Collection of Filing Fees

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Collection of Filing Fees

Audit Report No. 225
February 8, 1996

Summary

The Office of Inspector General conducted an audit of the internal controls related to the Commission's collection of filing fees. The audit confirmed the Commission's previous assessment that the internal controls are not materially in conformance with accounting standards. The audit identified additional specific problems and recommended corrective actions.

The Commission generally concurred with our recommendations (see attached comments). While providing comments on draft versions of this report, they began taking corrective actions specifically regarding access to computerized systems, separation of duties, and audit trails. The material weaknesses (including those identified by the Commission) have been disclosed in the Commission's December 1995 certification of management controls (under the Federal Managers' Financial Integrity Act, and OMB Circulars A-123 and A-127).

AUDIT SCOPE AND OBJECTIVES

In its 1994 internal control certification letter to the President and Congress, the Commission reported that the Entities, Filings, and Fees System (EFFS) - the primary system used in the collection of filing fees - did not conform to applicable accounting standards. Due to the extent of the existing internal control problems, we did not conduct a financial audit under Government Auditing Standards. Instead, we conducted a performance audit of the process in order to recommend corrective actions that would strengthen internal controls, and help prevent and detect possible errors and irregularities (i.e., fraudulent acts).

During the audit, we evaluated the aggregate balance of fees received and fees owed, as recorded by the Commission; management's internal controls; and compliance with laws and regulations. We interviewed Commission staff; mailed confirmation letters to selected registrants; recalculated account balances and filing fees; examined supporting documentation for a sample of account balances and filings; reviewed Department of Treasury reports; and performed analytical tests, among other procedures.

We limited our audit to fiscal year 1995 filing and fee data. Fee processing at financial institutions used by the Commission (e.g., Mellon Bank lockbox facility) was not reviewed. We performed only limited audit work on fee processing and recording in the Office of the Comptroller. Fee processing and recording was evaluated during other financial management audits. Because of the internal control weaknesses, our procedures would not necessarily detect whether the filer correctly determined the amount of fees due (e.g., misinterpretation of rules, typographical errors). Nor would our procedures identify certain errors and irregularities that might have been made by Commission staff.

The audit was performed between January and October 1995, in accordance with generally accepted government auditing standards.

BACKGROUND

This section presents a brief overview of the collection of filing fees. Appendix A contains a more detailed description of the process.

Section 6(b) of the Securities Act of 1933 requires that a filing fee be paid at the time securities are registered (referred to as a 6(b) filing or registration statement). The Commission also collects filing fees required by the Securities Exchange Act of 1934 and other statutes, and pursuant to rules issued under the Independent Offices Appropriation Act for various other filings. The Commission collected approximately $456 million in net filing fees during fiscal year 1995, approximately 89% of which were 6(b) fees.

Filing fees are recorded in EFFS. Each entity (i.e., registrants, agents, counsels, etc that does business with the Commission) has a separate account, with two components: unrestricted funds and restricted funds (reserved to pay for 6(b) filings). EFFS interfaces with other automated systems, such as the Electronic Data Gathering Analysis and Retrieval (EDGAR) system.

Several Commission offices are involved in fee processing. The Document Control Branch (DCB) of the Office of Filings and Information Services (OFIS) receives fees for paper filings, and enters the fee data into EFFS and the filing data into the File Establishment System (FILE). For electronic filings (submitted through EDGAR), and some paper filings, the registrant wires a payment or sends a check to a Mellon Bank lockbox; both FILE and EFFS are automatically updated from EDGAR and Mellon Bank respectively.

The Office of the Comptroller (OC) deposits checks and cash received by DCB, maintains summary level fee data in its accounting records, and reports and reconciles deposits with the Treasury. The Office of Information Technology (OIT) maintains the automated systems involved in fee processing (e.g., EDGAR, EFFS).

The EFFS has not met agency requirements since its implementation in July 1992. The Commission's 1995 certification letter under Office of Management and Budget (OMB) Circulars A-123 and A-127 reported EFFS as not conforming to General Accounting Office standards.

The Commission, in November 1994, formed an inter-disciplinary task force to improve EFFS operations. The task force has corrected numerous deficiencies, but the Commission is nevertheless planning to replace EFFS. The requirements for the new system are expected to be completed by March 1996, with the system being implemented in several years.

