Madoff aftermath could see SEC and CFTC merge

Bernard Madoff’s alleged US$50 billion Ponzi scheme is breathing new life into Bush-era proposals that could subject money managers to a new layer of regulation as well as a merger of the SEC and the CFTC, financial industry lobbyists said last month.

The regulatory proposal, if enacted, would subject money managers for the first time to the scrutiny of a self-regulatory organisation (SRO), submitting managers to the same sort of oversight that broker-dealers get from the Financial Industry Regulatory Authority (FINRA).

Money managers, now regulated at the federal level exclusively by the SEC, oppose SRO regulation, in part because they would have to pay for it.

The Securities and Exchange Commission-Commodity Futures Trading Commission merger proposal has long been championed as a reform that would make financial oversight more effective and efficient.

Both proposals were endorsed in a March 31 report by the Treasury Department, but got little traction on Capitol Hill last year.

Following news of the Madoff scandal, however, calls for major regulatory reform have grown — and the SRO and SEC-CFTC merger proposals are back on Congress’ front burner.

“After Bernie Madoff, it makes it increasingly likely that these major regulatory changes could be considered,” said David Tittsworth, executive director of the Investment Adviser Association in Washington.

Lobbyists say the SRO proposal is expected to gain momentum because Mary Schapiro is President Barack Obama’s nominee to chair the SEC. She is chief executive officer of FINRA and has advocated a self-regulatory organisation for money managers.

(In 2007, FINRA investigated Madoff’s operation and concluded it had made technical breaches, but never took action.)

In a December 2007 comment letter to the Department of Treasury, Schapiro said self-regulation might be appropriate for money managers, insurance companies and other financial services industries.

“The investment adviser and insurance industries, although regulated at both the state and federal level, do not benefit from [having] the additional comprehensive oversight provided by a self-regulatory regime,” she said.

“Moreover, state and local governments, and ultimately the taxpayer, bear the costs of the investment adviser and insurance company regulation,” the letter continued. “These governments must bear the heavy load of examining these firms, adopting rules and taking corrective action when firms fail to comply. Reliance on self-regulation would reduce these fiscal burdens on taxpayers.”

Schapiro declined to be interviewed for this story, FINRA spokesman Herb Perone said. However he added: “FINRA has long expressed its concerns about a firm’s ability to avoid our jurisdiction by keeping its customers outside the FINRA-registered broker-dealer, either through an unregistered investment vehicle or through registered investment advisers.”

The IAA’s Tittsworth said that Bernard L. Madoff Investment Securities had always been subject to FINRA review. “It’s absolutely incorrect to suggest that the fraud occurred because FINRA did not have authority to examine Madoff’s advisory affiliate,” Tittsworth said.

Tittsworth said his association will lobby vigorously against an SRO for money managers. “It (an SRO for money managers) is an additional layer of cost and bureaucracy that hasn’t been shown to be necessary,” he said.

“We’re concerned that she [Schapiro] has already made up her mind on this critically important issue for us,” he added. “We just want an assurance that she has an open mind.”