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United States Securities and Exchange Commission, Office of Inspector General,
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Controls of Negotiated Settlements
Audit No. 218
September 20, 1995
Controls over negotiated settlements of enforcement
cases were generally adequate, based on our review. We are recommending
several enhancements, including: creation of a separate unit in the Division
of Enforcement to monitor compliance with settlement terms; earlier consideration
of settlement issues by the Commission; consultation with the Branch of
Regional Office Assistance (BROA) for all settlements; and establishing
a data base of prior settlements.
OBJECTIVES AND SCOPE
Our primary objective was to determine whether
controls over settlements were adequate. Also, we sought to determine whether
the settlement process could be made more efficient, and whether monitoring
of settlement terms could be improved.
We interviewed staff in the Division of Enforcement
and three regions (Northeast, Central, and Pacific), and reviewed a judgement
sample of 24 negotiated settlements. The audit was performed between September
1994 and May 1995.
Most investigations eventually result in a negotiated
settlement between the Commission and the subject, resolving the allegations.
Typically, the subject neither admits nor denies the violation of the securities
laws, and agrees to the imposition of sanctions, such as disgorgement of
profits, penalties, and a bar from the securities industry. Through
settlements, the Commission avoids time-consuming litigation while still
The staff needs approval from the Commission to
enter into settlement negotiations, and the Commission approves virtually
all settlements.1 Settlement offers are reviewed based
on the facts and circumstances of the case, including the severity of the
alleged conduct, the sanctions imposed in similar, prior cases, policy
considerations, litigation risk, and the likelihood of future violations.
Generally, controls over negotiated settlements
appeared adequate. Regional cases are reviewed by the Regional Administrator,
the Branch of Regional Office Assistance (BROA), relevant headquarters
divisions, and the Office of the General Counsel (OGC). Headquarters cases
are reviewed by senior Enforcement managers, other divisions, and OGC.
All settlements are reviewed and approved by the Commission, which helps
ensure consistency with policy.
The Commission has established procedures for evaluating
financial hardship claims by subjects. Subjects must submit sworn financial
statements, which demonstrate an inability to pay a disgorgement or penalty.
Repayment is required if the financial statements prove to be false.
As discussed below, we are recommending several
enhancements to settlement procedures.
After a settlement is reached, the lead attorney
for the case monitors payments of disgorgements and penalties under it.
However, enforcement attorneys generally are not trained in collection
procedures, and their primary focus is on current cases.
The Justice Department has a central unit with
trained staff to monitor collection of funds owed it. This approach makes
sense for the Commission, especially considering that settlement claims
total millions of dollars.
The Division of Enforcement should improve collection
procedures for settlements. For example, it should consider establishing
a central unit to monitor collection of settlement payments. Paralegals
assigned to such a unit should be given appropriate training.
Consideration of Settlement Issues
Several staff we interviewed indicated that earlier
consideration of settlement issues would be helpful and save time. Currently,
at the conclusion of an investigation, the staff receive authority to negotiate
a settlement through an action memorandum (which also requests authorization
for enforcement action, such as the filing of civil litigation).
The action memorandum does not discuss the general
parameters of an acceptable settlement. If this issue were raised by the
staff and considered by the Commission, the staff would have a better basis
for settlement negotiations.
The Division of Enforcement and the regions should
discuss the general parameters of an acceptable settlement in their action
memorandum requesting negotiation authority. The action memorandum should
request the Commission's views on this issue.2
Subjects sometimes provide an offer of settlement
with their Wells submissions.3 These offers are reviewed
by the staff and the Commission, and may provide a starting point for settlement
negotiations. A number of staff told us that a settlement offer provided
with the Wells submission is very useful, as it expedites the settlement
Some subjects (particularly those associated with
small companies) may not be aware that a settlement offer can be included
with their Wells submission.
The Division of Enforcement and the regions should
informally advise subjects that a settlement offer may be included
with their Wells submission. The staff should make it clear that
subjects are not required to make a settlement offer.
Review by BROA
The Branch of Regional Office Assistance reviews
all settlements negotiated by the regions, to ensure consistency with Commission
policy. BROA does not routinely obtain copies of settlements negotiated
by the Division of Enforcement, although senior Division staff informally
discuss some settlements with BROA.
Obtaining copies of Division settlements would
help BROA provide assistance to the regions on Commission settlement policy.
The Branch of Regional Office Assistance should
obtain copies of settlements negotiated by the Division of Enforcement.
Settlement Data Base
Many staff we interviewed felt that more information
on acceptable settlements would be helpful in conducting negotiations.
A data base containing prior, approved settlements could provide this information.
The Division of Enforcement should establish a
data base of settlement information, with appropriate controls. It should
consult with the Office of Information Technology as necessary.
1 The Secretary has delegated authority to approve
settlements of administrative proceedings where complete relief is obtained
and the Commission reviewed the initial order instituting the action.
2 A prejudgment waiver from the subject would be necessary
for administrative proceeding settlements.
3 A Wells submission is a written statement
to the Commission, in which subjects on their own initiative set forth
their interests and position in regard to the investigation. It is
generally submitted as the staff is preparing a recommendation for the
commencement of an enforcement proceeding (17 CFR section 202.5(c)).