Our recommendations were developed with knowledge of the proposed new system. Some recommendations can be implemented immediately. However, others might not be feasible or cost effective to implement in the near term. These recommendations should be incorporated in the design of the new system.

AUDIT RESULTS

FINANCIAL INFORMATION AND REPORTING

EFFS reported that the Commission received approximately $335 million in filing fees, exclusive of refunds, for the period from October 1, 1994 to June 30, 1995. Although we did not perform comprehensive financial audit procedures, based on our audit work, this amount appears to be materially accurate. This audit work applies only to the amount of fees actually recorded as received by the Commission. Our procedures would not necessarily detect whether the filer correctly determined the amount of fees due (e.g., misinterpretation of rules, typographical errors). Nor would our procedures identify certain errors and irregularities that might have been made by Commission staff.

We did not attempt to verify the cover page information provided by registrants, which is used to calculate the fee. As discussed on page nine, the Commission verifies this information only to a limited extent. Accordingly, we did not independently evaluate whether the correct amount of fees was recorded as received, although we did recalculate fees for our sample based on the information provided by the registrant on the cover page of the filing.

The reliability of EFFS financial information appeared to improve significantly during our audit, due to the collective efforts of the task force, OFIS, and OIT. Nevertheless, due to insufficient internal controls in EFFS and other processes involved in the collection of filing fees (as explained in the Management Internal Controls and Background sections), we were not able to evaluate whether individual account balances were materially accurate.

Refunds Issued because of Fee Rate Change in Fiscal Year 1995

The statutory fee rate set in the Securities Act of 1933 for 6(b) filings is 1/50th of 1 percent of the offering amount. However, in recent years, Congress has increased the rate to 1/29th of 1 percent, as part of the Commission's appropriation bills. The Commission's appropriation bill for fiscal year 1995, enacted on October 10, 1994, again set the fee rate at 1/29th of 1 percent. During the week of October 3, 1994, however, the fee rate for 6(b) filings reverted to 1/50th of 1 percent, since the appropriation that would set it at 1/29th of 1 percent had not yet passed. According to the Commission, the total difference between these two fee rates for 6(b) filings submitted during the period was approximately $20 million.

Some registrants who filed during this period were unaware that the fee rate had reverted to 1/50th of 1 percent. These registrants paid filing fees based on 1/29th of 1 percent of the offering amount. Later, the Commission received requests for fee refunds from some of these filers.

The Commission determined that registrants who had overpaid because of this situation should receive a refund. Problems in processing these fee refund requests received immediate high-level attention within the Commission. A magazine article (see Appendix B) later described the refund problem and other problems disclosed in the Commission's internal control certifications. The article characterized the refund problem as "the biggest bug in the (EFFS) software," although the system was never designed to identify an overpayment of fees for a specific filing. The system design limitation (an inability to link fees and filings) had been identified by the task force as a material weakness. Specific problems in processing these refunds are described below.

The Office of General Counsel (OGC) was asked by the Office of the Executive Director (OED) to opine on the suitability of refunding overpayment to registrants who overpaid 6(b) fees during the week of October 3, 1994. In the course of issuing their opinion, they reviewed a list of registrants who overpaid that week. The list given to OGC was prepared from an EFFS-generated computer printout listing all filings received that week. OFIS had manually indicated on the computer printout which filings had been paid at 1/29th of one percent and which had been paid at 1/50th of one percent. OGC claimed that three firms which had requested refunds were not on initial versions of the list, although their fee payments and filings had been recorded in EFFS.

It appears that two of three firms were omitted from the list because of limitations in the methodology used by OFIS to identify the firms that paid at 1/29th of 1 percent. OFIS reviewed only the filings submitted (and not the payment data) to identify those filings whose fee calculations were based on 1/29th of 1 percent. However, these two registrants submitted their fee payment prior to the filing. The fee amounts on their registration statements were based on 1/50th of 1 percent. The fee payments remitted, however, were calculated using the 1/29th of 1 percent rate. Because OFIS based its original search on data from the filings exclusively, it assumed that the fees remitted by the registrants agreed with the 1/50th of 1 percent rate shown on the filing and that no refund was due.

