October 14, 1998

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

Dear Chairman Levitt:

In the wake of widespread reports of rampant fraud in microcap stocks, I asked the General Accounting Office (GAO), by a letter dated December 12, 1997, to conduct a comprehensive review of this problem. GAO has divided this task into several discrete assignments.

Their first report, SEC Enforcement: Responses to GAO and SEC Recommendations Related to Microcap Stock Fraud (GAO/GGD-98-204, September 30, 1998), looks at the status of SEC and self-regulatory organization (SRO) actions taken in response to recommendations in prior GAO and SEC reports that address issues related to microcap stock fraud.

The report's appendix details numerous new, amended, and proposed SEC, NASD, and NYSE rules related to microcap fraud. GAO concludes that SEC and the SROs have taken, or reported taking, actions, in some cases self-initiated, that respond to many of the recommendations in prior GAO and SEC reports.

However, GAO reports that actions have not been taken on four critical issues: (1) migration of unscrupulous brokers from the securities industry to other financial services industries; (2) ability of SEC to identify, across firms, trends in violations found during its broker- dealer examinations; (3) modernization of the central registration database (CRD) to improve oversight of problem brokers and public access to broker disciplinary histories; and (4) provision of information to investors on the availability of broker disciplinary histories before activity occurs in an account. (GAO Report at 2 and 11). Failure to address these problems with deliberate speed leaves major gaps in regulatory oversight and investor protection.

For example, CRD upgrades began in 1992, have experienced continuous unjustified delays, and are not yet complete. Every projected deadline has been missed. This has had serious implications for state investor protection programs. For example, the New York Attorney General office's plan to require brokers to disclose their disciplinary records to investors is being held up by delays in upgrading the CRD database. See "N.Y. Plan For Reps To Reveal Histories Delayed By CRD," Wall Street Letter (August 3, 1998) at 6 (copy enclosed). GAO reports that full implementation of all system improvements, including enhanced regulatory functions and full Internet access, is scheduled for late 1999 (GAO Report at 9-10). But an NASD spokeswoman is quoted in the WSL article that "nothing is a definite drop dead date." With all due respect, it should be.

On February 9, 1998, you wrote to me in your microcap stock fraud response:

"I view as unacceptable the possibility that any segment of this nation's securities markets has become rife with fraud and abuse .... I believe that it is critical that the SEC, other federal and state regulators, the self-regulatory organizations, and industry leaders and investor advocates, aggressively combat this egregious form of securities fraud."

These are wise words and I intend to hold you to them.

Accordingly, I respectfully request that the SEC submit semi-annual reports (in March and September) on progress in addressing the outstanding recommendations and, in furtherance of that goal, that you require NASD to submit to your agency quarterly reports on the status of their CRD upgrades.

Thank you for your cooperation and attention to this request.

Sincerely,

JOHN D. DINGELL
RANKING MEMBER

Enclosures

cc: The Honorable Thomas J. Bliley, Jr.
Chairman, Committee on Commerce

The Honorable Michael G. Oxley
Chairman, Subcommittee on Finance and Hazardous Materials

The Honorable Thomas J. Manton
Ranking Member, Subcommittee on Finance and Hazardous Materials

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

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