A new Inspector General's report says the Securities and Exchange Commission is failing to uncover potentially widespread abuses in the sale of unregistered securities — which, among other things, can be used to run pump-and-dump schemes.
SEC Inspector General H. David Kotz says the agency is not adequately policing a loophole that allows some companies to issue stock or other securities without first registering them with the SEC. While many unregistered offerings are legitimate, the report warns that the process can be prone to abuse.
Small businesses offered $1.2 trillion in unregistered securities in 2000 — the last year for which data is available, according to the report, because the SEC does not track all of the offerings. Issuers are supposed to notify the SEC of unregistered offerings under an SEC rule called "Regulation D."
But the report accuses the agency of not properly monitoring Regulation D filings, allowing issuers to abuse the rule and in some cases mislead investors. The Commission received more than 20,000 of the filings last year, according to the report, but did not adequately analyze them.
The Inspector General's analysis found "several instances of misuse, non-compliance and illegal acts" by Regulation D filers. The report recommends improvements in the filing process, and better coordination with state securities regulators.