It remains unclear why the third firm was not detected by OGC. On the two versions of the listing we reviewed, the firm was included as a paper filer. Since we did not have access to all versions of the listing, it is possible that the firm was not included in some of the versions. Alternatively, OGC attorneys may not have noticed that the firm was included as a paper filer. Regardless of what happened, the firms either received their refund or the overpayment was applied to other filings.

The manual analysis by OFIS was necessary because of an EFFS system limitation. The system cannot link (i.e., match) a filing with its respective fee payment because the system is based on an account concept. As fee payments are received, the registrant's balance increases and as filings are received the balance decreases. Manual analysis is necessary to link a filing with its respective payment. This material weakness was initially identified by the task force because of fiscal year accounting issues. The weakness would also cause difficulties should the Commission decide to assess interest and penalties on overdue accounts.

Recommendation A

OFIS and OC, in consultation with OIT, should explore the feasibility (i.e., cost-benefit) of the successor system linking filings and fee payments; as well as alternative corrective actions to satisfy the material weakness identified by the task force.

Fees Owed because of Continuing Resolution Provision in Fiscal Year 1996

For a few days beginning November 14, 1995, the fee rate again reverted to 1/50th of 1 percent because neither the Commission's appropriation bill for Fiscal Year 1996 nor a Continuing Resolution had been enacted, either of which could have kept the rate at 1/29th. According to the Commission, the total difference between these two fee rates for 6(b) filings submitted during the period was approximately $35 million. When a Continuing Resolution was enacted on November 19, 1995, it contained provisions which established the 6(b) fee rate at 1/29th of 1 percent and retroactively applied this rate to the period beginning November 14, 1995.

The Commission decided that registrants must, by December 8, 1995, either pay the additional fee or amend their filing to reduce the number of shares to be offered. The Commission notified registrants through press releases, the Commission's Web Site on the Internet, and a fee rate advisory. We were informed that filers who paid at the 1/50th of one percent rate received individual bills for the amount due on each filing.

According to Commission officials, they are unaware of any new problems resulting from the recent fee rate changes and the retroactive provision. We were informed that the Commission manually reviewed the 6(b) filings and fees paid between November 14 and 19, 1995 in order to identify those registrants who either owed an additional fee or needed to reduce the offering amount.

Exception Reports Useful

OFIS has developed two exception reports which have helped to improve EFFS data reliability: a report listing 6(b) fees owed as indicated by EFFS (these fees are due at the time of filing, by statute, and should have been collected at the time of filing and not owed), and a report of registrants with relatively large available account balances (greater than or equal to $8,000).

We identified two instances of EFFS accounts with unusual balances of non 6(b) fees owed, due to filings related to certain types of business acquisitions, dispositions, and consolidations. OFIS does not receive analytical reports covering non 6(b) fees owed (e.g., the total amount of fees owed by a particular type of form). OFIS indicated, however, they receive transactional reports which provide data about these types of balances.

Reconcile Comptroller's Records with EFFS

OC maintains a spreadsheet recording the amount of filing fees deposited with the Department of the Treasury. The spreadsheet, known as the Fee Summary System (FSS), classifies fees by form type. FSS is used to generate data used in the Commission's budget submissions to the President and Congress. FSS is supported by deposit records and EFFS reports. We did not review FSS in detail, as an audit of transaction fees reviewed it (FSS records both filing and transaction fees).

As of June 30, 1995, the $330 million of net deposits in FSS for fiscal year 1995 was approximately $3 million less than the amount reported by EFFS. The $3 million difference appeared to be due, in part, to timing differences and transactions recorded in one system but not yet in the other. According to OC, as of December 12, 1995, the unreconciled difference was approximately $245,019 out of approximately $1.5 billion that has been collected since EFFS was implemented. OFIS and OC are attempting to reconcile the two systems.

Some Accounts May be Misstated

To verify the accuracy of filing and fee information in EFFS, we mailed 100 confirmation letters to registrants from the population of approximately 347,000 entity accounts. The sample was judgmentally selected; these registrants are not representative of the population. Sixty-four of those selected had been previously identified as potential problems since they were listed on the EFFS exception reports. Twenty-five of those selected came to our attention during detailed audit testing. The remaining eleven were arbitrarily selected from mostly large, well known companies. We received eighty-three responses as of October 31, 1995, eighty-one of which provided account balances, according to their records.

