on fines invoiced from January
1997 through December 2002 (as opposed to the August 31, 2002, date for
the other SROs). Third, because NASD*s system could not identify cases on
a payment plan, NASD*s calculations do not adjust the fine amount to the
amount owing as

of December 31, 2002, exerting a slight bias toward understating the
collection rate. Fourth, NASD*s collection rates (1) include disgorgement
because NASD was not able to separate such amounts from its payment data
and (2) exclude fines that were levied but not invoiced because such fines
were not due unless the fined individual sought to reenter the securities
industry. We also assessed the reliability of the data provided by the 11
regulators by

asking officials about agency controls for collecting fines and payment
data, supervising data entry, safeguarding the data from unauthorized
changes, and processing that data. We also asked whether they performed
data verification and testing. Although the controls varied across the

agencies, each one demonstrated a basic level of system and application
controls. We also performed basic tests of the integrity of the data we
received from some of the regulators that provided us with individual
fines data. We concluded that the data from all of the organizations,
except SEC, was sufficiently reliable for the purposes of this report. The
number of errors we and SEC found in DPTS during the course of our

work and the findings of the January 3, 2003, report to the SEC Inspector
General that the data in DPTS were incomplete and inaccurate led us to
conclude that DPTS fines data remain insufficiently reliable to calculate
an accurate collection rate. While we cannot be sure of the magnitude or
direction of the errors in the DPTS fines data, we are nevertheless

reporting the number and dollar value of cases eligible for referral to
FMS and TOP, the age of this debt, and SEC collection rates as the best
estimates possible at this time. We did our work in accordance with
generally accepted government auditing standards between August 15, 2002,
and July 1, 2003. We

performed our work in Boston, Mass.; Chicago, Ill.; New York, N. Y.; and
Washington, D. C.

Comments from the Securities and Exchange

Appendi x II Commission

Securities Regulators* Collection Rates for

Appendi x III

Open and Closed Cases by Calendar Year We calculated the collection rates
using data from SEC and the SROs, except for NASD, which calculated its
own rates (see appendix I for further details). The rates are based on
fines levied from January 1997 through August 2002 and include all amounts
collected on those fines through December 2002, except for NASD. The fines
data listed for each year

represent collection activity on the fines levied in each of those years.
Percentages were rounded to the nearest whole number.

Tabl e 3: SEC*s Collection Rates Number of fines

Percentage of fines Percentage of Year levied paid in full Amount levied
Amount collected dollars collected

1997 233 80% $56,302,014 $18,360,390 33% 1998 291 72 47,688,706 26,530,896
56 1999 444 76 195,173,240 50,111,404 26 2000 347 74 38,390,286 21,188,325
55 2001 300 72 61,205,291 24,108,247 39 2002 215 55 81,615,816 49,804,134
61

Tot al 1,830 72% $480,375,353 $190,103,396 40%

Source: GAO analysis of SEC*s data.

Tabl e 4: The American Stock Exchange*s Collection Rates Number of fines

Percentage of fines Percentage of Year levied paid in full Amount levied
Amount collected dollars collected

1997 17 88% $310,000 $237,500 77% 1998 13 85 341,500 309,640 91 1999 8 63
355,000 260,000 73 2000 5 80 217,243 204,167 94 2001 8 88 1,300,000
1,200,000 92 2002 7 71 108,076 75,000 69

Tot al 58 81% $2,631,819 $2,286,307 87%

Source: GAO analysis of the American Stock Exchange*s data.

Tabl e 5: The Chicago Board Options Exchange*s Collection Rates Number of
fines

Percentage of fines Percentage of Year levied paid in full Amount levied
Amount collected dollars collected

1997 70 99% $1, 048,401 $1, 044,901 100% 1998 38 97 463, 278 453,278 98
1999 50 96 569, 165 561,565 99 2000 38 92 659, 400 633,065 96 2001 16 94
340, 000 332,500 98 2002 7 100 88, 500 88,500 100

Tot al 219 96% $3, 168,744 $3, 113,809 98%

Source: GAO analysis of the Chicago Board Options Exchange*s data.

Tabl e 6: The Chicago Stock Exchange*s Collection Rates Number of fines

Percentage of fines Percentage of Year levied paid in full Amount levied
Amount collected dollars collected

1997 3 100% $11,000 $11,000 100% 1998 6 100 39, 500 39,500 100 1999 8 88
125,000 100,000 80 2000 6 67 87, 000 85,000 98 2001 1 100 20, 000 20,000
100 2002 1 100 2,000 2,000 100

Tot al 25 88% $284,500 $257,500 91%

Source: GAO analysis of the Chicago Stock Exchange*s data.

