Financial Services Regulators: Better Information Sharing Could Reduce
Fraud (Testimony, 03/06/2001, GAO/GAO-01-478T).
The sharing of regulatory and criminal history data among financial
services regulators can reduce fraudulent activities. GAO recently
reported on several instances where unscrupulous brokers moved from one
financial industry to another. This testimony focuses on (1) systems
used by financial regulators for tracking regulatory history data, (2)
regulatory history data needed to help prevent rogue migration and limit
fraud, (3) criminal history data needs among financial regulators, and
(4) challenges and considerations for implementing an
information-sharing system among financial regulators.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GAO-01-478T
TITLE: Financial Services Regulators: Better Information Sharing
Could Reduce Fraud
DATE: 03/06/2001
SUBJECT: Fraud
Internal controls
Interagency relations
Insurance regulation
Securities regulation
Information disclosure
Reporting requirements
Consumer protection
Self-regulatory organizations
Information systems
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO Testimony. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
******************************************************************
GAO-01-478T
For Release on Delivery Expected at 2:00 p.m. EDT on Tuesday March 6, 2001
T-GAO-01-478T
FINANCIAL SERVICES REGULATORS
Better Information Sharing Could Reduce Fraud
Statement of Richard J. Hillman Director, Financial Markets and Community
Investment Testimony
Before the Subcommittee on Oversight and Investigations and the Subcommittee
on Financial Institutions and Consumer Credit, Committee on Financial
Services House of Representatives
United States General Accounting Office
GAO
GAO- 01- 478T
GAO- 01- 478T
Summary Financial Services Regulators: Better Information Sharing Could
Reduce Fraud
Page 1 GAO has long held the view that financial regulators can benefit from
greater information sharing. We have previously reported on the potential
for rogues, as highlighted by Martin Frankel's alleged activities, to
migrate between different financial services industries. In addition, a more
integrated financial services industry as envisioned by the passage of the
Gramm- Leach- Bliley Act highlights the need for strong information- sharing
capabilities among financial services regulators.
This statement focuses on: (1) systems used by financial regulators for
tracking regulatory history data, (2) regulatory history data needed to help
prevent rogue migration and limit fraud, (3) criminal history data needs
among financial regulators, and (4) challenges and considerations for
implementing an information- sharing system among financial regulators.
Systems used by financial regulators for tracking regulatory history data
are operated and maintained separately in the insurance, securities,
futures, and banking industries. Each industry operates systems and
databases that provide background information on individuals and entities,
consumer complaints, and disciplinary records within that industry. Within
the insurance, securities, and futures industries, this information is
largely centralized. In contrast, such systems and databases are
decentralized among regulators within the banking industry.
Regulatory history data needed to help prevent rogue migration and limit
fraud include information on completed disciplinary or enforcement actions,
ongoing investigations, consumer complaints, and reports of suspicious
activity. Most regulators are in agreement about sharing regulatory
information related to an individual's registration or licensing status and
closed, or completed, adjudicated regulatory actions. Concerns remain over
the sharing of other nonadjudicated regulatory information.
Criminal history data needs of regulators are focused on access to
nationwide criminal history data. Currently, insurance regulators are not on
equal par with their counterparts in the banking, securities, and futures
industries, since many cannot obtain such data.
Challenges and considerations for implementing an information- sharing
system among financial regulators are focused more on legal rather than
technical issues. We found substantial agreement among the regulators about
the benefits of sharing regulatory and criminal data in a more automated
fashion. To accomplish this, it is clear that Congress will need to address
confidentiality, liability, privacy, and other concerns.
With the Subcommittees' support, we believe that fraud prevention efforts
among financial services regulators can be enhanced.
Page 2 GAO- 01- 478T
Statement Financial Services Regulators: Better Information Sharing Could
Reduce Fraud
Subcommittee Chairs and Members of the Subcommittees: We are pleased to be
here today to discuss our observations on the sharing of regulatory and
criminal history data among financial services regulators. GAO has long held
the view that financial regulators can benefit from greater information
sharing. Let me point to a couple of examples. In 1994, we recognized the
potential for unscrupulous, or rogue, brokers to migrate freely from
securities to other financial services industries and related industries,
and we recommended expanded information sharing among financial regulators.
