SEC Good at Fining, Bad at Collecting

GAO says commission lousy at collecting receivables; changes coming? Plus: securitization market in Germany gets big boost, while in U.S., banks starting to waiver.

In late February, the Securities and Exchange Commission filed civil fraud charges against eight former and current managers of Qwest Communications International Inc. Among the punishments the SEC is seeking to impose are civil money penalties and disgorgement of ill-gotten gains.

But even if the executives are found guilty, investors may never get back a dime.

That’s because the SEC has a poor record of collecting on the fines it levies on those who have been found guilty of fraud. In fact, a report by the General Accounting Office found the SEC collected only 14 percent of the $3.1 billion in fines it issued against securities-law violators between 1995 and 2001.

“In the past, the SEC hasn’t done a very good job at collecting on the penalties that it has imposed,” says Alan R. Bromberg, a professor at the Dedman School of Law at Southern Methodist University. He explains that the SEC has typically been understaffed, and that limited resources have kept it from being able to pursue laggard fines.

In addition, a welter of state laws, such as those that protect a residence from collection efforts, make it difficult for the SEC to enforce the fines.

“Wrongdoers often hide assets to hinder collection efforts,” noted Stephen Cutler, director of the SEC’s division of enforcement, in testimony to Congress on Feb. 26.

The SEC is now taking steps to improve its ability to collect fines, including petitioning Congress to enable the agency to pursue expensive homes that are protected by some state laws. “The SEC is also seeking more latitude for civil penalties to be put toward disgorgements and paid back to wronged investors,” says Bromberg. Previously, most of what was collected went to the U.S. Treasury.

Bromberg says the new provisions should improve the SEC’s ability to enforce its penalties. “In the future, you’re going to see an SEC that is more aggressive at collecting the penalties it imposes.”

Liquid Refreshment

Securitization may be set for take-off in Germany, following changes in tax rules governing asset-backed financing.

Under a draft tax law released in March, German-resident special-purpose vehicles (SPVs) will be exempted from trade tax on bank receivables. Subject to approval from the opposition, the rules should be in place by September, with retroactive effect from Jan. 1, 2003.

While welcoming this change, observers are now waiting for stage two, in which the finance ministry will extend similar tax relief to non-bank originators. “The scope of the legislation has to be widened — it should apply to corporate assets too,” says Hubert Schmid, a tax partner at Clifford Chance Pünder in Frankfurt.

At present, larger German corporates currently sell their receivables directly to foreign-registered SPVs. That has held back the German securitization market. Standard & Poor’s reports that of new, funded deals in Europe in 2002, Germany ranked fifth, with $9.6 billion, well behind the U.K. ($51 billion), Italy ($30 billion), the Netherlands ($21 billion), and Spain ($19 billion).


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