Of these eighty-one responses, thirty-eight agreed with EFFS' account balance while forty-three did not agree with EFFS. Of the forty-three which did not agree, thirty-five differed by an amount less than $8,000 while eight differed by an amount greater than $8,000.

Because of time and resource constraints, we were not able to resolve the eight large discrepancies noted above. OFIS has since made correcting entries (based on their analysis) to these eight accounts. Currently, six of the eight either have an available balance or owe fees of less than $8,000. Two of the eight have available balances of greater than $8,000. According to OFIS, these two accounts with large available balances are correct.

Filing Types Were Generally Classified Correctly

The Commission classifies filing fees in its budget submission as either 6(b) or non 6(b). We reviewed whether this classification was being properly made. Generally, other than for two exceptions, the classification of filing fees appeared proper.

Two filing types (N-1A and T-3) were being classified differently in EFFS reports and FSS. The amounts involved were not material, and the discrepancies were corrected during the audit.

MANAGEMENT INTERNAL CONTROLS

We concur with the Commission's assessment in its certification letter that there are material deficiencies in the internal controls related to the collection of filing fees. A recent task force report (see Appendix C) has identified additional internal control deficiencies (e.g., problems with the electronic link with Mellon Bank, interface problems with the agency's EDGAR system).

In addition to weaknesses identified in the certification letter and by the task force, the following internal control weaknesses were identified during our audit. The weaknesses with respect to separation of duties, audit trails, and access indicate that a relatively high risk exists that errors and irregularities, including fraud, could occur without being detected.

Fee Verification Limited for 6(b) Filings

OFIS does not verify the fee amount, except for checking the mathematical accuracy of the fee calculation. Additional procedures would help provide assurance that the fee paid was correct. These procedures could include:

  • Determining whether the registrant interpreted the fee rules correctly;
  • Obtaining from an independent source (e.g., a financial newspaper) the offering price per unit (i.e., share price) used in the fee calculation; and
  • Comparing the information on the cover sheet (i.e., the first page of the filing) to similar information in the text of the filing.

The additional assurance obtained would need to be weighed against other factors, such as the cost of further review and the likelihood of identifying errors. In addition, the Division of Corporation Finance already reviews fee payments for those filings receiving a full review.

Recommendation B

OC, in consultation with the Divisions of Corporation Finance and Investment Management, and OFIS, should consider whether additional procedures for fee verification would be cost effective. One option would be to perform these procedures on a sample of 6(b) filings as a test of their usefulness.

Recalculation of Offering Amount for Electronic Filings

For paper registration filings, DCB staff in OFIS recalculate the offering amount (i.e., the total number of shares times the price per share) and the resulting fee. In our sample of 61 paper registration filings, we found two instances in which the registrant miscalculated the offering amount and the fee. DCB staff had identified both of these errors.

For electronic registration filings, EDGAR transmits to EFFS the total offering amount reported by the registrant in the introductory material (the header) to the filing. EFFS then calculates the fee based on this amount, but neither EDGAR nor EFFS recalculates the offering amount.

Our audit results indicate that this recalculation is needed. We selected a sample of 57 electronic registration filings for review. We found one instance in which the registrant miscalculated the offering amount and underpaid the fee. In another case, the offering amount in the header differed from the amount in the filing text, leading to an underpayment. Finally, we found three instances in which the registrants inaccurately calculated the fee, although the offering amount was correct. In these instances, the filing was either suspended because of an underpayment, or the registrant overpaid.

Recommendation C

OED, in consultation with the Divisions of Corporation Finance and Investment Management, OFIS, OC, and other users, should conduct a cost-benefit analysis of whether to request OIT to program EDGAR to recalculate the offering amount, based on the number of shares and the price per share, where applicable, or wait for EDGAR's successor. Share volume and price per share information could be added to the header, or this information could be obtained from the first page (cover sheet) of the filing.