1 More recently, we reported on an insurance investment scam allegedly
perpetrated by Martin Frankel, who had been barred for life from the
securities industry. Mr. Frankel moved to the insurance industry, where he
allegedly stole about $200 million over an 8- year period. 2 Our report
noted that many of those losses could have been avoided had more information
been shared among regulators. Moreover, with the passage of the Gramm-
Leach- Bliley (GLB) Act, the opportunity for banking, insurance, and
securities products to be sold under the same corporate umbrella highlights
the need for strong information- sharing capabilities among the financial
services regulators.
In my statement today, I will first provide an overview of the systems
currently used by insurance, securities, futures, and banking regulators for
tracking disciplinary and other regulatory information. Second, I will
discuss the data needs of regulators that would allow them to better prevent
the migration of rogues from one industry to another and limit
1 Securities Markers: Actions Needed to Better Protect Investors Against
Unscrupulous Brokers (GAO/ GGD- 94- 208, Sept. 14, 1994). 2 Insurance
Regulation: Scandal Highlights Need for Strengthened Regulatory Oversight
(GAO/ GGD00- 198, Sept. 19, 2000).
Page 3 GAO- 01- 478T
Statement Financial Services Regulators: Better Information Sharing Could
Reduce Fraud
fraud. Next, I will discuss regulators' needs for criminal history
information and barriers faced by some financial regulators. Finally, I will
discuss some of the regulators' concerns about problems that could arise
from sharing regulatory information through a more automated system.
In addition to reviewing our past work on these issues, we have had
discussions with and reviewed available documentation from representatives
of the National Association of Insurance Commissioners (NAIC), the
Securities and Exchange Commission (SEC), the National Association of
Securities Dealers Regulation, Inc. (NASDR), the North American Securities
Administrators Association (NASAA), the Commodity Futures Trading Commission
(CFTC), the National Futures Association (NFA), the Federal Reserve Board
(FRB), Office of the Comptroller of the Currency (OCC), the Office of Thrift
Supervision (OTS), the Federal Deposit Insurance Corporation (FDIC), the
Conference of State Bank Supervisors (CSBS), the Federal Financial
Institutions Examination Council (FFIEC), the Federal Bureau of
Investigation (FBI), and the Department of the Treasury's Financial Crimes
Enforcement Network (FinCEN). Each regulator maintains systems for tracking
information being discussed here today.
In our discussions we found substantial agreement among the regulators about
the potential benefits of improved information sharing, particularly related
to licensing or registration data and adjudicated regulatory actions. Most
also concurred that it would be useful to share regulatory and criminal
history information in a more automated fashion. However, each also raised
concerns about various issues including confidentiality, liability, privacy,
and the potential negative effects of premature disclosure of unadjudicated
actions. As a result, developing and implementing a useful information
sharing approach will require the Congress to address
Page 4 GAO- 01- 478T
Statement Financial Services Regulators: Better Information Sharing Could
Reduce Fraud
many challenges, including concerns and potential inertia from some
regulators about certain types of information sharing.
We found that most financial services regulators kept background and
disciplinary- related data on individuals and entities in their particular
financial industry. 3 Within the insurance, securities, and futures
industries, when regulators have authority to license or register
individuals to sell financial products, this information is largely
centralized. Each of these industries operates systems and databases that
provide background information on individuals and entities, consumer
complaints, and disciplinary records within that industry. In the banking
industry, where regulators do not license or register individuals, we found
that regulators also entered and maintained background, regulatory history,
lending practice, and complaint data on entities and some individuals.
