Finra needs more clout, reps at Madoff hearing say

Jan 5, 2009 @ 3:56 pm

By Sara Hansard

The $50 billion fraud allegedly perpetrated by Bernard L. Madoff Investment Securities LLC provides ample evidence that the Financial Industry Regulatory Authority Inc. should regulate investment advisory firms, the ranking minority member of the House Financial Services Committee indicated today.

“One factor that allowed his alleged fraud to continue as long as it did was the differential regulatory treatment of broker-dealers and investment advisers,” Rep. Spencer Bachus, R-Ala., said at a hearing this afternoon on how the alleged Ponzi scheme, perhaps the largest in history, should influence Congress as it takes up what could be the most substantial rewrite of the laws governing financial markets since the Great Depression.

Finra of New York and Washington inspected Mr. Madoff’s New York-based broker-dealer firm, which supported his market-making and proprietary trading operations, at least every other year, beginning in 1989, Mr. Bachus said.

But Finra had no authority to inspect the affiliated investment adviser, which is where the fraud allegedly operated, Mr. Bachus said.

The Securities and Exchange Commission typically inspects only a small percentage of the 11,000 investment advisory firms for which it has direct responsibility, he said.

“The Madoff affair is yet another indication that what is needed is a statutory and regulatory structure for the 21st century. We don’t have that,” Mr. Bachus said.

Other members of the committee pointed to a need for greater resources at the SEC as well as the need for more protection for all investors — including wealthy investors who are eligible to invest in hedge funds.

“We need to begin to understand how Bernard Madoff allegedly swindled thousands of innocent investors, effectively stole billions of dollars and evaded securities regulators already tipped off about this unprecedented alleged Ponzi scheme,” said Rep. Paul Kanjorski, D-Pa., chairman of the Subcommittee on Capital Markets Insurance and Government Sponsored Enterprises, which is part of the Financial Services Committee.

“The allegations that Mr. Madoff stands at the center of a $50 billion scam simply shock the conscience. These deeply disturbing events have raised even more troubling questions about the effectiveness of our regulatory system,” Mr. Kanjorski said.

“Clearly, our regulatory system has failed miserably, and we must rebuild it now,” he said, adding that the SEC missed numerous red flags.

Mr. Kanjorski was critical of the fact that the SEC’s Office of Compliance Inspections and Examinations had 433 employees two years ago when it regulated about 8,000 investment advisory firms but has 400 employees today who oversee 11,000 advisory firms and thousands of mutual funds.

The number of investment advisory firms subject to SEC oversight has doubled since 1997, he said.


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