Finra probed 19 Madoff complaints - FINRA and Madoff Investigations

Finra probed 19 Madoff complaints
By Joanna Chung in New York

Published: January 14 2009 23:34 | Last updated: January 15 2009 00:18

The securities industry regulator investigated 19 complaints about trading by Bernard Madoff’s broker-dealer operation since 1999, but could not ask questions about the investment advisory business at the centre of his alleged $50bn fraud because it is not legally authorised to do so.

The Financial Industry Regulatory Authority (Finra) serves as the first line of defence for the Securities and Exchange Commission by inspecting about 5,000 registered US broker-dealers.

It does not examine investment advisers, but Finra has been drawn into the debate over regulatory failures because the broker-dealer was the only business subject to examinations before Mr Madoff registered his investment advising arm in 2006. It is unclear how long the alleged “Ponzi” scheme went on.

Mr Madoff on Wednesday remained free on bail after a second federal judge rejected prosecutors’ latest bid to jail him pending trial after he mailed more than $1m in jewellery and other valuable items to friends and family.

“All of the [Madoff] complaints related to trading execution quality issues,” said Herb Perone, Finra spokesman. “Finra did not receive any whistleblower complaints alleging Ponzi schemes or customer fraud.”

The contrast between Finra’s supervision of Mr Madoff’s broker-dealer and the apparent neglect of his investment management business – which was not regularly inspected by the SEC either – underscores the sharply different regimes for overseeing broker-dealers and investment advisers.

“Finra has long expressed concerns regarding a firm’s ability to avoid its jurisdiction by keeping its customers outside the Finra-registered broker-dealer, either through an unregistered investment vehicle or through registered investment advisers,” said Mr Perone.

The case also highlights gaps in the US regulatory system, which many experts say is outdated and does not reflect the overlapping activities of broker-dealers, investment managers and financial planners.

“The Madoff issue, in one sense, is really no different than other problems that we have had this year. Everyone is looking at one piece of the puzzle; nobody has the whole puzzle,” said Gary DeWaal, general counsel of Newedge, a brokerage firm.

While the SEC requires the broker-dealer industry to regulate itself, there is no comparable arrangement for 11,274 registered investment advisers. Many investment advisers, from large asset managers such as Fidelity to one-person shops, oppose self-regulation because of the cost.

The number of investment advisers registered with the SEC has increased by more than 50 per cent since 2001. Only 10 per cent of registered advisers are examined on a cycle of every three years, though others may be subject to sweeps or random exams, the SEC said.

The SEC no longer routinely examines newly registered advisers in their first year. Mr Madoff’s investment advisory business was not examined after registering in 2006. Finra did not know that the SEC had received allegations that Mr Madoff was running a Ponzi scheme, Mr Perone said.

An SEC spokesman said that it shares information with Finra based on “individual facts and circumstances”.

Mary Schapiro, the chief executive of Finra, who faces her Senate confirmation hearing for SEC chairman on Thursday, has favoured extending self-regulation to investment advisers.

One investment adviser, who preferred not to be named, said: “This is a terrible idea. We already have the SEC overseeing us, we don’t need to pay Finra to do it too.”