Within in the banking industry, such systems and databases are decentralized
among the separate regulators. Therefore, unlike the
“one- stop shopping” search capabilities available in other
financial industries, a search on an individual's regulatory history in the
banking industry could necessitate separate inquiries of the five
regulators' systems. 4
In the insurance industry, NAIC serves as the data administrator for the
regulatory information systems and databases that serve each of the state
insurance departments. According to NAIC, regulatory information on
3 Regulatory background information, among other things, would include the
licensing or registration status and employment history of an individual. 4
Federal banking regulators include the FRB, OCC, OTS, FDIC, and the National
Credit Union Administration. Overview of Financial
Regulatory Information Systems
Insurance
Page 5 GAO- 01- 478T
Statement Financial Services Regulators: Better Information Sharing Could
Reduce Fraud
over 5,200 insurance companies and nearly 3 million agents throughout the
country is available to all state insurance regulators. Some of the key
databases administered by NAIC include
the Producer Database (PDB), a central repository of producer licensing
information on agents and brokers that is updated daily with information
provided by state insurance departments;
the Regulatory Information Retrieval System (RIRS), a database of official
regulatory actions taken against insurance agents and companies;
the Directors and Officers (D& O) Database, a collection of company officer
data derived from insurers' annual statements that, among other things,
allows regulators to track the movement of these individuals from one entity
to another (initiated in 1999);
the Complaints Database System (CDS), a database of closed customer
complaints made against individuals or firms; and
the Special Activities Database (SAD), a database intended to facilitate the
exchange of often unsubstantiated information that could be of regulatory
interest to insurance regulators, including, in some cases, ongoing
investigations.
To simplify queries for information, NAIC has also developed an Internet
search application for insurance regulators called I- SITE that can query
all of the above databases at the same time and return a combined response.
Information from PDB and RIRS are accessible by state insurance regulators
and commercial customers; the D& O, CDS, and SAD databases are only
accessible to state insurance regulators. Although these databases are
maintained by NAIC, much of the information must be supplied by regulators
in the individual states, and the extent of such participation varies across
the states.
Page 6 GAO- 01- 478T
Statement Financial Services Regulators: Better Information Sharing Could
Reduce Fraud
Within the securities industry, NASDR administers the Central Registration
Depository (CRD) system, the primary information system used by securities
regulators to search for background information on individuals and firms.
CRD can be used to obtain background information on an individual's
registration status and employment history. 5 CRD also contains "disclosure"
data that includes an individual's criminal history, disciplinary actions
taken on the individual by a federal or state securities regulatory
authority, and disciplinary actions taken by a self- regulatory organization
(SRO). Disclosure items on CRD also include civil judicial actions and open
and closed customer complaints tied to the activities of individuals or
firms. 6 According to NASDR, approximately 10 percent of CRD records contain
disclosure information.
The CRD system is accessible by federal and state securities regulators and
SROs as well as by securities firms and broker- dealers; however, the amount
of information disclosed varies. NASDR has allowed some other regulatory and
law enforcement agencies access to CRD as well. Additionally, NASDR, through
its statutory public disclosure program, releases certain disciplinary and
other background information to the public on request. To facilitate public
access to CRD, NASDR developed Web CRD, offering limited access to CRD
through the Internet, although responses are not viewable on NASDR's
Internet Web site and must be mailed or e- mailed to the requestor. SEC
officials noted that much of the information on CRD is self- reported by
broker- dealer firms and unverified.
5 In addition to registered individuals, CRD also contains records of
unlicensed individuals who have been involved in the securities industry. 6
CRD contains consumer complaints involving sales practice violations that
have been settled for more than $10, 000 or sales practice or fraudulent
practices that contain a claim of $5, 000 or more in damages within the past
24 months. Complaints older than 24 months are archived and are subject to
more limited disclosure. Securities
Page 7 GAO- 01- 478T
Statement Financial Services Regulators: Better Information Sharing Could
Reduce Fraud
Regulators of futures markets have also developed systems and databases to
collect background data on individuals and firms associated with the futures
markets. NFA maintains background information on individuals and firms in
the futures markets on the Background Affiliation Status Information Center
(BASIC) system. The BASIC system includes disciplinary actions taken against
firms and individuals by CFTC, NFA, or an SRO. It also includes pending
disciplinary actions by CFTC and NFA, but only final actions by SROs. Closed
customer complaints can also be found on BASIC. According to NFA officials,
nearly 6 percent of individuals in the BASIC system have records of
regulatory actions associated with them.