Tabl e 7: NASD*s Collection Rates Number of fines

Percentage of fines Percentage of Year levied paid in full Amount levied a
Amount collected dollars collected

1997 881 64% $38, 782,000 $10,189,309 26% 1998 916 65 27, 933,000
11,032,446 39 1999 901 66 42, 714,100 26,817,300 63 2000 701 70 14,
292,808 11,979,986 84 2001 657 76 16, 677,000 12,376,818 74 2002 659 72
70, 170,000 67,211,659 96

Tot al 4,715 68% $210, 568,908 $139,607,518 66%

Source: NASD. a NASD data include fines invoiced from 1997 through 2002.
See appendix I for the potential impact of

NASD*s invoicing procedures on the amounts collected.

Tabl e 8: NYSE*s Collection Rates Number of fines

Percentage of fines Percentage of Year levied paid in full Amount levied
Amount collected dollars collected

1997 37 100% $1,637,500 $1,637,500 100% 1998 38 100 3,345,000 3,345,000
100 1999 50 100 4,365,000 4,365,000 100 2000 54 100 4,953,667 4,953,667
100 2001 55 98 3,981,500 3,976,500 100 2002 22 100 869,000 869,000 100

Tot al 256 100% $19,151,667 $19,146,667 100%

Source: GAO analysis of NYSE*s data.

Futures Regulators* Collection Rates for Open

Appendi x IV

and Closed Cases by Calendar Year We calculated the collection rates using
data from CFTC and the SROs. The rates are based on fines levied from
January 1997 through August 2002 and include all amounts collected on
those fines through December 2002. The fines data listed for each year
represent collection activity on the fines levied in each of those years.
Percentages were rounded to the nearest whole number.

Tabl e 9: CFTC*s Collection Rates Number of fines

Percentage of fines Percentage of Year levied paid in full Amount levied
Amount collected dollars collected

1997 18 67% $2,767,000 $1,590,000 57% 1998 25 44 140,507,176 126,078,305
90 1999 40 38 86,192,731 22,955,045 27 2000 40 80 97,321,467 2,255,255 2
2001 39 44 15,689,399 7,886,289 50 2002 25 44 15,355,000 505,000 3

Tot al 187 52% $357,832,773 $161,269,894 45%

Source: GAO analysis of CFTC*s data.

Tabl e 10: The Chicago Board of Trade*s Collection Rates Number of fines

Percentage of fines Percentage of Year levied paid in full Amount levied
Amount collected dollars collected

1997 53 98% $334,500 $334,000 100% 1998 31 90 162,000 141,500 87 1999 38
95 1,570,500 1,545,500 98 2000 53 92 545,125 497,125 91 2001 39 90 306,175
273,925 89 2002 42 88 631,050 529,550 84

Tot al 256 93% $3,549,350 $3,321,600 94%

Source: GAO analysis of the Chicago Board of Trade*s data.

Tabl e 11: The Chicago Mercantile Exchange*s Collection Rates Number of
fines

Percentage of fines Percentage of Year levied paid in full Amount levied
Amount collected dollars collected

1997 16 94% $811,500 $801,500 99% 1998 21 86 1,053,000 1,032,000 98 1999
25 100 349,500 349,500 100 2000 16 81 183,000 138,000 75 2001 31 97
443,250 433,250 98 2002 11 91 233,335 208,335 89

Tot al 120 93% $3,073,585 $2,962,585 96%

Source: GAO analysis of the Chicago Mercantile Exchange*s data.

Tabl e 12: NFA*s Collection Rates Number of fines

Percentage of fines Percentage of Year levied paid in full Amount levied
Amount collected dollars collected

1997 16 94% $426,500 $401,500 94% 1998 32 47 962,500 450,000 47 1999 21 90
760,500 733,000 96 2000 28 57 1,269,000 638,375 50 2001 24 54 304,250
239,250 79 2002 14 29 298,500 214,600 72

Tot al 135 61% $4,021,250 $2,676,725 67%

Source: GAO analysis of NFA*s data.

Tabl e 13: The New York Mercantile Exchange*s Collection Rates Number of
fines

Percentage of fines Percentage of Year levied paid in full Amount levied
Amount collected dollars collected

1997 18 100% $186,100 $186,100 100% 1998 8 75 79, 000 39,000 49 1999 15
100 141,000 141,000 100 2000 22 91 396,000 191,000 48 2001 20 95 224,194
224,194 100 2002 14 100 396,000 396,000 100

Tot al 97 95% $1,422,294 $1,177,294 83%

Source: GAO analysis of the New York Mercantile Exchange*s data.

