GAO Report Reveals SEC's 'Fair Fund' Is Flawed

by Glen Shapiro, LawAndTax-News.com, New York

06 October 2005

Congressmen Paul E. Kanjorski (D-PA), the most senior Democrat on the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, and Barney Frank (D-MA), the Ranking Democratic Member of the House Financial Services Committee, on Monday released a report by the Government Accountability Office (GAO) which reviewed the efforts of the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) in tracking and managing the collection and distribution of civil fines and ill-gotten gains from corporate wrongdoers.

According to the GAO report, since implementing Section 308(a) of the Sarbanes-Oxley Act of 2002, (commonly known as the Fair Fund provision), the SEC has instructed its staff to aggressively use the provision and estimates designating over $4.8 billion for return to harmed investors as a result of the provision’s enactment.

However, to date, only a small amount of the funds have been distributed. According to SEC, distribution is often a lengthy process that can be further complicated by external factors such as a pending criminal indictment on the violator.

The GAO also found that SEC lacked a reliable method by which to identify and collect data on Fair Fund cases. The securities regulator has taken action to address this issue, but efforts were still in their early stages, and the SEC has yet to analyze the data it has collected in order to fully determine the provision’s effectiveness in returning an increased fund amount to harmed investors.

“While I am pleased that the GAO report determines that the SEC has made progress in more effectively managing its collection of penalties and disgorgement funds and that it has successfully used the Fair Fund to collect money to help investors harmed by corporate misdeeds,” Congressman Kanjorski, observed, “I am deeply troubled by the difficulties the agency has encountered in expeditiously returning these funds to American investors.”

In releasing the report, both Congressmen therefore called upon the SEC to continue to focus on improving its administration of the Fair Fund, requested assistance from the SEC in identifying additional legislative reforms needed to improve the implementation of the Fair Fund, and called for congressional hearings to examine these matters.

Congressman Kanjorski went on to add that:

“While the Fair Fund may never be a substitute for private litigation, the SEC needs to find ways to turn the Fair Fund into a more effective mechanism for returning funds to wronged investors, given the limitations of the law and the difficulties of identifying those injured by securities fraud. If the SEC needs additional statutory reforms to protect innocent investors, my Democratic colleagues and I stand ready to work in Congress to consider such changes.”

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