(The news featured below is a selection from the news covered in Federal Securities Law Reporter.)

Cox Pledges to Upgrade SEC's Administration of the Fair Funds Provision

In a letter to Rep. John Dingell, SEC Chairman Christopher Cox acknowledged problems with the tracking and management of penalties and disgorgement collection in the operation of the fair funds program mandated by the Sarbanes-Oxley Act and said that reform of the process is a top priority. His remarks were keyed to a recent GAO report which found that defrauded investors have received only a small percentage of the funds collected by securities regulators.

Chairman Cox's letter responds to a letter from Rep. Dingell regarding an August 2005 GAO report on SEC and CFTC penalties. The fair funds statute, Section 308 of Sarbanes-Oxley, takes the civil penalties levied by the SEC as a result of any judicial or administrative action and directs them to a disgorgement fund for the benefit of harmed investors. The provision was described by former Enforcement Director Stephen Cutler as a groundbreaking measure to help the Commission return more funds to defrauded investo rs. Section 308 also requires the SEC to develop methods to improve collection rates.

Chairman Cox said that, since taking office, he has been focusing intently on fixing the problems with the SEC's collection program. He expressed agreement with the findings in the GAO report and pledged to implement the GAO's recommendations in this area. He reported that it is already happening. Chairman Cox noted that the SEC is developing reports that will allow the agency to monitor its collections program worldwide, preparing additional training programs for staff and updating its existing case activity tracking system to include financial data to directly aid collection tracking efforts.

Chairman Cox sees the fair funds provision as a powerful tool that must be used to the fullest extent for the protection of investors. The process of returning money to investors has become needlessly complex, he added. While admitting that there are serious analytical issues to be addressed in any fair funds distribution, especially when the fund is large and the investors numerous, he emphasized that expeditious distribution of funds is critical. He agrees with the GAO's recommendation that the SEC set up a procedure for collecting fair funds data to assist the agency in monitoring and managing money distributed to investors, and reported that the Commission is working diligently to develop the system.

The GAO report also recommended that the SEC develop a method to ensure that case management specialists and collection monitors in the Enforcement Division receive consistent supervision and the necessary guidance to carry out their duties. The GAO said the SEC must determine the effectiveness of new case management specialists, collection monitors and collection attorneys by using formal approaches such as periodically surveying staff attorneys that interact with collection staff to evaluate the assistance the staff provides.

The SEC should also develop procedures for the staff in the Office of Financial Management to timely notify enforcement staff about data entered into the case activity tracking system. The GAO also urged the SEC to continue to identify and establish appropriate performance measures to gauge the effectiveness of collection activities and to begin collecting and tracking data to implement the timeliness measure presented in the Commission's 2004 annual performance plan, if the SEC still considers that measure appropriate.

The GAO found that the SEC has made progress in addressing previous recommendations by discontinuing the use of its sometimes unreliable disgorgement payment tracking system, modifying the case activity tracking system to capture financial information, and establishing an improved procedure for entering data into the case activity tracking system. Dingell, while noting that the fair funds provision must be made more workable, commended the SEC for the actions it has taken.