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 ó where there is an SEC, Finra, other [self regulatory organizations] and state involvement in regulation ó 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 firstname.lastname@example.org.