Although the BASIC system is accessible to the public, a number of other
databases maintained by NFA are not. The Membership Registration Receiver
System (MRRS) is an automated registration processing system that collects
registration data on firms, principals, associated persons, and floor
brokers. The Financial Analysis Compliance Tracking System (FACTS) is NFA's
internal record of all financial and compliance data on registered member
firms and individuals. This system also includes information on open
investigations, audits, criminal record checks, and consumer complaints. The
Fitness Image System is another database that includes scanned- in documents
associated with registered firms and individuals.
Within the banking industry, different bank regulators operate and maintain
their own separate systems. Several banking regulatory officials pointed out
to us that in contrast to the practice in other financial services
industries, individuals who work in the banking industry and deal with the
public are not registered or licensed. Consequently, since information
Futures
Banking
Page 8 GAO- 01- 478T
Statement Financial Services Regulators: Better Information Sharing Could
Reduce Fraud
systems and databases used in the banking industry do not have to support
such functions, they are not, in some respects, comparable to the systems
used by other financial regulators. Although each bank regulator maintains
its own databases of completed enforcement actions taken against individuals
or institutions, regulators told us that, in general, communication among
the banking agencies is good.
Additionally, working together with law enforcement agencies, bank
regulatory agencies developed a single form, the Suspicious Activity Report
(SAR), for the reporting of known or suspected criminal law violations and
transactions that an institution suspects involve money laundering or
violate the Bank Secrecy Act. Financial institutions enter these SARs into
Treasury's FinCEN system. FinCEN provides support to over 150 federal, state
and local law enforcement agencies, as well as to bank regulators and many
international financial crimes investigators. FinCEN is a key element in
efforts to prosecute money laundering and to
“follow the money” to identify and apprehend criminals in this
country and around the world.
Most enforcement actions taken by bank regulators have been public since
1989. Banking regulators are generally required to publish these actions
and, additionally, have made such information available through their web
sites. Recently, in cooperation with the FFIEC, bank regulators have created
a set of links between their individual Web sites to facilitate Internet
access to disciplinary or enforcement actions taken against individuals and
institutions. Although the level of disclosure varies somewhat with each
regulator, all disclose information on closed enforcement actions, such as
removal and prohibition actions taken against officers and directors of an
institution. Other actions posted by regulators include cease and desist
orders and civil monetary penalties.
Page 9 GAO- 01- 478T
Statement Financial Services Regulators: Better Information Sharing Could
Reduce Fraud
However, it is not always possible to determine from the posted data what
specific behaviors or activities resulted in an enforcement action.
Banking officials also told us that each regulator maintains information on
open investigations and consumer complaints. Upon request, banking
regulators may share information on open investigations with other
regulators. They may also contact other regulators including SEC or NAIC to
coordinate actions, if appropriate. Most banking regulators are working
through NAIC to establish agreements with state insurance regulators.
Banking regulators stressed that consumer complaints that they receive
usually do not involve bank officials, officers, or illegal acts. Complaints
typically involve such areas as fee and service charges, error resolution
procedures, interest payment calculations, or issues associated with bank
closings or mergers. Regulators monitor trends in consumer complaints and
follow up on them during bank examinations.
