SEC told to tighten process for investigating advisers

The Securities and Exchange Commission must tighten its process for deciding which investment advisers to inspect if it is to avoid colossal breakdowns like the one that allowed Bernard Madoff's multibillion-dollar fraud to go undetected for 16 years, the agency's inspector general says.
DEC 09, 2009
The Securities and Exchange Commission must tighten its process for deciding which investment advisers to inspect if it is to avoid colossal breakdowns like the one that allowed Bernard Madoff's multibillion-dollar fraud to go undetected for 16 years, the agency's inspector general says. A report released Thursday by the office of Inspector General David Kotz proposes new requirements that the SEC's inspections office examine databases and documents related to investment advisers that may be inspected. The Office of Compliance Inspections and Examinations and the SEC's enforcement division should also establish procedures for sharing tips, complaints, disciplinary history and violations regarding investment advisers, Kotz recommends. The IG's review found that the inspections office never undertook an exam of Madoff's investment business — which was separate from his brokerage operation — even after he was forced by the SEC in August 2006 to finally register the investment business. The inspector general found that "failures to communicate" within the SEC led to the agency's OCIE never inspecting Madoff's investment business. It was Kotz's second set of proposals for the OCIE in less than two months. In late September, he recommended that the office establish a specific process for identifying red flags and potential violations of securities laws. Kotz has detailed how the SEC bungled five investigations of Madoff's brokerage business between June 1992 and last December, when the financier confessed to his sons that he was operating a fraudulent scheme. Top SEC officials have pledged to fix the problems and say they already have made major changes. Madoff pleaded guilty in March to charges that his secretive investment operation was a multibillion-dollar Ponzi scheme that destroyed thousands of people's life savings and wrecked charities. He is serving a 150-year sentence in federal prison in North Carolina. Kotz asked OCIE, the enforcement division and the division that oversees investment companies to submit a corrective action plan within 45 days to address the recommendations. The three entities, plus the office of SEC Chairman Mary Schapiro, told Kotz that they agree with his recommendations.

Latest News

The 2025 InvestmentNews Awards Excellence Awardees revealed
The 2025 InvestmentNews Awards Excellence Awardees revealed

From outstanding individuals to innovative organizations, find out who made the final shortlist for top honors at the IN awards, now in its second year.

Top RIA Cresset warns of 'inevitable' recession amid tariff uncertainty
Top RIA Cresset warns of 'inevitable' recession amid tariff uncertainty

Cresset's Susie Cranston is expecting an economic recession, but says her $65 billion RIA sees "great opportunity" to keep investing in a down market.

Edward Jones joins the crowd to sell more alternative investments
Edward Jones joins the crowd to sell more alternative investments

“There’s a big pull to alternative investments right now because of volatility of the stock market,” Kevin Gannon, CEO of Robert A. Stanger & Co., said.

Record RIA M&A activity marks strong start to 2025
Record RIA M&A activity marks strong start to 2025

Sellers shift focus: It's not about succession anymore.

IB+ Data Hub offers strategic edge for U.S. wealth advisors and RIAs advising business clients
IB+ Data Hub offers strategic edge for U.S. wealth advisors and RIAs advising business clients

Platform being adopted by independent-minded advisors who see insurance as a core pillar of their business.

SPONSORED Compliance in real time: Technology's expanding role in RIA oversight

RIAs face rising regulatory pressure in 2025. Forward-looking firms are responding with embedded technology, not more paperwork.

SPONSORED Advisory firms confront crossroads amid historic wealth transfer

As inheritances are set to reshape client portfolios and next-gen heirs demand digital-first experiences, firms are retooling their wealth tech stacks and succession models in real time.