Recalculation of Filing Fees During Offering Update Process

Information about filings is recorded in FILE. When a 6(b) filing is initially received, the total offering amount is recorded. After the filing is accepted, OFIS staff classify the number of shares and offering amount data by the class of securities involved (e.g., common or preferred stock, options) in FILE.

During this classification (known as the offering update process), OFIS staff are supposed to recalculate the filing fee. This step is especially important for detecting mathematical errors in electronic filings, since EDGAR does not perform the fee calculation (see the previous finding).

In our sample of 57 electronic filings, we found one instance in which the registrant miscalculated the offering amount and underpaid the fee. OFIS staff did not recalculate the fee during the offering update process, and the error went undetected until found during our audit (the correct fee has since been paid).

We identified two instances in which the number of shares, share price, and/or the offering amount was incorrectly stated in the registration statement. Again, OFIS staff did not recalculate the fee during the offering update process, and therefore did not detect the errors. As a consequence, although the proper fee was initially paid, FILE contains incorrect information concerning the amount of each class of securities involved.

Recommendation D

OFIS should require its staff to recalculate the filing fee during the offering update procedure, especially for electronic filings.

Recommendation E

OFIS should correct filing information in FILE for the three filings discussed above.

Recommendation F

OED, in consultation with OC, OFIS, and the Divisions of Corporation Finance and Investment Management, should explore the feasibility of automating the offering update process.

EFFS, FILE and CICS Access Needs Coordination

EFFS and FILE reside within the mainframe Customer Information Control System (CICS) operating system. Employees need to provide passwords, first to access CICS, then to access EFFS and FILE. OFIS controls EFFS and FILE access, while OIT has overall responsibility for CICS access.

Currently, EFFS, FILE, and CICS access are not coordinated, posing a security risk. For example, an OFIS employee whose CICS access was deleted could still access EFFS and FILE, if the employee was assisted by someone with CICS access or found an unattended terminal running a CICS application.

Recommendation G

OFIS and OIT should implement procedures to ensure that an employee whose CICS access is deleted is also denied access to EFFS and FILE.

Update Access File

OIT had maintained the on-line security access system (referred to as SECD) used to control access to EFFS and FILE. However, maintenance responsibility was recently transferred to OFIS. The access database is not current or accurate. OFIS has begun taking steps to update the database. However, in order to keep the information current, OFIS needs to be informed of personnel actions (e.g., individuals leaving the Commission).

Recommendation H

OED should ensure that OFIS gets updates on relevant personnel actions in order to keep the access system current.

Separation of Duties

OFIS staff generally have either level 20 (basic) or level 95 (enhanced) access to EFFS. Level 20 allows the staff to record fees and adjustments, and establish new accounts. Level 95 allows the staff to reallocate, route, or delete fees, in addition to the level 20 functions. OFIS staff have similar access to FILE.

Within OFIS, DCB staff additionally have physical custody of filings and assets (checks and cash). Consequently, some staff have responsibility for both recording and receiving (i.e., custody) assets. This lack of adequate separation of duties needs to be corrected to help prevent errors or irregularities. Adequate separation of duties require that the responsibilities of authorizing transactions, recording transactions, and custody of assets be separated.

Recommendation I

OFIS and OC, should review the separation of duties of its staff with respect to the collection of filing fees. Appropriate changes to increase separation of duties among its staff should be made. Staff assignments should be made to minimize the possibility of non-collusive fraud.

Audit Trails Need Improvement

EFFS creates a partial audit file for transactions (e.g., deleted fees). This file also records FILE entries affecting fees. During the testing phase of our audit, the audit file did not identify the OFIS employee who performed the transaction, even though OFIS staff are assigned unique identification numbers. We were recently informed that during the later stages of our audit testing, OIT had begun to program EFFS to record (off-line) the identification number. According to Commission staff, EFFS is now recording the operator identification number for all transactions, however, the information is not available on-line while reviewing the audit file.

Explanations for changes to either system's data are not documented or reflected in management reports, except in limited instances (e.g., fee refunds). Consequently, EFFS audit trails are not adequate to prevent or detect errors and irregularities.

Recommendation J

OFIS and OC, should ask OIT to program EFFS to include the staff identification number in the audit file, provide capabilities for recording an explanation of why the change was made to the system, and develop appropriate management reports. OFIS staff should document explanations for changes, in the audit file, if possible, or elsewhere.