In discussions with financial regulators and Committee staff, four types of
data, aside from those related to licensing and employment history, used by
regulators could be useful in detecting fraud and limiting its spread from
one financial industry to another. These data types are 1) completed
disciplinary or enforcement actions, 2) ongoing regulatory investigations,
3) consumer complaints, and 4) reports of suspicious or unverified activity
that merit regulatory attention, but may not yet rise to the level of a
formal investigation. Some of these data types are not sufficient by
themselves to support a regulatory action such a disqualification for
registration or a license. However, if regulators had the information
available, it could prompt them to ask more probing questions or conduct
further checks to ensure the fitness of industry applicants. In the Frankel
case, although Frankel himself allegedly used aliases and fronts to
perpetrate the fraud, one of the individuals who appeared to have provided
funds to purchase Improved Regulatory
Data Sharing Could Help Prevent the Migration of Rogues and Limit Fraud
Page 10 GAO- 01- 478T
Statement Financial Services Regulators: Better Information Sharing Could
Reduce Fraud
the first insurance company, subsequently looted of its assets, had a
disclosure item involving complaints and settlements in the securities
industry. If regulators had interviewed that individual to discuss past
regulatory incidents and probed further, they may have found out that the
individual had not actually provided the funds to acquire the insurance
company and the scam may have been stopped before the assets were stolen.
Nearly all financial regulators maintain records and databases that include
each of the above types of information-- some as public information and some
for use by only regulators or law enforcement agencies. There is broad
agreement that all of this regulatory information has legitimate and
beneficial uses. There is much less agreement on how much or, indeed,
whether to share some of the information because of concerns about
confidentiality, liability, and the potential for inappropriate use of some
of the information.
In most cases, completed disciplinary or enforcement actions are public
information. Despite their public nature, they may not be easily or
conveniently available to all regulators for every person requiring a
background check for employment in a financial institution. A network or
system for routinely sharing this information would facilitate such checks.
Other types of regulatory information would also be useful to other
regulators for background checks and for identifying and investigating fraud
and other financial crimes. However, regulators' willingness to share this
more sensitive information will depend on resolving existing concerns.
Nevertheless, even a system for routinely sharing completed enforcement
actions would increase regulatory efficiency and effectiveness in
Page 11 GAO- 01- 478T
Statement Financial Services Regulators: Better Information Sharing Could
Reduce Fraud
conducting background investigations that could limit the migration of
undesirable people, or rogues, from one financial services industry to
another. To improve this process, financial regulators need the ability to
readily identify individuals that have had a problematic history within the
financial services sector and review the specific circumstances on a caseby-
case basis. Currently, financial regulators largely depend on the
selfreported information disclosed by applicants during chartering or
licensing approval activities to gather information about an individual's
participation and background in other financial industry.
Financial regulators should seek to validate the self- reported information
on an individual's work history and confirm their reported disciplinary
history. If a regulator knows an applicant has worked in another financial
industry, it may currently communicate with another regulator depending on
the existence of a bilateral information sharing arrangement. However, if
individuals with an employment history and involvement in another financial
industry do not disclose their backgrounds, it may be difficult for
regulators to detect. Without an effective way of routinely checking the
regulatory records of multiple industries and agencies throughout the
financial services sector, some rogues are undoubtedly able to avoid being
detected by regulators.
Our discussions with financial regulators revealed that disciplinary history
data would be most useful when evaluating applicants seeking to enter a
particular financial services industry or when conducting an investigation.
Regulators routinely evaluate new industry applicants when chartering a new
institution. During chartering approval activities, the regulatory body
assesses the backgrounds of the directors, officers, and owners of the
proposed financial institution. Similarly, new industry applicants in
insurance, securities, and futures are evaluated as regulators license or
Page 12 GAO- 01- 478T
Statement Financial Services Regulators: Better Information Sharing Could
Reduce Fraud
register those that wish to sell financial services products (e. g., agents,
brokers, etc.). Financial regulators also mentioned that regulatory history
data from other financial industries could be useful during investigative or
enforcement activities. An ability to identify associations and linkages
among both individuals and institutions would facilitate these investigative
functions.
