By Karey Wutkowski and Rachelle Younglai
WASHINGTON, Jan 27 (Reuters) - Top U.S. regulators, blamed for failing to uncover accused swindler Bernard Madoff, said they are exploring ways to boost oversight of broker-dealers and investment advisors to avoid an embarrassing repeat.
At a Senate Banking Committee hearing held on Tuesday to probe why regulators missed Madoff's alleged $50 billion fraud, a Securities and Exchange Commission official said the agency was considering how frequently to examine investment advisors.
Madoff registered as an investment advisor with the SEC in 2006, but the SEC did not examine those operations.
The explosive growth in the investment advice industry has overwhelmed the SEC and it is only able to examine about 10 percent of the registered advisors every three years.
Lori Richards, the SEC's director of compliance, inspections and examinations, said the agency is determining whether advisors should disclose more risk-related information, such as the identity of auditors and performance returns.
The SEC's director of enforcement, Linda Chatman Thomsen, said requiring third-party custody of customer assets should be considered along with more streamlined rules for broker-dealers and investment advisors.
The SEC has been criticized for not thoroughly following up on tips from one of Madoff's competitors and missing red flags, such as Madoff's ability to generate steady returns in all types of market environments.
'I am troubled by the sheer magnitude of the warning that the SEC received,' said Robert Menendez a Democrat from New Jersey, who during one exchange with Thomsen asked if Madoff was smarter than the regulators.
Madoff, 70, was arrested last month after his sons said he had confessed to a $50-billion Ponzi scheme, in which early investors are paid using money from later investors.
He is out on bail, although confined to his $7-million Manhattan penthouse.
Thomsen said resources for the SEC had not kept pace with the growth in the securities industry and the agency simply did not have the resources to fully investigate every tip.
FINRA CRITICIZED
The industry-funded Financial Industry Regulatory Authority (FINRA) also came in for criticism at the hearing.
FINRA's main mission is to supervise nearly 5,000 U.S. brokerages and the watchdog says it does not have authority to extend its oversight to the advisory arms of brokerages.
Interim FINRA Chief Executive Stephen Luparello, testified there was a need for more information sharing and oversight of broker-dealers who are also registered as investment advisors.
But lawmakers and experts were skeptical.
'The idea that FINRA would not explore further the issue at the Madoff firm, really because they felt there was a wall drawn is inexcusable,' Democratic Sen. Christopher Dodd of Connecticut, who chairs the banking committee, told reporters after the hearing.
John Coffee, a securities professor at Columbia Law School, told the panel he saw no reason that FINRA should have abstained from examining and monitoring the advisory side of Madoff's business prior to 2006.
FINRA's former CEO, Mary Schapiro, was officially sworn in as the SEC's new chairman on Tuesday.
During the last two decades, FINRA said it conducted regular examinations of Madoff's broker-dealer operations. The watchdog said it received and investigated 19 complaints against Madoff's broker-dealer, but the complaints generally related to trade execution quality and did not relate to the investment advisory issues where the massive fraud is alleged.
Dodd expressed disbelief that the SEC did not zero in on the fact that Madoff's auditor was a tiny, little-known outfit. 'Isn't it often a preliminary question to ask, who is your auditor?' asked Dodd.
Thomsen said consideration should be given to setting requirements for an auditor's qualifications. Other experts have said broker-dealer and investment advisor auditors should be required to register with the audit supervisor, the Public Company Accounting Oversight Board.
The SEC had probed Madoff's brokerage firm in the past, but found no evidence of a massive fraud.
Thomsen said the SEC started an investigation of Madoff's business in 2006 but closed it early in 2008 without recommending enforcement action.
She also said the SEC filed two enforcement actions in 1992 that involved Madoff's broker-dealer firm, but neither Madoff nor his firm was named as a defendant in either case.
Richards said the SEC examined Madoff's broker-dealer operation -- most recently in 2004 and 2005 -- but found no fraud.