Account Statements Not Sent Until Recently

As part of the existing internal control system, registrants are supposed to periodically receive account statements (also known as activity statements) detailing filing and fee activity. These statements are an important management control for detecting errors in EFFS.

Because EFFS data were unreliable, account statements were not sent out until recently. Some registrants are only now receiving their first account statement.

Recommendation K

OFIS should complete the initial mailing of account statements to registrants, and continue periodic mailings in compliance with 4 CFR 102.2.

Recommendation L

To the extent feasible, OFIS and OC should seek to separate the function of responding to registrant inquiries regarding information contained in their account statement from other filing fee collection duties.

Track Unused File Numbers

File numbers for registration statements are assigned in consecutive order. We selected a statistical sample of 134 registration filings for testing (half electronic, half paper) from the appropriate blocks of numbers.

We noted three unused numbers (two electronic filings, one paper filing) which were not adequately documented. As a management control, all numbers in a consecutive series should be accounted for.

Recommendation M

OFIS, OC, and OIT should develop a method to track and control all sequential registration statement file numbers.

Use One Dating Method for Management Reports

Some EFFS reports are based on the date the filing and fee were received, while others are based on the date the filing and fee were recorded (referred to as the on-file date). As a consequence of this timing difference, the totals from reports using different methods are not comparable.

Recommendation N

OFIS and OC should select and use one dating method (received or recorded) for EFFS reports in order to enable the fee collection process to be audited. Other versions of the reports can be created for other purposes using a different dating method.

Limit the Number of Accounts in EFFS

EFFS consists of approximately 347,000 accounts, but only 50,000 of these are assigned to active filers that pay fees. OFIS does not have a procedure for limiting the number of accounts in EFFS. Unnecessary accounts pose a control risk.

Recommendation O

OFIS and OC, should eliminate unnecessary EFFS accounts, or establish an inactive status. It should also consider reducing the number of its staff who can add new accounts to EFFS.

Display Account Balance as of Prior Date

EFFS can only display a registrant's account balance as of a prior date, if an activity statement was produced on that prior date. If no activity statement was prepared on a particular prior date, EFFS is unable to display the account balance for that date. This limitation makes reconstructing account activity difficult.

Recommendation P

OFIS and OC, should ask OIT to ensure that the successor system can display account balances for all prior dates.

Endorse and Secure Checks

As checks are received, DCB staff are to endorse them for deposit only. This important control helps prevent possible fraudulent negotiation of the checks.

We observed that DCB staff generally endorsed checks properly. However, the staff told us that checks received by the mail room and the field offices were not always endorsed before being forwarded to DCB. We could not confirm this statement, as the mail room and field offices receive relatively few checks and none were available in the mail room during the times of our attempted surprise observations.

We noted several unendorsed personal checks on a table in the DCB filing room. These checks were being held for replacement, since personal checks are not acceptable for payment of 6(b) filing fees. We also noted that the safe (where the checks should have been stored and cash receipts are kept) was unlocked.

Recommendation Q

OC should remind the mail room and field offices to endorse checks for deposit only before forwarding them to the DCB.

Recommendation R

OFIS should secure all unendorsed checks in the safe and keep the safe locked.

Appropriate Service Being Provided to Registrants

We surveyed those registrants to whom we sent confirmation letters (see page seven). The survey's objective was to assess the level of service being provided to registrants by OFIS staff.

Most registrants responded that they did not have difficulties with filing and fee procedures, and that OFIS staff were helpful, knowledgeable, and responsive. However, a few registrants indicated that phones were always busy, or that some OFIS staff were not knowledgeable.

Recommendation S

OFIS, in consultation with OIT and OC, should consider the cost and benefits of enhancing service to registrants (e.g., establishing an automated system providing registrants with inquiry access to their EFFS account information).

Recommendation T

OFIS should provide additional training to filer support staff, as resources permit.

Documentation Needs Improvement

The Commission disclosed, during our audit, that EFFS does not have sufficient current documentation describing functional requirements, system specifications, data and transaction requirements, and user and training manuals. This weakness has been reported in the Commission's December 1995 certification of management controls (under the Federal Manager's Financial Integrity Act, and OMB Circulars A-123 and A-127).

