Finra had authority in Madoff matter, legal eagles say

No customer accounts found, regulator says

Jan 25, 2009 @ 12:01 am

By Dan Jamieson

+ Zoom
Finra can't claim that it had no jurisdiction over Bernard Madoff's advisory activity, according to some legal experts. If the Financial Industry Regulatory Authority Inc. didn't have jurisdiction, "how come SIPC is [working] to reimburse" victims of the Madoff fraud? asked Peter Chepucavage, general counsel at Plexus Consulting Group LLC in Washington and a former Securities and Exchange Commission lawyer. The Securities Investor Protection Corp. of Washington covers only customers of broker-dealers. This month, it mailed more than 8,000 claim forms to Madoff investors. (See story, Page 3.) During a hearing this month before the Senate Banking Committee on her nomination to head the Securities and Exchange Commission, Finra's chief executive, Mary Schapiro, repeatedly said that the self-regulatory organization had no jurisdiction over Mr. Madoff's investment advisory firm.

<b>Mary Schapiro:</b> New SEC chief claimed Finra lacked jurisdiction.
+ Zoom
Mary Schapiro: New SEC chief claimed Finra lacked jurisdiction. (Bloomberg)

More of the blame game is expected tomorrow when the Senate Banking Committee begins a hearing regarding the alleged Madoff Ponzi scheme.

While few industry observers blame Finra for not catching what has been billed as a well-orchestrated fraud, these same people hold that the regulator can't claim that it had no jurisdiction over the Madoff adviser firm.

The defrauded hedge fund investors were clients of Mr. Madoff's broker-dealer, the observers said, and Finra has jurisdiction over any customer account of a broker-dealer.

But "our historical reviews of the books and records [of Madoff's broker-dealer] show that the broker-dealer had no customers," said Finra spokesman Herb Perone.

Finra's reviews found no customer assets on the books of Madoff's broker-dealer, no customer statements generated by the dealer, and no evidence of trades done on behalf of Madoff's investment adviser, Mr. Perone said.

Whether Mr. Madoff ran any trades through his broker-dealer or held assets at the firm, legal ob-servers say, Finra still had authority to look into the advisory firm.

"If [regulators] see a separate [advisory] business going on but none of the trades are going through the broker-dealer and the [broker-dealer] is not carrying the accounts, how does the B-D know [if there is] front running or other [improper] things going on?" Mr. Chepucavage asked.

"There's no question [that regulators] have the ability to audit and look at" advisory activity in which a brokerage firm is involved, said Pete Michaels, a partner at Michaels Ward & Rabinovitz LLP in Boston.

Finra doesn't have the "jurisdiction to drill down into the nuts and bolts of the investment adviser," he added, but "if any of the investment adviser touches the B-D in any way, that's Finra's right to look at that."

In regulatory filings, Mr. Madoff's advisory firm said that it managed $17 billion in assets, custodied assets and was compensated with commissions.

Finra should have asked how the Madoff broker-dealer was supervising that apparent outside business activity, industry sources said.

What's more, under a controversial 1994 notice to members from Finra's predecessor, NASD, broker-dealers were required to record and supervise most of the activity of their registered investment advisers.

Mr. Perone said the notice applied only to retail firms with dually registered individuals.

"There was no one in the Madoff [advisory] firm who has [an investment adviser representative] registration," he said.

"I respectfully disagree," said Sam Edgerton, a partner at Edgerton & Weaver LLP in Hermosa Beach, Calif.

Mr. Madoff's brokerage firm "has the duty to supervise his [adviser] trades, period,"he said.

"We've had audits, and that's exactly what [Finra has] told my [broker-dealer] clients" about their reps' advisory activity, Mr. Edgerton said.

But Ms. Schapiro told the Senate Banking Committee this month that "the adviser activity [of Madoff] did not run through the books of the B-D, which is what Finra was examining."

Separately, last week, Finra sent an e-mail notice to its members asking for information about investment adviser and hedge fund activity in which broker-dealers may be involved. Despite Finra's ability to track a broker-dealer's connection to an advisory business, Mr. Edgerton said, Finra or some other organization needs more authority to oversee investment advisers.

But the investment adviser industry has long opposed Finra's becoming a self-regulator for advisers.

"It's a very dicey political situation," Mr. Edgerton said.

Ms. Schapiro left little doubt what she thinks about investment adviser regulation.

"The bigger issue here is the increasing migration out of regulated B-Ds — where there is an SEC, Finra, other [self regulatory organizations] and state involvement in regulation — to investment advisers, where there are far fewer resources available for inspection and oversight," she told the Senate Banking Committee. "The SEC has not shared [Finra's] view that this is something to be concerned about."

E-mail Dan Jamieson at djamieson@investmentnews.com.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Oct 17

Conference

Best Practices Workshop

For the fifth year, InvestmentNews will host the Best Practices Workshop & Awards, bringing together the industry’s top-performing and most influential firms in one room for a full-day. This exclusive workshop and awards program for the... Learn more

Featured video

INTV

Wirehouse training programs are in vogue

At one time, major brokerage houses ran large, expensive training programs for thousands of young brokers, and now it looks as if they are about to return to that model.

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

Wealth management firms struggle with lower fees, fewer new clients

Advisers in North America earned less from clients last year and saw a decline in average fees, according to a new report by PriceMetrix.

These investors are allowed to put $500K into a Roth IRA at once

The HEART Act permits rolling all or part of life-insurance and combat-related-fatality payouts directly into the tax-free retirement plan, but few take advantage.

Labor's Alexander Acosta and SEC's Jay Clayton tell lawmakers they will work together on fiduciary rule

In separate appearances before Senate panels, the regulators stressed the cooperation that Republican legislators and opponents of the DOL fiduciary rule are demanding.

Brian Block denies cooking the books at Schorsch REIT

Former CFO claims everything he did was 'appropriate' and 'correct.'

Interns will take on several roles at advisory firms this summer

College students are helping with client prep, firm visioning and long-term projects, among other duties.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print