(Reporting by Karey Wutkowski, John Poirier and Rachelle Younglai; editing by Tim Dobbyn) Keywords: MADOFF/CONGRESS (rachelle.younglai@thomsonreuters.com; +1 202 898 8411) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
WASHINGTON, Jan 27 (Reuters) - Top U.S. regulators, blamed for failing to uncover accused swindler Bernard Madoff, said they are exploring ways to boost oversight of broker-dealers and investment advisors to avoid an embarrassing repeat.
At a Senate Banking Committee hearing held on Tuesday to probe why regulators missed Madoff's alleged $50 billion fraud, a Securities and Exchange Commission official said the agency was considering how frequently to examine investment advisors.
Madoff registered as an investment advisor with the SEC in 2006, but the SEC did not examine those operations.
The explosive growth in the investment advice industry has overwhelmed the SEC and it is only able to examine about 10 percent of the registered advisors every three years.
Lori Richards, the SEC's director of compliance, inspections and examinations, said the agency is determining whether advisors should disclose more risk-related information, such as the identity of auditors and performance returns.
The SEC's director of enforcement, Linda Chatman Thomsen, said requiring third-party custody of customer assets should be considered along with more streamlined rules for broker-dealers and investment advisors.
The SEC has been criticized for not thoroughly following up on tips from one of Madoff's competitors and missing red flags, such as Madoff's ability to generate steady returns in all types of market environments.
'I am troubled by the sheer magnitude of the warning that the SEC received,' said Robert Menendez a Democrat from New Jersey, who during one exchange with Thomsen asked if Madoff was smarter than the regulators.
Madoff, 70, was arrested last month after his sons said he had confessed to a $50-billion Ponzi scheme, in which early investors are paid using money from later investors.
He is out on bail, although confined to his $7-million Manhattan penthouse.
Thomsen said resources for the SEC had not kept pace with the growth in the securities industry and the agency simply did not have the resources to fully investigate every tip.
FINRA CRITICIZED
The industry-funded Financial Industry Regulatory Authority (FINRA) also came in for criticism at the hearing.
FINRA's main mission is to supervise nearly 5,000 U.S. brokerages and the watchdog says it does not have authority to extend its oversight to the advisory arms of brokerages.
Interim FINRA Chief Executive Stephen Luparello, testified there was a need for more information sharing and oversight of broker-dealers who are also registered as investment advisors.
But lawmakers and experts were skeptical.
'The idea that FINRA would not explore further the issue at the Madoff firm, really because they felt there was a wall drawn is inexcusable,' Democratic Sen. Christopher Dodd of Connecticut, who chairs the banking committee, told reporters after the hearing.
John Coffee, a securities professor at Columbia Law School, told the panel he saw no reason that FINRA should have abstained from examining and monitoring the advisory side of Madoff's business prior to 2006.
FINRA's former CEO, Mary Schapiro, was officially sworn in as the SEC's new chairman on Tuesday.
During the last two decades, FINRA said it conducted regular examinations of Madoff's broker-dealer operations. The watchdog said it received and investigated 19 complaints against Madoff's broker-dealer, but the complaints generally related to trade execution quality and did not relate to the investment advisory issues where the massive fraud is alleged.
Dodd expressed disbelief that the SEC did not zero in on the fact that Madoff's auditor was a tiny, little-known outfit. 'Isn't it often a preliminary question to ask, who is your auditor?' asked Dodd.
Thomsen said consideration should be given to setting requirements for an auditor's qualifications. Other experts have said broker-dealer and investment advisor auditors should be required to register with the audit supervisor, the Public Company Accounting Oversight Board.
The SEC had probed Madoff's brokerage firm in the past, but found no evidence of a massive fraud.
Thomsen said the SEC started an investigation of Madoff's business in 2006 but closed it early in 2008 without recommending enforcement action.
She also said the SEC filed two enforcement actions in 1992 that involved Madoff's broker-dealer firm, but neither Madoff nor his firm was named as a defendant in either case.
Richards said the SEC examined Madoff's broker-dealer operation -- most recently in 2004 and 2005 -- but found no fraud.
(Reporting by Karey Wutkowski, John Poirier and Rachelle Younglai; editing by Tim Dobbyn) Keywords: MADOFF/CONGRESS (rachelle.younglai@thomsonreuters.com; +1 202 898 8411) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.