Among other things, this program provides investors with information on the professional background, business practices, and conduct of NASD member firms and their brokers. The Actions Taken Respond to Many of Our Recommendations

SEC and the SROs have taken actions that respond to many of the recommendations in our reports that address issues related to microcap stock fraud. The Actions Reported Respond to Many SEC Recommendations

SEC and the SROs have reported taking actions that respond to many recommendations in two SEC reports that address issues related to microcap stock fraud. Actions have not been completed on our recommendations related to the migration of unscrupulous brokers from the securities industry; modernization of CRD to allow regulators to more easily monitor brokers with disciplinary histories; and ability of SEC to identify, across firms, trends in violations found during its broker-dealer examinations. Also, SEC’s recommendation that would require disclosures to customers on the availability of broker disciplinary information prior to account activity has not been implemented. Action on the Migration of Unscrupulous Brokers Is Not Complete

Our report on unscrupulous brokers discussed the potential for brokers barred from the securities industry to migrate to other financial services industries, such as banking and insurance. However, the NASD rule does not require that the information be provided before activity occurs in an account or at account opening. These actions have improved the availability of registration and disciplinary information on brokers and firms, branch office audit selection, and availability and analysis of customer complaints, which should enhance regulatory oversight and investor protection. Full implementation of these recommendations should further enhance regulatory oversight and investor protection.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on the actions taken by the Securities and Exchange Commission (SEC) and the self-regulatory organizations (SRO) in response to GAO's and SEC's recommendations to reduce microcap fraud.

What GAO Found

GAO noted that: (1) SEC and the SROs have taken, or reported taking, actions that respond to many of the recommendations in GAO's and SEC reports that address issues related to microcap stock fraud; (2) in responding to these recommendations, actions have been taken to: (a) expand the disclosure of and public access to broker disciplinary information; (b) improve National Association of Securities Dealers branch office examination selection; (c) provide more focused sales practices examinations; (d) improve compliance with industry reporting requirements; and (e) implement a continuing professional education requirement for broker-dealers; (3) these actions should enhance regulatory oversight of microcap stock firms and help provide investors with additional protections against abusive practices by such firms; (4) actions have not been completed that would respond to other recommendations related to the: (a) migration of unscrupulous brokers from the securities industry to other financial services industries; (b) modernization of the central registration database to improve oversight of problem brokers and public access to broker disciplinary histories; (c) ability of SEC to identify, across firms, trends in violations found during its broker-dealer examinations; and (d) provision of information on the availability of broker disciplinary histories before activity occurs in an account; and (5) completing actions on these recommendations would further enhance regulatory oversight and investor protection.