Recommendation U

OC, OFIS, and OIT should ensure that the successor system contains adequate documentation as defined by OMB Circular A-127.

Commission management indicated that it will address the lack of documentation in the system redesign. In addition, in the short term, they plan to distribute user and training manuals for EFFS.

COMPLIANCE WITH LAWS AND REGULATIONS

As part of the audit, we evaluated the extent to which the current collection of filing fees process complies with applicable laws and regulations. Our findings specifically related to compliance with laws and regulations are set forth below.

Lack of Payment of Certain Non 6(b) Fees at the Time of Filing

The federal securities laws administered by the Commission require the filing of a variety of documents with the Commission. With respect to some of these documents, the applicable statute itself requires that the filer "shall pay" a fee to the Commission "at the time of filing." With respect to other documents, the applicable statute is silent as to the time of payment, but the Commission's regulations similarly require payment of the fee at the time of filing.

Not all Commission fee collection practices comply with the requirements of fee payment at the time of filing. Although the Commission refuses to accept a registration statement under section 6(b) of the Securities Act of 1933 that is not accompanied by payment of the fee, either at the time of or prior to filing, it accepts non 6(b) filings that also require payment at the time of filing (see Appendix D) without the fee. These non 6(b) filings are accepted and an account receivable in the amount of the appropriate fee is established.

Recommendation V

OGC should consult with the Commission to determine if it believes that, for public policy reasons (e.g., timely dissemination of information to investors associated with acceptance of non 6(b) filings without fee payments), current collection practices should be retained. If the Commission determines that investors are best protected under current fee collection procedures it should propose appropriate amendments to the statutes involved and modify its own regulations.

Recommendation W

OED, in consultation with the OGC, OC, OFIS, and the Divisions of Corporation Finance, and Investment Management, should modify applicable current fee collection procedures for non 6(b) filings to require payment of filing fees at the time of filing, if required by statute or regulation.

Payment of Debts Requested Recently

Under 4 CFR 102.2, government agencies are required to promptly (i.e, within 30 days) demand payment in writing for debts owed to the government. Because EFFS data were unreliable, payment demands were not made until recently for debts arising from non-6(b) filings (6(b) filings are not accepted without payment).

As described in the Management Controls section, OFIS has recently begun mailing account statements. Among other purposes, these statements will demand payment of debts owed to the Commission.

Deposit Checks Timely or Obtain Waiver

Checks received by the DCB are generally deposited by OC on the second working day after their receipt. Treasury requires [Section 8030.30 of the Treasury Requirements Manual] that receipts totalling $1,000 or more be deposited on the day received, although a waiver can be obtained.

Recommendation X

OC should review the current deposit procedures to determine whether checks can be deposited on the day received. If it is determined that this is not possible, OC should seek a waiver from Treasury.

EFFS Reports of 6(b) Fees Owed

As of March 3, 1995, EFFS reported $12.9 million in 6(b) fees owed for fiscal year 1995, and a cumulative total of $27.3 million owed since EFFS was implemented in July 1992. This material balance of 6(b) fees owed raised the possibility of non-compliance with Section 6(b) of the 1933 Act, which requires prior or concurrent fee payment for registration statements.

OFIS and OIT examined this issue during our audit, and have accounted for virtually all of the reported balance. On October 31, 1995, EFFS reported about $6,000 in registration fees owed for fiscal year 1995, and a cumulative total of about $67,000.

We also reviewed this issue by examining selected filings and fee payments, as well as by sending confirmation letters to a sample of registrants. Based upon our review, it appears that, generally, 6(b) filings are not being accepted without the required filing fee. The large reported balance as of March 3, 1995 appeared to be primarily caused by EFFS system limitations, clerical errors, and other causes, as described below.

Explanation of 6(b) Fees Reported as Owed - Offset Transactions

The first cause of the $27.3 million reported as owed was that certain business acquisitions, dispositions, and consolidations require the initial filing of disclosure documents and payment of a filing fee for the disclosure document (1/50th of the value of the securities being acquired). Generally, a registration statement is filed subsequently in connection with the transaction. The filing fee for the disclosure documents is supposed to be deducted (offset) from the registration statement fee.

