November 23, 1998

The Honorable Arthur Levitt, Jr.
Chairman
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Dear Chairman Levitt:

I am writing with respect to the General Accounting Office (GAO) report, Money Penalties: Securities and Futures Regulators Collect Many Fines But Need To Better Use Industrywide Data (GAO/GGD-99-8, November 2, 1998). This self-initiated report, which was sent to eight recipients, including me, provides the results of GAO's review of fine imposition and collection activities by the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the securities and futures self-regulatory organizations (SROs). These fines are imposed on firms and individuals as part of the sanctions for current violations and to deter future violations. Given the increase in securities fraud in recent years, this is a matter of significant importance and interest.

With respect to entities under the jurisdiction of the Commerce Committee, GAO reports that SEC collected over 80 percent of the total dollar amount of fines for the 534 cases it closed in the five-year period 1992 through 1996, and collected the full amount of the fine in over 90 percent of the cases. The New York Stock Exchange, Chicago Stock Exchange, and Chicago Board Options Exchange collected 95 percent or more of the dollar amount of fines in their closed cases in the same period, while the American Stock Exchange (recently merged with the National Association of Securities Dealers (NASD)) collected 75 percent, according to GAO. However, GAO found that NASD, the largest securities SRO in the United States and the principal SRO for broker-dealers, collected only 24 percent of the total dollar amount of fines on its closed cases during this period, and only 67 percent of the fines collected were paid in full.

NASD defends its low collection rate by arguing that NASD levies high fines to remove violators from the industry: violators have no intention of paying the fines either to stay in the securities industry or as a re-entry fee after a suspension or bar (GAO report at 14). However, GAO says that: "We could not directly verify whether these lower collection rates were due to fines that NASD...never expected to collect or other reasons because we could not...electronically identify these data from the over 4,000 cases NASD provided" (GAO report at 13). Moreover, GAO's September 1998 microcap fraud report found a serious problem with migration of unscrupulous brokers from the securities industry to other financial services industries where they still are able to prey on the public.

GAO found that some SROs did not maintain automated records to document that their fines were paid. "Such documentation could provide an important internal control to ensure fines are collected and accounted for," stressed GAO (GAO report at 3).

GAO's analysis of industrywide sanctions data for the time period examined showed large differences among the securities SROs in the number of cases closed and the average dollar amount of fines imposed (GAO report at 29 and Table 2). According to GAO, "these differences cannot be specifically explained without further reviewing the data. Such an analysis could serve to indicate the differences between and among SRO performance over time and could provide SEC an additional systematic, fact-based way to assess industrywide sanctions" and "as an indicator of the differences between and among SRO performance over time" (GAO report at 3, 29).

SEC officials countered that SEC does not use industrywide data to assess comparative SRO sanctions because the data is not easily quantified and is not meaningful without additional review (GAO report at 28). While that may be true, SROs in the same industry basically do similar business and have many overlapping members, despite differences in their rules and membership requirements, differences that advances in technology and increasing mergers and alliances make increasingly less relevant.

GAO also reports that SEC oversight reviews found instances of inadequate sanctions but SRO officials told GAO that they have taken actions to correct the deficiencies that SEC identified in both enforcement and market surveillance departments (GAO report at 26-27). GAO notes that for each case reviewed in which fines had not been paid in full, the case files documented why the fines could not be collected. The primary reasons were bankruptcy or failure to locate respondents (GAO report at 16). GAO reports that, if a penalty is not paid within a prescribed time, SEC may request contempt proceedings in federal district court to compel payment or may refer the matter to the Department of the Treasury and the Attorney General for centralized debt collection (GAO report at 5,11). There is no discussion or data on the extent to which this avenue has been utilized, if at all.

GAO recommends that the SEC analyze industrywide information on disciplinary program sanctions, particularly fines, to understand possible disparities among the SROs and identify ways to improve SRO disciplinary programs. GAO also recommends that the SEC require that the results of these analyses be appropriately documented. Further, GAO recommends that the SEC encourage SROs to maintain automated records of their fine collection activities that are appropriate for the number of fines they impose.

I agree with these recommendations and respectfully request that you report back a year from now on your progress and that of the SROs in implementing them. Your report also should include an evaluation of SEC and securities SRO fine collection rates for 1997 and 1998, indicating any significant changes from the rates found by GAO for the previous five-year period. Please also confirm that the deficiencies found by SEC examiners have indeed been corrected by the relevant SROs, and indicate the extent to which the cited centralized debt collection facilities both have been or will be utilized to improve fine collections where necessary.

Thank you for your cooperation and attention to this important investor protection matter.

Sincerely,

JOHN D. DINGELL
RANKING MEMBER

cc: The Honorable Tom Bliley, Chairman
Committee on Commerce

The Honorable James F. Hinchman, Acting Comptroller General
General Accounting Office

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