Appendi x V

GAO Contacts and Staff Acknowledgments GAO Contacts Davi D*Agostino, (202)
512- 8678 Cecile Trop, (312) 220- 7705 Acknowledgments In addition to
those named above, Emily Chalmers, Marc Molino, Carl

Ramirez, Jerome Sandau, Michele Tong, Sindy Udell, and Anita Zagraniczny
made key contributions to this report.

(250092)

a

GAO United States General Accounting Office

SEC and CFTC have improved their collection programs since GAO issued its
2001 fines report. While it was too early to fully assess the
effectiveness of their actions, SEC could be doing more to maximize its
use of Treasury*s collection services. SEC has implemented regulations,
procedures, collections guidelines, and controls for using the Treasury
Offset Program (TOP), which applies payments the federal government owes
to debtors to

their outstanding debts. However, SEC has been focusing on referring to
TOP those delinquent cases with amounts levied after its new collections
guidelines went into effect. The agency has not developed a formal
strategy for referring older cases, reducing the likelihood of collecting
monies on what could be more than a billion dollars of delinquent debt.
Further impeding collection efforts, SEC does not have a reliable system
for tracking monies owed on these older cases and therefore could not
determine which cases were not being referred to TOP. SEC has drafted an
action plan for a new system to track all cases with a monetary judgment.
Once the system is in place, the agency should have a tool for identifying
all cases, including older delinquent cases that can be referred to TOP.
However, SEC has not established a time frame for fully implementing the
plan.

GAO*s calculations for closed cases (collection actions completed) showed
that regulators* collection rates on fines imposed between 1997 and August
2002 equaled or exceeded those from 1992 to 1996. Recalculating the rates
to include closed and open cases (collection actions ongoing) affected
SEC*s and CFTC*s collection rates, primarily because of a few large
uncollected fines. Collection Rates for Fines Levied on Open and Closed
Cases and Closed Cases for 1997*

August 2002 Open and closed cases Closed cases Securities and futures
regulators Percentage collected Percentage collected

SEC 40% 94% CFTC 45 99 American Stock Exchange 87 95 Chicago Board Options
Exchange 98 99 Chicago Board of Trade 94 95 Chicago Mercantile Exchange 96
97 Chicago Stock Exchange 91 100 NASD 66 95 National Futures Association
67 75 New York Mercantile Exchange 83 100 New York Stock Exchange 100 100
Source: GAO analysis of regulators* data, except NASD, which calculated
its own rates.

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. The requesters asked

GAO to evaluate the actions the Securities and Exchange Commission (SEC)
and Commodity

Futures Trading Commission (CFTC) have taken to address earlier
recommendations for improving their collection programs. The committees
also

asked GAO to update the fines collection rates from previous reports. SEC
should (1) develop a strategy

for referring older cases to Treasury for collection and (2) implement a
reliable system to help manage all cases. SEC generally agreed with the
facts presented and

agreed to implement the recommendations made. www. gao. gov/ cgi- bin/
getrpt? GAO- 03- 795. To view the full product, including the scope

and methodology, click on the link above. For more information, contact
Davi D*Agostino at (202) 512- 8678 or

dagostinod@ gao. gov. Highlights of GAO- 03- 795, a report to

House Ranking Minority Members of congressional committees

July 2003

SEC AND CFTC FINES FOLLOW- UP

Collection Programs Are Improving, but Further Steps Are Warranted

Page i GAO- 03- 795 SEC and CFTC Fines Follow- up

Contents

Page ii GAO- 03- 795 SEC and CFTC Fines Follow- up

Page 1 GAO- 03- 795 SEC and CFTC Fines Follow- up United States General
Accounting Office Washington, D. C. 20548

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Appendix I

Appendix I Scope and Methodology

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Appendix I Scope and Methodology

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Appendix I Scope and Methodology

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Appendix I Scope and Methodology

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Appendix I Scope and Methodology

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Appendix II

Appendix II Comments from the Securities and Exchange Commission Page 37
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Appendix II Comments from the Securities and Exchange Commission Page 38
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Appendix III

Appendix III Securities Regulators* Collection Rates for Open and Closed
Cases by Calendar Year

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Appendix III Securities Regulators* Collection Rates for Open and Closed
Cases by Calendar Year

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Appendix IV

Appendix IV Futures Regulators* Collection Rates for Open and Closed Cases
by Calendar Year

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Appendix IV Futures Regulators* Collection Rates for Open and Closed Cases
by Calendar Year

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Appendix V

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