Summary: The Securities and Exchange Commission's (SEC) primary mission is to protect investors and maintain the integrity of securities markets. As a part of its responsibility to protect investors, SEC seeks to ensure that individuals who violate federal securities laws and regulations take responsibility for their misdeeds. Specifically, when individuals or firms are found to have violated securities laws, SEC may order civil monetary penalties and seek ill-gotten financial gains, or disgorgement, from the violators. For its enforcement actions to be successful, SEC must have a collection and distribution program for both civil monetary penalties and disgorgement that functions effectively. In 2002, Congress passed the Sarbanes-Oxley Act to address corporate malfeasance and restore investor confidence in the U.S. securities markets. This legislation established numerous reforms to increase investor protection, including Section 308(a), the Federal Account for Investor Restitution provision, commonly known as the Fair Fund provision. This provision allows SEC to combine civil monetary penalties and other donations to disgorgement funds for the benefit of investors who suffer losses resulting from fraud or other securities violations. Fair Funds may be created through either SEC administrative proceedings or litigation in U.S. District Court, and either SEC or the courts may administer the funds. However, SEC is responsible for general monitoring of all Fair Funds created, reinforcing the need for SEC to have an effective collection and distribution program for both civil monetary penalties and disgorgement so that additional funds collected as a result of the Fair Fund provision can benefit harmed investors. In 2007, SEC created the Office of Collections and Distribution (OCD) to manage the collection of penalties and disgorgement, including Fair Funds, and speed the process of returning funds back to harmed investors. We have issued a number of reports on SEC's Fair Fund program and made a number of recommendations designed to help SEC improve the Fair Fund program management and internal controls. For example, in 2005, we recommended that SEC ensure that management establish a procedure for consistently collecting and aggregating its Fair Fund data to assist in the monitoring and managing of the distribution of monies to harmed investors and establish measures to evaluate the timeliness and completeness of distribution efforts. In 2007, we recommended that SEC establish and implement a comprehensive plan for improving the management of the Fair Fund program, to include (1) staffing the new central Fair Fund office, defining its roles and responsibilities, and establishing relevant written procedures and (2) ensuring the consistency of and analyzing final accounting reports on completed Fair Fund plans. In 2009, we recommended that SEC, to help ensure effective and efficient operation of OCD, consider an alternative organizational structure and reporting relationship for the office. SEC generally has agreed with our recommendations. We have previously reported that SEC continues to make refinements and improvements in many areas but that some recommendations designed to further strengthen their data collection efforts remain open. Because of your interest in ensuring that SEC effectively manages its resources and enforces compliance with securities laws and regulations, you requested that we follow up on our previous work, including updating the information on the status of Fair Funds presented in our 2007 report and SEC's progress in implementing our recommendations related to OCD. Accordingly, this study examines (1) the status of Fair Fund collections and distributions and (2) the actions that SEC has taken to address our previous recommendations regarding SEC's OCD. On March 15, 2010, we briefed staff from your office on the results of this work. This report summarizes the information provided during that briefing.
Since 2007, fewer Fair Funds have been established and the collection and distribution of Fair Funds have increased, but many Fair Funds continue to remain open and active for years. From 2002 through February 2010, $9.5 billion in Fair Funds were ordered, with the majority of this total ordered prior to May 2007. Since that date, only $521 million, or less than 6 percent, of total Fair Funds have been ordered. Of the $9.5 billion total Fair Funds ordered, $9.1 billion (96 percent) has been collected and $6.9 billion (76 percent) of the Funds collected has been distributed. In comparison, in 2007, only 21 percent of Fair Funds had been distributed. Although the percentage of Fair Funds distributed has increased, there are many Fair Funds that remain open and active for years. For example, our analysis of SEC data shows that of the 128 ongoing Fair Fund cases, over half have been ongoing for more than 4 years. SEC officials offered several reasons why Fair Funds remain open, including difficulties in obtaining investor information and legal objections and appeals that must be settled. To improve its management of Fair Fund cases, SEC proposed a performance metric of tracking the number of cases that have completed distribution within 2 years of the appointment of a Fund administrator.4 However, to date, SEC has not started collecting the data in a manner necessary to track this measure. SEC has taken steps to increase efficiency and assess Fair Fund distribution, but a number of actions that are necessary to improve tracking of distribution related information are still pending. In response to our recommendations, SEC centralized the administration of collections and distributions under OCD and subsequently eliminated the dual reporting structure that initially existed in this new office. According to SEC, the creation of OCD has allowed the opportunity to build institutional knowledge and decreased inefficiencies by developing key administrative aspects of the program. SEC officials also told us that they have implemented other operational and administrative changes that are designed to improve Fair Fund distribution. For example, SEC established a working group to share information and to coordinate between functions on distribution plans and to identify problems that may slow distribution. However, SEC officials acknowledged that Fair Fund information and data tracking still need improvement. SEC officials said they have not implemented any major improvements to Fair Fund-related data management since 2007 and that additional improvements are needed in recording and monitoring of Fair Fund data. For instance, Fair Fund data are housed in several different databases that have not been reconciled and aggregate information on Fair Fund administrative expenses is unavailable. According to SEC officials, an extensive review of the Fair Fund program is under way, the findings of which may result in changes to workflow, procedures, and information systems. While SEC is taking steps to better capture, report, and manage the programmatic and financial impact of the collections and distribution process, it is too early to determine the impact and ultimate success of these efforts.