After FILE obtains the offset information from EDGAR (for electronic filings) or OFIS (for paper filings), it transmits the data to EFFS. However, at the time of our audit, this offset function was not properly operating and the offsets were not being applied. These 6(b) filings were reported as being accepted without payment because the fee paid for the registration statement was reduced by the offset amount but the offset was not recorded. Since the offset was not being recorded, the fee due, calculated from the registration statement, was greater than the fee paid with the registration statement (which was net of the offset). Since EFFS does not consider partial payments, the entire fee was reported as owed and the registrant's available balance was also misstated.

The Commission informed us that the offset function is now operational, although it cannot process multiple offset transactions.

Recommendation Y

OFIS and OC, in conjunction with OIT, should ensure that EFFS or its successor can process multiple offsets.

Explanation of 6(b) Fees Reported as Owed - Improper Fee Designation

Another cause of the $27.3 million reported as owed was that EFFS designates fee payments as either restricted (limited to 6(b) filings) or unrestricted (available for both 6(b) and non-6(b) filings). If the registrant does not designate the payment, it is recorded as unrestricted.

If a payment for a 6(b) filing is designated as unrestricted, EFFS will apply the payment to any previously unpaid filing(s) (in chronological order). The fee for the 6(b) filing will then be reported as owed. OFIS then must make a manual adjustment to record the 6(b) filing as paid.

In the "Activity Statement Guide" and "Fedwire Guide", the Commission attempts to notify filers to designate their 6(b) fee payments as restricted. However, some of the filers we spoke with did not understand what the term "6(b)" referred to. As a consequence, they will be unable to understand the instruction when they receive it. Also, the guides fail to instruct short form registration filers to designate their payments as non-restricted (see page 21).

Recommendation Z

OFIS, in conjunction with OIT and the task force, should revise the "Activity Statement Guide" and "Fedwire Guide" to define the term "6(b)" and include instructions for designating short form registration fees. This information should also be included in other future correspondence to filers (e.g., transmittal letters of account statements).

Explanation of 6(b) Fees Reported as Owed - Tolerance Waivers

Another cause of the $27.3 million reported as owed was that EFFS automatically accepts fees that are underpaid by $1 or less (referred to as a tolerance waiver). This procedure was established because of differences caused by rounding. The rounding differences depend somewhat on how, and in what order, the filing fee is calculated (e.g., whether the offering amount is multiplied by 1/29th of 1% or divided by 2,900). OFIS divides the offering amount by 2,900 to determine the filing fee.

OFIS can forgive (i.e., waive) filing fee deficiencies less than $5. If OFIS forgives an amount larger than EFFS's tolerance limit of $1 and does not record the waiver, EFFS would report the full amount of the 6(b) fee as owed, since EFFS does not reduce 6(b) fees owed by partial payments. In addition, since the payment would not be applied to the filing, the registrant's available account balance would be overstated.

Recommendation AA

OFIS and OC, should ask OIT to program EFFS' tolerance waiver to equal OFIS' waiver authority of $5. Otherwise, OFIS and OC should ensure that there are adequate policies and procedures to ensure that fee waivers that are greater than $1 but less than $5 are recorded in a timely manner.

Recommendation BB

OFIS should clearly notify registrants (e.g., through the account activity statements and/or other mailings) that 6(b) fees should be calculated by dividing the offering amount by 2,900.

Apply Restricted Funds to Short Form Registration Statements

Under a recent rule change (462(b) of the Securities Act), registrants can increase, by up to 20%, the amount of securities offered in a prior registration statement by filing a short form registration statement. The registrant has to pay the appropriate fee by the close of the next business day.

EFFS is not programmed to accept registration statements without the filing fee; therefore, these filings are classified as non-6(b). However, if registrants designate fee payments for these filings as restricted, EFFS will not apply the payments to the filings. In addition, if the registrant designates the fee payment as non-restricted, the payment would be applied to any unpaid filings, in the order they were filed.

The task force has determined that restricted and non-restricted funds should be used to pay for short form registration statements. However, because of the significant effort required to program this change, the issue should be addressed when EFFS is replaced.

Recommendation CC

OFIS, OC, and OIT should ensure that the successor system to EFFS can properly process short form registration statements.