Although regulators generally share information with other regulators when
asked, they may not routinely share regulatory data with each other because
no convenient method for such sharing exists. Information systems and
databases that could be used to conduct regulatory history checks are
generally accessible to regulators within a particular financial services
industry, such as within the banking or insurance industries, but may not be
available or easily accessible across different financial industries. Some
regulators, recognizing a need to share regulatory data with other financial
regulators, have established bilateral information sharing arrangements to
access external regulatory information. Using such arrangements, some
regulators already access some systems and databases operated by other
financial regulators. For instance, NASDR has provided some banking and
futures regulators the ability to access CRD. However, even when such
information- sharing agreements exist, obtaining regulatory history data
from multiple financial regulators currently requires separate inquiries to
each financial regulator from which such information is desired.
For most financial services regulators, performing routine criminal history
background checks is another requirement in carrying out licensing or
chartering responsibilities. Currently, financial services regulators do not
all have the same ability to access criminal history information on
individuals. As noted in our recent report on regulatory weaknesses
Regulators Need Access to
Nationwide Criminal History Data
Page 13 GAO- 01- 478T
Statement Financial Services Regulators: Better Information Sharing Could
Reduce Fraud
associated with a fraud perpetrated in the insurance industry, we found that
many state insurance regulators do not have the means to routinely conduct
nationwide criminal background checks on applicants who enter the industry.
In contrast, the securities, futures, and banking regulators we contacted
are authorized to routinely request criminal history checks on industry
applicants through the FBI and other law enforcement agencies. As we noted
in our earlier work, we believe insurance regulators need to have this
capability to help prevent criminals from entering the industry.
Representatives from NAIC and the FBI have been working on solutions to
facilitate insurance regulators' ability to conduct routine criminal
background checks through the FBI utilizing their recently developed
automated fingerprint identification system.
FBI and regulatory officials agreed that facilitating information sharing
between law enforcement and regulatory agencies was of mutual benefit. FBI
officials noted that recent financial modernization efforts will make it
increasingly important to assess regulatory information from all financial
industries. Likewise, financial regulators may benefit from other law
enforcement information beyond that typically supplied through criminal
history background checks. Questions remain on the appropriate timing and
extent to which information about an ongoing criminal investigation could be
shared between law enforcement and regulatory agencies in a more automated
fashion.
Generally speaking, the concerns that financial regulators expressed to us
about sharing more regulatory information with one another were not
technological in nature; rather, they involved issues about the need to
protect sensitive regulatory data that may be disseminated to a wider
audience. These concerns include questions about what specific Challenges
and
Observations for Implementing a Shared Regulatory Data Network
Page 14 GAO- 01- 478T
Statement Financial Services Regulators: Better Information Sharing Could
Reduce Fraud
regulatory information may be appropriate to share, the types of entities
that would have access to such data, and liability issues surrounding the
release of unsubstantiated information. Some of the financial regulators
with whom we spoke, including SEC and NAIC, were already considering or
recommending legislative remedies to facilitate enhanced information sharing
with other regulators or the FBI. Because the views we obtained from
regulatory agency officials were preliminary in nature and not official
agency positions, we must defer to the financial regulators to convey their
specific proposals or positions. Undoubtedly, legislative actions will be
needed to address issues related to the sharing of sensitive information.
Ultimately, the optimal implementation approach will depend on the extent to
which protections are in place to make financial regulators feel comfortable
in sharing sensitive regulatory information with one another.
As mentioned earlier, financial regulators possess regulatory data of
varying levels of sensitivity. The financial regulators we contacted did not
express concern about sharing basic regulatory history data on closed
disciplinary or enforcement actions. The majority of such information is
already publicly available, although not necessarily easily accessible. Such
information could convey whether an individual was registered in a
particular financial industry and any closed regulatory actions tied to the
individual's activities in that industry. The threshold of concern rises as
the sensitivity of the regulatory data rises, particularly when
unsubstantiated regulatory and ongoing investigation data is involved. For
example, several financial regulators pointed out that the untimely release
of information on an open investigation could jeopardize that investigation
and existing sources of information.
