Deterring Securities Recidivism

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DETERRING SECURITIES RECIDIVISM

Audit No. 360
March 17, 2003

EXECUTIVE SUMMARY

We reviewed the effectiveness of Enforcement's existing procedures to deter recidivism. We also examined whether "best practices" from other organizations (e.g., federal agencies) would be feasible at the Securities and Exchange Commission (SEC). We found that, while the SEC does not have a formal program to deter recidivism, it does use some procedures that might deter recidivism.

SCOPE

During the audit, we interviewed staff from the SEC, the National Association of Security Dealers (NASD), and the following federal agencies: Department of Justice, Environmental Protection Agency, Commodities Futures Trading Commission, Federal Trade Commission (FTC), Federal Communications Commission, and the Equal Employment Opportunity Commission (EEOC). We also reviewed recent SEC Enforcement actions and supporting documentation, among other procedures.

The audit was performed from July 2002 to November 2002 in accordance with generally accepted government auditing standards.

AUDIT RESULTS

Based on our research and other audit work, we identified some methods1 and concepts that Enforcement management could potentially implement to further deter recidivism, which would enhance investor protection.

The FTC has implemented a program to target recidivism. FTC staff believes that its program has reduced recidivism. Other agencies have procedures that could be used to deter recidivism. For instance, the EEOC sometimes requires an employer to give employees a copy of an Order indicating past violations. The SEC sometimes seeks similar relief. For instance, an Investment Advisor sometimes is required to give its clients and prospective clients a copy of an Order indicating past violations.

We discussed our observations with senior Enforcement management. They are considering whether any of the procedures would be practical to implement.

1 Some of the methods could also be used to deter securities fraud in general.