GAO Calls for Better Criminal Referrals, Postemployment Monitoring

June 7, 2005 ( - A Congressional watchdog agency has recommended that the US Securities and Exchange Commission (SEC) better document its criminal referrals in securities cases and better monitor departing workers for potential conflicts of interest.

The suggestions came from the US Government Accountability Office  in a report released Tuesday about the SEC’s performance during the ongoing mutual fund trading scandal that has focused on market timing, late trading and certain sales practices.

GAO researchers said that the SEC has brought 24 actions relating to the scandal, including 14 against investment advisors and 10 against other firms for fund trading abuses and won penalties averaging $56 million.   Further, the SEC filed enforcement actions against 24 people associated with the investment advisors, many of them high-ranking, and obtained penalties as high as $30 million, as well as lifetime industry bars for some persons, the GAO said.

The GAO said it looked at a sample of the advisor cases and found that the SEC followed a consistent process for determining penalties and that it coordinated penalties and other sanctions with interested states.

SEC officials said they didn’t have to tell criminal prosecutors about the potential cases since they were already aware of them, the GAO said. However, during the course of its review, GAO found that SEC’s capacity to effectively manage its overall criminal referral process may be limited by inadequate recordkeeping.

The GAO said the SEC does not require staff to document whether a referral was made or why. According to federal internal control standards, appropriate documentation of agency actions helps ensure that management directives are carried out, GAO warned. Without such documentation, the SEC cannot readily determine whether staff make appropriate referrals and such information is also important as an agency performance indicator and for congressional oversight purposes, the GAO maintained.

The other primary area of GAO concern was the extent to which the SEC was properly enforcing and monitoring compliance with rules governing jobs its personnel can take after leaving the agency. “We also found that SEC has not established controls that could help ensure the independence of staff from the fund industry as they carry out SEC’s critical oversight work. Although SEC provides ethics training to its employees regarding seeking employment and postemployment conflict-of-interest laws, the agency does not require departing staff to provide information on their future employment plans,” the GAO wrote. “In the absence of such information, SEC’s capacity to ensure compliance with conflict-of-interest laws related to postemployment opportunities is limited. Further, SEC does not have procedures in place requiring review of departing employees’ workpapers should a potential conflict of interest be discovered.”