Another concern was the release of regulatory data to entities or
individuals without regulatory authority. Financial regulators in both the
Page 15 GAO- 01- 478T
Statement Financial Services Regulators: Better Information Sharing Could
Reduce Fraud
banking and securities industry believed that NAIC's status as a
nonregulatory entity was a barrier to releasing regulatory data to it, even
though NAIC operates on behalf of state insurance regulators. Also, some
financial regulators expressed concern over the varying degrees to which
individual states are obligated to protect regulatory information and the
different degrees of protection that could result as such information is
released among regulators.
Regulators also expressed concern with regard to the potential liability
associated with disclosing some of the information maintained in their
databases. Financial regulators noted that some of their regulatory data are
self- reported or otherwise unsubstantiated. Release of unsubstantiated
information, particularly with regard to customer complaints and open
investigations, raises liability concerns for some regulators. Those
regulators noted that the appropriate sharing and use of this sensitive data
must be considered because of its highly prejudicial nature and the
potential detriment to the party in question.
Some regulators also questioned whether the proposed system would violate
the Privacy Act's prohibition against the nonconsensual disclosure of
personal information contained in records maintained by federal agencies.
While there are numerous exemptions to this prohibition, including the
"routine use" exemption, 7 those regulators cautioned that the Privacy Act,
and its goal of safeguarding individual privacy, should be a consideration.
7 The routine use exemption permits nonconsensual disclosure of personal
information when the internal use of the information that is disclosed is
compatible with the purpose for which it was originally collected.
Page 16 GAO- 01- 478T
Statement Financial Services Regulators: Better Information Sharing Could
Reduce Fraud
Concerning the method for facilitating the sharing of information across
financial industries, the regulators we contacted generally agreed that some
limited information- sharing capabilities would be useful. Most generally
supported an approach whereby regulators would share some basic regulatory
information on individuals, such as whether or not they were registered in
another financial industry and had a disciplinary related record. However,
all of the financial regulators emphasized that maintaining a centralized
database containing all of the regulatory data of each financial industry
would be costly and difficult to maintain. They pointed out that the vast
majority of applicants were not likely to have come with a blemished
regulatory history from another financial services industry. Nevertheless,
most financial regulators appeared to support the concept of an information-
sharing approach that would flag problems disclosed by regulators in
connection with an individual's activities in other financial services
industries.
A needs assessment would need to be conducted to determine the data elements
most useful to each of the financial regulators and the extent to which each
regulatory authority is obligated to safeguard the data it collects from its
industry. In doing so, a key issue will be balancing one regulator's
“need to know” with another's need to safeguard or restrict
confidential or sensitive regulatory information. As an informationsharing
approach is implemented and the sharing of regulatory data becomes more
routine, we believe that regulators will be better positioned to predict,
recognize, and reduce the movement of rogues from one industry to another.
Moreover, better and more consistent information sharing may facilitate
joint efforts to investigate and prosecute fraudulent behavior in the
financial services industries.
Page 17 GAO- 01- 478T
Statement Financial Services Regulators: Better Information Sharing Could
Reduce Fraud
In conclusion, we have long advocated better information sharing among
financial regulators and commend the Subcommittees for moving forward with
its efforts to better protect consumers by improving regulators' ability to
detect fraud. However, difficult issues must be addressed in order to make
this a reality, and regulators will have to overcome some level of inertia
and resistance to change. The Subcommittees' continued endorsement and
encouragement for improvement in the inter- industry sharing of regulatory
and criminal information will provide an important impetus to succeed.
Subcommittee Chairs, this concludes my prepared statement. I would be
pleased to respond to any questions you or other Members of the
Subcommittees may have.
For further contacts regarding this testimony, please contact Richard J.
Hillman, Director, Financial Markets and Community Investment, (202) 512-
8678. Individuals making key contributions to this testimony included
Lawrence D. Cluff, Barry A. Kirby, Tamara Cross, Dave Tarosky, James Black,
Roger Kolar, Angela Pun, Rosemary Healy, and Shirley Jones.
(250020) Contacts and
Acknowledgements
*** End of document. ***